Backdating "can have a pernicious effect on executive compensation," Ann Yerger, CII's executive director, wrote in her June 12 letter to companies. “By giving an executive an instant paper profit, backdating undermines the purpose of options, which is to motivate executives to act in ways that lift the stock price. For this reason, the Council believes that except in extraordinary circumstances, long-term incentive awards of options should be granted at the same time each year."

CalPERS, in its June 7 letter to 24 firms, urged directors to:

--Conduct an independent investigation into backdating allegations.
--Publicly disclose all findings from both internal and external investigations.
--Develop and disclose in public financial statements and proxy statements a new board policy for the determination of all option grant dates.
--Refrain from using any company resources to satisfy the tax and legal liability for executives implicated for wrongdoing related to the backdating of options.
--Commit to have the company's external auditor ratified by shareowners annually.

CalPERS sent its letter to: Affiliated Computer Services, Altera, American Tower, Analog Devices, Brooks Automation, Caremark Rx, Comverse Technology, F5 Networks, Jabil Circuit, KLA-Tencor, Maxim Integrated Products, McAfee, Meade Instruments, Medarex, Openwave Systems Power Integrations, RSA Security, SafeNet, Semtech, Sepracor, Sycamore Networks, Trident Microsystems, UnitedHealth Group, and Vitesse Semiconductor.

"Stock option backdating potentially threatens the credibility, governance, and performance of companies," Russell Read, CalPERS' new chief investment officer, said in a statement.

AFL-CIO Secretary-Treasurer Richard Trumka, in his June 13 letter, urged compensation committees to grant options on predetermined dates that are at least 30 days from earnings announcements, to set grant dates independently from executives, and to avoid granting options for executives and directors at the same time. He also urged firms to consider replacing options with stock grants that vest after performance goals are met.

The labor federation also sent its letter to Occidental Petroleum, American Express, Cardinal Health, Eli Lilly, McGraw-Hill, Proctor & Gamble, and U.S. Bancorp.

On June 7, the AFL-CIO called on the Securities and Exchange Commission to address stock option grants as it finalizes new executive compensation disclosure rules. The CFA Centre for Financial Market Integrity, in a May 30 letter, urged the SEC to require the disclosure of:

--The compensation committee's meeting dates for the preceding year.
--The dates when the committee plans to make share-based awards.
--Whether any grants were made on other dates.
--Whether any grant dates were selected to take advantage of the pending release of material information.
--Whether any executives were permitted to select or recommend grant dates for their options.

"The intent of these disclosures is to enable shareholders to hold boards accountable for improper behavior," the CFA Centre noted.

Regulators and Lawmakers Respond
The widening scandal has attracted the attention of regulators and senior lawmakers. On June 8, SEC Chairman Christopher Cox said his agency will require firms to "release all information related to their [stock option] decisions," including the rationale for those grants and dates when the options were priced, according to news reports. Cox said the new pay disclosure rules should be in place by next year's proxy season.

"We expect this to be written in plain English so every investor can understand it," Cox said in a speech to the New York Financial Writers Association. "No shareholder should need a machete and a pith helmet to find out how much the CEO makes."

Two senior lawmakers have also called for action. U.S. Senator Richard Shelby, chairman of the Senate Banking Committee, expressed concern that backdating would undermine investors' "belief in the integrity of the marketplace. Transparency and integrity are keys to capital markets."

"If you're backdating stock options . . . that's fraud," Shelby told reporters on June 8. "And we should punish people who do that."

U.S. Senator Charles Grassley, who chairs the Senate Finance Committee, said he hoped that the SEC and the Justice Department "are taking a hard look at this practice."

"I've asked the Justice Department to let me know whether the tax laws on the books are adequate to rein in and prosecute stock option backdating. If the tax laws are inadequate, I want to beef them up," Grassley said in a June 13 press release.

To review the CalPERS letter, click here:

To read the CII letter, click here.

To review the CFA Centre's letter to the SEC, click here:

To see Senator Grassley's statement, click here: