Over 400 callers tuned in last Thursday for a webcast on this year's hottest compensation topic - options backdating and spring loading. The hour-long webcast included a robust discussion by the panel of experts: Dr. Erik Lie from the University of Iowa, CFA's Kurt Schacht, and ISS' Pat McGurn.

According to the panel, backdating was most prevalent during the 1990's through 2002. Since then it has fallen by about 50 percent. Reasons for the decrease included Sarbanes-Oxley and accelerated Form 4 requirements. However, these don't safeguard against spring loading, which is more likely to be viewed as insider trading.

Dr. Lie provided a summary of his current work on the prevalence of options backdating practices. In his findings, Dr. Lie studied 8,000 companies from 1996-2005. His empirical work suggests that as many as 1,000 companies appear to have manipulated stock option grant dates. While over 50 firms are currently under investigation by the SEC, it appears that shareholders are seeing the tip of the iceberg of companies who have come forward to "confess and correct."

CFA's Kurt Schacht echoed that there are lots of facts still to be revealed, and he cautioned that shareholders should not jump the gun. In a comment letter submitted to the SEC, the CFA Centre for Financial Market Integrity cites loss of investor confidence as one of the largest implications for shareholders. A volatile stock market suffers from the uncertainty involved with these scandals and their associated legal, accounting, and tax costs.

The market is already seeing the issue being taken up in court, with more than 70 lawsuits filed. ISS' Pat McGurn weighed in on the success of these lawsuits. Future reaction to backdating scandals will depend on the findings and outcomes of current investigations. Questions still remain, such as how to deal with boards of directors, audit committees, and compensation consultants that were "in the know," or worse, involved in the cover-up. There seems to be a lack of communication and cooperation between audit and compensation committees, which will need to improve.

The panel members also discussed better compensation disclosure, in light of the SEC's proposal and suggestion that some guidance in this area is forthcoming. It was generally felt that the SEC should augment their reform proposal concerning executive compensation. Companies that don't use "plain English" in compensation disclosure as proposed by the SEC will be seen as less forthcoming. More troublesome is that companies and boards may try to defend their actions rather than disclose them. (Consider SEC Commissioner Atkins' remarks defending spring loading.) The larger implication goes to the investor confidence issue. While discounted stock options are nothing new and not illegal per se, it's the cover-up that is most problematic for shareholders.

What do you think? Please let us know your thoughts and comments from last week's webcast.

To learn more about the practice of options backdating and spring loading, please click here.