Defined benefit plans sometimes invest in company stock.Defined contribution plan participants are often given a similar choice.How often did pension fiduciaries assess option grant practices and/or inquire about industry norms, internal controls and likely impact on "shareholder" retirement plan participants?For interested readers, the D&O Diary, authored by attorney Kevin La Croix, has an excellent collection of articles about option backdating.Any problems with option grants, especially when they result in tax and/or accounting penalties, not to mention regulatory enforcement levies or litigation payouts, can do serious harm to an employee's retirement plan.From a fiduciary perspective, real questions could arise about the ex-ante assessment of company stock as a viable investment vehicle for a sponsored plan(s).Did an adequate due diligence review of risk factors that influence company stock price occur?
(Experts remind that neither backdating nor spring loading is necessarily illegal per se, a conclusion that is best left to attorneys and regulators.)These and other practices are important to pension fiduciaries and plan participants alike.
reporter Jessie Seyfer describes a judge's refusal to dismiss the case, with significant focus surrounding the issue of material economic harm to shareholders. " Should pension fiduciaries ask to meet with the compensation committee and more thoroughly vet company stock risk factors related to option awards for those at the top of the management ladder? Not addressed in the article but an interesting point to ponder relates to possible conflicts of interest.
In the wake of several stories about 401(k) stock drop litigation, one connects the backdating - company stock dots by asking: "How much extra homework should pension fiduciaries undertake before recommending company stock (if at all) when the terms of prevailing option awards are misunderstood, questionable or insufficiently transparent?
Executive stock options continue to grab headlines.
In late 2004, after a parade of protests, the Financial Accounting Standards Board issued the "Summary of Statement No. Intending to promote transparency, FASB's rule requires public companies "to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award" and to recognize the cost "over the period during which an employee is required to provide service in exchange for the award-the requisite service period (usually the vesting period)." Following suit, on July 26, 2006, the U. Securities and Exchange Commission announced news about additional (and arguably more comprehensive) disclosure rules for all sorts of executive compensation vehicles, including stock options.