Photobucket - Video and Image HostingLucky CEOs: A new study by three leading academics claims to establish a link between governance practices and questionably timed stock options to chief executives. A November 16, 2006 study entitled “Lucky CEOs” (here) by Lucian Bebchuk of Harvard Law School, Yaniv Grinstein of Cornell, and Urs Peyer of INSEAD, examined 19,036 option grants between 1996 and 2005, involving about 6,000 companies and about 8,000 CEOs. The authors looked at the distribution of grant prices within the grant month and found a disproportionately higher numbers of grants on the date during the month with the lowest share price (and a disproportionately lower number of grants on the date with the highest share price). The authors found that these “lucky” grants were likeliest to occur at companies that did not have a majority of independent directors. The authors also found that this luck was persistent; CEOs that had lucky grants tended to have multiple lucky grants.

The authors also found that about 43% of lucky grants were “super lucky,” because they fell on the date with the lowest share price for the quarter.

Among the authors more interesting findings is their conclusion that the lucky grants were not concentrated amongst high tech companies. The authors found that a majority of the lucky grants as well as the super lucky grants were awarded at “old economy” firms.

The authors estimated (using probabilistic techniques) that about half of the lucky grants were due to manipulation rather than chance. They also estimated that about 850 CEOs at about 750 companies received or provided lucky grants produced by opportunistic timing.

The authors also found that lucky grants were likeliest to occur at companies that had CEOs with longer tenure. The authors estimated that the average gain to CEOs from the lucky grants that were backdated exceeded 20% of the reported grants and increased the CEOs total reported compensation for the year by 10%.

News reports describing the study may be found here and here. A brief commentary critical of the study can be found on Professor Larry Ribstein’s Ideoblog, here.

Stock Option Grant Givebacks: On November 15, 2006, EMCORE announced (here) that two top executives will return gains from exercising stock options that a voluntary internal investigation had concluded were the result of improper practices. EMCORE’s CEO voluntarily agreed to return $147,775 and its chief legal officer agreed to repay $97,000. The company said these amounts represented “the entire benefit received from the misdated grants they exercised.” The company’s CFO, who had not exercised any of the misdated stock option grants, voluntarily surrendered his rights to the grants. The company’s internal investigation was “unable to concluded that the company or anyone involved in the stock option granting process engaged in willful misconduct.”

A article discussing the EMCORE stock option investigation can be found here.

As The D & O Diary previously noted (here), executives at Molex agreed to repay the company $685,000 to cover gains they realized on misdated options.

These somewhat isolated incidents pale by comparison to the givebacks involving UnitedHealth Group’s options investigation. UnitedHealth Group’s outgoing CEO William McGuire and his successor Stephen Helmsley collectively forfeit $390 million in gains from previously exercised options, and their unexercised stock options were repriced to eliminate paper gains from due to options timing. See the Wall Street Journal’s November 9, 2006 article, here, registration required. UnitedHealth Group’s November 8 press release can be found here.

UPDATE: The November 20, 2006 Wall Street Journal has a front page article entitled “Companies Discover It’s Hard to Reclaim Pay from Executives” (here, subscription required) discussing difficulties companies have had trying to recover past compensation to which executives were not entitled.

Options Backdating Lawsuit Update: With the recent addition of new lawsuits that have been filed against Flowserve, Biomet and Black Box, The D & O Diary’s running tally (here) of companies named as nominal defendants in shareholders derivative lawsuits raising options timing allegations now stands at 113. The number of companies sued in securities fraud lawsuits remains at 21.