The WSJ Breaks a Pseudo-Scandal

The Wall Street Journal has a front-page story today on how corporate boards awarded stock options to senior executives in the wake of 9/11.
The story has the look and feel of uncovering some insidious corporate scandal. Look at the juxtaposition presented in the first two paragraphs:

On Sept. 21, 2001, rescuers dug through the smoldering remains of the World Trade Center. Across town, families buried two firefighters found a week earlier. At Fort Drum, on the edge of New York’s Adirondacks, soldiers readied for deployment halfway across the world.
Boards of directors of scores of American companies were also busy that day. They handed out millions of bargain-priced stock options to their top executives.

Not very subtle is it? The soldiers readying for deployment was nice touch. Those evil corporate plutocrats just couldn’t wait to profit off 9/11.
But hold up, how exactly did those boards know that the options grants were, as the Journal points out, “bargain-priced”? The answer is, they didn’t (assuming the options were at-the-money). More importantly, they couldn’t have known. The grants were based on nothing more than faith in the future, which was hardly in overabundance at the time.
It’s true that stocks nosedived when the markets reopened, but that doesn’t by itself mean the options were a bargain. After all, the market had already been falling and it continued to fall for more than a year. In fact, the S&P 500 was still below its pre-9/11 level nearly three years after the attacks (and, of course, those soldiers readying themselves).
The article continues:

A Wall Street Journal analysis shows how some companies rushed, amid the post-9/11 stock-market decline, to give executives especially valuable options. A review of Standard & Poor’s ExecuComp data for 1,800 leading companies indicates that from Sept. 17, 2001, through the end of the month, 511 top executives at 186 of these companies got stock-option grants. The number who received grants was 2.6 times as many as in the same stretch of September in 2000, and more than twice as many as in the like period in any other year between 1999 and 2003.
Ninety-one companies that didn’t regularly grant stock options in September did so in the first two weeks of trading after the terror attack. Their grants were concentrated around Sept. 21, when the market reached its post-attack low. (Wrong! The markets continued to fall.) They were worth about $325 million when granted, based on a standard method of valuing stock options.

Before I get myself into any more trouble, let me make the usual disclaimers. If the executives back-dated their options against company policy, that’s fraud. Fine. Toss them away for good. But that’s not the issue here.
As Larry E. Ribstein points out, this article arrives with the back-dating scandal to give the appearance of flowing from one river into a new branch. It’s not.
Or, if the issue is the use of stock options. Fine. Let’s talk about that. But then, you have to address Congress’ silly law that caps the tax deductibility of salaries at $1 million. That’s what’s led to the soaring use of stock options. I say, let’s have that debate. The two sides of the WSJ can square against each other.
Or, if the issue is corporate boards being the poodles of CEOs. Fine. I think that’s an important issue that needs to be looked at. But again, that’s not what this article is about. Instead, we get more juxtaposing:

The 91 companies included such corporate icons as Home Depot Inc., Black & Decker Corp. and UnitedHealth Group Inc. It included two companies directly touched by the tragedy. Merrill Lynch & Co., across the street from the Twin Towers, lost three employees. On Sept. 24, Merrill granted its president options to buy more than 750,000 shares, at a price 15% below the pre-attack level. At Teradyne Inc. in Boston, an employee delayed a business trip until Sept. 11 to attend a son’s soccer game and died on American Flight 11. Teradyne that month gave its CEO more than 600,000 options at a price enabling him to buy stock at 24% below its pre-attack level.
At Stryker Corp., a Michigan maker of orthopedic products, onetime stock-option-committee member John Lillard said he didn’t regret the decision to award options nine days after the attack. “If you believe the company is going to do well, and here is an external event that is affecting the market and you’ve made a decision to reward executives, you go ahead with it,” Mr. Lillard said. “Life goes on.”

I think we’re all agreed not to use Mr. Lillard as a PR spokesman. It may be flippant, but he’s got a point. This is exactly what was being said at the time, “get on with you lives, get on with your work.” If you recall, there was an urgency to open the markets as soon as possible.
The Journal notes that the Merrill Lynch options were granted at a price 15% below the pre-attack level and for Teradyne, the options were 24% below the pre-attack level. Wouldn’t it also be true to say that the executive at those companies saw their share values drop by 15% and 24%? This also could have erased millions of dollars of previously granted options. The article doesn’t say, but in the eighth paragraph we learn:

There’s nothing illegal about granting options after the market plunges. (Oh!!). But acting so quickly after a national tragedy drove down stocks shows the eagerness of some companies to increase their executives’ potential wealth. These grants also offer important new fodder for an already fractious debate over what constitutes the proper use of options in executive compensation.
Dozens of companies are under investigation for possibly backdating option grants to a day when the stock was lower, a practice that could mean the companies have made false disclosures and perhaps reported financial results incorrectly. Other companies are being investigated on suspicion of timing options grants ahead of good corporate news.
The multiple options grants after 9/11 raise a different question: Did companies take unseemly advantage of a national tragedy?

Let me see if I have this right. It’s not illegal. It’s not backdating. Although if it were, it’s definitely possible that it could be illegal assuming the possibility that it is legal is incorrect. And backdating, the thing it’s not, is going on now which is raising fodder which this adds to. Or perhaps this is the one raising fodder which adds to earlier fodder that’s already been raised. I’m really not sure.
But they’re absolutely guilty of one thing—being unseemly. And rushing. And eagerness. I got it: They’re unseemly rushing towards their eagerness to increase their wealth. I mean, potential wealth. Those bastards!
Sorry folks, but this is what options grants are all about. They have to be granted at some point. Some points will be better than others. There’s no guarantee. Despite barrage of indefinite pronouns, this is not “profiting off 9/11.” These were events caused by 9/11 but the executives had no assurance that it would make money for themselves or anyone else. Remember that Saudi prince guy who gave money after 9/11 and used the moment to denounce Israel. That’s abusing 9/11. Not this.

Minutes after the bell rang Sept. 17 at the New York Stock Exchange, New York Mayor Rudy Giuliani, who’d attended the solemn reopening ceremony, told CNBC, “Everybody should step up to the plate right now and show the strength of the American economy.” He added: “We depend on this. A lot of jobs and the future of America and the world rests on what happens here.”
The market fell nonetheless. And on that Monday, Home Depot broke with a regular pattern of issuing stock options in February and made a huge grant to its chief executive, Robert Nardelli. The grant permitted Mr. Nardelli, for the next 10 years, to buy one million Home Depot shares at that tumultuous September day’s closing price of $36.20 a share. This was 10.7% below the Sept. 10 closing price of $40.55.
The following day, Home Depot gave more grants: 50,000 options to each of four other executives, all of whom had already received options earlier in 2001. With Home Depot shares now trading at about $34, the options are currently out of the money.

This is truly a first. The WSJ is reporting on a scandal that’s not scandal involving profiteering that didn’t make money. (At least, not in Nardelli’s case). Wow, that is unseemly.
This pseudo-scandal is that what went on didn’t “look right.” Essentially, Wall Street is accused of being gauche. Is this news to anyone? Of course they’re greedy bastards, it’s Wall Street. That’s the idea.
Or as Professor Ribstein put it:

One reason our markets were so resilient is because we had managers who were focused on money. Should they have been thinking only about how to fill the shareholders’ wallets with the nasty stuff? So what we really want from our corporate executives is people who are greedy enough to be thinking about money after 9/11, but altruistic enough only to be thinking about how to make it for the shareholders? Aren’t we getting a little picky?

Exactly.
The problem with the “how it looks” accusation is that it can be thrown around very easily. How long are we supposed to wait? What about last week? Or is that profiting off Hezbollah’s terrorist attacks on Israel? I fail to see how murdering civilians with Katyusha rockets affects the price of oil, but apparently, it does.
Now there’s an unseemly juxtaposition for you.
Update: Barry Ritholtz has a very different take here and here: “Brain cancer is too good for these people.” Except he didn’t call them “people.”
Stephen Bainbridge has more thoughts here.

Posted by on July 15th, 2006 at 9:03 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.