This issue is one of intense public interest because it strikes at the heart of the relationship among a public company's management, its directors, and its shareholders. Securities and Exchange Commission Chairman Shelby, Ranking Member Sarbanes, and Members of the Committee: Thank you for inviting me to testify today about options backdating.I appreciate the opportunity to explain the Commission's initiatives to deal with abuses involving the backdating of options.I am especially pleased to testify together with Chairman Mark Olson of the Public Company Accounting Oversight Board.I will let Chairman Olson speak to the steps the PCAOB is taking to address these issues from the auditing regulator's perspective, but I'd like to assure the Committee, and the public, that the Commission is working in close cooperation with the PCAOB in this important area. But here is a typical example of what some companies did: They granted an "in-the-money" option-that is, an option with an exercise price lower than that day's market price.They did this by misrepresenting the date of the option grant, to make it appear that the grant was made on an earlier date when the market value was lower.That, of course, is what is meant by abusive "backdating" in today's parlance.
The SEC has been after the problem of abusive options backdating for several years.
As a preliminary step in explaining the Commission's response to the problem of fraudulent options backdating, it would be useful to put the whole topic of options compensation into some perspective.
As you know, during the last year the Commission has been intensely focused on the quality of disclosure of executive compensation.
Very recently, we enacted new rules that will require, beginning with the next proxy season, the full disclosure of all aspects of executive and director pay and benefits.
A key component of that disclosure will be compensation in the form of stock options, which has been a fast growing portion of executive pay since the early 1990s.
Under the new SEC rules, all of an executive's compensation will now be totaled into one number, so that it can be compared easily from person to person, company to company, and industry to industry.