Wednesday, August 23, 2006

A Tangled Options-Timing Web

The options-timing investigations that have ensnared numerous companies call into question the oversight role of the board of directors at the organizations.  The Wall Street Journal reports (here) that KB Home, the Los Angeles home building giant, has initiated an internal investigation into some "propitiously timed" stock options granted to CEO Bruce Karatz, who was among the highest paid executives in 2005 with total compensation of over $150 million, most of it from cashing in options.  An interesting tidbit in the story is that the former head of the compensation committee on KB Home's board, James Johnson, is also an independent director at UnitedHealth Group, which is also involved in a number of options-timing investigations.  Indeed, UnitedHealth has hired Bill McLucas, former head of the Enforcement Division at the SEC and now at Wilmer Cutler, to lead its internal investigation, and the company has achieved the federal investigatory hat trick, with the IRS, SEC, and Department of Justice conducting investigations of possible options backdating in grants to executives, including its CEO, William McGuire (see proxy statement here).  Johnson is the former CEO of Fannie Mae, and serves as a director at Goldman Sachs and Temple-Inland, along with KB Home and UnitedHealth.  Directors serving on multiple boards is certainly not unknown, and boards are stocked with former CEOs, giving these groups the feel of an old boys club.  While there is certainly no conflict involved in serving on multiple boards, the options-timing investigations will focus on the work of compensation committees in particular, and it cannot be comforting to shareholders to see companies with the same directors facing similar problems involving internal controls and oversight of executive compensation.  (ph)

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