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Atkins Supports Business Judgment in Options Grants

In remarks to the International Corporate Governance Network, Commissioner Paul Atkins defended the timing of options grants as an exercise of business judgment and warned against undercutting the business judgment rule through enforcement actions. Atkins also addressed accusations about insider trading by corporate boards in connection with options grants. He said an insider trading theory falls flat since there is no counterparty who could be harmed by an options grant. The counterparty is the corporation, he explained, which represents the shareholders who are intended to benefit from the decision. Atkins added that boards are almost always in possession of material nonpublic information, so it would be difficult to refrain from making options grants while in possession of such information. His prepared remarks were posted on the SEC's Web site.

Atkins believes that employee stock options are one of the reasons that innovative corporations have flourished. With respect to recent stories about manipulations of stock option prices for personal gain, Atkins said the situations should be examined before being condemned. Atkins agreed that attempts to evade legal obligations should not be tolerated, but advised that the mere fact that options were back-dated does not mean that the securities laws were violated. If the back-dated options are properly accounted for and disclosed they are legal, according to Atkins.

Atkins believes that most of the questionable options granting activity that has been the subject of news reports occurred prior to the SEC's adoption of accelerated disclosure requirements. He added that the SEC will likely include additional disclosure requirements for options grants in the pending executive compensation rules.

Springloading, a term for when a company schedules an option grant ahead of good news or postpones it until after bad news, has drawn a lot of attention, Atkins said. However, he questioned whether there has been a securities law violation even where the nexis between the grant and the news event can be identified. If the directors conclude that they can grant fewer options to get the same economic benefit by granting options ahead of a positive earnings report, Atkins asked why anyone should second-guess that decision.

Atkins said one must consider the business purposes behind the timing of options grants. He said that deciding when and to whom options are granted is a complicated calculous filled with uncertainty since no one knows what will happen to the stock price. Even boards that attempt to issue options at opportune times may miss their intent, he noted, partly because of the vesting period to which most options are subject, he explained.

As for granting options in advance of good news, Atkins suggested there was no better way to maximize the value to the recipient. He believes there is a good reason not to grant options on a rigid, preset schedule. Atkins added that underwater options do more harm than good. The employee has no incentive to stay with the company to exercise the option.

Atkins concluded that the focus on corporate compensation arrangements and on practices relating to the granting of stock options should not undermine a compensation arrangement that he believes has served shareholders well for many years. He encouraged others to share their views on this matter.