Ethics of options repricing and backdating

The stock option is intended to motivate the executive to increase the stock price of the firm. If the stock rises, the executive exercises the option, buys the stock from the company at the strike price and then immediately sells those shares on the stock exchange at the current (higher) market price to obtain a capital gain. Both the investor and the employee gain from the increase in the market price of the company’s stock.

However, sometimes the stock price falls and the current price is less than the strike price.

Virtue ethics does not accept discrimination and prudential treatment of insiders as the mark of an ethical businessperson. is that the repricing of stock options may be legal but it is certainly unethical.

Their concluding paragraph reads: Stock options were designed as a way to provide pay for performance, not to reward poor performance by backwards-looking repricing or backdating.

Such activities undermine the incentive justification for use of stock option plans.

Executives deserve compensation packages that provide both short-run benefits and a long-run motivation to increase organizational value for all stakeholders. Should a board of directors approve repricing or backdating stock options for outstanding executives whose current stock options are underwater due to uncontrollable economic factors, and who might be lured away unless some incentives to stay are created?

The other is to “bullet-dodge” by delaying the granting of stock options until after bad news has been released.

An analysis of the ethics of repricing, backdating, spring-loading, and bullet-dodging is contained in the article “Ethics of Options Repricing and Backdating: Banishing Greed from Corporate Governance and Management,” reprinted at the end of the chapter.

Their inside knowledge discriminates against all the other shareholders who do not know the good or bad news.

Utilitarianism or consequentialism argues that the ethically correct decision must be of benefit to most shareholders in the long-term.

Backdating stock options benefits the executive at the expense of the other shareholders.

As such it is unlikely that everyone in society would accept as a universal rule that management should be given preferential treatment.

It is difficult to say that manipulating stock options, through any of these four tactics, is the sign of a virtuous person.

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Furthermore, it does not allow exceptions to a rule.

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