Directors spotlighted in options scandal

WASHINGTON — As the scandal widens involving stock options that may have been manipulated to enrich top executives, investors are wondering anew whether corporate directors have been complicit or negligent in allowing questionable practices yet again.

With a single vote, the directors of Cyberonics Inc. are said to have approved options grants that netted the chief executive a paper profit of $2.3 million overnight. At other companies ensnared in the affair, executives may have acted without board approval to improperly grant themselves stock options, or may have recorded dates differently from what the board approved.

Already, 15 senior executives or directors — including four CEOs, four finance chiefs and three general counsels — have been fired or have stepped down at seven companies.

“Boards are going to be forced to seize more control from management” and give executives less leeway in setting compensation, said Ted White, a consultant to the Council of Institutional Investors and a former California pension fund official.

A “deeply troubling” aspect of the stock options controversy, he said, is “the possibility that some boards were complicit in this.”

A growing number of public companies — there are at least 31 — are being investigated by the Securities and Exchange Commission or federal prosecutors for possible improper backdating of options grants to executives.

But in a new twist, the Cyberonics case is said to have involved a different sort of timing: not backdating options to a low point in the company’s stock price, but granting them shortly after the company received positive news certain to boost the share price. Many academic studies have shown that options grants often appear to have been carefully timed around good and bad news.

Cyberonics, a medical-device maker based in Houston, on Thursday called the assertions of unusual timing made by Wall Street analyst Amit Hazan “inaccurate and without merit.” Company shares tumbled in trading after the comments by Hazan, who also downgraded the stock, were published.

The SEC has begun an informal inquiry into stock options practices at Cyberonics, The Wall Street Journal reported online Friday, citing an unnamed person familiar with the matter.

The responsibility of directors as corporate watchdogs — and the apparent breach of that duty in many instances — came into sharp focus during the wave of company scandals that began with Enron Corp.’s collapse in late 2001.

Board members at many companies were sued by shareholders in the aftermath. Regulators and shareholder advocates have decried what they see as a trend in recent years toward autocratic chief executives, their decisions rubber-stamped by docile directors.

Directors are seen as the first line of defense in protecting shareholders’ interests, since the SEC can’t be inside the boardroom to watch for questionable dealings.

Now again, in the stock options debacle, some company boards — specifically their compensation committees — may have relinquished their duty to oversee how their top executives were paid.