Wel, we didn’t quite say that backdating doesn’t matter. The point we’ve raised here (and that’s been raised over and over again by Larry Ribstein) is not about whether backdating matters in some sense of universal, metaphysical justice. That sort of thing is in the eye of the beholder. Or the Creator. Or…well, you get the point.
The question we want to ask is: does backdating matter to investors and analysts? In the primary and most important sense, the answer is clearly “no.” And the reason is simple: because investors and analysts do not usually take stock options expenses in account when assessing the value of the company. There are all sorts of reasons why this is true—that the officially recognized, SEC-approved accounting method is backward looking and inexact, for instance—but there’s little argument about whether it is true.
Holman Jenkins illustrated this nicely in yesterday’s column:
Look at Yahoo's latest earnings release, which flags several versions of income and cash flow that leave out stock compensation charges. Says Yahoo: "Because of the variety of equity awards used by companies, the varying methodologies for determining stock-based compensation expense, and the subjective assumptions involved in those determinations, we believe excluding stock-based compensation enhances the ability of management and investors to understand the impact of stock-based compensation expense on our operating income."
Look at any news account of company earnings in which options cost is a significant factor: "Sysco Profit Falls On Stock-option Expense, Fuel Costs," reported a Dow Jones Newswires headline last year. "Excluding stock-option expense, earnings would have been 34 cents a share," said the story's third sentence.
The legal eagles have a word for things that don’t matter to investors or stock analysts—“immaterial.” And when it comes to the prosecution of crimes such as stock fraud—the hammer which the authorities have been using to beat alleged backdaters—this does matter because immaterial errors or omissions in a companies financial disclosures don’t typically amount to criminal acts.
In another sense, however, backdating does matter to investors and analysts. The zeal of muckraking journalists and status seeking prosecutors has made it matter very much, in large part because both groups have chosen to ignore the more important question of materiality in favor of criminalizing and scandalizing. And that has brought down more than a few good otherwise fine executives who might still be leading their companies if not for this kind of irresponsible journalism and law-enforecment.