How to Clean Up a Scandal

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Showing Executives the Door

Initially, ACS moved slowly in its probe. In May, the company made a filing with the SEC that said, "ACS does not believe that any director or officer of the company has engaged in the intentional backdating of stock option grants in order to achieve a more advantageous exercise price."

It was only six months later that ACS took the step of pushing out two of its top executives. Such a move can be difficult, especially if it's an executive who has been integral to the company's success. But it may be necessary to reassure outsiders. "The blueprint that we're seeing is, first and foremost, if someone broke the law and knew they broke they law, they have to go," says Patrick McGurn, executive vice-president at Institutional Shareholder Services, which advises institutional shareholders on governance and proxy issues.

A growing number of chief executives have lost their jobs as fallout from the scandal spreads. Among those affected have been the CEOs at UnitedHealth (UNH), McAfee (MFE), CNET (CNET), Comverse Technology (CMVT), Vitesse Semiconductor (VTSS), and Monster.com (MNST) (see BusinessWeek.com, 10/12/06, "CEOs Feel the Heat"). Homebuilder KB Home said on Nov. 12 that its longtime CEO Bruce Karatz was stepping down from his post (see BusinessWeek.com, 11/13/06, "KB Home Cleans House"). The company's stock rose 4% the next trading day, to $44, and has since increased to more than $48. Mercury Interactive was one of the first companies to see its CEO leave under the cloud of an options investigation, back in 2005 (see BusinessWeek.com, 7/29/06, "Mercury's Star Rises").

Standardizing Options Grants

McGurn of ISS says there are important steps that companies can take, even after removing executives involved in backdating and restating financials. Companies can attempt to reclaim for their shareholders financial gains that top executives reaped from backdating options or move to reprice options that have been issued.

McGurn adds that companies can also institutionalize certain practices to make sure backdating doesn't happen again. For example, all options can be granted at the same time every year or every quarter.

Lie cautions that companies can go too far, however. He points to UnitedHealth, which after coming under intense scrutiny over its options awards moved to eliminate the use of options for its chief executive and president. "I think maybe that's going further than you have to go," says Lie. "Options can be very useful as a motivational tool."

Ryst is a reporter for BusinessWeek.com in New York.