The problem at UnitedHealth is that top-level managers may have changed the grant date of their options, choosing a date that minimizes the exercise price of the option. There are two difficulties of backdating stock options for managers. First, FASB requires the firm to put an expense on the income statement that measures, however imperfectly, the cost of allowing managers to change the stock option calendar. Second, and more importantly, backdating allows managers to choose their own cost, defeating the supposed benefits of stock options. In effect, the practice attempts to provide cover for managers as they raid the resources of a business enterprise.

Let's get back to basics. The rationale for stock options -- the alignment of the interests of managers with the interests of stockholders -- is fallacious in the real world. While stock options allow the holder to enjoy investment gains as the stock price increases, it spares the holder of any pain from stock price decreases. If stock prices do not move in such a way to allow managers a wealth increment, then business entities often reload the stock options (i.e., reduce the exercise or strike price of the stock option). In other words, managers typically face little risk that the stock options will run dry because compensation committees react by lowering the strike price to some figure more likely to allow the managers a chance to exercise the options. Shareholders, on the other hand, experience any losses very dearly and very personally, and they have no opportunity to reload and buy the stock at lower prices than they originally paid. Stock options do not align the interests of managers and shareholders.

Even if compensation contracts could be written that better align these divergent interests, stock options remain deficient because they usually are not distributed on the basis of managerial performance. Typical stock option plans do not distinguish between the performance of the overall stock market and the performance by company executives. At the margin, managerial performance has a relatively small impact on the value of corporate stock.

When stock options are distributed on the basis of accounting earnings, the process becomes more pernicious. Managers control the accounting strategies and policies for the firm, and not surprisingly, choose strategies and policies that benefit themselves instead of shareholders. Many of the accounting scandals of the past ten years resulted from the temptations for managers to manipulate accounting earnings and thereby increase the number of stock options they "earned."

These practices are bad enough, clearly unethical to the investment community, despite being legal. Backdating, however, crosses the legal line as well. By amending the grant date, managers are writing themselves a check for nothing. If these investigations produce evidence to show that managers were indeed backdating their own stock options, then let's hope district attorneys prosecute them to the fullest extent of the law.

In the midst of all this discussion, however, we must ask who is to blame for these runaway managers. Who has permitted managers to cook the financial books of so many corporations over the past decade? And with respect to today's topic, who allows corporate managers to backdate their own stock options? In other words, where is the board of directors? As happens too often, board members are absent from the oversight responsibilities that society has asked them to bear and for which shareholders compensate them. If Congress is really serious about accounting and corporate reforms, then I urge members to pass legislation criminalizing such willful inaction. The see-and-hear-no-evil attitude of so many corporate directors has to stop, else we can forget ever improving the financial reporting climate.