NY Times Examines Stock-Option Sins of the Valley

In today’s edition of the New York Times, reporters Gary Rivlin and Eric Dash examine why technology companies in general, and those in Silicon Valley in particular, were more inclined to indulge the illicit practice of stock-option backdating than were companies in other industry and in other parts of the country.

Write the article’s authors:

The practice of backdating options dates to the early 1990’s but took on momentum during the frenzied days of the Internet era, when the competition for available talent was fierce. Numerous Silicon Valley insiders described the practice as routine — so much so that the universe of technology companies ultimately placed under the microscope may well far exceed the dozens already under scrutiny by the Justice Department or the Securities and Exchange Commission, if not both.”

While that statement seems fair enough, the writers then push their luck by straying into the boggy land of questionable assumptions and hyperbolic imaginings:

There is little doubt that Silicon Valley provided the perfect setting for cutting corners. The heady days of the tech boom gave many a sense of entitlement, if not also a sense that they were the primary force keeping America strong in the world economy. It was also a maverick culture where clever ways of gaming the system were admired rather than excoriated.

I don’t disagree that cutting corners occurred and was encouraged by many executives during the boom days of technology industry. It happened, sure. I’m not as disposed to see, even in retrospect, the “sense of entitlement” or the “sense that they”(presumably the denizens of the technology industry, and particularly those in Silicon Valley) were “the primary force keeping America strong in the world economy.”

Balderdash! The people who cut corners and enriched themselves and their employees at stockholder expense did it because they could. They didn’t need grandiose rationalizations as to how they were defending the interests of the American economy. That never entered into the equation, except perhaps in a few delusional instances.

The stock-option backdating craze took hold because of two basic human emotions: greed and fear. Greed was a obvious motivator; executives saw the opportunity to pad their nests with even more money, felt it was a victimless crime (as one of those quoted in the article points out), and they grabbed with both hands. Fear also was a motivating factor, because an intense battle was being waged for technology talent in the Valley and beyond. Companies figured if they didn’t put together exceptionally compelling compensation packages, with favorable stock-options at attractive strike prices, prospective employees would work elsewhere.

For some reason, the New York Times feels the need to add an element to the story that was never there, to ascribe motives to these actors that they never would entertain, much less possess. The technology industry, from my firsthand experience, is a multinational, multiethnic, multicultural realm, and it largely is apolitical, at least in the geopolitical sense. People are in the business either because they like the technologies or because they like to make money, and some people are in it because they like both.

That said, the article is worth reading — it includes a graphic that maps 25 Valley-area companies under investigation for, or conducting their own probes into, stock-option improprieties — and it closes with a remark by an SEC official that should trigger consternation throughout the technology industry, especially in light of the recent criminal and civil charges filed against former Brocade CEO Gregory Reyes.

Linda Chatman Thomsen, chief of enforcement at the S.E.C., said in an interview that the government filed charges against Brocade first “because it was ready.’’

“It wasn’t necessarily,’’ she said, “the most egregious case.”

Who’s next? We’ll probably get that answer soon enough.


One response to “NY Times Examines Stock-Option Sins of the Valley

  1. Brad
    There are quite a few companies that we are currently working with for the backdating issue, that neither were completely aware NOR were sure they were doing wrong. There is much room for error based on interpretation. I dont think you can cast a wide net and say they were all motivated by greed or fear. There are a few executives that genuinely did want to give great prices to their employees so they could benefit from the “growth” of the stock. I think the jury is out on who was wrong and did something illegal, vs. who was unethical vs. who were just plain uninformed.

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