Monday, August 20, 2012

Looking back at Stock Options Backdating: A Debate

The following is a mock debate between John Ruskin and Andrew Carnegie over the problem of whether options should be allowed to be backdated.  The arguments are made based on my interpretation of their individual viewpoints from studying their works.  It was originally composed in 2006, but is being republished as we look back on the backdating scandal that occurred in 2006, namely with Apple and Steve Jobs.


A Debate Between Mr. John Ruskin and Mr. Andrew Carnegie


Commentator: Backdating Stock Options, that is the subject of our discussion and debate

today on our program. The business world has been immersed in discussion over the

ethics of this strategy, and whether or not it should be allowed. With me today, I have

two authorities on business to discuss this very issue, Mr. John Ruskin, and Mr. Andrew

Carnegie, both of whom have commented on creating wealth and the best practices for

So, Mr. Ruskin, I will start with you. How do you see this issue?

Ruskin: I won’t go as far as to say that I am surprised by it, nor will I go as far as to say

it is appalling behavior. However, I am one to study the effects of such behaviors on

organizations and society as a whole, and will say that I don’t believe that backdating

options is good for the creation of wealth.

Commentator: How so? Isn’t backdating stock options a way to help executives stay on

top and be competitive?

Ruskin: It comes down to the fact that backdating these options to buy stock is merely

the way that executives can increase their wealth solely for the purpose of mortal

luxury. They are doing this in spite of any concern to investors in the company, and

even sometimes doing so while the industry in which they operate and the market and

profitability of their business is decreasing. These are ill gotten gains obtained most

often at the peril of many.

Carnegie: If I may, I am going to have to disagree with Mr. Ruskin on a few issues.

I argue that the purposes of backdating options are not always solely to benefit these

industrialists with some form of “ill gotten” gains, as my colleague Mr. Ruskin has

stated. These backdating procedures are in place by executives to keep the businesses,

and the directors, as well as the employees a few cases, competing amongst themselves

and the other companies. Let us not forget, Mr. Ruskin, that the Law of Competition is

in play here, which is absolutely central and essential to the advancement of society and

mankind. Individualism is the best and most fertile field, which always produces the best

fruit, and this fosters individualism.

I think also that Mr. Ruskin has not correctly suggested the idea that these procedures are

somehow adrift from the desires and considerations of the stockholders. In most cases,

these modes of increasing the value of the options have been accepted by the voters as a

means for the option to be exercised at its greatest value and return.

Commentator: Then, aren’t there ethical and moral consequences for gaining greater

wealth in this way, or is this something that, as interest was for so long, will eventually be

viewed as not only acceptable but necessary?

Ruskin: I would never hope such a thing would be seen as necessary, or advantageous

for society, business or mankind. I am somewhat surprised at Mr. Carnegie, whom I

respect as a fellow gentleman and colleague in the science of economic thought, because

he forgets that there is at all times present the question of justice. Backdating stock

options puts a negative value to the wealth gained, and therefore draws downward on

the economy. Already, we are seeing this effect in the figures that show the amount

of money that was lost, or misreported, by these programs. Corporations are having to

go back and restate their financial statements to the public, and the majority of those

reissued statements show a correction for hundreds of millions in losses.

Is putting the benefit and favour of one man ahead of another the proper thing, if the rules

and measures by which it is achieved are not justly or nobly stated, or not fully disclosed

to all parties involved? In my view, this is selling the dying man the loaf of bread.

Although there exists no illegality in the least, one is commercially rich and the other is

commercially poor, and without reason, as I have said, due to the fact that in most cases,

the executive never made the company’s stock rise, or ever increased the market share

during that period of time. Let Mr. Carnegie not forget, and society also, that “Many joys

can be given to men which cannot be bought for gold.”

Commentator: Mr. Carnegie, how does one respond to this idea, and is your view one

that sees these practices as becoming acceptable or necessary?

Carnegie: One could argue the point of whether or not these practices are necessary, or

whether or not they are moral or should eventually be made illegal. I won’t pretend to

know the answer, nor will I sit as a judge of that issue. We’ll let time and the overall

markets dictate that, and they will decide whether or not these things are acceptable.

The rudiments of business are such that sometimes can have the appearance of being

immoral or unjust. But I believe that such costs of injustice within the system, many of

which are allowed injustices, are far outweighed by the benefits that can be produced

as the individual is given his right to obtain, and aspire to new heights, “with none to

make afraid.” As such, I don’t believe laws or legislation should be introduced on such

matters. I strongly advocate the free play of economic forces. The laws and fundamental

theories surrounding the governance of Corporations, and the very purpose for a charter

for such from a State or governmental body, has always been to allow for private

governance of internal business affairs. This is part of the legal right the millionaire

has to his money. He has the right to control it. If the shareholders and directors of that

organization have voted such to allow for these actions, and know about their existence,

then they should be allowed to continue, as they have the rights entrusted to them to

govern the trade and rules of their property and issuance of stock. I would argue that this

inequality of environment and concentration of business is helpful to the overall aspects

of society. The wealth of a few is always beneficial to society if the wealthy know how

to use their wealth correctly.

Commentator: Mr. Ruskin, Mr. Carnegie makes the point that the millionaire must

have the right to control his money, and that these corporate boards and shareholders

are merely voting to allow for these programs by way of corporate law which allows for

corporations to govern themselves with articles and bylaws. How then, Mr. Ruskin, can

we take away from these advantages, and take away such opportunity from the rich? I’ll

give you the last word.

Ruskin: Many men of business hardly know the meaning of what it is to be rich, and

frankly cannot govern themselves to make such decisions without help from outside

thought. I have dealt with the likes of Mr. Carnegie’s argument before. Are these so

called stocks really their stocks, just as I argued in my book that the heathen leads forth

to say “These are MY jewels”?

economy. The blood that comes from fever resembles the ill gotten wealth of these

executives. The grounds have already been made known by which we can judge the

great question of justice, and so Mr. Carnegie’s argument of the need for markets to

determine such is not applicable to this argument. What we need is a system that is

made that will help to develop an honest man. One that will deal with these men, and

send the clear message to the others in the arena of business that if they persist in such

things that we as a society will deal with them just as cunningly as they stole from us and

our economy when backdating their options to reap a seemingly better one.

Remember that economic wealth is the blood of that

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