Ethics of Stock Option Backdating - Ethicapublishing.com

shareholders, by way of financial statements, as to the amount of compensation they are
receiving for the services they render. Reducing corporate transparency leads to a loss of
shareholder confidence, and violates the social and legal contract executives entered into
with the shareholders when they accepted a position at the company. Misleading and
deceptive information is unethical when there is a contractual obligation to provide
honest and accurate information.
Backdating violates the ethics of the manager/shareholder contract-based
framework. An implicit agreement is said to exist between individuals and the groups
they belong to. This agreement dictates the rights and responsibilities of the individuals
within the group. This framework applies to executives, in that they work at a firm on a
voluntary basis, and this choice is what obligates them to act ethically. In the case of most
executives, the agreement is more than an implicit one, since they are explicitly defined
by actual, legal contracts of employment as well as by the laws and regulations of the
society in which they operate. Some might argue that the social contract theory does not
hold in the case of government regulation, in this case taxation, because the agreement is
not entered voluntarily but rather through government force. However, the unethical
behavior is not reliant on the tax evasion property of backdating, but on the detriment
caused to the shareholders that the executives work for. Backdating directly reduces
returns that the shareholders would have otherwise realized. According to a contract-
based ethical framework, the act of backdating and misrepresentation of compensation
practices is unethical.
Moral Disengagement
It can be argued that only a few managers at a few firms might take advantage of
loopholes to increase their compensation. This counterargument is the basis for the belief
that backdating was not a product of a widespread breakdown of ethics, but in actuality
the wrongdoings of a few individuals with each situation being detached from the rest.
However, a recent joint investigation by the Securities and Exchange Commission and
Justice Department has found potentially fraudulent behavior with executive stock option
grants at more than 120 companies. The question is then, how did so many executives, all
at different companies, come to take part in this unethical act? The answer is moral