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The Employee Ownership Update

Corey Rosen

June 1, 2006

(Corey Rosen)

Options Backdating Becomes Major Concern

Dozens of companies may be under investigation by the Securities and Exchange Commission for backdating stock options. The Manhattan U.S. District Attorney's Office has also issued several subpoenas in launching a criminal probe. Shareholder lawsuits are starting and promise to rival the post-Enron suits over company stock in 401(k) plans as new sources of corporate litigation.

The story has been making front-page business headlines for the last few weeks, and new companies seem to be coming under investigation daily. In theory, the Sarbanes-Oxley Act should prevent these practices because it requires companies to disclose grants with two days. But now new concern about the practice has been spurred by a study commissioned by the Wall Street Journal, which reports that an analysis of 1,000 companies by M.P. Narayanan and H. Nejat Seyhun of the University of Michigan found that options granting practices between 2002 and 2004 often failed to comply with the Sarbanes-Oxley requirement that grants of awards to executives be reported within two days of board approval ("The Dating Game: Do Managers Designate Option Grant Dates to Increase Their Compensation?", working paper, April 2006). Backdating is not per se illegal, but failure to disclose it can be. Backdating without proper shareholder approval also can cause delisting, shareholder lawsuits, and investor flight. Executives and companies may face tax consequences as well.

Now a new study reported in the Los Angeles Times (5/30/06) reports that an analysis of 191 companies between October 2001 and the end of 2003 finds that "10b5-1" sales may not be as automatic as they seem (10b5-1 sales are pre-set trading programs under which executives sell shares on a regular schedule). The data show that 10.4% of the sales came just before negative earnings reports and only 5.2% before positive reports, a pattern very unlikely to have occurred by chance.

For a more detailed look at backdating and related issues, see my May 26 special column on this issue.

Applications Open for 2007 Best Small and Medium-Sized Companies to Work for List

Employee ownership companies are often great places to work and deserve to be so recognized. The same group that puts out the "100 Best Companies to Work for in America" list is now accepting nominations for its list of the best small and medium-sized companies, which is open to companies with 50 to 999 employees. Among other things, all or a sample of your employees will fill out a survey. To learn about applying, go to this link. In addition to the chance to win, you get a feedback report on how you are doing relative to the winning companies. There is an administrative fee of $975 or $1,250, depending on the size of the company.

New York Times Column Extols Employee Ownership

William Taylor, a founding editor of Fast Company, wrote a very laudatory article in the May 21 issue of the New York Times business section about employee ownership, focusing on NCEO/Beyster Institute Innovations in Employee Ownership Awards winners Reflexite and Hot Dog on a Stick, as well as employee-owned KI in Green Bay, Wis. We encourage readers to share this story with their contacts.

Most Business Ethics 100 Companies Have Broad-Based Ownership Plans

The Business Ethics 100 list--a list of the top 100 corporate citizens in 2006--is dominated by companies with some kind of broad-based ownership plan. The number one company is Green Mountain Coffee, which has an ESOP and a variety of other ownership opportunities. At least 18 of the companies have broad-based option plans, at least 44 have employee stock purchase plans (ESPPs) (most of the options companies also have ESPPs), and at least 13 have ESOPs (a few of these also have ESPPs). We were unable to find employee ownership information for 30 of the companies on the list, but some of these may also offer plans.

Author biography and other columns in this series

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