Researching a Scandal
Associate Professor of Finance
The stock-option backdating scandal has generated a lot more than just headlines. It has caused significant heartburn in corporate boardrooms and executive offices across the country. Heron says some 200 to 250 companies are either suspected by the SEC of improper backdating or are doing their own internal investigations, and some 200 lawsuits have been filed on behalf of disgruntled shareholders. Some companies are being forced to restate their earnings, and some could face penalties for engaging in what the SEC has referred to as financial fraud.
Among the bigger names caught up in the mess is iconic computer and electronics manufacturer Apple Inc., whose backdating activities are being investigated by the U.S. Attorney's office for the Northern District of California. The company itself has disclosed numerous incidents of backdating, including a 2001 occasion when CEO Steve Jobs received an option to acquire 7.5 million shares—officially granted in December but backdated to an October board meeting that the company now acknowledges never took place. Media reports indicate that the backdating was worth about $20 million because the stock price was lower in October 2001 than it was two months later. An internal company investigation absolved the CEO of any wrongdoing and says the problems have since been corrected.
There's no indication of danger to Jobs's future at the company he co-founded and later revived, but not all CEOs are likely to come through backdating scandals unscathed. Media reports in April stated that the SEC would file suit against two other Apple executives over the company's backdating of employee stock options. And Heron fully expects to see some chief executives lose their jobs, though he believes "the firms that are going to get really caught up in this are the ones that are doing it egregiously."
In the meantime, "there have been changes in reporting requirements, and a lot of it is the direct result of our research shedding a light on this," he says. "The thing we take the most comfort in is that this research has had a big effect on reporting policies, so people won't be able to pull this off in the future. It has made a sizable impact on corporate governance."
Dan Dalton, director of the Institute for Corporate Governance and dean emeritus of the Kelley School of Business, says a lot of investors and regulators would be in the dark without the efforts of Heron and Lie.
"On a practical level, there simply would be no option backdating scandal without their work," Dalton says. "Absent that work, government regulators, shareholders, and the many constituencies touched by post-Sarbanes-Oxley corporate governance would be blindly unaware of these excesses."
Heron says like any researcher in this field, he always hopes that his work has some useful policy implications. "We always try to look at something that people are interested in," he says. "But to have something have this significant and immediate an impact is extremely rare. We happened to be at the right place at the right time with the right information."
That's a much more modest assessment than Dalton's view. "It is without a doubt the best contemporary example of the masterful intersection of academic research and corporate practice," he says. "Twenty years hence, this work will still retain its rightful place in the highest echelon of outstanding research informing best practice."
Maremont agrees, calling the work "absolutely first-rate academic research that was very important in uncovering this scandal that had been hidden for decades."
Heron acknowledges that the chance to be so directly involved in the making of news and business policy is rare—and thrilling, too.
"It's not a once-in-a-lifetime event," he says. "It's a one-in-several-thousand-academic-lifetimes event, to be so fortunate to be right at Ground Zero."
Courtesy of Indiana Alumni Magazine: Steve Kaelble, BA'85, writer; Randy Johnson, photography; Andrea Eberbach, Illustrations.