Major investors call for option disclosures

Some of America's biggest institutional investors, including the California Public Employees' Retirement System (Calpers), are joining prosecutors and regulators in examining whether companies manipulated the timing of awarding stock options to benefit executives.

At least 24 companies, including Seattle's F5, have said federal officials are investigating their stock-option practices, including the possibility they deliberately moved option grants back to dates when the stock price was lower. Back-dating would inflate the value of the options and shorten the amount of time executives would have to wait before claiming a profit.

"Executive pay has been one of the top issues for our members for the past few years and this just adds fuel to the fire," said Ann Yerger, executive director of the Council of Institutional Investors in Washington, D.C. "It's a corporate atrocity that everyone is shocked by."

Council members, who represent pension funds with more than $3.5 trillion of assets, will consider filing shareholder proposals for companies identified in the scandal during the 2007 proxy season, Yerger said.

"Investors rightfully should be ticked off and pressing for disclosures and enforcement, as well as greater scrutiny by audit firms, to ensure this type of conduct doesn't happen," said Jonathan Weil, managing director at Glass Lewis, an adviser to institutional investors.

Stock options allow holders to buy shares at set prices on future dates. They're usually granted to executives as part of annual compensation and set at the current market price, giving managers an incentive to make the stock advance.

While companies are allowed to award executive options at below-market prices, they must charge the difference in value against profits and potentially lose the right to tax deductions on compensation exceeding $1 million. Undisclosed back-dating gives executives a similar benefit without the extra corporate costs.

Calpers, a $207 billion fund, wants companies to disclose the results of any investigations into possible back-dating of stock options, including internal probes and those by the Securities and Exchange Commission (SEC) or federal prosecutors. It also wants companies under investigation to come clean on whether any findings will affect financial statements.

Pension funds probably will ask the SEC to consider requiring new disclosures of option grants, according to Institutional Shareholder Services, the largest U.S. proxy adviser to fund managers.