Corporate Governance, Ethics, and the Backdating of Stock Options


Backdating of stock options is an example of an agency problem. It has emerged despite all the measures (i.e., new regulations and additional corporate governance mechanisms) aimed at addressing such problems? Beyond such negative controlling measures, a more positive empowering approach based on ethics may also be necessary. What ethical measures need to be taken to address the agency problem? What values and norms should guide the board of directors in protecting the shareholders’ interests? To examine these issues, we first discuss the role values and norms can play with respect to underlying corporate governance and the proper role of directors, such as transparency, accountability, integrity (which is reflected in proper mechanisms of checks and balances), and public responsibility. Second, we discuss various stakeholder approaches (e.g., government, directors, managers, and shareholders) by which conflicts of interest (i.e., the agency problem) can be addressed. Third, we assess the practice of backdating stock options, as an illustration of the agency problem, in terms of whether the practice is legally acceptable or ethically justifiable. Fourth, we proceed to an analysis of good corporate governance practice involving backdating options based on a series of ethical standards including: (1) trustworthiness; (2) utilitarianism; (3) justice; and (4) Kantianism. We conclude that while executive compensation schemes (e.g., stock options) were originally intended to help remedy the agency problem by tying together the interests of the executives and shareholders, these schemes may have actually become “part of the problem,” and that the solution ultimately depends upon whether directors and executives accept that all of their actions must be based on a set of core ethical values.

This is a preview of subscription content, access via your institution.


  1. Adam, A. M., A. Aderet and A. Sadeh (2007) Does Ethics Matter to e-Consumers. International Journal of Internet Commerce. 6(2): 19–34

    Article  Google Scholar 

  2. Adam, A. M. and T. Shavit: 2008a, ‘How Can a Ratings Based Method for Assessing Corporate Social Responsibility (CSR) Provide an Incentive to Firms Excluded from Socially Responsible Investment Indices to Invest in CSR?’, Journal of Business Ethics. doi:10.1007/s10551-007-9600-4

  3. Adam, A. M. and T. Shavit: 2008b, ‘The Business of Business: Re-Modeled in Economic and Ethical Terms’, Presented in The 5th ADERSE (Association for the Development of Education and Research on Corporate Social Responsibility) Conference. Grenoble, France, 11 January, Accessed 8 Jan 2008

  4. AFL-CIO: 2007, ‘Stock Options Backdating and Spring Loading – CEO Pay Run Amok’,

  5. Arbel-Ganz, O.: 2003, ‘Regulation’, Working Paper in Hebrew, The Israel Democracy Institute

  6. Arya, A. Sun, H.L. (2004). “Stock Option Repricing: Heads I Win, Tails You Lose,” Journal of Business Ethics, 50(4), 297–312

    Article  Google Scholar 

  7. Barron, J. (2007). “Options Backdating Scandals Take the Main Stage,” Business Credit, 109(3), 30

    Google Scholar 

  8. Bebchuk, L. A. and J. M. Fried: 2003, April, ‘Executive Compensation as an Agency Problem’, Discussion Paper No. 421, Harvard Law School

  9. Berle, A., and Means G. (1932). The Modern Corporation and Private Property. NY: MacMillion

    Google Scholar 

  10. Bizjak, J., M. Lemmon and R. Whitby: 2007, February, ‘Option Backdating and Board Overlocks’, AFA New Orleans Meeting Paper

  11. Boatright, J.: 2007, Ethics in Finance, 2nd edition (Blackwell Publishing, Malden, MA

    Google Scholar 

  12. Bowie, N., P. Werhane: 2004, Management Ethics, Blackwell Publishing, Malden, MA

    Google Scholar 

  13. Boyd, D.P. (2003). Chicanery in the corporate culture: WorldCom or World Con? Corporate Governance. 3(1): 83–85

    Article  Google Scholar 

  14. Braum, M. and Sharma, A. (2007). “Should the CEO Also Be Chair of the Board? An Empirical Examination of Family-Controlled Public Firms,” Family Business Review. 20(2): 111–126

    Article  Google Scholar 

  15. Bruhl, R.H. (2003). “A Possible Solution to the Principal-Agent Problem Posed by the Contemporary Corporate CEO,” Journal of Business Ethics. 48(4): 401–402

    Article  Google Scholar 

  16. Bryce, R. (2002). Pipe Dreams And the Death of Enron. NY: PublicAffairs

    Google Scholar 

  17. Bunge, M. (1989). “Treatise on Basic Philosophy,” Vol 8. Ethics: The Good and the Right. Dordrecht: D. Reidel Publishing Company

    Google Scholar 

  18. Clapman, P.C. (2005). “Shareholder governance activism at TIAA-CREF,” International Journal of Disclosure and Governance. 2(3): 219–227

    Article  Google Scholar 

  19. Clearly, B.: 2007, ‘Managing the Risks Associated with␣Stock Options Backdating’, The CPA Journal, April.

  20. CNW: 2005, December, ‘CIBC Adopts New CEO Compensation Model’,

  21. Corporate Watch: 2007, ‘Stock Options Backdating and Spring Loading – CEO Pay Run Amok Stock Options␣Backdating and Spring Loading – CEO Pay Run Amok’,

  22. Cosenza, E. (2007). The Holy Grail of Corporate Governance Reform: Independence or Democracy? Brigham Young University Law Review. 1: 1–54

    Google Scholar 

  23. Engelen, P.J. and Liedekerke, L.V. (2007). “The Ethics of Insider Trading Revisited,” Journal of Business Ethics. 74(4): 497–507

    Article  Google Scholar 

  24. Felo, A.J. (2001). “Ethics Programs, Board Involvement, and Potential Conflicts of Interest in Corporate Governance,” Journal of Business Ethics. 32(3): 205–218

    Article  Google Scholar 

  25. Forelle, C. and J. Bandler: 2006, ‘The Perfect Payday; Some CEOs Reap Millions By Landing Stock Options When They Are Most Valuable; Luck – Or Something Else?’, The Wall Street Journal, A1

  26. Forelle, C., J. Bandler and M. Maremont: 2006, July 15, ‘C. Executive Pay: The 9/11 Factor’, The Wall Street Journal. A1

  27. Friedman, M.: 1970, The Social Responsibility of Business is to Increase Its Profits, New York Times Magazine, 33(30), 122–125

    Google Scholar 

  28. Harshberger, S., and Jois, G.U. (2007) Looking Back and Looking Forward: Sarbanes-Oxley and the Future of Corporate Governance. Akron Law Review. 40:1

    Google Scholar 

  29. Heron, R. A. and E. Lie: 2006, ‘What Fraction of Stock Options Grants to Top Executives Have Been Backdated or Manipulated?’, Working Paper, University of Iowa and University of Indiana.

  30. Jayaratnam, A.: 2007, ‘Prosecuting Stock-Option Backdating: The Ethics of Enforcement Techniques’, The Georgetown Journal of Legal Ethics, 20(3): 755–767

    Google Scholar 

  31. Jensen, M. and Meckling, W. (1976). “Theory of the Firm: Managerial Behavior, Agency Costs, and Ownerhip Structure,” Journal of Financial Economics, 3: 305–360

    Article  Google Scholar 

  32. Kim, A.K. and Nofsinger, J.R. (2007). Corporate Governance. (2nd ed). NJ: Pearson Prentice Hall

    Google Scholar 

  33. Laufer, W.S. (2006). Corporate Bodies and Guilty Minds: The Failure of Corporate Criminal Liability. The University of Chicago Press: Chicago

    Google Scholar 

  34. Lunsford, J. L., A. Pasztor and J. S. Lubline: 2005, March 8, ‘Emergency Exit: Boeing’s CEO Forced to Resign Over his Affair with Employee; Stonecipher was brought into Restore Credibility in Wake of Other Scandals; Undone by a Secret Tipster’, Wall Street Journal, A.1

  35. Maich, S.: 2007, November 28, ‘Research in Motion Finds a Better Option’,, Accessed 7 Jan 2008

  36. Matsumura, E.M, and Shin, J.Y. (2005). “Corporate Governance Reform and CEO Compensation: Intended and Unintended Consequences,” The Journal of Business Ethics, 62: 101–113

    Article  Google Scholar 

  37. McLean, B. and P. Elkind. (2003). The Smartest Guys in The Room. N.Y: Penguin Group

    Google Scholar 

  38. Montgomery, D.: 2006, September 22, ‘Backdating Options Grants: A Dead Man’s Tale’, Business Ethics␣News.

  39. Narayanan, M.P., Schipani, C.A., and Najet-Seyhun, H. (June 2007). “The Economic Impact of Backdating Executive Stock Options,” Michigan Law Review. 105(8): 1598–1642

    Google Scholar 

  40. Newswise: 2006, August 16, ‘Experts Call Expensing Stock Options Improper Accounting’, Berkeley Haas School of Business, University of California,

  41. Peters, G.B. (2001). The Politics of Bureaucracy. 5thEd. NY: Routledge

    Google Scholar 

  42. Plitch, P.: 2004, June 21, ‘Corporate Governance (A␣Special Report); Blowing the Whistle: Sarbanes-Oxley Requires that Companies Treat Internal Complaints – and Complainers – Seriously’, Wall Street Journal, R.6

  43. Raiborn, C., M. Massoud, R. Morris and C. Pier: 2007, ‘Ethics of Options Repricing and Backdating’, The CPA Journal, October,

  44. Research in Motion: 2007, March 5, ‘RIM Provides Status Update and Reports on Results of Internal Review of Stock Option Grants by Special Committee’,

  45. Rodgers, W. and Gago, S. (2003). “A Model Capturing Ethics and Executive Compensation,” Journal of Business Ethics, 48(2): 189–201

    Article  Google Scholar 

  46. Saul, S.: 2006, July 17, ‘Study Finds Backdating of Options Widespread’, New York Times.

  47. Schwartz, M.S., Dunfee, T. W., and Kline, M.J. (2005). “Tone at the Top: An Ethics Code for Directors? Journal of Business Ethics. 58(1–3): 79–100

    Article  Google Scholar 

  48. Sesil, J.C., Kroumova, M.K., Kruse, D.L., Blasi, J.R. (2007). “Broad-based Employee Stock Options in the U.S. - Company Performance and Characteristics.” Management Revue, 18(1): 5–22

    Google Scholar 

  49. Simon, E.: 2006, ‘Options Backdating: Lost Share Price, Additional Compensation Total More Than $10 Billion’, Associated Press, October 24

  50. Stecklow, S.: 2006, ‘Options Study Becomes Required Reading’, The Wall Street Journal, May 30th, B1

  51. Surowiecki, J.: 2006, ‘The Dating Game’, The New Yorker, November 6,

  52. Thompson, M. (2006). Are You Built to Last? Chief Executive. 222:24

    Google Scholar 

Download references

Author information



Corresponding author

Correspondence to Mark S. Schwartz.

Additional information

Authors names are listed alphabetically.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Adam, A.M., Schwartz, M.S. Corporate Governance, Ethics, and the Backdating of Stock Options. J Bus Ethics 85, 225–237 (2009).

Download citation


  • corporate governance
  • directors
  • agency problem
  • values
  • norms
  • backdating stock options