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Considering that nearly companies have been caught in the swarm of scandal surrounding the backdating of stock options, more people are questioning whether backdating is really such a bad thing. Now that Silicon Valley icon Steve Jobs has become one of the highest-profile personalities to become ensnared, perhaps it's really just much ado about nothing. A tempest in a teapot As we've recounted on these pages many times , a stock option gives the holder the right to buy a stock at a certain price -- called the "exercise" or "strike" price -- at some point in the future.

The theory is that options are an incentive to have management work hard to ensure that the company's value increases, and that its share price grows, so that management and shareholders can profit together in the future. Backdating , on the other hand, pretends that the strike price was actually set earlier than it was, or at some time when the share price was lower than on the day it was actually granted. It gives the manager instant extra profits on the options.

What is Option Backdating?

Apple NASDAQ:AAPL shareholders have been particularly unfazed by the revelation that Jobs was not only aware that backdating was occurring, but also intimately involved in picking the dates to which the stock options were backdated. Many shareholders have rallied to defend Jobs' actions on the basis of his overall performance with the company.

They have also sought shelter under the banner that Jobs was no accountant, and thus didn't realize the effects that backdating would render. But you don't need an accounting to degree to know that backdating is wrong. Ethics should have taught you that. What have you done for me lately?

Critics of prosecuting options backdaters, and basically most of the Apple shareholders who've contacted me, believe that as long as the executive has otherwise performed admirably for shareholders, and as long as shareholders have personally been able to profit from a company's share price growth, it's OK to overlook a few failings. He had led the firm to phenomenal gains over a year period, but perhaps because he was also richly rewarded as a result, it was easier to oust him.

He had to be hauled back to the U. Jobs' only sin, his defenders will say, was that he was an ignorant shmoe who didn't "appreciate the accounting implications" and didn't personally benefit from the scheme. As a matter of fact, they argue, he actually cancelled the big 7. While Saint Steve may not have really understood all the accounting mumbo jumbo that goes into play, it's hard to argue that he didn't benefit. The grants he cancelled would have vested over a period of as much as 10 years.

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• Fraud Vs. Ethics Backdating of Stock Options.

Let the punishment fit the crime I do agree that the extent to which an executive goes to conceal backdating -- like creating fictitious board meetings, as an Apple employee allegedly did in Jobs' case -- should play a role in deciding the size of the penalty imposed. Outright fraud should be dealt with harshly, while other cases, done in plain sight, but out of supposed ignorance, might deserve more of a financial slap on the wrist. The practice was entirely spelled out, and nothing was hidden or done surreptitiously.

Backdating stock options carries a real cost to shareholders. When options are granted, they are considered to be " at the money," and companies are required to record an expense for them. Backdating, however, allows companies to artificially issue options that are already " in the money"; for that, they do not have to record an expense.

More by Santa Clara University

Arbel-Ganz, O. Arya, A. Sun, H. Barron, J. Google Scholar. Bebchuk, L. Berle, A. The Modern Corporation and Private Property. NY: MacMillion. Bizjak, J. Lemmon and R. Boatright, J. Bowie, N. Boyd, D. Chicanery in the corporate culture: WorldCom or World Con? Corporate Governance.

Braum, M. Bruhl, R. Bryce, R. Pipe Dreams And the Death of Enron. NY: PublicAffairs. Bunge, M. Ethics: The Good and the Right. Dordrecht: D. Reidel Publishing Company. Clapman, P. Clearly, B. Cosenza, E. Brigham Young University Law Review. Engelen, P. Felo, A. Forelle, C. Bandler and M. Friedman, M. Harshberger, S. Akron Law Review. Heron, R. Jayaratnam, A. Jensen, M. Kim, A. NJ: Pearson Prentice Hall.

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Laufer, W. The University of Chicago Press: Chicago. Lunsford, J. Pasztor and J. Maich, S. Accessed 7 Jan Matsumura, E. M, and Shin, J. McLean, B. The Smartest Guys in The Room. Y: Penguin Group. Montgomery, D. Narayanan, M. June Peters, G.