Time is right  for corporate housecleaning

George Samenuk
Chairman of McAfee Inc., George Samenuk, will retire after a stock options investigation found accounting problems that will require financial restatements. Gautam Singh / AP file
/ Source: The Associated Press

The resignations of top executives for McAfee Inc. and CNet Networks Inc. could signal the beginning of a wave of corporate housecleaning, as other companies become entangled in stock options investigations.

McAfee CEO George Samenuk and CNet CEO Shelby Bonnie both stepped aside Wednesday to atone for stock option shenanigans that will erase some of the companies’ past profits. Santa Clara-based McAfee, a leading maker of computer antivirus software, also fired its president, Kevin Weiss.

Boston Communications Group Inc. said Thursday that three senior managers including its top executive will step down immediately over matters related to the practice.

Those actions — as well as last week’s resignation of Apple Computer Inc. board member Fred Anderson amid similar stock options impropriety — may sway other corporate boards to take harsh steps to show they have zero tolerance for reckless accounting even if there is no evidence of intentional misconduct, said James Post, a Boston University professor who focuses on corporate governance.

“This kind of lifts the bars for all the other companies” with stock options problems, Post said. “The burden of proof is starting to shift. The executives involved in this may have to prove they are very clean if they want to keep their jobs.”

The stock option practices of at least 135 companies are under government investigation or internal review. So far, at least 30 senior executives or directors at 16 companies with stock option problems have resigned or been fired.

Companies that cooperate with the government and take steps to clean up their books have the best chance of avoiding legal trouble, said Eumi Choi, a federal prosecutor who is chairing a San Francisco-based task force looking for evidence of stock option malfeasance.

“That’s something we will seriously consider when taking action,” Choi said. “What’s really called for here is a transparent process.”

Most inquiries are focused on a technique known as “backdating,” which occurs when insiders look back in time for a low point in their company’s stock price so the exercise, or “strike,” price of the options could be set at that ebb.

If they aren’t properly disclosed, backdated options can inflate corporate profits and result in an underpayment of taxes.

Silicon Valley has been caught in the eye of the stock option storm because of an entrepreneurial culture that embraced the rewards during the 1990s as the best way to get rich fast. That mind-set encouraged high-tech companies to pass out stock options like candy on Halloween.

Perhaps the most famous executive caught up in the options scandal is Jacob “Kobi” Alexander, the fugitive former CEO of software company Comverse Technology Inc. He’s in the southern African nation of Namibia, awaiting extradition to the United States to face charges of manipulating options.

Another former Silicon Valley CEO, Gregory Reyes of Brocade Communications Systems Inc., is fighting criminal charges tied to his alleged mishandling of stock options at that San Jose-based company.

Apple CEO Steve Jobs held onto his job in the wake of Anderson’s departure because the Cupertino-based iPod maker’s internal inquiry cleared him of any misconduct.

The Securities and Exchange Commission is focusing its stock option investigation on companies forced to make big changes to their past profits, said Marc Fagel, head of enforcement in the agency’s San Francisco office.

The SEC expects to impose civil fines on some companies and make criminal referrals on others. “There’s always fraud versus recklessness and calls will have to be made,” Fagel said.

Neither McAfee nor San Francisco-based CNet elaborated on the reasons why they parted ways with their CEOs, but the financial problems caused by the improper accounting of stock options appear to be a pivotal factor.

McAfee said it expects to absorb charges of $100 million to $150 million to correct the errors. CNet hasn’t specified how large its restatements will be other than to say they will be “material.”

Such substantial revisions to companies’ financial statements could spell doom for other CEOs, said Michael Koenig, a former federal prosecutor now working at a Washington law firm.

“The bigger the restatement, the more likely you will see people falling on their swords, rightly or wrongly,” Koenig said. “This issue isn’t going away soon, by any stretch of the imagination.”