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Option Scandals Might Put HR in Watchdog Role

July 25, 2006
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Recent scandals involving companies backdating their stock option grants to employees may help HR managers get that seat at the table they’ve longed for.

However, it might not be the seat they wanted.

On July 20, the U.S. attorney for the Northern District of California, the Securities and Exchange Commission and the FBI filed criminal and civil charges against former executives of Brocade Communications, a San Francisco high-tech firm, for backdating stock options to employees from 2000 and 2004.

The charges allege that Gregory Reyes, Brocade’s former CEO, and Stephanie Jensen, the company’s former vice president of human resources, backdated stock options to current and new employees to give them the opportunity for a greater windfall. The civil charges also name the company’s former CFO, Antonio Conova, who is alleged to have learned of the backdating after joining the company in December 2000.

"In some instances, employment offer letters and compensation committee minutes were falsified and purported to document option grants to employees before they had even been hired by the company," according to a joint statement by the SEC and Justice Department. "As a result of this practice, Brocade was able to give employees ‘in-the-money’ stock options without having to recognize compensation expenses as required by accounting rules."

The case is part of a larger investigation of more than 80 companies by both the Justice Department and the SEC. More charges are expected, officials say. These cases suggest that HR professionals can’t just plead ignorance anymore, says Pearl Meyer, senior managing director at Steven Hall & Partners, a New York executive compensation consulting firm.

"Their jobs are going to be far more complex and technical than they bargained for," she says. No longer can HR managers just focus on recruiting and retaining employees, she says. "They need to extend their compliance knowledge and responsibilities."

In effect, HR may be expected to become a watchdog within the organization, says compensation consultant Jack Dolmat-Connell.

"HR should be questioning everything," he says. "They can’t just go along and then plead ignorance."

But the role that HR will have to assume may not be the strategic business partner that they had hoped to become, says Peter Cappelli, director of the Center for Human Resources at the University of Pennsylvania’s Wharton School of Business.

"They are going to become insider cops that have to tell managers what they can and can’t do," he says.

Similar to the way that company executives treat general counsel, executives may soon need to go to HR about issues not because they want to, but because they have to.

Jessica Marquez

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