How the WSJ stories on backdating originated

David Warsh, writing on the Economicprincipals.com web site, has a great story about how the Wall Street Journal’s series on backdating of stock options, which earlier this week won a Pulitzer Prize, was reported, and how it’s been criticized by a columnist on the paper’s editorial page.

Warsh wrote, “[Mark] Maremont’s story was scrupulously clear, but, had his scoop been the end of it, the matter would have been quickly forgotten. What came next was an act of considerable moral imagination on the part of the WSJ’s editors and their reporters, calling into play all the forensic powers at their disposal to establish what had been happening. The statistical findings of finance professors were an indication of corruption. Successful prosecutions were plenty concrete, but they were anything but statistical in their approach to the problem. (Maremont had reported the first of these, of Mercury Interactive Corp., in his initial story.)

“Could the broad facts of the back-dating matter be established by newspaper methods? That is, could they be set out sufficiently forcefully before the general public, with clear explanations, sharp measurements and striking examples of particular companies, so that their significance could be fully assessed? That is what the editors decided to find out.

“Maremont, 48, headed a small investigative team based in Boston; he and reporter James Bandler, 40, set out on an investigation parallel and, in certain ways, complementary to that of the federal authorities, designed to uncover the historical facts of the matter. As often happens with such borderland explorations, the reporters immediately found themselves in need of an intermediary language. Before long, they brought in Charles Forelle, a 27-year-old WSJ reporter with a degree from Yale in applied math, to oversee the preparation by consultants of a special algorithm with which to gauge the likelihood that particular grants were simply the result of good timing.  They were joined, too, by reporter Steve Stecklow, 53, who in due course would contribute a pair of memorable stories to the series.

“Thus, after four months of hard work, Bandler and Forelle published ‘The Perfect Payday,’ on March 18, 2006. The sub-head stated: ‘Some CEOs reap millions by landing options when they are most valuable.  Luck — or something else?’ The story itself related the saga of several companies in which boards of directors granted top executives their options on remarkably propitious dates. The odds of one such favorable grant were found to be 300 billion to one, compared to 146 million to one that a particular $1 ticket might win the Powerball lottery. The effect, at least on the various communities that took corporate governance seriously — the legal, accounting and regulatory professions — was electric.”

Read more here.