Stock
Options:
The Ultimate Swindle,
The Slick Tax Dodge
By Charles Allmon, editor
Growth Stock Outlook
Are
we witnessing the greatest investor swindle since Mr. And Mrs.
America bought stocks on 10% margin in the 1920s? Seems so to
me. Whenever executive compensation is based upon performance
of the stock price, anything and everything goes in the world
of creating accounting. And go it did. Enron, WorldCom, et al.,
and all the other fiascoes taught investors a bitter lesson not
soon forgottena lesson from the school of hard knocks. While
they did not sign up for this particular course, investors nevertheless
were obligated to take the final exam. I have lived in the metropolitan
Washington D.C. area for almost 50 years. I cannot recall a time
when so many CEOs swarmed over our capital city like a plague
of locusts, buttonholing senators and congressmen, not to mention
burning up the phone lines and swamping e-mails advocating a
hands-off policy for stock options. Money still talks in Washington.
That stock options jackpot obviously ranks as the biggest ever.
The dot.com and telecom busts would not have happened without
stock options.
One economist observed
(BusinessWeek 7-22-02), "Investors need to be convinced
that corporate abuse is not widespread." Of course the abuse
is widespread. You have only to look at the S&P 500, where
only three companies were honest enough to expense stock options
Boeing, Winn-Dixie, and recently Coca-Cola (see box).
Let's go back to the
days of generous CEO salaries. I thought at the time that proposed
regulation of corporate salaries, imposing a deductible limit
around one million dollars, would end in a colossal disaster.
Out of that regulatory quagmire sprang thousands of stock option
schemes, corporate candy which not only eliminated huge company
income taxes but spawned near-total corruption of the U.S. accounting
profession. U.S. accounting standards today are a joke throughout
the European Union, and with a substantial majority of U.S. investors,
too.
So where does leadership
come from? Jim Grant said in the Wall Street Journal of
July 9, "The government can no more restore confidence than
it can impose virtue." I watch with no little fascination
as the catalyst of distrust levels the marketplace. Now, the
mighty Business Roundtable, composed of an elite list of fewer
than 200 of our country's top CEOs, inherits an opportunity to
impose strong corporate medicine on their brethren. Or will they
follow their 1988 fiasco when they attempted to have a federal
court eliminate the rule of one share, one vote? In 1993, the
Business Roundtable had a shot at the proposed FASB ruling to
expense stock options. FASB was sent packing with its tail between
its legs.
"Options Do Not
Raise Performance, Study Finds" was The New York Times
headline of August 11, 2002. A study conducted over 30 years
gives the big raspberry to all those silly claims about performance
benefits of stock options. "There's no relationship whatsoever,"
said Dan R. Dalton, dean of the Indiana University Kelly School
of Business. David Leonhardt, in his Times article, said
this about stock options: "They can give executives an incentive
to inflate their company's earnings or make irresponsibly optimistic
forecasts to keep their stock prices high and their paychecks
lavish."
|
No Guts, No Glory Early
in July a major U.S. corporation, a household name, was about
to hold a regular board meeting. A friend of some 20 years, who
sat on the board, asked if I would have any thoughts, which might
be discussed. Indeed I did have a suggestion. Tell the board
that they should immediately announce that they would henceforth
expense all stock options, as well as outlawing use of pro forma
accounting. I thought such a revolutionary idea today of speaking
the truth would make headlines and be front-page news. |
I
learned firsthand about stock options after investing in a small
California company with 12 employees. That was over 10 years
ago, when revenues were less than $1 million. Today, they're
pushing $200 million. My earlier 2% ownership of the company
has been diluted down to less than 1%, thanks to stock options.
Taxes? Stock options
also may be the ultimate tax dodge. How else do you suppose a
slippery-accounting outfit such as Cisco could gather $21 billion
in cash? As I stated earlier in GSO, the marketplace is a great
leveler. Wild market excesses of the 1990s, egged on by equally
wild corporate excesses and phony profits, will guarantee that
the market will return to saner levels.
Editor's Note: Charles
Allmon is editor of Growth Stock Outlook, P.O. Box 15381,
Chevy Chase, MD 20825, 1 year, 24 issues, $235.
