Actually, you've inadvertently highlighted another problem with requiring companies to expense employee stock options.
Under current accounting rules, a company cannot restate option expenses no matter what the subsequent performance of the stock. In other words, no matter how much the expensed options rise or decline in imputed value, once expensed, the charge is permanent.
It's not hard to imagine what the effect on the market would have been in recent years, had this expensing rule been in effect. Numerous companies, many in high tech, would have had to "erase", or more accurately, not be allowed to report, billions in profits because they had issued stock option grants, even though those grants quickly turned out to be virtually worthless.
It is hard to see how requiring companies to expense stock options in recent years would would have made a positive difference in today's market for today's investor. I think it's easy to conclude that this rule would have worsened an already difficult economic and market situation. All of which achieves exactly the opposite goal of what the rule's proponents are arguing.
At heart, requiring companies to expense stock options is based on a misguided argument. Expensing employee stock options would not have prevented the recent financial scandals. The argument that options create incentives for executives to deliver good results is true. But executives should deliver good numbers. That is their job. And good numbers are the correct measure of their job performance, I don't mean good numbers for just a single quarter, but good numbers delivered consistently (an occasional bad quarter or two is to be expected) over a few years.
Not long ago American companies were criticized for being too focused on quarterly results while Japanese companies could easily weather mediocre quarters because they had a "long-term" focus. Lousy results now would be rewarded with great results in the "long term".
Well the "long term" never arrived in Japan, and mediocre quarters become awful than disastrous quarters for many companies. What seemed an admirable, principled approach toward corporate management (short term sacrifice for long term gain), turned out to be a weak excuse to avoid reforming outdated businesses and practices.
So American companies were right to focus on the here and now, in delivering good numbers on a consistent basis. Good results is the drive that makes American companies (probably) the most efficient and the American worker among the most productive in the world.
Contrast your typical successful American company with most brand name European companies and the difference is stark. European companies with their clubby, not competitive, executives, with their unmotivated management (few if any stock options for them. France until recently would tax employee option gains at up to 97%. The reason being it's OK to become rich playing soccer or winning the lottery, but becoming rich through a rising stock price is, without argument, immoral). So your typical European company with its entrenched unions, passive shareholders, opaque accounting -- consistently delivers lackluster results. And many have trouble competing outside of Europe as a direct result.
But back to the original debate:
So, to argue that the pressure on executives to produce good results, directly leads to accounting shenanigans and therefore this is an incentive that must be removed -- is like arguing that college entrance exams should not be graded because it encourages students to cheat. Ungraded college exams would remove the incentive for students to score well, and therefore no students would cheat. It is an effective and simple solution to the problem of student cheating. But it's also an absurd one, if one believes that the finite resources of the best colleges should go to those students who will make the best use of them; and to make the most use of the best colleges not just for the benefit of the student directly, but for the benefit of society as a whole.
So what conclusion should we draw from the stock option expensing debate? I maintain that there will always be the temptation for some to pursue worthy objectives by illicit means. But the solution is not to change the objectives and thus eliminate the rule-breaking; the solution is to preserve the objective but to make it harder for anyone to cheat successfully and to have stronger penalties in place for those who don't follow the rules when (not if) they are caught.
In short we must reaffirm the rectitude of our goals, just as we must also reaffirm that no worthy goal is ever truly achieved, if we corrupt ourselves in its pursuit. |
