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Politics : Stockman Scott's Political Debate Porch -- Ignore unavailable to you. Want to Upgrade?

To: Mannie who wrote (2115)	7/15/2002 9:40:32 AM
From: stockman_scott	Respond to of 89467

Too Soft on Stock Options . . . By Sebastian Mallaby The Washington Post Monday, July 15, 2002 It's sometimes said that executive stock options would be fine -- almost patriotic -- if only they were properly disclosed in corporate accounts. After all, options reward executives for great performance, and what could be more American than that? This is a bit naive, unfortunately. Options, at least as they exist currently, do not reward performance. And their accounting cover-up is not incidental -- it is central to the real goal of many options schemes, which is to disguise bosses' absurd pay from the rest of us. This insight comes from an article by Lucian Bebchuk, Jesse Fried and David Walker that will appear in the Chicago Law Review. The authors point out that if options schemes aimed to reward performance, they would avoid several features that interfere with that goal. They would not reward stock price rises that reflect a general rally in the market rather than the boss's own performance. They would not allow bosses to undo options' incentive by selling an off-setting chunk of company stock. They certainly would not indulge bosses who preside over a falling stock price and then expect their options to be rejigged so that they can cash out. In practice, however, stock-option plans do all of these things, so they clearly aren't aimed at spurring performance. Instead, their point is to make executive pay appear legitimate. They do this partly by encouraging the myth that the pay is linked to merit and partly by keeping the pay hidden. Why should bosses hide their pay packets? First, because they're enormous: A century ago J.P. Morgan said that top managers' pay might reasonably be 20 times that of the average worker; today the ratio is about 500 to 1. But second because the mechanism for setting CEO pay is an embarrassment. Even film stars have to negotiate their pay with studio managers who have an incentive to constrain it. Bosses negotiate with buddies who have no reason to get tough. At most public companies, CEO pay is decided by a compensation committee made up of "independent" directors. Independent means that they do not work for the company, they are not related to one of the top managers and so on. But independent also can mean that they were invited to join the board by the chief executive, that they are friends of his and that they are themselves chief executives with an incentive to bid up CEO pay nationwide. What's more, the pay comes out of shareholders' profits. Unless the directors are substantial shareholders, they don't care how much they lavish on the boss. In theory, there's an external discipline on this process: If a company wastes profits by overpaying executives, the share price will suffer, and the firm will be taken over. But a variety of legal obstacles make hostile takeovers difficult, and the takeover threat is in any case a weak deterrent. If a boss increases his own pay by $10 million, the cash goes straight into his pocket. That bonanza easily outweighs the small additional risk of takeover resulting from $10 million less in profits. The main discipline on bosses' compensation turns out to be shame. CEOs feel sheepish about asking for multi-millions if their demands will be splashed over the newspapers; directors feel shy about risking their reputations by signing off. This is why options are so useful. Rather than asking for unseemly sums of money, bosses award themselves options packages that are too complicated to make headlines. A few years later, when the options prove to be worth a zillion, the boss hides behind the fiction that extraordinary compensation reflected extraordinary merit. What to do about this scamming? President Bush has proposed that options plans should require shareholder approval, an idea that sounds as if it gets around the cronyism of company directors. But the tax rules already drive most companies to run their options schemes by shareholders, and this process has proved useless. Shareholders have to vote yes or no on the outlines of the policy without knowing how much money they are approving for the boss. We need something more than this Bush tokenism. Today Sen. Carl Levin (D-Mich.) will introduce a measure that might change options accounting, so that the cost of executive compensation would be dragged into the open. But even this provision, which will probably be killed by Silicon Valley lobbyists, is not the whole answer. The rules need to be changed so that the chief selectors of company directors are not the bosses but the shareholders. It's their money, after all. © 2002 The Washington Post Company washingtonpost.com

To: Mannie who wrote (2115)	7/16/2002 2:02:15 AM
From: stockman_scott	Respond to of 89467

The Washington Post's Lead Editorial... Mr. Bush's Empty Rhetoric Tuesday, July 16, 2002 PRESIDENT BUSH continued his rhetorical offensive against corporate scandals yesterday, demanding that the House and Senate hammer out a joint post-Enron reform package before they go home for the August recess. Quick action is a great idea if it means uniting around the Senate bill that passed last night by an overwhelming margin of 97 to 0. But by refusing to come out in support of that bill, Mr. Bush is slowing the momentum of genuine reform, however urgent his rhetoric may sound. He is giving cover to anti-reformers who want to pick apart the Senate bill, substituting measures from the weaker House version -- and wasting weeks as they do so. It's hard to understand the administration's reluctance to endorse the Senate measure. Last week Treasury Secretary Paul O'Neill complained that the bill did not empower the Securities and Exchange Commission to bar individuals from serving as directors of public companies. But the bill has since been fixed to take care of this objection. Mr. O'Neill also claimed that the Senate proposal would create "an unaccountable private body." But the Senate's new accounting oversight board would be accountable to the SEC, which chooses the board's members, approves its budget, reviews its rules and retains a right of veto over its sanctions. The administration's official Statement of Policy on the Senate bill raises two other issues. First, it urges that the new accounting board should not disclose the information it gathers in the course of disciplinary proceedings lest it fuel private lawsuits. But the Senate bill was amended in committee to ensure confidentiality -- arguably, too much of it. Second, the administration says that the bill should not ban smaller public companies from buying consulting services from their auditors. But the conflicts of interest that undermine audit credibility are the same whether a public firm is large or small. The Senate has already bent over backward to be moderate on this issue: It restricts only some of the consulting services that auditors offer, and it allows for exemptions to these limited restrictions. Unless he comes out in favor of the Senate bill, Mr. Bush will be behind the curve -- both among businesses and politicians. On the business front, companies are embracing higher standards: On Sunday Coca-Cola said it would soon deduct the cost of executive stock options from its profits, and yesterday The Washington Post Co. (which uses options sparingly) followed. On the political front, members of Congress are embracing the need for serious reform: Yesterday brought not only the overwhelming Senate reform vote, but also a promise from Senate Majority Leader Tom Daschle to come back to the issue of stock options, which the reform bill excluded. The parade of corporate scandals has given everybody a chance to clamp down on abuses. Mr. Bush should be leading this effort, in fact and not merely in rhetoric. © 2002 The Washington Post Company washingtonpost.com