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Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: Don Lloyd who wrote (63667)	4/21/2003 11:33:24 AM
From: Stock Farmer	Read Replies (1) \| Respond to of 77400

Don, sigh, listen to what I am saying, not the words I'm using. Long ago I used to wrestle with compilers... same thing now, it appears. You are arguing that my substitution of "value from shareholders" with "value to employees" is improper because they are not equal. You are right. But it's kind of like the number of hours of daylight today is not equal to the number of hours of daylight tomorrow. Yet we still get away with calling the period between sunrise and sunset "daylight" and equating one day with the next, most of the time. Precision gets in the way of understanding. Here's where we agree: If management is exercising fiduciary duty then shareholders will part with less value than they would have by paying employees in Cash. I trust this statement will pass your semantics checker? In other words, instead of parsing: "Employees get (less value) from shareholders... ", parse my statement as "Employees get less (value from shareholders)..." - which assumes that shareholders parting with value are doing so in the employee's direction. Object to my equation of (value to shareholders) with (value to employees) if you want. Personally, when I ask most employees what they value it's the cash, and most shareholders put the dollars in their portfolio way up there on the value curve... If we wanted to be perfectly precise then yes, we would include a whole host of other factors in the value equation (like employees telling Mom "I'm getting paid in Stock Options", and being able to brag at parties that "I hold shares in companies that compensate employees in line with value creation", etc.) but if you wait until people are thinking clearly, these tend to pale in comparison to the dollar value. Except of course for economists, where all inequalities are equal. Apparently. So maybe the inequality of cash to value when it comes to stock options is off by about 11.27345% if measured precisely to seven significant figures... but close is close Don. Anyway, since nothing less than perfect seems to do, let me try again, this time re-arranging terms to pass your syntax checker. Continuing... So then we have another "big if" IF management is at the helm of a profitable company THEN revenues minus costs are greater than zero ELSE revenues minus costs are less than zero. As shareholders, we want a mechanism to hold management's feet to the fire on both of these big if's. On the first one, we want to whack them if they dip their hand into the cookie jar too deeply. On the second one we want to reward them in proportion to how profitable the company is to shareholders. Tucked into that little word "costs" up in the profit equation is something we can call salary, also by way of definition. Management has a choice: salary cost can consist of compensation actually paid (e.g. in cash and benefits at cost), plus either (a) the cash which employees will not forego if they do not get stock options, or (b) the value that shareholders part with so that employees will forego the cash. But one way or another and depending on which one management chooses, and the degree, amounts (a) or (b) represent a reduction in value to the shareholder. Either one is a cost, by definition. However, neither of amounts (a) or (b) show up in the "accounting profit" reported by the company. If management is judged only on the basis of accounting profit, then management has an incentive to maximize (a) and thereby increase (b) [rkral: so that the maximum amount of cost disappears from the P&L account]. This is because management is currently reporting only the part of salary that isn't (a), and the lower a salary they can report, the bigger a profit they can report. But the actual profit (increase in value to shareholder) of the company is equal to the accounting profit (reported revenue minus reported costs), minus (a) or (b) as appropriate. If, and this is your big if, management is exercising its fiduciary duty, then (a) is bigger than (b), thereby increasing the actual profit of the business, and all is well and good. By subtracting amount (b) from accounting profit to get something I might call "management measurement profit", and measuring various management teams by this amount instead of "accounting profit", we end up with a very interesting result. Firstly, shareholders have one place in which to figure out whether or not their value is getting bigger or smaller, merely by looking at the sign of "management measurement profit". They do not have to perform dilution calculations to determine whether $0.20 per share "profit" offset by 4% increase in share count issued at 60% discount gave them more or less in the end. Secondly, as this correction factor (b) increases, management is penalized, and as it decreases, management is rewarded. Management therefore no longer merely has an incentive to increase (a) and (b). Instead management has a direct incentive to minimize the amount (b) that employees will take [from shareholders] instead of (a), and indeed if (a) is less than (b), then management will be rewarded to choose (a) instead of (b). In other words, management will have an incentive to exercise their fiduciary duty. My suggestion is to create this "management measurement profit"... a "reflection" of what is going on. Like a mirror to the truth. How does this work for you? John. P.S. All this "cash isn't equal to value" niggling is a pretty good argument for not even bothering with valuation. Instead one should look at the company and assess it qualitatively and then buy if you like it. At any price. Because of course price isn't comparable with "value". It's no wonder wealthy economists are few and far between!