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

To: Stock Farmer who wrote (63682)	4/22/2003 9:20:10 AM
From: Don Lloyd	Read Replies (1) \| Respond to of 77400

John, It is clear that I have not been able to make you realize that precision has nothing to do with my arguments on value, but that my argument is that values are different than prices and are subject to NO arithmetic operation or measurement other than the subjective valuation that a single individual undertakes at a single instant in time in deciding whether to undertake an exchange. So we can set this aside. The ultimate futility of expensing stock or stock options is the result of the fact that the expensing is an attempt to hit three targets with just one bullet. The three targets are as follows -- 1. The actual profitability of the business itself. 2. The degree to which any profits that exist actually flow to shareholders. 3. An attempt to enforce the fiduciary responsibility of management to shareholders. To see that these targets are not, in general, compatible, consider the following -- A company that manufactures widgets and pays competitive market wages in cash with no stock or option compensation sells widgets for $1.15 each, with a total unit cost or expense of $1.10, resulting in a net business profit of $.05 per unit. It has a 100% market share for widgets. All of the profits are paid out to the owners in cash dividends. A new competitor emerges with a total unit cost or expense of $1.00 and it sells widgets for $1.05 each, stealing the entire market and putting the original company out of business. If the original company had offered its employees 50% of the profits (and dividends) in exchange for a substantial reduction in wages, it might still be in business. Assume that the reduction in wages reduced the total unit business costs or expenses to $0.90. The company could then sell its widgets for $0.95 and win back 100% of the widget market. The owners would then share the $0.05 per widget business profit equally with its employees. The sharing of profits has increased the business profitability of the company by reducing, not increasing, its business expenses. The owners have seen their dividends cut in half from the original situation, but without the sharing, their dividends would have been lost completely to competition. It is clear to me that equity compensation must be dealt with as a change in the structure that conveys business profits to the owners, with some of the business profits now going to the new employee/owners. The business itself, and the company ownership are distinct entities, and must be dealt with separately. The third target, the fiduciary responsibility of managers, comes down to a question as to whether the company could have regained its market share by only giving 25% of the profits to its employees. This is not a question for which the fallacious expensing of stock and options provides any useful input. This is a problem that badly needs to be solved, but expensing stock and options is NOT an answer. Regards, Don