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Corporate America Belongs to Us
By Stephen J. Butler |
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Those of us struggling to improve our retirement prospects depend upon corporate America to create long-term value to fund our future life-styles. As long-term investors, we have the staying power to accept the temporary risk of fluctuating values and we therefore depend on the additional returns generated by the so-called "risk premium." In return for short-term risk the stock market over longer periods of time has generated a 10% return while virtually all other investment vehicles (including even home ownership) have been substantially lower.
For the system to work, the abuses of the nineties have to be corrected. The first thing to go needs to be the concept of stock options. Next, we need to stop the looting of our public companies by handfuls of senior managers. And third, of course, is to end the opportunity for accounting misrepresentations.
Stock options make no sense whatsoever. I don't know of any study showing that companies that offer them are more profitable or successful than companies that just offer or encourage direct stock ownership as part of employee compensation. The problem with options is that they offer no way to determine their future cost. If we start by assuming that the use of options contributes no marginal increased productivity from employees, then let's assume that any corporate expenses could be paid by an application of the options model. This might mean that a company's rent, to pick an absurd example, could cost a company either nothing for the next five years or as much as one third of the value of all outstanding stock. (At one point, over 30% of Microsoft's entire value (our money) was reputed to be obligated to the funding of options.)
A well-run company tries to limit future uncertainty, so why would one tolerate an expense component that represents a huge loose cannon on the deck? Furthermore, the value of options is influenced primarily by the overall performance of the company's industry and with the stock market in general. Overall, seventy percent of any one stock's performance is a function of what the entire market is doing, so owning options for those who do so amounts to sitting in cubicles and holding some lottery tickets. If all the planets line up, those options might be worth something. In the meantime, they mean next to nothing when it comes to returning tough phone calls, staying late or coming in on Saturday. People who work hard and make a contribution do so for reasons of self-respect more than for a possible future windfall. Those motivated more by a windfall don't last long at most companies.
The ease with which options can be manipulated by revaluing strategies has stripped the veneer of "stockholder alignment" from what was once argued as a tool that put stockholders and employees in the same boat. The popularity of options has its roots, I think, in our culture's fascination for gambling in general. The proliferation of gambling in our society apparently knows no bounds, and it reinforces the cancerous notion that we can get something for nothing. Historically, gambling has enjoyed long sixty-year cycles in this country where it has been alternately condoned and then outlawed. At some point, society gets fed up with the ancillary problems that the "something for nothing" crowd brings to the table, and hopefully we have arrived at that point with regard to options today.
Moving on to executive pay, I have a problem with how I see some of MY MONEY being spent. I invest in mutual funds that, in turn, invest in major U.S. companies. I don't want to read that the new Human Resource Manager at Home Depot was paid $22 million. I don't want to read that the CFO of Worldcom was paid $40 million. I especially don't want to hear that Bernie Ebbers was loaned $400 million with no hope of recovery. I do want to know that these key executives working for me, who admittedly have to work very hard, are paid enough money to live in the nicest part of whatever town they've chosen and that they can send their kids to any college. Let's say this requires a million dollars per year at the most. Then, they should be given some real stock ---not options. For an extremely large company that continues to do well, that stock could be worth a few million per year and the company can pay whatever income tax is triggered. If a senior executive succeeds on this basis for several years, he or she will wind up with more money than they or their families can ever spend. Large companies are full of talented people who would jump at this deal. We don't need to promise several hundred million dollars to induce someone to take the reins of a major corporation. President Bush, to his credit, works for less than $500,000 per year.
If talented business leaders feel a need to make an exorbitant amount of money, they can go round up financing, start a company and talk their investors into giving them promotional stock. This creates real value and offers a true test of ability. It can be far more challenging than floating on a sea of other people's money where too many CEO's are simply operating as a victims or beneficiaries of circumstance...and where the average tenure is only about two years.
Corporate directors, for their part, are responsible for OUR MONEY. We should pay them more but demand that they receive compensation only in company stock that they must hold for at least two years after leaving the board. At least a few of the outside directors should have the past experience and ability to jump in and run a company that threatens to unravel. Tyco international offers a refreshing example of this mechanism in action. Otherwise, valuable outside directors protecting our interests are held hostage by existing management. These changes don't need to be legislated. Mutual funds just need to demand them as a condition for further investment. A mutual fund prospectus should spell out what the fund demands of corporate directors. We investors can then vote with our feet when we notice that more demanding funds generate better results over time.
With regard to accounting malfeasance, the single most expedient swath through the current mess can be cut with the requirement to make corporate tax returns public...or at least available to all stockholders of record. Right now, only management gets to see them. Hello? How stupid can we stockholders and voters be? We own these companies, remember? How reasonable would it be to refuse to show your spouse the joint tax return you prepared? We allow annual reports that show great earnings while tax returns struggle to depict losses. Somewhere in the middle is the true picture of a company's progress.
While the three rules of real estate are "location, location, and location," the three rules of improved corporate governance should be "disclosure, disclosure, and disclosure." Public opinion and the need to avoid looking foolish are powerful motivators for good governance. Would the directors of Worldcom have made that ridiculous loan to Bernie Ebbers if they had known it would become immediate public knowledge? I don't think so. Would the SEC be struggling to determine its auditing standards if we just quintupled the IRS audit staff to give us the resources to go after the truth in corporate financial affairs? Ending options and forcing tax return disclosure are two simple, tangible improvements we can champion with our elected representatives. For corporate governance, we can let mutual funds know what we expect and let market forces do the rest.
Thanks to 401(k) plans, a much larger group of us own corporate America today than was the case ten or twenty years ago. It's time to flex some political and consumer awareness to protect our interests and our retirement security.
The securities are subject to the risks of fluctuating prices and the uncertainty of rates of return and yields inherent in investing and past performance is no guarantee of future results.
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