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A 'Witch Hunt' in Silicon Valley
garzpacho writes "BusinessWeek Online has an interview with Daniel Warmenhoven (CEO of Network Appliances), who joins a growing list of technology executives in saying that the government's search for backdated options among tech companies is going too far: 'It's become a witch hunt. I think the government is looking to find some egregious examples [of wrongdoing] and to publicly hang people for them. That's fine. But where does it stop? I'm not saying the past practices were all good. But I thought the SEC's role was to build investor confidence. What they're doing right now is destroying it, and I don't see the purpose. They're penalizing today's shareholders for events that occurred five years ago. But who is this protecting, exactly? With Enron, every shareholder in the company lost money. The same with Qwest, and with MCI-Worldcom. But I don't know who the injured party is here.'"
"But I don't know who the injured party is here"
Well that should be obvious - it's the shareholders. If executives weren't fiddling the dates over share options to make more money, the shareholders would probably get more money in dividends, a higher stock price, shares in a company without a damaged reputation and possibly a company with more money too. All these should be incredibly obvious to someone who's spent more than 2 seconds thinking about it.
Video Game cheats, hints a
But I don't know who the injured party is here
Well, the shareholders are, that is, the owners of the company, if you had forgotten. Giving a stock option is fine, backdating it is plainly getting money out of the coffers of the company and into the hands of employees. That's also fine if the shareholders accept it, but they didn't.
About the witch hunt, it's based perhaps in the SEC being fed up with ever-more-ingenious schemes to divert money into the hands of the executives, said schemes devised by the executives themselves. Of course now there are not failing companies, like with Enron, because the economy is doing all right. But Enron crashed during a small recession. Let's see what the next recession bring. Then perhaps many of those back-datter companies will fail, the executives retire rich and the stockholders start asking questions, some of the to the SEC.
In a word, if they want to reward themselves, let them do it, but in an open way, that's all the shareholders and the SEC ask. And only fear of criminal prosecution will do it, because they'll certainly have no fear of money fines.
Rome taught me patience and assiduous application to detail. Virtues which temper the boldness of great, general views.
In a print edition of the Wall Street Journal, they had (think it was D1, but the cover of one of the inside sections) a fairly lengthy article yesterday, and another lengthy one on Saturday (the weekend edition), on how Sarbanes-Oxley and back-dated options are in fact serious problems and most of the CEOs and senior execs who were so upset at options expensing being a balance sheet cost for tech businesses later turned out to be the people using back-dated options to steal money from the shareowners of the company.
So, you may call it a witch hunt. I'll call it going after employees who steal from me, thank you very much.
-- Tigger warning: This post may contain tiggers! --
Well of course their heads are in the sand. How many folks have their money in funds and have a clear idea or a strong say in where that money is invested? Raise your hands please.
When I last looked into this for retirement plans all anyone gave me an option was on what percentage I want in high risk and low risk. For Pete's sake! I want a bit more control than that. I want to tell my advisor "I do not wish to have any stock in *insert name of company with dubious practices here* please" and then it just happens. When I looked into the details of what some (not all though) funds would give me I was disappointed by the "ethical" offerings in a lot of cases. But that's just me.
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The tone of the posts under this topic confirms that this is indeed a which hunt.
First off, the amount of stocks set aside for options is typically already known well in advance and already priced into the price of the shares. If someone exercises an option they bought at 1-cent, and sells for $100 dollars that will have the same effect on the price of the stock as if they bought options at $99 and sold them for $100.
Second off, while executives benefit from options, the people who benefit the most are employees. People are so blinded with envy over a few boys-club executives, that they are shooting themselves more than they are shooting the 'good-ole-boys'.
Third off, artificially reducing the option price would take money away from the company, but typically this price is minimal and reflected in other compensation. If a hot-shot programmer got 100K in value from 50K of options + 50K of salary, or got 100K in value from 25K of options + 75K of salary. The company and the share holders are pretty much out the same expense either way. The former actually benefits the company more because it increases the companies cash on hand that it can use for other activities.
Fourth off, noone seems to understand what's driving this, and it's not greed, but taxes. Between sales, property, state, federal, social security, and medicare eating the majority of peoples pay - it is humanly impossible to have any independent savings or any decent retirement. Now people go thru all these crazy schemes to aviod taxes that are clearly unjust and like fools we start whining about these crazy schemes. Well bullshit.
Fith, stock options are not inflationary. Over the last 5 years the Fed has doubbled the amount of money in circulation. People who have held on to dollars, or are paid in dollars have been screwed and not by the companies. They get screwed because the value of their pay gets watered down, and they get screwed because as their pay adjusts for inflation they get pushed into higher tax brackets. So then when people counter by back-dating their options - we call them thieves?, well bullshit again.
If they've done wrong, even in the past, shouldn't they have to answer for it?
I think there are a few issues with this:
1. It wasn't clear that this was wrong at the time. The law isn't 100% clear-cut, and this was apparently a pretty common practice at one point.
2. The purpose of these deals was to acquire and retain key people who presumably added significant shareholder value. If the shareholders are the party that is "wronged" by these actions, but the stock price has gone nothing but up, who's the injured party?
3. If you want to claim that these deals devalued shareholder equity by X amount (the difference between the price at grant date and the back-dated price), to be fair you should really also discount the contribution of the people you retained in this manner. I suspect some of these deals improved net shareholder value.
4. So, then, what's the appropriate "penalty" for doing nothing but good for your company, their shareholders, and the employees?
Obviously it hasn't been all roses at all involved companies, but this really isn't an Enron type of situation. This didn't cause power failures that got a democratic election overturned, or eat up tens of thousands of folks retirement accounts, or even hurt a lot of the shareholders in any way. The SEC investigation is more likely to cause damage than the original acts. It's just an accounting snafu that might merit a little fine, but not a huge overreaction.
E pluribus unum
Now I am opposed to the death penalty, because I know that the legal system is exremely biased and commonly produces incorrect results. Just look at the number of people (almost always poor and/or non-white) who have been cleared of rape and murder convictions becasue of DNA testing that was only avalable after their trials. Even so, we have decided, as a society, that the death penalty is just and it deters future crime. If any area needs more justice and more deterence, it is white collar corporate crime.
I am sick and tired of reading news about a corporation that has been caught breaking the law, is caught, and then pays a fine while 'neither admitting or denying responsibility.' If someone steals your car and is caught, do we let them drive the car back to your house, fill it with gas, and let them go as if nothing happened?
There is a complete disconnect between the penalties for corporate crime and the penalties for individual crime. In Califorina, there are people in jail for LIFE for stealing less then a few thousand dollars worth of property. You can't read the business section of the LA Times for a week without a story about a company that is paying a multi-million dollar fine, with no admission of guilt and no accoutability by any individual. No one faces a trial, no one is fired. The penalties are paid by the company, and there is no justice and no deterence.
You never hear about a corporate criminal going to jail unless they either drive their company into bankruptcy or cheat the IRS, and even being charged after bankruptcy is almost unheard of. This shows that the only real crime is cheating the wrong people, i.e. the government and the really big investors. When companies cheat anyone else (or each other) it's just good business.
What we should be doing is sending more corrupt corporate officers to jail for a long, long time. If you break the law to the tune of millions of dollars, you should be in jail for at least 5 years, if not more. If it's over 20 or 30 million it should be 10 to 30 years. If it's over 100 million, you should be facing life behind bars. If it's a sizable part of a billion, you should be facing death. Just remember, if you break the law and the amount is above a half a billion, it is a statistical certainty that your bad behavior has caused someone to die. People loose their income, their houses, their health insurace, some of them will die. Heck, some will kill themselves.
Here's one example. It's somewhat unusual, but it shows how bad the damage can be when corporations act badly.
The Northern Califoria Kaiser HMO (a non-profit) just shut down their kidney transplant program. It was started a few years ago, and was a complete disaster from the beginning. Other transplant programs in the state had a death rate less then half of the Kaiser program. Kaiser was turning down matching kidneys becasue they wanted to make their surgery success rate look good. They were fined two million dollars, and they are 'voluntarily' putting three million into a public awarness campaign for transplant doners. People died. Becasue of state law, no one can sue. They have to submit to arbitration paid for by Kaiser They'll get a real fair treatment in that setup, I'm sure. Now some of them will sue, and given the breakdown of the system, they may get their day in court, but it will be even harder then a normal malpractice case. Kaiser did admit to failing. Even so, when a Kaiser spokesperson was asked about anyone being fired, they said that they were not placing blame, they were trying to get their former kidney transplant patients into other programs. They are so commited to the well being of their c