Thanks for Commenting
Actually the SEC does require full disclosure of the compensation packages of other employees.
Mario, let me put forward a scenario for you to consider. Let's say that I start a company, I put in a benefit package for myself that says I get $100,000,000 (or as close as I can get to it with the company resources) if I ever leave employment with the company, and I don't disclose this provision in the company prospectus. You decide that the company looks like a good investment and put some money into it. I then leave the company, bankrupting it with my big bonus.
Tell me that you wouldn't feel cheated. You'd want to sue for damages, wouldn't you? You'd wonder why the SEC didn't have some mechanisms in place for making the prospectus more transparent, wouldn't you?
And you might be a bit irritated with sophistries like "Institutional investors who are unhappy with disclosure practices of particular companies can just refuse to invest in those companies," wouldn't you?
How would you know that the big bonus wasn't disclosed if it wasn't disclosed? How would you be unhappy until you got robbed (when it would be too late to refuse to invest)?
You're probably a clever investor, but how would you protect yourself against fraud without some regulation of the marketplace to enforce transparency?
And why would companies who aren't cheating object to the transparency? We've been hearing a lot lately about how those of us who are not terrorists should have nothing to fear from the government's examining every element of our lives. If these CEOs don't have their hands in the cookie jars, why would they object to having their company expenses, including their own compensation, exposed to their own investors?
How about we close some of the tax loopholes that make all these permutations profitable? Tax the CEO at at least the rate that the factory worker is getting taxed, including all deductions.
Charlie, i appreciate your example, however, the ceo is answerable to a board of directors.
The board would have to approve the compensation package of the CEO. If the comp package would bankrupt the company, the board of directors are responsible. Mario could and would sue the board for malfeasonce. In your example he(Mario) would probably successful. Given the recent paybacks of injured investors by member of the board of directors of MCI, Enron and others using their personal assets; Only a fool or a cheat would approve the package in your example.
Most members of board of directors of public companies are neither.
I agree that the example is extremely unlikely. I think, however, that the wall between the CEO and her/his Board of Directors may not always be as high as we would wish.
All of Enron's moves were approved by the legal Board of Directors.
While some paybacks come from the offending companies and/or individuals, most of the ones I've read about lately are against stock brokerages. While the losses may increase the due diligence necessary for, say, Merrill Lynch to put a buy recommendation on a resource, it only moves the transparency issue from the investor to his/her broker.
Good luck to the little guys like me trading with discount brokers!
Charlie,
The post-Enron/Sarbanes-Oxley world is very different when it comes to the expectations for Board members. Plus, the problems at Enron were a matter of manipulating accounting loopholes sometimes legally, often not - read "Conspiracy of Fools." They were not about hiding executive perks included in compensation packages.
With that said, we're not talking about "little guys" driving these new regulations. We're talking about institutional investors with billions to invest, and they can throw their weight around if they want certain disclosures provided. Instead, they are seeking additional government regulations, and whenever that occurs, it usually has ramifications beyond its intended consequences.
I can appreciate your points on this. In an environment where the accounting practices push and sometimes tear the envelope, relatively petty transgressions with executive compensations are likelier.
The "broken window" syndrome may at work with some of this.
It appears that the institutional investors may be throwing their weight around asking for additional transparency to be enforced by the government. I agree that unintended consequences could result.
The agenda of the investors and the administrators usually coincide. The billion-dollar institutional investors are usually familiar with all the players and are in a much better position to evaluate the variables on their own. Asking for the SEC to intervene in this relationship may be asking for trouble. What next? Investigating interlocking directorates?
As an aside, I appreciate the civil tone of this discussion.
An additional unintended consequence which I'll admit I haven't considered is mentioned in this editorial from the new issue of Practical Accounting: "A Double-Edged Sword in Action" http://www.webcpa.com/
article.cf...articleid=18342
Apparently "a number of companies are going private" to avoid complying with Sarbanes-Oxley.
This warping of the normal investment structure as a result of regulatory intervention is probably not serving anyone.
I'll admit to reexamining my initial views on this subject as a result of this discussion. Thanks!
Charlie, great information. However, the reason that the large institutional investors want a "federal solution" is to bring actions when an investment goes bad. They want the ability to go and sue the bankers, investments bankers, accountants and attorney's that advise these large companies; if a company fortunes go bad.
Economist calls this activities externalities that provide no benefit and cost the companies additional resources.
What ever happened to buyer beware?
As a professional buyer, I can assure you that caveat emptor is alive and well and especially vigorous here in New Mexico. Caveat venditor makes an appearance every now and again, too.
Have you ever tried to use New Mexico courts to resolve any business issues? If so, was the experience swift and professional?
I apologize for asking a tangential question, but you appear to know what you're talking about (on THIS ONE point at least) (grin) How do you think companies should report stock options given to executives?
Under some market conditions they could be worth a bundle; in other conditions not so much. How should a company report this crapshoot (albeit with somewhat loaded dice)?
Commenting by HaloScan
