Sunday with Gretchen on options

It's Sunday and the NYT's Gretchen Morgenson is ranting about stock options. Quelle surprise! Since GM has been obsessed with this subject for years, one can only imagine the ecstasy with which she greeted the Brocade criminal charges this week . She says these charges tell us that stock options are "one of the biggest wealth redistributions ever fobbed off on American investors"  (which is actually relatively restrained, since she's referred to stock options as "criminals' . . . most powerful weapon" (NYT, 7/11/2002)). What we don't get in this column is what we never get from GM – clear, measured and informed judgments or insights.

GM begins by saying that the "revelation" of criminal charges for backdating at Brocade tells us that "almost everything about stock options. . . was apparently a mirage." She says that the backdating charges show, contrary to what options' defenders have been saying, that options don't align executives' interests with those of shareholders, that they should be expensed, and that options heavily favor executives rather than being shared with lower level employees.

GM may or may not be right about these assertions, but unfortunately none is proven by the backdating at Brocade, or at any other company.

GM concludes that "the easy money [options] represented for companies and executives, especially when the awards were not accounted for as a cost or monitored by investors, seems to have encouraged some corporate chiselers to take advantage of their shareholders, whom they never had to face." She quotes her expert of the week as saying options are "like a crime where you don’t know the victim. It’s easier to take advantage of somebody when they don’t know what you’re doing.”

So is she saying that options are bad because they cause criminal behavior?  One would like to see some data on this. Instead, Johnson, Ryan and Tian, in their recent Executive Compensation and Corporate Fraud, show that "the likelihood of fraud is positively related to incentives from unrestricted stock holdings and is unrelated to incentives from restricted stock and unvested and vested options." The authors note that this " is somewhat surprising given the negative press coverage of option compensation following recent corporate scandals."

Indeed, GM is not really saying (contrary to her sweeping assertion in 2002) that options generally cause crime.  Today she says that "options are not inherently bad, of course. Options do not cause crookedness."

The real problem for today seems to be that "the companies that may have fiddled with their options grants also had a habit of granting options heavily at the top." In other words, dishonesty about backdating is associated with favoring executives. GM tells us that "of the 53 companies under investigation for stock option grants as of June 30, some 57 percent of them granted considerably more options to their top executives during the past five years than their peers did." For example, Brocade executives got 13.9% of the company's options. This compares with the industry average of 11.3%.

And at least we know that one of GM's opening assertions isn't true -- options generally are shared broadly in companies. But why should crime be associated with the exceptions? Why should the distribution of stock options relate to criminal behavior?  Is GM telling us that as long as everybody gets stock options there will be less fraud? Because after all Brocade was 2.6% over the industry average in option distribution?  Well, we can be thankful at least that GM will permit variation among industries!

It would be nice if GM gave us a little more analysis and a lot less overheated rhetoric. Of course that assumes Morgenson is interested in informing her readers and contributing positively to the executive compensation debate. On the other hand, if she is interested in ratcheting up the hysteria of readers who want their daily fix of anger and resentment at executive greed, she's doing a fine job.