A good example is the move to expense stock options.  Not only is this effort unlikely to resolve the corporate governance problems it is supposed to address, but it could also further impede the economic recovery.

Expensing Stock Options Really Doesn’t Solve Anything…

Saying giving options to executives causes accounting abuses is like saying giving executives control of the corporate treasury causes embezzlement.  Temptation exists in both instances, but an executive cannot run a corporation without control of the treasury, and a corporation cannot attract top executives without top compensation. 

Too frequently executives have received enormous cash payments while their companies founder.  At least stock options align the executive’s interest with that of the stockholder.  It’s not what is given, but how it is given that is critical.

The concern over stock options is that executives will manipulate a company’s financials to create an inflated stock price, then will exercise their options and sell the stock before their manipulation is discovered.  The problem is not the options themselves, but the lack of controls on the options.  Expensing options doesn’t have any direct impact on such manipulation.

Moreover, stock options can be and are reported without expensing them - through diluted earnings per share.  Many investors not only know a company’s P/E, but also buy or sell based upon it.  If P/E is based on full dilution, then the impact of options will be reflected in a fundamental benchmark.  On the other hand, how many investors know even the amount of long-term debt, let alone buy or sell on it?

How does expensing stock options cause difficulties?  By making it more difficult for companies to attract top talent.  For early stage companies, which do not have the cash to compensate blue chip players, the problems are compounded.  Expensing options unnecessarily degrades the company’s financial statements, making it harder to obtain credit, negotiate loans or raise capital.

What’s good for startups is good for America. This is a problem not only for the startups, but for the entire economy.  What else drove the economy of the ‘90s but the creation of jobs and wealth generated primarily by the explosive growth of early stage companies?  Certainly many of those companies may be gone now.  But it was not their stock options that killed them.

Any corporate governance initiative must be tailored to address the problems for which they are intended, and should not be instituted to provide reform for reform’s sake – or a pretext for pundits and politicians to claim that the problems are solved.

Enacting “reforms” that unnecessarily burden entrepreneurs only dissipates their limited resources, and so increases the failure rate of those companies that would otherwise be likely to fuel our economic recovery.  It is therefore imperative that any “reform” be scrutinized to insure that: It truly does address its purported problem; It does not exact an undue cost; and better methods are not available.

If not expensing, then what? Why not just restrict when the executive can sell the stock acquired by the options until after an audit?  If the numbers don’t hold up, the execs forfeit the options, with additional penalties if they are culpable in any manipulation.  The executives are thus only rewarded if they properly improve corporate performance, and punished if they try to fake it.

It wasn’t the dot.com execs that inflated stock prices.  That was Wall Street.  If you want to address the abuses that burst the tech bubble, start there, rather than imposing irrelevant restraints that will cripple tomorrow’s entrepreneurs.  But don’t pretend that adding line items to financial statements will have any impact on what executives are doing with the line items already there.

Opposition to expensing stock options is not a magic bullet.  But at least it might prevent our shooting ourselves in the foot.  Which is the least we should do with an economy already limping along.