Another reason to lock up CEOs

Greedy CEOs Can't Help Themselves -- by Richard Gwyn

The Financial Times of London, although its pages are pink coloured, is pretty grey. It puts a premium on detail and accuracy; it doesn't inject spin into its stories; it would rather be right than be first.

So how come the Financial Times is the only paper that I know of to have covered one of the hottest stories on the go?

This story is about an investigation being carried out by the New York Securities and Exchange Commission (SEC) into what appears to be widespread corporate fraud.

Admittedly, the nature of this fraud is complicated.

It involves allegations that a large number of companies have been lying to the SEC and to their shareholders.

The specific, alleged lying comes in the form of what could be called post-dated, secret, payments to corporate executives.

As is standard practice, the CEOs and other senior executives of these companies, are awarded "options," that is, the chance to buy hunks of company stock at reduced prices.

The justification for these options is that they encourage the executives to work hard — for their own benefit, first, but also for the benefit of shareholders. This is because the higher company share prices go, the greater will be the value to them of their options when they cash these in.

Regular shareholders will benefit, too, because the shares they own, even though bought at regular market prices, will likewise be worth more when they choose to cash in. This is a legitimate business incentive.

It becomes a wholly illegitimate non-incentive — a straight giveaway, an outright rip-off — when the option is backdated.

These senior executives are not buying anything at all nor are they taking any risk. They are simply paying themselves an unearned, undisclosed, bonus.

Last Tuesday, the first paragraph of the Financial Times's main, front-page story read:

"Corporate America was hit yesterday by widening fall-out from the stock options back-dating scandal as four more companies revealed they were being investigated." The Times has followed up with other stories, editorials, and analyses.

Some 40 corporations are now under investigation. Everyone expects the number to go far higher. One financial analyst is quoted as saying, "This is probably the beginning of a lot more companies being investigated."

As in earlier scandals, it isn't just corporate executives at whom fingers are being pointed. Once again, boards of directors of these companies (supposedly there to serve the interests of shareholders) appear to have been asleep. Also sleeping, it seems, were all the supposedly sharp-eyed accounting firms which audited these companies.

What makes this story so hot is that it confirms that nothing has happened. Absolute, total, nothingness.

For some four years now, newspapers have been full of stories about corporate malfeasance, about wildly overpaid executives, about a succession of specific scandals, such as that at Enron, which has just resulted in the conviction of its top executives.

There have been Congressional investigations. There has been the superb investigative work of New York Attorney General Elliot Spritzer.

New legislation has been introduced to hold boards of directors to account and to impose limits on options. There have been countless academic papers and conferences and endless earnest statements by business leaders that everything must change and would change.

And nothing has changed.

The really hot story about corporations therefore is that nothing can change. The poor dears in their suits and corner offices can't change. They can't help themselves. They have to make immense amounts of money, by any means, because that's all there is to their lives. They're hollow men (overwhelmingly, they are men).

Maybe it's time to stop being so cynical about politicians. They are the only alternative we have.

(Richard Gwyn's column appears Tuesdays and Fridays.)