[lbo-talk] The inefficiency of the share option incentive

[Julian Gollop]

I just finished reading Stiglitz's 'The Roaring Nineties'. It's a nice
little book - nothing terribly deep - but a good economic survery of the 90s
boom and bust. One thing that struck me as quite horrifyingly inefficient in
the current corporate system is the use of share options for CEOs. Stiglitz
goes on about the importance of effective incentives, and this is one
example of something so egregiously inefficient that any apologist for
capitlism would surely be quite worried? I didn't realise the extent to
which this system was used to deceive shareholders, due to the fact that the
share options were not reported as an expense in corporate accounts. Plus,
many CEOs and other senior execs did everything possible to push the share
price up, to the extent of deceiving the shareholders, then exercised their
share options and sold their shares when they realised the whole house of
cards was about to fall. Maybe the 90s bubble, with many so-called 'new
economy' corporations was an exceptional situation, where in the absence of
any foreseeable profits in the near future, the mythologizing about new
technology and the rush for 'first mover advantage' meant that the share
price was king? Or maybe various methods of share price manipulation are
very widespread for a whole variety of reasons and in different situations?
And what has actually been done about it since the bubble burst? Stiglitz
says he has great faith in markets, as long as they are properly regulated,
but his book is such and effective horror story that his prescriptions seem
a little vague and under whelming.

Julian Gollop