“Taking Stock” by Ron Unz
The Los Angeles Times, Sunday, August 25th, 2002
PALO ALTO—Regulators looking at how stock options are accounted for have seen cause for concern. I see opportunity.
It’s true that when actual expenses don’t appear on an operating statement it can make for some rude surprises–as at Enron and elsewhere. But faced with the worrisome risk of our economy falling into a double-dip recession, perhaps we should look at the potential for even more creative exploitation of off-the-books transactions. All we have to do is follow the odd logic of numerous corporate CEOs and Wall Street strategizers to its obvious conclusion. They have vigorously defended the practice of not counting stock options as expenses, arguing that since no actual dollars leave the corporate treasury, no actual expense has been incurred. Under this analysis, profits per share might fall but total profits would not.
So why not apply this same argument to the issuance not just of options–which give someone the right to purchase stock at a guaranteed price–but also to the issuance of stock itself. Issuing new stock also involves no direct outlay of corporate cash. So shouldn’t it too be excluded as an operating expense? Imagine the possibilities.
First, since stock has a clear market value, workers and executives could easily be persuaded to take their entire compensation in that form, some of which they could then sell to pay their ordinary living expenses. This business innovation would allow corporations to eliminate all salary costs from an accounting perspective, since no actual cash is spent. Corporate profits could soar, enormously boosting our economy.
Even better, similar financial engineering would allow corporations to barter their shares or options for rent, raw materials, advertising, capital equipment and everything else they require, thereby completely eliminating all these burdensome drags on profit margins. Since not a single actual dollar would change hands, corporations could reasonably reduce their total accounting expenses to zero, allowing profits to equal revenues. Such an elimination of all business expenses in our society would lead to an unprecedented economic boom, far surpassing that achieved at the height of the late-1990s bubble.
Ultimately, if the issuance of stock were not considered an accounting expense, companies could abandon the difficult task of producing and selling actual goods or services, and instead could switch their business activity to merely issuing and selling stock and options directly into the marketplace. This would generate enormous revenue at no cost whatsoever, with the only necessary raw materials being blank stock certificates, which would be purchased with–what else?–stock certificates.
Although such financial techniques might seem risky, they have already been partially exploited by some of America’s largest and most prestigious corporations, particularly in the innovative Silicon Valley.
Take the case of mighty Intel: Its official 2001 profits would have been reduced by over 80% without this effective use of options accounting technology. In an even bolder use of the concept, hugely profitable Cisco Systems would have actually lost vast sums of money throughout most of the last decade had it fully accounted for the stock options it issued. Financial analysts have suggested that Cisco’s reported 1998 profit of $1.35 billion would have become a loss of $4.9 billion had it not employed this remarkable technique. Effective use of options allowed Cisco to report the massive and endlessly rising profits that led its market value to peak just north of $500 billion, briefly establishing it as the most valuable company in the world in 2000.
It’s true that Cisco has since encountered a few rough patches, with more than $400 billion of that market value having disappeared. But if Cisco CEO John Chambers remains steadfast in his commitment to options technology–becoming a national leader on the issue and a prominent speaker at President Bush’s recent economic forum in Waco–then why should the rest of us shy away?
Chambers has demonstrated his patriotic commitment to his principles by personally raising or directly contributing millions of dollars to the Republican Party over the last several years, an exertion made easier by the $239 million he earned by selling much of his Cisco stock during its better days.
His persuasiveness has led the Bush administration to adopt his views on this important accounting issue. Meanwhile, Chambers’ high-tech allies have been equally persuasive with America’s top Democratic leaders, perhaps for many of the same underlying reasons.
Indeed, the effective business use of stock options by Intel and Cisco are examples so universally typical of other, similar companies that one could make a plausible case that in recent years the key technology powering the financial success of Silicon Valley companies has gradually shifted from the microchip and the fiber-optic strand to reliance on options finance–which actually seems very closely related to that Holy Grail of mechanical engineers, the perpetual motion machine.
Given this fact, perhaps we should encourage these same innovators to apply their innovations to more mundane practical needs. Exactly the same theoretical logic that permits companies to avoid counting their stock options as expenses could easily be used to produce mechanical devices that would allow us to run our cars without fuel and our lights without electricity. An eager world awaits.
Ron Unz, a political activist and Silicon Valley, software developer, is the founder and chairman of Wall Street, Analytics, a financial services software company.