With all of the media attention given this week to Joe Lieberman’s waivering loyalty to the Democratic Party, I decided to go on a slight tangent and discuss how, more than anybody else in America, Joe Lieberman is responsible for some of the worst corporate abuses during the recent tech bubble and for the current growing options backdating scandal. The Connecticut media has noted this, but not the national media, and it is real important. In short, in 1993, Lieberman saved amazingly bad accounting for when a company pays an executive with stock options instead of cash. This caused options to flourish. Options make an executive more concerned with short-term fluctuations in her company’s stock price than in running the company well. Disaster resulted. Details below the fold. Back on track tomorrow.
In 1993, the Financial Accounting Standards Board (FASB) was set to fix the accounting rules for compensatory stock options. The rules had been that paying an executive with a stock option reseulted in no cost or expense to the company. Cash compensation is an expense. Giving an executive a piece of the company for nothing dilutes the value of the stock for the other shareholders every bit as much as paying cash, but no expense was booked. There were a few weak technical arguments in favor of the old rule: Options are hard to value. The real compensation is when the executive exercises the option ane that is not when the compensation was provided. And so on.
FASB rejected these arguments. Along comes Joe Lieberman! Reflecting the cost of options on financial statements will hurt high-tech companies. This will destroy America. Lieberman pushes through a Sense of the Senate resolution that Congress would disband FASB if they require expensing of stock options. FASB caved. PBS has a nice discussion of all this online at Lieberman v. FASB
Just this year, FASB began requiring expensing of stock options. The Republic did not fall. FASB was able to hide behind residual post-Enron public distrust of corporate executives and Europe adopting options expensing to finally get things right 13 years later.
One can wonder how much better American business would have been run for the last 13 years were it not for Joe Lieberman.