Dear Mr. Buffett_ What an Investor Learns 1,269 Miles From Wall Street - Janet M. Tavakoli [22]
U.S. lawmakers blamed themselves in the ensuing scandal.They cited a tax law passed by Congress in 1993 exempting employee stock options from the $1 million tax deduction limit for senior executives. Executives have an incentive to award themselves stock options, and backdating may have been an unintended consequence of the law. Honest executives use stock options as they were intended, by both setting rational strike prices and securing the tax deduction, thus benefiting stockholders. Backdating, a perverted twist on employee stock options, is a separate problem. Shareholders and U.S. lawmakers alike were ambushed. Backdating directly benefits the option holders; greedy executives would probably have backdated with or without the tax deduction.
The late William Proxmire, while serving in the U.S. Senate, created the Golden Fleece Award for congressmen who waste taxpayer money. The Wisconsin Democrat named it after the mythological Golden Fleece swiped by the creatively deceptive Jason. Following Proxmire’s example, I wrote a commentary in October 2006 bestowing the Golden Fleece Award for Optional Integrity on corporate executives who backdated their own stock options and failed to specifically disclose this material information to their board of directors and shareholders.1112 I nominated Harry Markowitz, the surviving Nobel Prize winner who supports not expensing stock options, to bestow the award.Warren called the idea a “gem.”13
Had I not met Warren Buffett, I do not know if I would have ever published such an article pushing against famous names in finance. Meeting him encouraged me to put my own views forward and not to concern myself with what everyone else was doing, however many titles or awards they may have accumulated.
Warren wrote a memo the previous week to Berkshire Hathaway managers partly because of the option-backdating scandal that already embroiled more than 100 companies, and partly in reaction to Hewlett-Packard’s headline-making pretexting scandal. Warren sent me a copy of his memo the day after I sent him my commentary.
Former Hewlett Packard chairwoman Patricia Dunn stepped down and, along with four others, faced criminal charges after allegedly using pretexting—a nice way of saying investigators pretended to be someone else to dupe phone companies—to obtain the phone records of staff, board members, and journalists. It seems that in trying to track down a boardroom leak, they became bigger rats.14
At the time Warren wrote this memo to the “All Stars”15 (his managers), Berkshire Hathaway employed over 200,000 people. It is impossible to totally eliminate bad behavior in a conglomerate that size. Nevertheless, Buffett asked his top managers to increase their efforts especially when there was even a hint of a problem. He especially admonished his managers not to excuse potential problems because other corporations were doing something problematic:
The five most dangerous words in business may be “Everybody else is doing it.”. . . [L]et’s start with what is legal, but always go on to what we would feel comfortable about being printed on the front page of our local paper . . . Your attitude . . . expressed by behavior as well as words, will be the most important factor in how the culture of your business develops.16
On October 8, 2006, I sent Warren an e-mail about a segment I had watched the previous evening on