| Wednesday, July
9, 2003
We are all recovering. I am back to work on fiction. And of course there
is mail.
Stock Options and the Strategy
of Progress
It is the end of an era: Microsoft is no longer giving stock options as
part of its compensation package, and will now show stock payments as a
current expense rather than as a deferred payment. We may expect
Microsoft's lobbyists to join the push to make this a universal practice,
so that no one will be able to use stock options as a way to finance
incentives to grow a startup.
It was predictable. The use of options can be, and thus was, abused,
and with big high-flyer companies the incentive for the top executives to
make the company look really really good so that the stock options were
worth a lot rather quickly was very high, and rather antithetical to the
long-term growth strategies such companies need. Note, incidentally, that
Microsoft never did things that way, but that's another story we don't
need to get into now.
The real reason it was predictable comes from Adam Smith. Whenever two
wealthy capitalists get together, the first thing they do is conspire to
get the government to limit new competition. This is as old as capitalism
and is not going away. Established companies don't fear competition from
each other: it's upstarts they fear, and so they seek to have government
grant them oligopoly status. Progress depends on freedom and initiative
and ease of entry into the market, all antithetical to the interests of
the large and established firms, who want to cement their control over
their industry. Compete with each other, certainly; but get government to
keep the competition from upstarts down and out.
In the modern world oligopolies aren't granted directly. There is no
law that says you can't start an automobile company, or any other business
you care to start (although try to start a pharmaceutical research
laboratory and you'll see what happens to you). But even without criminal
law designed to Protect The Public Interest, there are many other
regulations, and these can be as expensive to a new company as the initial
capitalization. Sometimes more so. The regulations need compliance
reports, and those too are expensive. Larger companies can amortize the
compliance and compliance report costs over a lot of business, but
startups have to burn capital to produce paper that brings them no
revenue. The more such paper needed, the higher the cost of entry into the
industry, and the less threat to established companies.
This is one reason why big companies don't fight so hard over worker
unemployment compensation so long as all their competition has to pay it
as well. When it gets as onerous as it is in California -- it can amount
to a payment as high as 90% of the salary you pay the employee -- the
companies just move out and leave unemployment and a recall election
behind; but so long as it's not insane (as it is here now), it's a good
way to keep the upstart startups out of the business. They have to raise
capital not only for employee payments, but for workman's comp and such.
Note that a low salary plus a stock option requires considerably less
capital outlay than a higher salary.
If stock options are not a current expense, there's an incentive to the
startup employees to work their tails off to get the company profitable or
at least growing. Microsoft's major secret over all these years has been
that Bill Gates could get some of the best and brightest people on the
planet working their hearts out to make money for him and his
stockholders. Of course they could get rich themselves. Do not bind the
mouths of the kine that tread the grain; a lesson Gates learned early on.
Microsoft has notoriously worked people to burnout for about seven to
ten years, then let them pretty well do what they want to after that: the
best ones were rich by then, and could either work in less stressful
Microsoft jobs including management positions, or just take their money
and go somewhere else. Meanwhile, the costs of the stock options didn't
show up immediately, allowing the company's value to grow more quickly,
and making the options worth more, thus providing more incentive for
productivity.
That works much better for a startup than for an established company,
which is why established companies have always hated the practice and
wanted government to do something. It was that way with junk bonds, too:
junk bonds provided the capital to challenge management of old line
established companies which were putting lots of assets into executive
compensation like corporate jets and pleasure domes and other non-taxable
psychic income for management. Established companies hated junk bonds, and
hated those who invented them, and worked very hard to get the full weight
of government including criminal law to come down hard on anyone connected
with junk bonds.
Microsoft has always run scared, acting more like a startup than a
mature company. Today's announcement is a sign of company maturity.
So: it's another era, and a signal that the garage startup that can
grow into a multi-billion dollar company is just about a thing of the past
in the computer industry. It's possible, but increasingly unlikely,
because the capital requirements to meet both the real development costs,
and the regulatory costs of doing business, have risen enormously, and
there's less capital to burn now.
Many years ago Possony and I pointed out in a work we never finished
called The Strategy of Progress that: Human history is the story of
a race between freedom and innovation, and regulation and bureaucracy.
Over time the natural tendency of all states at all times and places is to
divert more and more productive output to structure, regulations,
regulation enforcement, inspections, reports, all unrelated to production,
and all producing a bureaucracy that can't be laid off when the business
it is intended to "serve" takes a downturn or is
destroyed.
Unless things have changed in the past decade, the US Navy still pays a
company to make hemp hawser cables in New England; this was set up during
the Civil War when those cables couldn't be bought from the South, and at
least through the Carter Era the company continued year after year to make
cables suitable for sailing ships; the output was instantly sold as
surplus, of course. This is merely a dramatic example of what is an easily
demonstrated tendency. Das Buros steht immer, as Metternich is said to
have observed when finally leaving office.
As Possony and I observed, sometimes things get away from the
regulators and bureaucrats, and there is a brief period of freedom, and
enormous growth. The Discovery of the New World ushered in one such era
(and at the same time the bureaucrats strangled a brilliant period of
growth in China.) The First Industrial Revolution was another, and then
came the Second Industrial Revolution.
It isn't generally remembered, but in World War II the P-51 Mustang
went from drawing board to an operational airplane used in combat in under
90 days. Think about that one for a while, and imagine doing something
like that now even though now we have computers.**
The electronics and computer industries broke free of the regulatory
chains. There was also financial freedom to allow accumulation of capital
for investment. The computer growth era began in about 1970 and continued
to the Bush-Clinton era when the regulatory people caught up with the
Americans with Disabilities Act, new minimum wage requirements, new
employee rights laws, etc., etc.. Moore's Law kept things going beyond
that, but apparently the regulators have caught up even with that.
Depend upon it: just as the Savings and Loan disaster, itself produced
by government regulation, ended with an environment less friendly to
startup competition to established big financial institutions, the new era
of "stockholder protection" will protect lawyers and big
established businesses, in that order, and stockholders not at all. So it
goes.
** That turns out to be a
bit of an exaggeration; see mail.
And have a look at:
http://news.com.com/2100-1029-1023735.html?part=dht&tag=ntop
Which ought to be enough for the day...
Subject: Windows buffer overflow DoS/exploit ( priority
one)
http://www.microsoft.com/technet/treeview/
default.asp?url=/technet/security/bulletin/MS03-024.asp
---------- Roland Dobbins
Hacking Goes Public:
http://www.techweb.com/tech/security/20030709_security
And we have warned against this for months, but it's well to repeat the
warning: don't give information to what appear to be trusted sites. It's
probably spam scam:
http://www.informationweek.com/story/
showArticle.jhtml?articleID=10818424
Then we have
http://www.rockymountainnews.com/drmn/local/
article/0,1299,DRMN_15_2096156,00.html
which is just full of stuff about this horrible celebrity and this 19
year old girl who went on vacation, and isn't identified. Now if
Kobe Bryant actually assaulted her, of course he ought to be accountable;
but this all sounds extremely odd.
I thought I remembered something about "In all criminal
prosecutions, the accused shall enjoy the right to a speedy and public
trial, by an impartial jury of the state and district wherein the crime
shall have been committed, which district shall have been previously
ascertained by law, and to be informed of the nature and cause of the
accusation; to be confronted with the witnesses against him; to have
compulsory process for obtaining witnesses in his favor, and to have the
assistance of counsel for his defense ."
It's that confronted with the witnesses, oh, and speedy and public,
that I don't quite understand here.
The sheriff says "I'm sure he is a fine, upstanding guy.
Obviously he is well-liked, and he is a role model," the sheriff
said. "But I think sometimes when people look at their heroes, they
forget they are human beings. One of the unique traits of humans is they
make mistakes." He also talks about the stresses in a rape
accusation. And
The newly elected sheriff expressed dismay with what he called "mindboggling"
media coverage, saying the focus has been more on the athlete than the
woman who says she was victimized.
Given that no one seems to know who the victim is, or what she claims
happened, I suppose it's astonishing that all the attention is focused on
the Laker's cleancut star. At least it would be to an Eagle County,
Colorado Sheriff.
Doubtless it will all come out, but it sure seems odd that Kobe Bryant
would go to Colorado and assault a hotel employee as the first criminal
action of his life. And that the District Attorney has yet to file any
charges, and the complainant is unidentified and "on vacation"
while this goes on and on and on.
Full disclosure: this house is full of Lakers fans. And we've been
admirers of Kobe Bryant who has been, so far as we can tell, one of the
outstanding role models in the sports world.
TOP
Current Mail
|
CLICK HERE for
a Special Request. 
