In 1996, Federal Reserve Chairman Alan Greenspan terrified investors when he used the term “irrational exuberance” to describe the frenzied rise in the stock market.
Americans feared anything that might slow the economic miracle they witnessed each month when their brokerage statements arrived and, thus, Greenspan’s comments caused apprehension throughout the land.
People so wanted Greenspan to be wrong that some accused him of trying to sabotage the economic miracle we enjoyed throughout the roarin’ 1990s. But alas, his predictions proved accurate, and now we are trying to figure how to get things going again.
In the grips of ‘infectious greed’
Some of the economic problems in America today are structural in nature, like the overbuilt capacity in the information technology industry. Some are the natural result of a free market economy adjusting for vagaries in supply and demand. The most troubling issues result from the lies, manipulation and accounting tricks which beset corporate America during the last decade and up to the last few years.
Last summer, Dr. Greenspan — who took his Ph.D. in economics from New York University — spoke to the Senate Banking Committee about the excesses that surfaced after the stock market bubble burst.
In his view, the incentives created by poorly designed stock options, “overcame the good judgment of too many corporate managers.” Further, he said, “an infectious greed seemed to grip much of our business community.”
“It is not,” he added, “that humans have become any more greedy than in generations past. It is that the avenues to express greed had grown so enormously.” Stock options meant that executives could get rich if they faked profits, and fake them they did.
A few pieces of the puzzle…
So, what’s the answer? More government regulation? Changed accounting rules? Jail terms for the miscreants? What will it take to fix corporate America?
It seems to me that several things need doing. I do not suggest this to be a comprehensive list, but just some needed pieces of the puzzle.
• Expense stock options. The temptation to run up stock prices by whatever means necessary to enhance the value of employee stock options that are not reflected on the financial statements is strong and needs to be eliminated. Stockholders suffer some dilution of value when stock options are issued and that expense needs to be recorded in the books just like a cash expense.
The accounting profession is currently wrestling with this issue and they need to take a strong stand. That means requiring that options be expensed on the income statement so that every reader of the financial statements can plainly see what is going on without having to dig through forty pages of fine print in the footnotes.
• Corporate boards of directors need to get serious about their responsibility to the stockholders. Too many times, directors merely rubber stamp whatever management proposes without thoroughly examining the data. The directors are trustees for the stockholders and occupying that position of trust requires vigilance. Much of the greedy excesses of the recent past could have been curtailed by more proactive director involvement in corporate governance.
• And finally, we need vigorous prosecution of corporate criminals. Mistakes are one thing, intentional fraud is another. Wherever crime is detected, swift prosecution should be the order of the day. By making it clear that wrongdoing will be punished corporate executives may hesitate to get tangled up in schemes of corporate malfeasance.
Cleaning up the mess
We are likely going to experience a slow economic recovery and unlikely to see a return to the rock ‘n roll days of yore anytime soon.
However, taking little baby steps toward cleaning up the mess can create a solid foundation for the future.
Thought for the Moment — A new command I give you: Love one another. As I have loved you, so you must love one another. By this all men will know that you are my disciples, if you love one another. — John 13:34
Joe D. Jones, CPA, is publisher of the Mississippi Business Journal. Contact him at firstname.lastname@example.org.