View 2645 July 7 - 13, 2003 (original) (raw)
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.