Just what we need in the nation's boardrooms: an option to fiddle the figures
CHRISTOPHER FILDES
Something new in the boardroom: an incentive to fiddle the figures. Just what the shareholders need. It is called the stock option — but, of course, most fully fitted directors will have some already. In theory, this encourages them to work their socks off to the shareholders' benefit. They are granted options which mature at some date in the future, entitling them to buy shares at something like present-day prices — so the higher the share price has gone, the more the stock options are worth. It used to be thought that they had the magical property of making their holders rich at no cost to the company, but the auditors — on our side of the Atlantic, at least — have at last rumbled this. Now a posse of sharp-eyed academics from Texas A & M University have worked out what these incentives actually encourage. They looked at American companies which had to go back to their shareholders and admit that the figures they had previously published were all nonsense. Some of these companies — Enron and WorldCom, for instance — turned out to be bust. The Texans find a direct correlation between overstated results and valuable stock options. Funny thing, eh? Bernie Ebbers, the bearded wonder who used to run WorldCom, almost warned us. His standard reply to a critical question was to wave at the chart of WorldCom's ever-rising share price. This worked well until the chart stood on its head.
Lining up lemons
How I wish that the Texan posse would ride into town and turn their sharp eyes to our own directors and their contracts. They have stock options, of course, and longterm incentive schemes and pension provisions and bonuses. All that they need to do is to line up three lemons and collect the jackpot. How is that done? Well, the bonuses might be linked to the company's earnings per share, or earnings before such tiresome outgoings as interest, taxes or dividends. Borrowing a lot of money or bidding for some other companies can do wonders for these figures, and if it turns out to be disastrous, the director responsible can be given an even bigger jackpot to go away. Consultants make fortunes from devising these incentives — all, of course, in full accordance with the codes of corporate governance — and the results have been on view in Baker Street, where Marks & Spencer directors, past, present and putative, keep on passing Go and collecting seven-figure cheques. I count on the Texans to find a new correlation. The codes that were meant to curb boardroom excesses have worked in reverse — remuneration committees, headhunters and lawyers have seen to that — so the more code-bound a company is, the more its directors get paid.
Make do with slack
This week's shortages: steam coal and small change. Turkey's steelworks are running flat out, the coal has gone to heat their furnaces, and Britain's 70-odd steam-hauled railways (says my man on the footplate, I.K. Gricer) are having to make do with slack. The demand for steel means that the minters of those fiddly little euro coins cannot get enough of it to meet their orders. The Bundesbank, still there as Germany's central bank, has called for a search in everyone's pockets and piggy-banks. Scrap steel and iron ore are being sucked into China, creating a shortage of shipping space. A survey this week tells us that British firms are running short of skilled labour. There is enough oil to go round, at a price, and enough houses, too. When supply falls short of demand and pushes prices up, the result is known as inflation. We have been here before, though not recently. Even on the Chancellor's self-serving index (housing costs don't count) inflation is on its way up again.
Telling the mule
No wonder the Bank of England has changed its tune. In April I was urging the Governor to take a length of four-by-two planking and hit inflation — most of all, house-price inflation — over the head with it. He was still pinning his faith on understatement, sweet reason and an absence of nasty surprises. Mine, I said, was the only proven way to attract a mule's attention, and the Bank has opted to try it. Interest rates have gone up twice and look sure to go up again, and the Governor has warned us in plain terms that house prices look exposed and are capable of falling. Can time be catching up with my Stopped Clocks Club? What the Bank needs to do now is to organise a shortage of money. The mints of Europe are showing the way.
Come and get it
I once went to look at a house which was empty apart from a fridge, crammed to the roof with champagne. If I buy this house, I asked, does the champagne come with it? Oh, no, said the agent, this is for the party next week, when we launch the house to all the other agents. I now learn from Alastair Ross Goobey, who is president of the Investment Property Forum, that champagne is no longer enough. To get agents to come to a launch party for a new building — so he writes in Estates Gazette, the market's lively trade paper — the hosts must offer backhanders, such as £50 John Lewis vouchers, or portable television sets. I would have thought that self-respect would suffice to put paid to such venality, but, as I already knew, the good things are reserved for the agents: the customer pays.
Sony, Gordon
We must commiserate with Gordon Brown, who this week overhauls David Lloyd George to become the longest-serving Chancellor since Gladstone. He is so obviously anxious to move over before his effects come unstuck — as happens to chancellors who stay too long — and to follow his mighty predecessors into the house next door. The Treasury said of Lloyd George that he used figures as though they were adjectives. This Chancellor likes to use them as though they were baseball bats, but the ones to spot are the ones he leaves out. The Blessed Prudence, virgin and martyr, helped with these deceptions until he gave her the cold shoulder. No Chancellor has spent so much of our money, and few, perhaps, to less effect, but if he stays on he may yet learn from Gladstone. Wealth, so the greatest of chancellors said, should be allowed to fructify in the pockets of the people.
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