SENATE BILL: Executive Compensation Act of 2014 (Redraft Vetoed)

[Fmr. Pres. Duke]

I'm really leery about allowing the government to start meddling in what company's do with their own stock. The decision should be left up to them. We can provide people information about executive pay versus lower earning employees and they can change it, but having the federal government step in and say "hey, you can't do whatever you want with your own stock anymore" makes me uncomfortable.

Usually, the way the market works, is performing well = good returns to investors. There are exceptions, sure, but we can't legislate to punish the good because of a few bad apples.

Besides, maximizing stock value is what investors, the owners of the companies, want.

[Fmr. Pres. Duke]

What's wrong with stock-based compensation?

Executives, or whoever receives the compensation, are incentivized to manage stock price to maximize their returns. By definition, this means that they need to manage expectations and then attempt to exceed them, rather than actually perform well.

If they are maximizing returns, how is that not performing well?

You can argue in some periods like the financial crisis, where banks were engaging in risky behavior to make huge profits, is an example, but that was not a normal circumstance. Typically, if a company is performing well, their stock is doing well.

Some shareholders want executives to hold stock because their performance directly determines their pay.

[Fmr. Pres. Duke]

Share price can increase regardless of company performance. It is almost arbitrary. But yes, it normally increases if the company exceeds expectations. Sure, raw performance may be poor, but normally it is compared to performances of other companies. It's rare that a company that is performing poorly has a high stock price.

[Fmr. Pres. Duke]

Managing expectations is the name of the game in the stock market. Every company does it. Most issue lower than expected guidance each quarter so it can "beat" expectations next quarter. It sometimes increases the stock, sometimes not.

And in regard to executive compensation, most stock based compensation packages come in the form of options, yes some get actual shares, but that's not always the case, and the options have a set date when the individual can buy or sell the shares. They aren't just trading on the open market when they so please. That would lead to insider trading controversies because CEO's know their companies performance before we do.

All this bill does really is allow forbid the company from issuing options that can be cashed in prior to them leaving the company, but since all options have a set date, i.e. June 2015 calls, etc, and people don't always know when they will leave the company, I'm not sure how it will work, unless they aren't given the options or stock until after they leave the company. And the CEO will still realize a massive payout when he leaves, as the markets tend to go up over time.

[Fmr. Pres. Duke]

I just think this is a case where I won't see eye to eye with those who want something like this in effect. At the end of the day, I see nothing wrong with allowing a company to issue stock based compensation - it gives executives and in some cases employees a chance to have a stake in the company they work for.

Further, I don't really understand the rationale behind replacing the FASB. Sure, the government could write their own standards, but hell, if anyone is familiar with the IRS code and regulations, they'll know it's a mess. I'm not sure I want the government taking on this responsibility too. We already do have real book value versus market value, so I don't buy into the argument that it's wrong we asses value not factoring in the market perception of things. Even if that is a problem, we can fix that without nationalizing the standards.

[Fmr. Pres. Duke]

Well, what's a version of this bill that could pass in your minds, Duke and Yankee?

In short, I don't know. I'm not sure I could support limiting what a company does with its own stock because, to quote TNF, "muh free enterprise." Even in your bill as it is, all we really do is prolong the inevitable of executives cashing in their lucrative options. They will still make loads of money. All this does is make them wait till the stock could arguably be trading even higher since markets in the long run typically go up.

As for the FASB, I guess we could adopt different standards, but again, I don't see the purpose of going through the expense of doing it. What is inherently wrong with the FASB and why does it need to be replaced? Maybe the federal government can provide oversight of the FASB instead of unilaterally replacing them? Maybe we just have different philosophies on this matter?

I am really big on if it isn't broken, don't try to fix it. But if you want to find a way for the government to provide oversight, I might consider that.

[Fmr. Pres. Duke]

As for the FASB, I guess we could adopt different standards, but again, I don't see the purpose of going through the expense of doing it. What is inherently wrong with the FASB and why does it need to be replaced? Maybe the federal government can provide oversight of the FASB instead of unilaterally replacing them? Maybe we just have different philosophies on this matter?

Speaking as an accountant, FASB is an antiquated system. It's riddled with adjustments made for political reasons (both by business and government) and often doesn't make any sense. (Ex: LIFO is used for valuing inventory).

As for the bill itself: Why don't we just switch to International Financial Reporting Standards? It's much more modern. Plus it's already set up and enforced in most of the world already, so it'd be much easier to switch compared to coming up with a new set of standards from scratch.

This would be a good move, actually. I'd favor it over nationalizing our standards to something proprietary, and we could avoid the expense incurred to write entirely new standards.

[Fmr. Pres. Duke]

Where are we on this?

[Fmr. Pres. Duke]

I am fine with replacing accounting standards, but this whole artificial forcing executives to not sell their stock until they're gone for 5 years won't fly with me. We aren't solving any problem with that. We are just postponing the inevitable. Let companies do with their stock what they want. I am too drunk to consider anything else on this matter.

[Fmr. Pres. Duke]

Probably heading for a redraft here. I'm unlikely to sign this with part 4 included, as it is too much of an intrusion on a company's stock and does nothing to accomplish the goal of lessening executive compensation. If anything, executives will receive even more 5 years after retirement, as markets typically increase over time.

I am fine with the rest of the bill though.

[Fmr. Pres. Duke]

If you have learned anything, dear Tyrion, it is that humans are not irrational, despite what economics will tell you - and I usually buy into most of what I have studied in that field. I doubt section 4 would do anything to curb executive compensation.

In fact, I wouldn't be surprised to see options being used more to make up for the fact that executives wouldn't be allowed to cash them in while working! Think of the inflation, they will say! As with all measures to limit executive compensation, they usually have the opposite effect on what we intend; see: capping the tax write off for executive compensation, which led to this whole stock compensation in the first place.

Either one of us could be right on this matter, but I just fear that this would have an opposite effect and executives may do better in the long term. Yeah, they may be poorer while they work, but that wouldn't last. And we run the risk of having high executive turnover because people will move around in order to cash in on their options. If people want to get their money, they will find a way to do it.

Let's not forget the lengths people will go to satisfy their greed.

[Fmr. Pres. Duke]

So what do you suggest to address the reversing the trend towards stock based compensation, Mr. President? Reversing the tax write-off?

I don't know if that will have any effect anymore now that companies have moved in that direction. What I do believe is requiring companies to force executives not to sell until 5 years after leaving a company is not the answer. I don't even know what it really aims to accomplish besides encouraging executives to leave companies sooner rather than later to be able to cash in on their stock faster.

We had this debate previously and put in some regulations to increase shareholder awareness. Beyond that, I am not sure. I'm afraid imposing the cap as we did in the 1990s opened pandoras box.

[Fmr. Pres. Duke]

I can smell that redraft train coming!

[Fmr. Pres. Duke]

My biggest concern with section 4 really comes down to turnover. Companies need certainty in markets and with their executive team, and I fear that if we put this law into place, we will see high executive turnover because they wish to cash out earlier rather than later. The only way to curb this would be to force them to work for a company for X number of years, but that is far too many strings attached than makes me comfortable, and probably not legal.

This isn't slavery after all. It's a basic right to be able to move around as you please assuming there is no non-compete contract in place.

[Fmr. Pres. Duke]

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Tyrion, I like to knock even my own alternatives sometimes

The way I see it is this: exec signs a contract with stock compensation to work for company A. He decides shortly after, say 5 years, that he wants to cash those in, so he leaves and takes a job with company B so he can cash in his stock from company A. This becomes an ongoing problem. Executives typically can find new jobs and high paying jobs at that, and "experience" may not mean as much because of the new law. Companies and individuals will do a lot to get their money.

I just view this as creating unnecessary hoops that will only hurt our job market because it encourages turnover and will cause a lack of continuity in the marketplace. Companies changing high level executives is a big, big deal. If we had a better reason for this, maybe I could support it, but as of now, I just can't. Sorry. We can still be friends though.

Thus, I am offering this redraft.

[Fmr. Pres. Duke]

You know what, I don't think I like this bill except for the changes to our accounting policies. I was mistaken over repealing the PSLRA; I thought that case was dealing with another issue. I don't think there is a pressing need to do that, and I fear it will just fill our courts with frivolous lawsuits.

I know, I know, it's an oversight. I need to pay better attention while juggling this with studying for the bar.

[Fmr. Pres. Duke]

Vote on the Executive Compensation Act of 2014:

Aye (5): Tyrion, Griffin, TNF, bore, and Alfred
Nay (4): DC, Goldwater, Yankee, shua
Abstain (1): Lumine

Didn't Vote (0):

The redraft passes and is sent to the President for Executive Action.

Thanks, pal.

I am vetoing my redraft. Upon further review, I was mistaken about the PSLRA, and I don't believe it's something that needs to be repealed. Courts operate on efficiency, and it was enacted to they would not be filled with frivolous lawsuits that would, in turn, clog up our court system. I don't think I have heard a pressing reason as to why this needs to be repealed. It seems to be working as intended.

Rest assured, I have introduced a bill with the elements I liked of this bill, like adopting the international accounting standards, so not all is lost.