Is Buffett Hazardous To Your Wealth?
Vahan Janjigian, Forbes Growth Investor, 05.27.03, 2:30 PM ET
First stock options, then earnings guidance, and now taxes on dividends. America's most successful investor has taken positions on key issues that could harm businesses and their shareholders.
According to out latest Billionaires List, Warren Buffett is the world's second-richest person. He got that way by being a very savvy investor.
However, it seems that the severe bear market, the dozen or so corporate scandals that have taken place in recent years, and the "unfair" distribution of wealth have convinced Mr. Buffett that systemic reforms are required, that corporate managements cannot be trusted and that the double taxation of corporate profits is perfectly fair and logical.
Although Mr. Buffett has long been a champion of shareholder rights, we concluded that despite Berkshire Hathaway's strong stock price performance the company ranks poorly when it comes to corporate governance (see "Does the Board Have a Backbone"). What's worse, in recent periods Mr. Buffett has supported measures that may not necessarily be in the best interests of shareholders.
Take the matter of executive stock options. There have certainly been some abuses, such as the repricing of options when stock prices fall. However, options serve a useful purpose. They help high-risk, cash-poor corporations attract good employees. In effect, the company gets away with paying its employees a lower cash salary in exchange for a promise to reap larger rewards if the market one day assigns a higher value to the company's shares.
While it makes perfect sense to expense the difference between the stock's market price and the option's exercise price when the options are actually exercised, expensing them when they are granted, as Mr. Buffett and others favor, only increases the distortion between the firm's financial accounts and economic reality. How does this serve shareholders? Intel's (nyse: INTC - news - people ) shareholders recently concluded it doesn't. They narrowly--but wisely--defeated a measure that would have required expensing options when they are granted.
Mr. Buffett also advocates the elimination of earnings guidance. This is the management practice of telling analysts and investors what they should expect in earnings for upcoming quarters. Critics argue that guidance encourages investors to focus on short-term results rather than long-term goals, and management to manage expectations rather than the business.
AI
