As we discussed recently in an article on Ken Auletta’s new book, Googled: The End of the World as We Know It, the story of Google’s founding and astounding growth is one that has a secure place in the history books. A major part of Google’s success has been attributed to its unique way of doing business. The motto “Do No Evil” has been enshrined into Google’s core philosophy. Google has been positioned by its founders as more than just a business but as an institution that seeks to promote a better world for society.
This type of pronouncement from a corporation was always certain to bring about a great deal of skepticism. After all, Google is now a large corporation presumably seeking to maximize shareholder wealth. Or is it?
Wonderful Timing, Just Not For Shareholders
As the Wall Street Journal reminds us today, in early 2009 Google re-priced a large number of options at much lower strike prices. 7.6 million options with an average strike price of $522 were exchanged for an equivalent number exercisable at $308.57. This narrowly missed the low for the year of $282.75. Google now trades at just under $600.
Google’s founders were supposedly influenced by Warren Buffett when they published an “owner’s manual” shortly before Google’s IPO. It is therefore even more surprising that management reacted to what proved to be a temporary share price decline by massively re-price options at the expense of Google’s shareholders.
Did Google’s management believe that the share price decline was temporary and did not reflect a decline in intrinsic value? If so, how could a re-price of the options be justified? Eventually, the share price would recover to reflect intrinsic value and option holders would benefit even at the original strike price.
Or did Google’s management believe that intrinsic value had declined and the share price accurately reflected the decline? If so, how could management possibly justify resetting the option strike price and providing employees and managers who presided over the decline in intrinsic value any benefit from a subsequent recovery?
The likely response to this criticism is that management “had no choice” because they had to “retain key employees”. There are ample reasons for skepticism regarding such a claim. But even if the concern had merit, why use stock options to promote retention? Does the average recipient of Google options have any direct control over Google’s share price or intrinsic value?
This sorry episode is only another reason to be highly skeptical of companies that use stock options as currency for paying employees. Other than for top management (who presumably are accountable for progress in overall corporate results and intrinsic value progress), options are a very poor way of aligning employee incentives with shareholder interests. Of course, this is even more true when management creates a “heads I win, tails you lose” situation by re-pricing options when the share price declines.
Disclosure: No position.