Warren Buffett in the Washington Post and James Glassman in TechCentralStation dueled yesterday over proposals to treat stock option grants as corporate expenses.

Glassman is right in his opposition, but, IMHO, he and other champions of Silicon Valley underestimate the political and ideological nature of this struggle. They keep treating the issue as one of technical accounting, and assume that if they explain it clearly enough, once again, this time their opponents will see the light.

In fact, the opponents know that the proposed accounting changes would discourage stock options and work to the disadvantage of the rising creative classes. That is the point of their proposals. To repeat views expressed in "Options Wars," The Milken Institute Review (1st Quarter 2003):

"The options issue actually ties into profound questions about the nature of capital and the structure of business enterprises in the 21st century. It embodies serious conflicts between the generators of intellectual capital allied with their gunslinging venture finance allies on the one hand and the conventional providers of financial capital on the other."
. . . .
"[O]ld line capitalists are trying to stem the pressure to share the loot with the creative classes by eliminating the means by which this sharing is occurring. If the peons are creating capital assets, then, by golly, the assets should belong to the capitalists.

"In terms of realpolitik, eliminating stock options for the creative classes would help to protect the cartel of old line providers of finance capital. The availability of options allows the geeks to force the financiers to bid against each other not in terms of absolute dollar amounts but in the coin of who will give the biggest share of the enterprise to the idea people. It also allows the geeks to guarantee their own sincerity by reducing their immediate reward in exchange for more of the long term profits.

"If this mechanism were removed from the system, the geeks would lose a powerful bargaining tool, and thus would be able to capture less of the pie. And who gets what they lose? The financiers. And who is disadvantaged, besides the geeks? The venture capitalists, who are far better at playing the game of investing in intangible assets than are the conventional moneymen. It is no accident, Comrade, that leading proponents of expensing options include giant retirement funds that represent public employees and conventional financiers such as Warren Buffett."

For an earlier post that links to more background work, see here.

posted by James DeLong @ 11:43 AM | General

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