The Cisco move is just the latest example of companies that put too much time and creativity into dreaming up elaborate financial schemes —schemes which, by some remarkable consistency of nature, always wind up adding to the CEO’s pay package.
I am not a big fan of company stock repurchasing. While I am the first to admit that today’s global corporations are complex institutions on almost every level, including financial, I think stock buybacks often drain potentially valuable funds that could be put to better use in research or in adding value to the traditional business chain, and serve to benefit insiders and the investment bankers arranging the deals more than anyone. One of the pluses that private equity advocates often talk about is that corporate funds for unlisted companies don’t need to be diverted into exercises like buying back stock because the price can’t be raised any other way. I don’t usually align myself with the private equity crowd, but on this point they seem to make sense.
And so it was with a somewhat jaded eye that I read of Cisco Systems’ plans to add billions to its already lavishly endowed program to buy back its stock. It just kicked in $10 billion more to an already huge $52 billion pot. And who do you suppose will come off best from the deal? How about Cisco insiders, like CEO John T. Chambers, who typically receives most of his compensation in the form of stock options. The company’s 2007 proxy circular notes:
During fiscal 2007, as part of the on-going companywide grant, the Compensation Committee granted Mr. Chambers an option to purchase up to 1,300,000 shares of Cisco common stock at an exercise price of $23.01 per share…. The option grant places a significant portion of Mr. Chambers’ total compensation at risk, since the option grant delivers a return only if Cisco’s share price appreciates over the option’s exercisable term.
In September 2007, the Compensation Committee also made an annual stock option grant to Mr. Chambers to purchase up to 900,000 shares of Common Stock, and the right to receive a target of 200,000 future restricted stock units based on Cisco’s financial performance in fiscal 2008.
So we have a situation at Cisco where the CEO, who also chairs its board, stands to gain significantly from a buy-up of stock that is being paid for with shareholder money from a company where the CEO is the chief decider on how it is used. An interesting moving around of the financial shells on the boardroom table, don’t you think?
The old fashioned idea of issuing a dividend —one that worked very well in the era of the Fedora CEO, as I have affectionately called them— is just too passé for Cisco. They don’t do dividends. I guess that would be too much like something that could benefit all investors in equal proportion to the shares they actually own —not the shares that might be bought on a discounted basis by a lucky CEO if things pick up.
The Cisco move is just the latest example of companies that put too much time and creativity into dreaming up elaborate financial schemes —schemes which, by some remarkable consistency of nature, always wind up adding to the CEO’s pay package— when the time and creativity and investment banking costs could instead be used for purposes of product innovation, employee education and in finding better and more efficient ways to add value to the customer.