[Fwd: Kudos and questions]

[Jeff Bone]

Paul Prescod wrote:

> My interpretation of Tom's complaint is that Michael Dell tried to put
> something over on his shareholders. He figured that some would notice
> that he had sold some shares and some would notice that he'd been
> granted options, but most wouldn't notice both. Dell succeeded in
> transferring risk from himself to the other shareholders. Insofar as
> risk is hard to quantify, most shareholders would not notice or
> understand what he had done.

Sure, this is *an* analysis.  But a few things:  first, whether you think Dell's a
smart guy or not, he's surrounded by lots of undeniably smart people inside and
outside the company.  It would take a fool surrounded by fools to think you can "put
one over" on your shareholders, esp. in a public company.

My analysis of this isn't that Dell figured nobody would notice, but rather that
nobody would have an issue with this.  The net effect I believe he was trying to
achieve was a more-or-less steady state ownership stake while still being able to
monetize equity, and while yes this process transfers "risk" from himself to the
shareholders, it doesn't do this any more than any other option grants.  An optionee
always has less risk than a shareholder --- that's the point --- and yet we generally
(modulo Tom's new book) have no problem with using options as compensation.  And we
don't have a problem with non-founders that exercise a few options, build up a stake,
sell off a few shares, get more options...  we don't even have a problem when they
negotiate with their employers about ongoing option grants.

The behavior that Tom thinks is despicable by Dell himself is assumed in other
parties.  So what's the issue?  Is it the founder issue?  We don't flinch too much
when non-founder CEOs do this kind of thing.  Tom has said that this was "inside
dealing" --- but that's a bogus assumption, given all the input to the process, its
very visible nature, and the fact that at no point in recent years has Dell's stake
been sufficient to give him board fiat.

Tom's complaint (as you point out) seems to rest on the assumption that the
shareholders Dell was allegedly trying to "put one over on" weren't the
sophisticated, larger shareholders, but rather the unsophisticated mom-and-pops that
own a few 10s or maybe 100s of shares.  Frankly, (a) they just aren't that important
in making these kinds of decisions --- the equity market being a kind of weighted
democracy where your voice is as loud as your vested interest, and (b) most of them
are probably pretty happy with the price growth Dell has experienced over the last
decade.  Tom's position cries out "look, Mr. Little Guy Shareholder, don't be duped,
this man is creating risk for you, he's taking money out of your pockets!"

But Tom isn't doing right by the little guy in making these claims.  What Tom is
failing to point out is that (a) this is an entirely open, public process with many
checks and balances, (b) it's impossible for Dell to "set his own comp" even though
that's how Tom is painting the picture, as if Dell is somehow raiding the cookie jar,
and (c) Tom doesn't point out the unknown, unquantifiable, and unbounded amount of
risk to value that they would experience if the company didn't meet Dell's comp
requirements and lost its eponymous CEO.  Creating a controversy out of something
that's really not controversial, spinning a populist story around something for
maximum sensationalism ("Top CEO Raids Cookie Jar, Screws Little Guy!") etc. --- esp.
when done by a pundit, who after all need a story angle --- and failing to present
the full story isn't just bad analysis, it's irresponsible.

> So the question comes down to whether Dell knowingly engaged in
> practices that he suspected most people wouldn't understand, of if it
> just "turns out" that they didn't understand it and when everyone
> understood it he realized that it wasn't a good plan anymore.

Or possibly (c) Dell decided he had better things to do --- like run a company and
continue increasing shareholder value --- rather than defend his own comp against a
propaganda war waged by outsiders and pundits for the purpose of selling copy and
"expert" opinion.

> Note that the shareholders have three different relationships with Dell:
> they are his partners, they are his employers and as a board member he
> has a responsibility to look out for their interests. You may believe
> that parties to a contract have NO responsibility to each other, other
> than to stick to the letter of the contract but most people find it
> distasteful to do business with people trying to put something over on
> you. When the person trying to trick you is merely a used car salesman,
> it is annoying but at least you know to expect that. When the person
> trying to trick you is a *business partner* it is arguably unethical.

I don't see how anybody but a complete moron with no understanding of the workings of
the public market could've been "fooled" by anything that happened.  Anybody that
could've been or would've been probably doesn't belong in the equity investments
anyway.  More and more I come to appreciate the reasons for the SEC "qualified
investor" rules.  Perhaps they should be expanded to include all equity investment
activity rather than eliminated as I have previously argued.

jb