The questioner is Jon Brandt, the son of a very good friend of mine for many years. Jon is referring to an article I wrote for Fortune in the 1970’s – and he’s also referring to the tremendous ROE shown on the S&P 500, which includes the effects of restructurings.
Even allowing for the effects of stock options, I have still been surprised by the returns on equity shown by the S&P 500. As for options, we look at what the value of average option issuance is going to be over the next five years and figure what they’d be worth as warrants to the [issuing] company. That’s what we use as a cost to shareholders.
This should be shown as an expense in the income statement. I think a number of auditors believed it should be a cost but their clients pressured them and caved, and then Congress got called in. I think it’s a scandal. Charlie?
Munger: It’s fundamentally wrong not to have honest accounting. It’s wrong to have little corruptions, that later can become big corruptions. The accounting in America is corrupt. It is not a good idea to have corrupt accounting.
It’s like campaign reform. Once you get a number of players benefiting, it’s hard to get reform. It’s the same thing with options accounting. It would have been better to have reform a couple decades ago, when it wasn’t such a big thing.
That doesn’t mean that we’re against options. They could make sense here at some point, but not with Charlie and me.
Source: Berkshire Hathaway Annual Meeting