Chapter 3. The Prairie Princes Versus the Princes of Darkness

 

Bravo! Your Golden Fleece Award is a gem.

 
 --Warren Buffett to Janet Tavakoli, October 2, 2006

Both Warren Buffett and I advocate treating employee stock options as a cost of doing business. Warren operates in a competitive marketplace, and he has no problem compensating employees well. This cost of doing business should be calculated correctly and it should be expensed. Stock options are not an issue when Berkshire Hathaway finds a well-run family-owned business to purchase; if Berkshire Hathaway buys shares of stock in the marketplace, however, stock options are difficult to avoid. For example, Berkshire Hathaway has owned shares of Coca-Cola since 1988 (8.6 percent of Coca-Cola shares as of the end of 2007)[22], but Coca-Cola did not start expensing employee stock options until 2002.[23]

In his 1985 letter to Berkshire Hathaway shareholders, Buffett challenged the CEOs of corporate America. He offered to pay a substantial cash sum to any executive granted a restricted stock option in exchange for the right to any future gain the executive might realize. Stock options are a real cost of doing business. You say you cannot value them? Great! I'll pay cash for them. Now try to explain to your shareholders how this cash didn't just come out of their pocket and move into yours. Warren's challenge, which he continually reissues, remains unanswered.

Many corporate executives resist expensing the value of employee stock options, ...

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