Why We Don't Have Backdating

What a parade!

One by one they pass, the CEOs and the chairmen, the CFOs and the directors and even the founders of Wall Street's biggest companies.

One by one, America's companies, most of which belong to its glittering hi-tech sector, are admitting that they defrauded their shareholders. Internal probes are uncovering evidence of stock option backdating and other tricks.

They retroactively dated stock option grants to dates on which the share price was lowest, to maximize profit to beneficiaries.

Don't pass go

Kobi Alexander, founder and leader of Israel's Comverse Technologies (Nasdaq: CMVT), is one of a very big group of executives who found a fantastic way to transfer tremendous wealth from shareholders to the executives and workers without passing through the profit & loss statement.

We, the Jews of Zion, are forced to an inescapable conclusion: America's capital market is a filthy place. The ugly face of Wall Street is exposed yet again and the moral superiority of the Israeli corporate ethic reigns supreme.

To wit, since the Enron scandal exploded four years ago, Wall Street has been embroiled in one disgrace after another while here in Israel, all is well. Nobody has been caught backdating, or spring-loading, stock options, nor will any local executives ever go to jail.

We must conclude that is because of the high moral fiber over here, or at least, because our watchdogs are so vigilant and efficient: none would dare to tangle with them, clearly.

That viewpoint has been gradually permeating the public debate and even the speeches of the lawmakers and enforcers, not to mention the commentary on TV and in the press.

Landing on Boardwalk

Sadly, that isn't the story. The low incidence of accounting scandal in Israel has entirely different causes, and they aren't happy ones. The main reason we don't read about financial scandals is that they're not necessary.

A nation in which the public sector controls 50% of GDP, a nation in which 90% of the land belongs to the state, a nation in which the political and regulatory echelons dance to the tune of the billionaires, a nation in which the banks were the sole source of credit to households and business alike - in a nation like that, you don't need fancy accounting shenanigans to steal money.

While the unhappy thieves of WorldCom and Enron set up tremendously complex financial structures, involving ex-balance sheet entities, circular deals, forward and backward and sideways options, here matters are a lot simpler.

Here the methods are cynical to the extreme: share a plate of humous once or twice a week with a party official, employ his cousin, slip an envelope to a city planning councilman, sell overpriced billions worth of gear to government without any checks or controls, hire a "connected" lawyer or accountant, kiss up to the banker and watch your debt get written off, keep the press on a tight leash, promise cushy jobs to regulators growling about competition.

Go to jail

Backdating stock options is one form of fraud and here we have good news: we don't have that here. The bad news, is we don't need it.

The good news is, we aren't likely to have a rash of backdating here. Three engines drove it in the U.S.:

1. Accounting loopholes that enabled companies to avoid expensing stock options grants, when the stock options were granted at market prices (this is the foundation of the fraud).

2. Greed of the managers who found an elegant way to shift huge sums from shareholders to themselves.

3. Sharing the stolen wealth not only with directors, but with workers.

The pressure to issue stock options "inside the money" was born of the terrific competitive pressure over talent in hi-tech in the late 1990s and early 2000s. Also, the management had to keep the share price high, and the result was creative ways to spoil workers without impairing the balance sheet.

Bizarrely, backdating occurred among some of the most successful, and creative, companies on the Street, most notably Apple.

Unhappily, one of the reasons we won't see backdating here is that in Israel, there's no such American-style comeptition over the talent. There is some in hi-tech but our technology companies are on Wall Street anyway.

In the States, a company can be made or broken by its ability to recruit talent. In our cartel-ridden uncompetitive marketplace, profit drivers lie elsewhere than excellence. Not many of Israel's top managers awake in the wee hours dripping with sweat in terror of losing their best people.

In short, the more you read about the backdating scandals sweeping Wall Street, the more you should envy the Americans.

Envy them for their competitive labor market and business culture in which leaders resign in shame without clinging with their last strength to the horns of the altar. Envy them for their disgraced managers who refrain from attacking the watchdogs for their vigilance.

Envy them for their corporations that don't hire PR mavens who explain why backdating is the very thing for widows and orphans. But don't preen in our absence of backdating.