NEWSWIRE - February 28, 2002

Topic: Shareholder Value, Executive Compensation

Source: "To Avoid a Tumble, Look for These Red Flags," by Alfred Rappaport, Wall Street Journal, February 25, 2002, page B5; and "For Well-Paid CEOs, No Passing the Buck," by David Wessel, Wall Street Journal, February 28, 2002, page A1.

Synopsis of Articles: The Rappaport article discusses several management decisions that may signal future declines in stock price. These include 1) ambiguous business models, 2) opaque financial reports, 3) earnings-expectations games, 4) price wars, 5) value-destroying mergers and acquisitions, 6) uneconomic share buybacks, and 7) shareholder-unfriendly executive compensation practices. The Wessel article discusses recent government pressure, in the wake of the Enron scandal, to address some of these issues, particularly opaque financial reports and executive compensation. The articles provide an opportunity to discuss how management decisions impact shareholder value and some of the strengths and weaknesses of executive compensation schemes.

Questions and Teaching Note:

1. How has the Enron problem impacted other companies with questionable accounting practices?
2. What are some potential benefits to companies of paying executives with stock options?
3. What are some potential risks to companies of paying executives with stock options?

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