This past week the NFL changed its drug policy to reclassify Amphetamines such as Adderall to be now treated as recreational drugs and not PEDs in the offseason, with lighter punishments. The upshot of this is that certain people who were suspended for 4 games for having violated the rules as they stood when they were violated are now able to receive lesser punishments, Wes Welker being the most prominent of these players.
I like comparing sports to business. Sports are easy to understand and I think business is also, unless you get an MBA in the room (worse if there are two). This example of a shifting drug policy is a perfect illustration of moving the goal posts. I am perfectly fine if the NFL changes it drug policy, but such changes should apply to violations going forward.
Compensation structures often exhibit this idea of moving the goal posts. Some examples to specified targets include:
1. Normalalized EBITDA adjustments (MBA jargon translation: we didn’t meet our goals).
2. Acquisition costs
3. Legal fees and settlements
4. Exchange out-of-money options for in-the-money options (this is the modern day version of option backdating).
I would provide specific examples of this language, but I usually stop reading when discovering these types of antics in the proxy filings (I will be sure to save more for future shaming posts). Lots of people ignore these issues as something that everyone does or a small blemish. I disagree. I think it reveals a lot about the management. Buffett has preached investing with a management team you can trust since…forever. But, since it is something that he says so often, I think people take that point less seriously (Perhaps he should say it less often?).
A few years back, a company I follow settled a employment litigation suit for approximately $10m. Not a small amount, but the company was worth around, let’s call it, $10B. Instead of adjusting the bonus amounts to exclude the amount, they did exactly the opposite. Here is the language (I save the good ones)…”The expense related to this legal settlement lowered our bonus payout by approximately $1.8 million for the third quarter of 2008.” This settlement dated back almost 4 years, but with this company 4 years was a blip. At the time of the settlement, the executive officers had all been with the company over 20 years (with the exception of the Information Technology Executive–only 10 years).
It’s tough to exclude companies for questionable practices when everyone else is doing it, especially when the bad actors are enjoying success. If you are playing the long game, there is no need to lower your standards just because everyone else is.