Twenty Changes Over Twenty Years

CFO has an interesting piece about some of the major contributors to the paradigm shifts we have experienced over the last few decades.

When Thomas Kuhn first coined the phrase "paradigm shift" in The Structure of Scientific Revolutions, he used it to describe the effect of fundamental changes in scientific assumptions. But such radical deviations have shaped other disciplines, including finance.

Hyperbole? Consider this: 20 years ago, risk management involved buying insurance, not guarding against terrorist attacks. Competition from overseas meant Japan, not China. Two decades back, CFO magazine wrote about the vexations wrought by FAS 87; these days, Sarbanes-Oxley can make pension accounting look like a walk in the park. And finally, the idea of a finance executive being a strategic partner was just that — an idea.

My favorite? The example I often give people to demonstrate that the government can't fix everything. Legislation doesn't always have the desired impact, and can create more problems than it solves.

Talk about irony. In the early 1990s, critics complained that CEOs made too many bucks for the bang. In 1993, Congress limited the tax deduction for the top five executive salaries to $1 million apiece.

About the same time, companies started giving stock options to their executives. They were influenced by academics and shareholder activists who declared that executive pay and performance had to be aligned. And it didn't hurt that, from an accounting perspective, stock options didn't cost anything. So strong became the stock-option dogma that Congress almost shut down FASB for suggesting that options weren't free.

Soon, CEOs were reaping outlandish sums from their options. In fairness, options may have motivated executives to work harder. But as the bull market heated up, it didn't seem hard to cash them in. And it wasn't easy to discern how much of the (often short-lived) gain in companies' stock prices was due to the CEO's actions, rather than simple investor exuberance.

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