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In 1990 Harvard Business School professor and compensation guru Michael Jensen called for a revolution in the way companies compensate chief executives. “Corporate America pays its most important leaders like bureaucrats. Is it any wonder, then, that so many CEOs act like bureaucrats?” he wrote. To transform them into bold entrepreneurs who would build real value for shareholders, Jensen recommended that CEOs own company stock, and lots of it. In 2001 Jensen wrote another article on CEO pay, but this time he took a radically different position. In “How Stock Options Reward Managers for Destroying Value,” Jensen urged American companies to “never again issue another standard stock option.” Why did Jensen change his mind about the revolution? His two papers bracket the story Roger Lowenstein tells in Origins of the Crash: The Great Bubble and Its Undoing. Although short on reportorial color, Origins of the Crash offers a comprehensive and fascinating argument about what led U.S. companies astray in the 1990s: their obsession with their stock price. The events Lowenstein recounts will not be new to anyone who paid even cursory attention to business news during the recent past: the dot-com mania, the stock market’s boom and bust, a series of accounting scandals climaxing with Enron Corp.’s collapse, and a belated attempt at reform with the passage of the Sarbanes-Oxley Act of 2002. A rash of recent books � such as Joseph Stiglitz’s The Roaring Nineties and Bethany McLean and Peter Elkind’s The Smartest Guys in the Room � cover much of the same territory. But Lowenstein writes with passion and style, and he weaves an absorbing narrative. The most memorable scenes in Origins of the Crash come from Lowenstein’s reporting, much of it as a reporter for The Wall Street Journal. They include his account of an October 2001 encounter between Enron’s Kenneth Lay and a skeptical hedge fund manager, Richard Grubman, over lunch. Enron had already disclosed huge losses, and the stock was tumbling. Lay asked Grubman about the hedge fund business. After Grubman replied, Lay said: ” ‘Well, you must be some pretty bright guys, ’cause you been making a bundle while I been losing one.’ ” Unfortunately, such sharply realized vignettes are rare in this book. Rather than focus on original reporting, Lowenstein puts his efforts into building his overarching thesis about stock options, what he calls “the period’s original sin.” Options, he writes, led to the wholesale corruption of American business. Lowenstein starts in the 1980s, when corporations began to focus on the problem of “realizing shareholder value,” a euphemism for raising stock prices. Hostile takeovers and leveraged buyouts enjoyed a brief vogue as tools for reviving underperforming companies. But then options became the standard incentive for getting CEOs to focus on stock value. As Lowenstein tells it, this carrot worked all too well. Share price overrode all other measures of value. From there, it was only a short step to managed earnings and then to increasingly dubious accounting practices. Lowenstein leads us through the details of the major accounting scandals of the late 1990s, including those at Xerox Corporation, WorldCom, Inc., and, of course, Enron. In many of these cases, someone, usually a relatively low-ranking employee, stood up and objected to the accounting gimmicks that were inflating the company’s profits � and promptly got fired, or at best, transferred. Whistle-blowers in the late 1990s were like the extras in red shirts at the start of a Star Trek episode: They didn’t last long. Lowenstein’s lucid explanation of the complex financial shenanigans at these companies will be welcomed by readers who are still hazy on, say, exactly what Enron was doing with all those special purpose entities. But his chapter on the Internet gold rush feels like a detour in which the scenery is all too familiar. Origins of the Crash ends on a mixed note. Recent reforms will have a beneficial effect, Lowenstein wagers. But they don’t go far enough, especially in curbing executive compensation and stock option grants. Accounting rules are still frighteningly complex and subject to manipulation. And Wall Street remains obsessed with short-term results. The question that Lowenstein does not answer is whether he has only written part one of what might turn out to be a much longer history of greed and mass delusion. Emily Barker is editor in chief of D&O Advisor, a sibling publication of Corporate Counsel, and a freelance writer.

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