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http://slate.msn.com/id/2097857/
Out of
Options
Why some cowardly companies still won't
count stock options as expenses.
By
Daniel Gross
Shareholders of software
company PeopleSoft yesterday voted to recommend that management declare a loss
instead of a profit. That's because some 53 percent of the votes cast
in its annual shareholders elections favored a proposal to treat stock
options as an expense. Doing so, as the Wall Street Journal reported,
would have had the effect of turning the company's 2003 profit of $85
million into a loss of $75.5 million.
At Hewlett-Packard,
shareholders in mid-March approved a similar options-expensing proposal,
which would have slashed the company's impressive 2003 profit of $2.5
billion to a somewhat less impressive $1.8 billion.
Have investors at major
technology companies suddenly been seized by a fit of irrationality? Of
course not. Next week, the Financial Accounting Standards Board is expected to
release a final draft of rules that would mandate companies report
stock options as expenses. And investors at HP and PeopleSoft have
simply suggested to their managements that they comply sooner rather
than later.
These votes—and management's
cagey efforts to ignore them—throw into almost comic relief the
increasingly desperate efforts of technology executives to ward off the
apparently inevitable mandate that they actually treat a huge component
of executive compensation as an expense. In advance of the FASB's new
proposal, the International Employee Stock Options Coalition is
mounting one last lobbying push, hoping it can convince Congress to put
the kibosh on the options-expensing drive—as it did in the 1990s. Of
course, the IESOC isn't a grass-roots organization of programmers and
Web designers with visions of options millions dancing in their heads.
Its membership consists largely of trade groups that
generally represent the interests of employers, not employees.
This Coalition of the
Shilling's appeals are likely to fail in Washington, partly because
it's an election year and partly because the memories of stock option
excesses are still vivid. But they'll fail mostly because the
much-warned-of dire consequences of expensing options have failed to
materialize.
In the past two years, market pressures—as much
as the threat of regulation—have pushed many companies to voluntarily
treat options as an expense. Investors have digested this significant
shift calmly. Rather than punish stocks that reduce their reported
income by expensing options, investors have rewarded them. According to
the Financial Times, some 500 U.S. public companies
have switched to expensing options in recent years. And the Wall
Street Journal has reported that "companies representing 38
percent of the index's market capitalization are expensing stock
options." Plainly, the movement toward expensing options—which has the
inevitable effect of tamping down earnings—has not stood in the way of
significant rallies in the S&P 500 or the Nasdaq, which are now
heavily populated by options-expensers.
Indeed, the evidence suggests
that companies that voluntarily slash their earnings by expensing
options will be hailed rather than condemned by investors. The giant
computer services company EDS
yesterday told the Financial Times it was dropping out
of the IESOC—and its stock is up today.
For that reason alone, you'd
think that the management at HP and PeopleSoft would follow the wishes
of their shareholders. But they're not. The votes at HP and PeopleSoft
were not binding—which means management is free to ignore the issue for
several more months. PeopleSoft pledged its board would "give this
stockholder vote careful consideration as part of their evaluation of
the accounting treatment of option grants." An HP spokesman pledged
that the company would "continue to carefully debate the matter."
Management always swears
maximum fealty to majority shareholder rule—except when the votes go
against their wishes. Were a majority of shareholders to vote for a
nonbinding proposal that would, say, mandate the purchase of a new Gulfstream V jet, you can
be sure the bosses would be doing a lot more than studying and debating
it.