20 September 2002 The split within the IT industry over the treatment of stock options widened this week after a number of key figures said that they would defy moves to treat stock options as an expense in their companies’ accounts.
Intel co-founder and chairman Andy Grove, Todd Bradley, CEO of handheld computer maker Palm’s hardware unit and Bernard Liautaud, CEO of business intelligence software vendor Business Objects, all said this week that they object to the idea of treating stock options as a corporate expense like pay.
But as part of a straw poll of IT bosses conducted this week by Infoconomy, the publisher of Infoconomist magazine, David DeWalt, president and CEO of content management software vendor Documentum, said that his company planned to expense stock options in future financial reports.
DeWalt said that Documentum, which by the standards of the high-tech sector has a relatively small stock option ‘overhang’ of about 30%, was looking at a range of alternative compensation methods, including profit sharing.
Systems management software giant Computer Associates has already said it will expense options as part of its plans to overhaul its controversial accounting practices in 2003. Other companies in this camp include enterprise resource planning software vendor SAP and online retailer Amazon.
But Intel’s Grove, one of an influential 12-member business panel set up to curb excessive executive pay, drew criticism earlier this week when he came out against the panel’s key proposal to treat options as an expense. He argued that changing accounting rules would not in itself stop abuses over pay.
Palm’s Bradley told Infoconomy that his company would not voluntarily treat options as an expense. “It is not our intention to do that,” he said. “Treating stock options like that is like double-counting expenses. I believe that stock options are one of the things that drives innovation in the IT industry.”
In particular, the stand taken by Liautaud will disappoint supporters of the proposal, given Business Objects’ reputation for conservative accounting practices. “I do not think it is a good idea,” he told Infoconomy. “One of the main characteristics of the technology industry is that it creates big companies very fast. The stock option is therefore very unique to this particular industry.”
Other high-tech companies that are unwilling to expense stock options include networking equipment vendor Cisco Systems and software giant Microsoft, although the latter’s stance has softened in recent weeks.
They argue that expensing options will confuse, rather than clarify, accounts since it is so difficult to establish the options’ fair value. Cisco said, for example, that the options it granted for the year ended July 2001 were valued at $3.3 billion (EU3.4bn). Today, using the same statistical model, those options would be valued at $131 million (EU133.3m), because of the fall in Cisco’s share price.
The IT sector is tied to the modern business philosophy of venture capital, initial public offerings (IPOs) and stock options and some industry figures believe that expensing the cost of all new stock option grants would not only hit their companies’ bottom line but would also deter talented individuals and entrepreneurs from joining the fold.
The clamour to expense stock options is part of wider efforts driven by US stock market regulators and politicians to clarify corporate accounts in the wake of a spate of scandals. But treating stock options as an expense would dramatically hit company profits, which are already under severe pressure from one of the worst recessions in the IT industry’s history.
A recent study by investment bank Dresdner Kleinwort Wasserstein found that the earnings of companies in the S&P 500 stock market index would have been reduced by an average of 8% in the three years to 2000, rising to 30% in 2001.
But Dresdner Kleinwort found that the biggest impact would have been on the technology sector. Cambridge, England-based chip designer ARM Holdings, for example, would have seen its net income fall by 34% in 2001 and 28% in 2000 had the new rules applied. SAP, despite backing the moves to expense options, would have seen its earnings fall by 15% and 12% during the same periods.
