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That's old hat, so let's move to some new aspects of this debate. In recent days stockholders have presented recommendations to require the expensing of stock options -- and some of these proposals have received a majority vote. Shareholders of Apple Corporation, for example, recently passed such a resolution. Managers of other tech companies have successfully frustrated these efforts, including such firms as Cisco, IBM, and Intel. Even there the news is good because the votes were close and because with time and with education many other shareholders will see the light. When shareholders reintroduce these proposals in the near future, chances for passage at some of these corporations will be high.
We should thank public pension funds and labor unions for leading the fight for accounting truth. They realize that profits at high tech firms are exaggerated and that stock options are really tricks for transferring wealth from shareholders to the select few. The first step in rethinking stock options for corporate executives is to show their impact on the bottom line, and so public pension fund managers and labor union representatives are crying out for corporations to disclose the truth. (These public pension funds and labor unions also seek to limit or eradicate golden parachutes and special retirement deals for top corporate executives. Given how little value most managers contributed during the past couple of years, I hope they succeed.)
Top managers at Cisco and Intel continue to lead the charge for ignoring the costs of stock options, if you can call this leadership. They continue to claim that option-pricing models do not accurately reflect the value of stock options. While these models introduce some errors into the measurement process, so does not expensing any stock options. In fact, a zero valuation of stock-based compensation is a much greater inaccuracy for most high tech companies, so their arguments are as enduring as a nanosecond.
In addition, the Financial Times reports that John Chambers raised the specter of moving Cisco abroad. Talk about corporate temper tantrums! Talk about desperation! I suggest that Cisco's shareholders consider whether they want to be led by a manager who attempts to bully those around him when he doesn't get his way. Further, I propose that Congress consider imposing taxes and tariffs on any corporation that would emigrate from the U.S. rather than tell the truth and that Congress nullify all government contracts with Cisco.
Let's not lose our focus. Income statements by those in the high tech sector greatly overstate earnings because of the stock options; this understanding might lead some to wonder whether stock prices of high tech firms remain overvalued. In addition, when people realize that the industry's profitability is close to zero, they might doubt whether managers deserve the lucrative stock options that they write for themselves.
The initial step in this process requires the accounting numbers to regain some credibility. While expensing stock options is but one small step -- as there are many other accounting issues with which to deal -- it is still a giant leap for investors because one accounting distortion will soon be eliminated. But let's not stop here; let's restore integrity to accounting numbers by making more improvements to the accounting system. The sky's the limit.
Do you agree with the Financial Accounting Standards Board's tentative decision to require companies to book stock options as an expense? Vote now!
J. EDWARD KETZ is the MBA Faculty Director at the Smeal College of Business at The Pennsylvania State University. Dr. Ketz's teaching and research interests focus on financial accounting, accounting information systems, and accounting ethics. He is the author of Hidden Financial Risk (Wiley, July 2003), which explores the causes of recent accounting scandals.
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