Yesterday, my boss, Laura Ipsen (VP of Worldwide Gov’t Affairs) presented a Cisco overview to a delegation from China. It is a basic history of where Cisco came from, what our innovation strategy is, and where we are going. She then talked a bit about our public policy philosophy which consists of 1) a strong education system; 2) robust communications infrastructure (i.e. “true” broadband); 3) supporting innovation and productivity enhancing systems and tools; and 4) a supportive government -- which more often these days means a government that operates with a healthy dose of forbearance.
After her presentation, she was asked about why stock options were so important to the growth of a company. Without getting into the technical accounting arguments on the merits of whether they are an expense or not, she talked about how they infuse a sense of ownership in the employee population. There have been studies done that show that companies that give stock options to all employees are more productive than those companies that do not. A company of “owners”, she said, is more productive than a company of “renters.” Which made me think of the current debate on social security and the “ownership society.”
I’m not sure why stock options are not a part of this debate. After all, 14 million stock option holders have a stake in their companies (i.e. ownership) and this may be taken away rather than strengthened if stock options are made an expense. Shouldn’t stock options be a part of the “ownership society” and strengthened, not weakened? Just my .02.
California Members of Congress David Dreier (R) and Ann Eshoo (D) today sent a “Dear Colleague” letter to all their fellow members of Congress. A “Dear Colleague” is generally used to bring attention to an issue as well show who cares enough about an issue to send a note to all their fellow members of Congress. Please read full letter below, but especially the press clips that they include at the end of their letter that highlight the fact that many companies are already beginning to scale back their stock options programs to the rank and file workers and only give options to senior executives. As a decidedly non-senior-executive, sure, I don’t like this trend…
Mandatory Stock Options Expensing Hurts Rank-and-File Employees
As Congress considers legislation to protect broad-based employee stock option plans, we hope you’ll bear in mind the impact that new mandatory expensing rules proposed by the Financial Accounting Standards Board (FASB) will have on rank-and-file employees. As the news excerpts below make clear, FASB’s proposal has forced many companies to discontinue their broad-based options plans for most employees, and even more are contemplating severely curtailing their programs or eliminating them altogether.
In order to protect this vital employee ownership program, we’ve introduced H.R. 913, the Broad-Based Stock Option Plan Transparency Act. This legislation will protect employee options by preventing the implementation of the FASB rule pending the SEC’s evaluation of enhanced disclosures. If you’d like to cosponsor H.R. 913 or have any questions about the bill, please contact (Dreier Contact name) (Rep. Dreier) at ###-#### or (Eshoo Contact name) (Rep. Eshoo) at ###-####.
Anna G. Eshoo
As many as 40% of publicly held companies are reconsidering broad-based option plans. “Based on his research and industry survey data, [Corey Rosen, the executive director of the National Center for Employee Ownership] estimated that at least 40 percent of publicly traded companies with stock option plans are reconsidering them and as many as a third may discontinue them in the next few years.” [New York Times, 2/19/05
Dell - "To curb option grants, companies are using a variety of strategies. Many, like Progress, are replacing some or all of their options with fewer shares of restricted stock. Others are simply reducing option grants, without offering a replacement. That's the case at Dell, which awarded employees 51 million options in 2004, down [60%] from 126 million two years earlier.” [BusinessWeek Online, 2/16/05
Time Warner - "New financial reporting standards . . . which will require companies to treat stock options as expenses, 'make it prohibitively expensive' to continue the practice for all employees." [New York Times, 2/19/05
Aetna - Aetna Inc., once known for its generous stock options, said it would no longer offer them to rank-and-file employees under the new accounting standards." [Boston Globe, 1/9/05
Pfizer - "Pfizer said in the U.S. Securities and Exchange Commission filing that in response to new accounting rules requiring employee stock options to be expensed, it plans in 2005 to reduce the number of options granted, 'except for most of senior Pfizer management.'" [Reuters, 2/28/05
Whole Foods - "John Mackey, chairman and chief executive, branded [the new FASB rule] ‘a stupid rule’, but said the company had opted to protect shareholders by limiting the dilution from option expensing to 10 per cent of earnings in any one year.” [Financial Times, 2/10/05
Others - "In addition to the companies that have dropped options programs, Delphi, Eastman Kodak and AstraZeneca plan to cut back on the options they distribute to regular employees, said Corey Rosen, the executive director of the National Center for Employee Ownership. Last year, Citigroup ended its renewable stock option plan." [New York Times, 2/19/05, emphasis added]
Testifying before a Senate Banking Committee hearing today, Securities and Exchange Commission (SEC) Chairman William Donaldson today said the SEC will issue guidance on how to value stock options for expensing this month. No word on if the SEC is going to go the way of the Financial Accounting Standards Board (FASB) who basically punted on the valuation issue by saying that a company could use the Black/Scholes method, the binomial method or by consulting with your teenage nephew, Bucky, who by all accounts is a math whiz.
Senator Bob Bennett (R-UT), who, while a proponent of expensing, has questioned the FASB’s logic on valuation was quoted in a leading DC policy publication as saying, “”What in the world kind of accounting standard is that, when FASB says, ‘You have to expense [stock options] but we don’t particularly care what value you put on them.” Ummm, I’d like to be the first to second that.
Cisco and other companies are continuing to urge the Congress and the SEC to delay the June 15 date for expensing by encouraging an economic impact study. The FASB has claimed that they have nothing to do with economic impact, they only do accounting. The Congress, in my humble opinion, DOES have everything to do with economic impact and should utilize the Hippocratic oath here: First, do no harm. Look at the econoic impact before doing anything.
In a TechNet press conference yesterday, it was mentioned that some high-profile companies, including Pfizer have announced plans to stop or scale back their options plans and will only give options to senior executives. “The prediction was made that people would stop giving options to anybody but the top executives, and that is coming true,” Senator Bennett said, according to CongressDaily’s article by Molly Peterson.
Thoughts on this anyone? Bueller?
I’m in DC this week for TechNet Day among other various and sundry business. TechNet today released its 2005 Innovation Agenda which you may (or may not) find interesting. At the least it is an earnest attempt to give advice and guidance and thoughts on what this group of technology executives and companies find of public policy import. Among the top issues is helping improve the U.S. K-12 education system. The passion which the technology executives in attendance discussed education actually impressed me. Cisco has long talked about the importance of education as one of the primary reasons that innovation is born and a country remains competitive or gets competitive, but I had no idea how much thought most of the attendees put into this issue.
I was at another event last night where a reporter inquired if we would be discussing stock options ad nauseum (the reporter did not hide their inference that this would not make them happy). Stock options, it seems, among the reporter set is a done issue. Not so for TechNet, for Cisco and for much of the 14 million U.S. stock option holders. The issue continues to be worked on multiple fronts and we eagerly await guidance from the SEC on implementing, as well as any thoughts they have on valuation. I should add that the majority of the time at said event was not taken with a discussion of stock options, but of…education. Many of the attendees were parents of school age children and could speak first hand what worked and what did not. Further, the consensus at a luncheon session today was that the technology industry has a lot of good ideas that could be brought to bear on improving education -- it is only a matter of picking where an impact can be had -- both short term, mid- and long-term. None of the technology executives claimed to be education experts, but all want to help.
The luncheon speaker today was Senator Barack Obama [D-IL] and I must say that you should believe the hype about him. I last heard him at the Democratic convention in Boston this past summer where he silenced the oftentimes inattentive crowd -- when they weren’tt cheering for his words. When he speaks, people definitely listen. He has worked the on the education issue for a long time -- most significantly while in the Illinois Senate. The most intriguing idea that he discussed was how to get those industry professionals outside of the K-12 education system to directly benefit the K-12 education system -- much like those today in industry often move between academia, industry and government…i.e. why can’t a chemical engineer for a major drug company retire early and go teach high school chemistry? Interesting concept.
See the TechNet Innovation report here: http://www.technet.org/resources/TechNetInnovationInitiative.pdf (Adobe document)
Boilerplate on TechNet: TechNet is the national, bipartisan network of CEOs that promotes the growth of technology industries and the economy by building long-term relationships between technology leaders and policymakers and by advocating a targeted policy agenda. TechNet, based in Silicon Valley, has offices in Seattle, Boston, Austin, and Orange County (California). Web address: www.technet.org.
Over the last few weeks, we have all been concerned with the reported loss of data from ChoicePoint and the Bank of America. Properly maintaining, holding and safeguarding private data is important to each of us as individuals, to the reputations and businesses of those holding data, and to the continued trust in electronic-based services. From a policy perspective, we need to continue to drive these cases to fact.
As I understand it, ChoicePoint was defrauded into selling or giving data to bad actors. The Bank of America is reported to have lost some of its tapes. These were not hacks, breach of computer systems, the result of spyware, or other ‘cyber security’ events. Notwithstanding this, in many of the policy discussions surrounding the events, it seems that people are treating them as breaches of ‘cyber security.’ From what I can glean from the factual reporting, this is not the case.
They are important cases, however, and we need to know more. Were these crimes? The principles animating what defines criminal activity are centuries old. I suspect the principles and words of existing law can be applied to these facts. But we do need to examine these facts, and think about these issues, both from a privacy and criminal law perspective. These issues will continue to play out over the next few months, and we all should inform the process as policy makers understand what happened, what it means, and react.
Have a great Friday…..