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To: steve who wrote (15002)	10/3/1999 1:46:00 AM
From: steve	Read Replies (2) \| Respond to of 26039

To all OT news item Bid to limit options stirs heated debate BY JAMES J. MITCHELL Mercury News Staff Writer YET another battle is raging over stock options, one of the key contributors to the high-tech boom. It's a high-stakes dispute over corporate governance that could have important ramifications in Silicon Valley. Some institutional investors are trying to rein in companies' ability to issue options to employees without shareholder approval of the option plans. They say these plans should require stockholder approval to protect investors. They worry that companies with a free hand will issue so many options that earnings per share would be diluted and stock prices would fall. If these institutional investors are successful, companies may be less generous in handing out options. That could affect compensation for tens of thousands of Silicon Valley workers, and the decrease in productivity might overshadow the benefits of reducing dilution. On the other hand, investors -- including many stockholders here -- might benefit from tighter limits on stock options. Such limits would make it harder for senior executives to abuse the system. Proponents of stricter rules are using a lever that doesn't get much attention: the power of the two major stock exchanges -- the New York Stock Exchange and the Nasdaq stock market -- to regulate companies listed with them. Last June the NYSE tightened its limits on its companies' so-called "broad-based plans," which provide options to a high percentage of employees. And it's considering limiting the percentage of a company's stock options that can be issued without stockholder approval. Up to now Nasdaq has managed to finesse the issue. But the NYSE is pressuring it and the Securities and Exchange Commission to go along, says Scott Spector, a partner at the law firm of Fenwick & West. The NYSE would like its rules to apply across the board so companies don't feel they're at a disadvantage if they list on the Big Board. The issue of non-shareholder approved plans has surfaced for two reasons: changes in SEC rules and the growing popularity of options. Until the mid-1990s, the SEC limited stock option plans that didn't have shareholder approval. But then the SEC changed its rules, Spector told a conference on stock options. Meanwhile, the use of options exploded as corporate America -- led by high-tech companies -- found them a cost-effective way to motivate and compensate workers. Companies got used to issuing plans without going through a relatively lengthy approval process. In mid-1998 institutional investors became alarmed by the amount of possible dilution of their ownership and clamored for the NYSE to change its rules. This fear of dilution is a dramatic change from a prior debate, in which critics of options, including the Financial Accounting Standards Board, contended that option accounting was incorrect because companies allegedly could issue options at no cost. Clearly, these critics were wrong. Dilution is a significant cost to companies and shareholders. But if options are issued wisely and lead to greater company success, they can result in profit increases that more than compensate for the dilution. Overall, that has been Silicon Valley's experience, and there's probably no better example than Gordon Moore, co-founder of Intel Corp. He told the FASB in 1994 that he had never received a stock option from Intel and that his percentage of ownership in Intel had declined by two-thirds through dilution since Intel's initial public offering. Nonetheless, his Intel stock was worth about $5 billion then -- and it's worth more than $13 billion today. Most executives have not been that successful, and there have been some abuses. But institutional investors should be careful when they tinker with a system that has worked so well overall. Contact James J. Mitchell at jmitchell@sjmercury.com or (408) 920-5544. The fax number is (408) 920-5917. mercurycenter.com steve