Three Cheers for Andy Grove
By Russ Mitchell
Thursday August 15, 2:42 pm Eastern Time
SmartMoney.com - Techwise
LET US PRAISE Andrew Grove, Intel's (NASDAQ:INTC - News) chairman and founder. Praise him for making the tough decision — as Cisco Systems (NASDAQ:CSCO - News) and Microsoft (NASDAQ:MSFT - News) have done — not to treat stock options as expenses on the income statement. For making a pledge to clarify footnote accounting for options so investors can understand it. For attempting to separate the issue of stock options from the issue of piggish executive compensation.
The technology sector, which should be leading the U.S. economy into the new century, is struggling for recovery. The options issue threatens not only to slow recovery down, but, far more important, to rein in the kind of vibrant entrepreneurial innovation so essential to U.S. prosperity. The harder it is for innovations to make their way to the marketplace, the worse the economy will perform. It's a simple equation.
The options debate, admittedly, is complicated. All sides make excellent points. President Bush is a black and white thinker, but he's right when he says accounting is mostly shades of gray.
So I'll focus on one thing — young start-up companies trying to make a business out of creative but risky ideas, companies utterly dependent on a core group of energetic, talented employees, but companies that almost always are short on cash.
Silicon Valley was built on such companies. The employees they hired could have earned far higher salaries elsewhere; they signed up for an entrepreneurial kick, and most of them, I submit, for the chance to get rich. (Or, these days, to be able to afford a house in California.) The favored reward was, and remains, stock options. And they work. Cancel out the dot-com period as essentially inane, and you're left with the emergence over several decades of major companies and industries — hardware, software, networking, etc. — built with stock options as a major incentive. Intel, founded in 1968, was one of them.
Nobody's suggesting that stock options be abolished. For many young and innovative companies, however, a requirement to expense options amounts to practically the same thing. The negative impact on a young company's net earnings would be enormous. Most start-ups aren't profitable in their early stages anyway. Expensing options would only lengthen the period before a company reaches profitability under generally accepted accounting principles.
It may be true that, over a longer stretch of time, the market will take the perverse effect of options on earnings into account. But mere observation shows that in shorter periods, investors are acutely focused on companies' net incomes. And start-ups don't have long periods of time.
Venture capitalists behaved rather omniverously themselves during the bubble, taking companies public too early, pocketing riches before the dumber money suffered, thus degrading their already iffy public image.
That said, venture capitalists are essential to the entrepreneurial process. Burned stock investors now are skittish about companies that lose money. They'll remain skittish for a while. They want to buy shares in companies that are making money, or at least aren't losing too much.
But if a company's road to accounting profits is extended by years because of stock-option expensing — even though plenty of economic profits are rolling into the front door — they're going to find it difficult to get funding. If they reduce their options grants to boost their accounting-based bottom line, they'll have to settle for less than the best talent.
That's why more technology chief executives should stand up and do what Grove has done. But they've got to go all the way.
Grove's approach is brilliant because he's offering trade-offs to investors concerned about stock-option expensing. Intel will go well beyond what's demanded by the SEC. Among other things, it will include stock-option tables in quarterly reports, not just annually, as required; it will include information on option grants over the past five years; it will reveal what percentage of options are going to the top five executives.
Grove wants to make clear to investors that Intel spreads its options widely across its work force: It's not just a stash for top execs. The wisdom of that approach is debatable. Barry Diller of USA Networks (NASDAQ:USAI - News) says that spreading options too democratically at bigger companies isn't much of an incentive, and he may be right. The point — and it's a crucial one — is that Grove is offering details and making clear Intel's options strategy.
He's also doing a service by trying to separate the issue of stock options from the issue of executive compensation. He's in effect pointing out that while stock options were used as tools of executive greed, they don't account for the greed itself.
Are a tech company's executives being too greedy? Investors should have the information available to decide for themselves. A company doesn't have to limit itself to the requirements of the SEC. It can reveal more. It can write its reports in language that clarifies rather than obfuscates. Most companies seem to prefer language that, while meeting legal requirements, is confusing.
For the sake of innovation, let's hope Congress doesn't bully the Financial Accounting Standards Board into mandating option expenses onto the income statement. Let's also hope that companies explain their option strategies to investors as Grove has done, and begin offering more, and clearer, information in SEC reports. Not just about options. About everything.
Unfortunately, some bad people have cost investors a lot of money, with the result that the general public currently regards CEOs as avaricious, self-enriching swine. If CEOs don't start becoming a lot more straightforward, investors will have a hard time believing otherwise.
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Russ Mitchell is a veteran technology journalist based in San Francisco. |
