Intel, Taser Tell Congress Stock Options Needed to Spur Hiring
April 19 (Bloomberg) -- Taser International Inc. Chairman Phillips Smith says a new government rule will limit his stun-gun company's ability to use stock options the way Bill Gates did to build Microsoft Corp. and Andy Grove has at Intel Corp.
Taser, Intel and Cisco Systems Inc. are among companies urging Congress to pass legislation to overturn a Financial Accounting Standards Board rule that treats stock options as an expense starting next year. The requirement would have erased a third of Scottsdale, Arizona-based Taser's $4.5 million profit in 2003 and limited the company's ability to hire, Smith said.
``It penalizes exactly the people you don't want to penalize,'' Smith, 66, said in an interview.
The American Electronics Association, representing 3,000 companies, has helped persuade almost half of the members of the House Committee on Financial Services to oppose the FASB rule. Lawmakers such as House Minority Leader Nancy Pelosi, a California Democrat, say they are balancing the threat to job creation against demand for greater detail on costs and the effect on earnings from investors such as billionaire Warren Buffett and Federal Reserve Chairman Alan Greenspan.
``This is going to be lobbying 101,'' said John Palafoutas, 58, head of domestic policy for the American Electronics Association. Lawmakers ``are sitting around screaming and almost in hysteria over offshoring, and here they are with this provision making the cost of American labor even higher.''
Microsoft, Intel
Companies such as Microsoft and Intel, boosted by their rising stock prices, were able to use stock options to offer employees pay beyond the cash means of their companies.
Options give employees the right to buy company stock at a set price within a specified period. When a company's shares rise, employees can purchase stock with the options at the set price and sell at the higher market price.
Intel Chairman Grove, 67, said Oct. 9 that U.S. companies need a rule requiring expensing of options ``like we need a hole in the head.''
Berkshire Hathaway Inc. Chairman Buffett says options obscure a transfer of wealth from shareholders to employees.
``It is vital that we earn back the trust of the American public,'' Buffett, 73, said last year in his company's annual letter to shareholders.
Congressional opponents of expensing options, including Pelosi, 64, from San Francisco, and Representative Stephen Lynch, 49, a Boston Democrat, say stock options help start-up companies recruit and retain good workers.
Top Executives
House Capital Markets Subcommittee Chairman Richard Baker, 55, a Republican from Baton Rouge, Louisiana, is sponsoring a bill that would require only the top five executives of large companies such as Intel to expense options and exempt small- and medium-sized businesses. Of the 47 members of Baker's subcommittee, 27 support the bill, according to their staffs.
In the full House Financial Services committee, which would be the last hurdle to bringing the bill to a vote before all members of Congress, 34 of the 70 members support the legislation, according to their staffs.
The technology companies are winning the policy debate, Prudential Securities political analyst Charles Gabriel said.
``Members from both parties continue to pander to the tech mavens,'' Gabriel said. ``This bill should pass -- perhaps surprisingly, in an environment where gridlock is laying waste to other, similarly important measures -- simply because of the continuing political allure of Silicon Valley.''
50-50 Odds
Lobbyists for Taser and Intel say the odds of blocking the FASB rule are no better than 50-50. Legislation must pass both the House and Senate and be signed by the president.
``I would not support that legislation,'' Senate Banking Chairman Richard Shelby, 69, a Republican from Alabama, said in an April 8 interview. ``FASB is the body that should make those decisions. We are not in the accounting business.''
A similar bill in the Senate introduced by Wyoming Republican Mike Enzi, 60, has 16 co-sponsors, including both senators from California, Democrats Barbara Boxer, 63, and Dianne Feinstein, 70.
Paul Volcker, 76, former Federal Reserve chairman who is now head of the International Accounting Standards Committee, and FASB Chairman Robert Herz will go before the Senate's governmental affairs committee Tuesday. Boxer and National Venture Capital Association President Mark Heesen will be there in opposition.
``These guys have never started a high-tech enterprise,'' said Smith, whose 320,337 shares of Taser are worth $36.6 million based on the company's closing price on Friday of $114.10. ``They've never operated a company with options.''
Enron
FASB, a self-regulatory board, wrote the rule as concern about corporate governance peaked following the 2001 collapse of Enron Corp., which inflated earnings by hiding losses in affiliated partnerships. Enron had the largest bankruptcy in U.S. history by debt, listing $107 billion in assets and $31 billion in debt.
Former Enron Chairman Kenneth Lay, 62, exercised $180.3 million of options from 1998 to the end of 2000, and former Chief Executive Officer Jeffrey Skilling, 50, got $111.7 million from options in that period, according to company filings.
Supporting FASB
Republican Representative Paul Gillmor of Ohio is circulating a letter among colleagues ahead of a House Capital Markets Subcommittee hearing Wednesday, urging support of the FASB rule and citing accounting scandals at Enron and Tyco International Ltd. Former Tyco Chief Executive Officer Dennis Kozlowski and his top lieutenant Mark Swartz are charged with looting Tyco of $600 million and taking unauthorized bonuses and loans.
At least 113 of the companies in the Standard & Poor's 500 Index have agreed to begin treating options as an expense, according to Bear Stearns Cos. S&P estimates the FASB rule, issued last month and set to take effect next year, would cut earnings per share for the S&P 500 by 7.4 percent this year.
Palafoutas's group, working with the National Venture Capital Association and the CapNet technology-industry group, is now going after members such as Representative Barney Frank, 64, the ranking Democrat on the full House Financial Services Committee.
`Torn'
``I'm torn,'' said Frank, who represents a Massachusetts district southwest of Boston, in an interview. ``The high-tech people are an important group. There are some questions I'm still wrestling with.''
Frank's district includes Taunton, Massachusetts, home to semiconductor-materials maker Kopin Corp. Kopin's net loss would have been $9.3 million greater in 2003 had the company expensed options under the fair-value based method.
``We don't like the rule,'' Kopin Chief Financial Officer Richard Sneider said in an interview. ``It has a lot of problems on a lot of fronts.''
Kopin gives options to all its 400-plus employees and would probably modify the program if the rule takes effect. Other plans don't ``have the same type of bang for the buck,'' Sneider said.
About 23 percent of corporate workers in the U.S. participate in stock-option plans, according to the General Social Survey by the University of Chicago's National Opinion Research Center.
Taser granted 3.56 million options to employees through last year at an average strike price of $3.65. With the shares trading above $114, 28 of the 42 people at the company's head office are millionaires, with no cost to the company, Smith said. Without the shares, 20 of those millionaires would have earned an average $40,000 a year.
Santa Clara, California-based Intel, which gives options to most of its 80,000 employees, says larger companies also depend on them as an incentive for employees to perform.
`Part of Our Culture'
``It is part of our culture,'' Intel spokesman Bill Calder said. ``They've been very effective at enabling the company to attract and retain talent.''
Intel's profit would have fallen by 18 percent, or $991 million, in 2003 if it had followed the FASB rule, according to its annual report.
Democratic presidential candidate and Massachusetts Senator John Kerry, 60, has made job creation one of his top campaign issues. President George W. Bush, 57, is focusing on retraining to help unemployed people find new jobs and on extending tax cuts aimed at boosting economic growth and job creation.
Kerry Supports Expensing
Kerry supports treating options as an expense, according to an editorial he wrote in the San Jose Mercury News last year. Yet he opposes the use of some of the valuation methods proposed by FASB, citing their effect on the earnings of Intel and Cisco.
Securities & Exchange Commission Chairman William Donaldson, 72, has said he supports treating options as an expense. The SEC hasn't taken a formal position on the FASB rule or the opposing bill in Congress, a spokesman said.
The Bush administration believes stock options ``encourage innovation and competitiveness,'' Treasury Department spokeswoman Anne Womack-Kolton said. Still ``it is important for shareholders to have the transparency to make informed decisions. We have confidence that Chairman Donaldson will find a solution that weighs both sides.''
Microsoft went the other way, announcing it would stop granting stock options and would start recording costs for old awards. Gates, 48, chairman and chief software architect, never took stock options himself, according to a July 8 company release.
International Standard
The new rule from FASB would bring the U.S. in line with the London-based International Accounting Standards Board.
``Since stock options are compensation and they have a value and a cost, they should be expensed,'' said Ann Yerger, deputy director of the Council of Institutional Investors, a group of more than 140 pension funds with $3 trillion in investments.
Yerger said efforts to block the FASB rule reflect an interest to protect companies rather than investors.
Genentech Inc., the world's second-biggest biotechnology company behind Amgen Inc., disagrees, saying the bigger effect of the FASB rule would be to stunt the growth of small and mid-sized companies or to deter the startup of new ones who may only have stock options to offer as a recruitment incentive.
``Some of the methodology that they're proposing is very likely to significantly overstate the value of employee stock options,'' Genentech Chief Financial Officer Lou Lavigne said. Bills in the House and Senate ``recognize the importance of stock options in the environment of creating new companies and building industries.''
Variety of Formulas
FASB's rule allows companies to use a variety of formulas to calculate option values, including the binomial or Black-Scholes models. They use factors such as interest rates, stock-price volatility and vesting periods to calculate values.
Palafoutas and other lobbyists are attacking these methods, saying they will create greater inaccuracies in financial reporting. Supporters such as Pelosi have picked up on those arguments as reasons for blocking the rule. If successful, it would be at least the second time FASB has been turned away by Congress on the options expensing issue.
In 1994, Congress forced FASB to back down from a rule that would have required expensing by threatening to take away its authority to set U.S. accounting standards. Calls to strengthen standards for corporate governance have helped the board.
``This time around, the lobbyists are trying to be a little smarter,'' said Dennis Beresford, a former FASB chairman and a University of Georgia accounting professor. ``Trying to close down the FASB altogether is not likely to be successful. They're doing more of what I'd call a smart bomb or a surgical strike.''
Proponents of the rule will be helped by the fact that at least 483 companies have either adopted or plan to adopt the rules on their own, according to Bear Stearns. Those that have haven't had ``any devastating effects,'' Beresford said.
Yet Taser's Smith argues the FASB rule won't punish companies like Microsoft, which with $58.2 billion in cash, can afford the change. It is cash-starved startup companies like Microsoft circa 1975 or Taser today that feel the pain and will stop hiring workers just as monthly job growth is accelerating. The U.S added 308,000 jobs last month, the most in four years.
``I'd be loath to start disassembling the engine,'' Smith said. ``We need to create jobs.''
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