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IBM's Stock Option Dance

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By Bill Mann (TMF Otter)
March 24, 2003

An intrepid reader sent me a note about a shareholder proposal in IBM's (NYSE: IBM) most recent proxy statement that would require the company to expense its stock options. IBM's board of directors is "unanimously opposed" to the proposal, which is interesting because one of the board members is Ken Chenault, CEO of American Express (NYSE: AXP), which this past year elected to expense options. Must be one of those instances that Warren Buffett recently referred to as "boardroom culture" trumping actual protection of shareholder interests.

IBM's reasons for opposing the proposal are telling. First and foremost is the fact that IBM follows Generally Accepted Accounting Practices (GAAP) by having a footnote that describes the effect of options. What IBM does NOT say is that GAAP calls expensing of options "accounting best practices," so while companies are given the choice whether to expense or not, by not expensing they are electing to go a route that is less than best.

IBM claims to be awaiting the outcome of current discussions at the Financial Accounting Standards Board (FASB) as to whether to require options expensing. Apparently the fact that FASB has already declared expensing using current models an improvement on listing their economic cost at "zero" is not sufficient.

Last year, IBM gave out nearly 60 million options, more than 3.4% of total shares outstanding, significantly higher than its awards the previous two years. IBM has also allocated hundreds of millions in shareholder equity to buy back shares on the open market, essentially allocating shareholder money to offset the dilutive effect of these options. I'd hardly call IBM an abuser of stock options, but I'd say its shareholders deserve significantly better than such a lame fob-off of a substantial issue.

Dear IBM shareholders: Your board of directors urge you to vote against this proposal. I urge you to vote "FOR."

Bill Mann owns shares of American Express.

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