OUR TAKE

Stock Option Wars

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By Bill Mann (TMF Otter)
July 31, 2002

While several lobbying groups are fighting tooth and nail to keep stock option costs buried in the footnotes (rather than expensed), many companies made the unilateral decision to do the right thing and give shareholders a clear vision of their compensation costs.

Congress trumpets its victory in strengthening corporate governance laws, but it has yet to take a real crack at stock options accounting. In last week's New York Times article (which ought to be required reading on Capitol Hill), Berkshire Hathaway (NYSE: BRK.A) Chairman Warren Buffett called the non-expensing of stock options a "flagrant deception" of shareholders. We have long agreed, and we think the greed surrounding stock option mega-grants caused much of the incompetent capital spending of the late '90s. In the Rule Maker Portfolio, we're putting our money where our mouth is. We're selling the stock of every company that belongs to the American Electronics Association (AeA), a leading opponent of stock option expensing.

We're heartened to see that some companies have decided to expense stock options. As part of an effort to make accounting as accurate as possible, the decision will benefit these companies, as outside investors will have some reassurance that shareholders received the best disclosure possible.

Last week, we provided a partial list of companies expensing stock options. Here's a longer, though likely still incomplete, list. Got others? Please email us.

Amazon.com (Nasdaq: AMZN), AMB Property Corp. (NYSE: AMB), Ambac (NYSE: ABK), Bank One (NYSE: ONE), Boeing (NYSE: BA), Cinergy (NYSE: CIN), Coca-Cola (NYSE: KO), Computer Associates (NYSE: CA) Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE), Gabelli Asset Management (NYSE: GBL), Household International (NYSE: HI), iStar Financial (NYSE: SFI), Level 3 Communications (Nasdaq: LVLT), Macdermid (NYSE: MRD), NetFlix (Nasdaq: NFLX), Neuberger Berman (NYSE: NEU), Rambus (Nasdaq: RMBS), Scotts Company (NYSE: SMG), Sovereign Bancorp (NYSE: SOV), Toronto-Dominion Bank (NYSE: TD), Wachovia Bank (NYSE: WB), The Washington Post Co. (NYSE: WPO), Winn-Dixie (NYSE: WIN).

A tip o' the jester's cap to EMC (NYSE: EMC), an AeA member with one of the best disclosures of stock options effects we've seen (though it hasn't made the final step). Plenty of companies, including Berkshire Hathaway, Wesco (Amex: WSC), and Fastenal (Nasdaq: FAST), don't grant employee stock options at all, electing instead to reward with cash or straight stock.

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