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HP Out of Fantasy?

By Jeff Hwang - Updated Nov 16, 2016 at 5:19PM

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Shareholders vote to expense stock options. As well they should.

In fantasy league hockey, you score points by racking up more penalty minutes than the other "team owners" in your league. But in real life, you actually have to score goals to win the game.

Try telling that to Hewlett-Packard (NYSE:HPQ) CEO Carly Fiorina.

On Wednesday, during the company's annual shareholder meeting broadcast over the Internet, HP shareholders did just that, voting 1.21 billion to 925 million in favor of expensing stock options. But in expressing her opposition to the practice, Fiorina said that expensing options would "create valuation problems" by making HP's financials "harder to compare" with its competitors that don't expense them.

Basically, she's saying that net income is a better way of keeping score.

Now I could be mistaken, but I was under the impression that accounting was supposed to tell a story, and that net income was supposed to be a reflection of what a company actually earns. The problem is that, in this game, the players are allowed to score points simply by issuing stock options, artificially boosting net income. In effect, the incentive here is to "win" without necessarily having to score goals.

The fact is that stock options have a real cost. Last month, Texas Instruments (NYSE:TXN) proved that when it announced a share buyback program for the express purpose of offsetting option-related dilution. The buyback had nothing to do with value and will be performed using TI's shareholders' real cash.

I'm not saying that granting options is wrong. It can help create real value by attracting talent. However, a company's incentive shouldn't be to score in fantasy league terms. If net income is the score, then by expensing stock options, a company is forced to account for its return on its stock options investment -- which is how it should be.

And maybe it's about time these companies started scoring by real-world metrics.

Though Fiorina expressed opposition to the idea, she did admit that the company would consider expensing options at some point, something that many leading companies in America -- including Coca-Cola (NYSE:KO) and Microsoft (NASDAQ:MSFT) -- already do.

And who knows? As many tech executives might fear, HP could just be the next domino to fall. If it gets on board, the pressure will mount on other tech giants such as Intel (NASDAQ:INTC), Cisco Systems (NASDAQ:CSCO), and HP rival Dell Computer (NASDAQ:DELL) to do the same. Sounds good to me.

Give us your take on the Hewlett-Packard discussion board.

Fool contributor Jeff Hwang owns none of the companies mentioned in this story.

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Stocks Mentioned

HP Inc. Stock Quote
HP Inc.
$34.44 (-2.60%) $0.92
Microsoft Corporation Stock Quote
Microsoft Corporation
$256.48 (-3.17%) $-8.41
The Coca-Cola Company Stock Quote
The Coca-Cola Company
$62.28 (-1.00%) $0.63
Intel Corporation Stock Quote
Intel Corporation
$37.78 (-2.20%) $0.85
Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
$43.06 (-1.62%) $0.71
Texas Instruments Incorporated Stock Quote
Texas Instruments Incorporated
$154.16 (-0.94%) $-1.46
Dell Technologies Inc. Stock Quote
Dell Technologies Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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