by Paul B.W. Miller and Paul R. Bahnson
We’re always on the lookout for column ideas, so we write possibilities down and stick the notes in a desk drawer. Many don’t pan out simply because there isn’t enough substance to justify a full piece. In this column, we have decided to comment on three recent news items, all related to options. We think you’ll find them interesting and funny.
Boxer gets her knickers in a twist
In the City Slickers movies, the audience howls with laughter over the continuing misadventures of three bumbling greenhorns. The protagonists suffer little physical injury, but experience much humiliation - and even some fear - when Curly, the seasoned cowboy, teaches them lessons through their mistakes.
While not set in the Wild West, the following news release (dated April 23, 2003) caused us to cackle with glee:
“U.S. Senator Barbara Boxer today issued the following statement in response to the Federal Accounting Standards Board’s decision mandating the expensing of employee stock options. [Boxer said,] ‘Given FASB’s history on stock options, I am not surprised that they ruled to expense them. However, FASB admits that it doesn’t take into account the economic impact of its decision. Therefore, I will work hard to pass the Ensign-Boxer bill, which will be introduced shortly. This bill will send this whole matter to the SEC for review before the proposed rule goes into place and we are dealing with its unintended negative economic consequenses [sic].’”
My, my. The Federal Accounting Standards Board? Excuse us, senator, while we catch our breath after much laughter.
Of course, if you don’t get the name right, it’s hard to take the rest of what you say seriously. Furthermore, FASB, the real FASB, is miles from mandating options expense. It hasn’t even issued an exposure draft.
And those who follow these things carefully know that the Securities and Exchange Commission keeps tabs on the board’s process and preliminary positions. If there were serious problems in the commission’s eyes, that fact would be known.
As to the economic impact of an accounting policy, just what does the senator have in mind? We think that the only economic impact she’s thinking about comes from the PAC money that must have motivated this letter. We hope she got some, actually, so that she can use it to hire a capable staff member who is an experienced fact (and spelling) checker. It would be a bonus if this person could steer the senator away from taking the dark side with these self-serving and specious arguments of economic doom.
Rest assured, senator: The sky will not fall if option expense appears on corporate income statements, despite what you have been told. It looks to us like you have swallowed a case of snake oil.
Intel CEO’s bloomers are showing
In late April, The Wall Street Journal published an op-ed by Intel CEO Craig Barrett in which he paraded both his ignorance and his desperation before the huge readership of that publication.
Specifically, he repeated the timeworn and thoroughly discredited argument that the Black-Scholes option valuation model is inaccurate, unreliable and unworkable.
Therefore, he concluded, FASB shouldn’t pollute financial statements by requiring these estimated expenses to be recognized.
If, indeed, he has no earthly idea how much the options are worth, then he is a terrible steward of the stockholders’ money for giving them away so blithely. But, if he does have a good idea (after all, he exchanged his time and talent for some of them), then he has incriminated himself for keeping these valuable, but unrecorded, options out of the financial statements.
Clearly, options do have value or workers would not take them in lieu of cash. Mr. Barrett is disingenuous in asserting that zero could ever be a more reliable estimate than an amount that factors in the underlying stock price, its volatility and how distant the expiration date is.
The biggest inconsistency in Barrett’s argument, though, was uncovered by Jack Ciesielski, the well-known accounting critic from Baltimore. In a letter to the Journal, Jack points out that Mr. Barrett managed to somehow overcome his aversion to Black-Scholes, because he certified the accuracy of Intel’s estimated values of many of its derivative securities measured with, you guessed it, the Black-Scholes model. In reaching to satisfy his greed, Barrett exposed his BVDs.
Apple board gets a wakeup wedgie
Perhaps no other part of the world is as inclined to believe that options have no cost as Silicon Valley, as witnessed by the two preceding vignettes. Thus, the board of directors and management of Apple Computer Inc. must be having a difficult time dealing with the outcome of a shareholder initiative vote at its recent annual meeting.
Specifically, a majority of the shares voted in favor of a stockholder proposal calling for the company’s management to begin recognizing compensation expense for stock options.
Reportedly, the proposal was introduced by a representative of a construction-based labor union that owns more than a few shares of Apple in its pension fund. In fact, one report suggests that the union introduced similar resolutions at something like 125 different companies.
So, what will Apple’s management do? Even though the company is well known for producing computers that are more user-friendly than the competition, that same attitude does not seem to carry over to its financial reporting. Investors would, no doubt, appreciate statements and related disclosures that are more informative than the competition’s. Disappointingly, the Apple board’s first response was to say that they weren’t inclined to make the change, despite the majority vote.
But there’s more irony. Who do you suppose just joined the Apple board? Former presidential candidate Al Gore, who lost the 2000 election despite collecting more popular votes than George W. Bush. After all the complaining on Gore’s behalf that he ought to be president because he had more votes, what are he and the rest of the board going to do with the results of this majority vote?
It’s time for decent exposure. Much of what we write about here reflects our Quality Financial Reporting paradigm. All three of these episodes describe attitudes that are out of step with the common-sense idea that rewards flow to those who publish financials that tell the full story with timeliness and transparency. In fact, each epitomizes a familiar nonsensical excuse for not practicing the principles of QFR.
We remind those singled out above and everyone else that providing full and accessible reporting is not only the right thing to do, it is also good for the pocketbook.
Growing evidence and economic logic show that lower capital costs and higher stock prices result from truly informative reporting. As accountants, we are trained to be skeptical of things that sound too good to be true. However, in this case, the glitter in the miner’s pan is not fool’s gold but the real thing.
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