Small investors' support for the expensing of stock options has gotten a lot of attention lately, as angry shareholders rail against overcompensated execs of underperforming companies. But corporate and institutional investor support for options expensing is quietly gathering steam as well. Approximately 275 companies, with a collective market cap approaching that of the S&P 500, are now expensing options, according to Institutional Shareholder Services. "This idea is now at a tipping point. Before Coca-Cola ( KO) broke the ice
in July 2002, maybe a dozen companies expensed options," said Patrick McGurn, senior vice president of ISS, an influential provider of information to shareholders. Even at tech companies, strongly opposed to options expensing, shareholders have demonstrated a surprising openness to the idea. In recent votes at software company PeopleSoft ( PSFT) and chip giant Intel ( INTC), nonbinding proposals demanding options expensing were only narrowly defeated. Savvy institutional investors have favored the idea for some time, McGurn said. In fact, a 1991 survey by the Association for Investment Management and Research found that more than 80% of financial analysts and portfolio managers around the world who responded "believe any stock options granted to employees are compensation and should be recognized as an expense in the income statements of the companies that grant them." In recent testimony before the Senate, Peter Clapman, senior vice president of the $262 billion Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF) explained his organization's rationale for supporting expensing: "The overemphasis on options, however, and our experience under that approach is that the alignment for option holders is only with other option holders." Arrayed on the other side of the argument are chief executives and senior managers of public companies who say expensing options will hurt their ability to attract and retain talented employees -- and cost shareholders serious money.
"Employee stock options have no economic impact on a company," PeopleSoft CEO Craig Conway said in a letter to shareholders a few weeks before the company's annual meeting. And in an earlier filing with the Securities and Exchange Commission, the enterprise-software company calculated that it would have had a loss of $403,000 rather than its reported profit of $38.5 million in its March quarter if it had used the fair-market method to expense employee share options. Advocates for expensing maintain that such calculations may well be exaggerated, and argue that the current practice of treating standard options as if they had no financial impact at all is misleading. In any case, Conway's argument prevailed with PeopleSoft shareholders -- but just barely. A preliminary tally of the vote announced at the company's
annual shareholder meeting on Tuesday showed about 46.7% in favor and 53% against. That vote was strikingly similar to the results of a tally announced by Intel the week before, following an aggressive lobbying campaign by top-level Intel executives. Yahoo! ( YHOO) shareholders, likely happy with the company's big run-up this year, overwhelmingly disapproved a nonbinding proposal to expense options in mid-May. But shareholders at Veritas Software ( VRTS), Mercury Interactive ( MERQ), Apple Computer ( AAPL) and NCR ( NCR) have voted in favor of expensing. Shareholders of software company Cognos ( COGN) will vote on a similar proposal -- also opposed by management -- before the company's June 19 meeting. Of course, the arguments may well be moot because the Financial Accounting Standards Board is expected soon to order companies to expense options.