by , 3:00 PM EDT, April 15th, 2004
Apple's board of director, including CEO Steve Jobs, has a thorn in its collective side. That thorn comes in the form of the California Public Employee's Retirement System (Calpers), one of the company's largest shareholders. Calpers has announced that it will withhold its 1.48 million votes for Apple's entire board of directors because the board failed to implement a plan to account for stock options as an expense that was approved by shareholders. From a Reuters report:
The California Public Employees' Retirement System, which has assets of about $167 billion, also criticized Apple's board for authorizing Apple's auditor, KPMG LLP, to perform nonauditing, or consulting services, for the maker of Macintosh computers and the iPod digital music players.
Calpers said it would withhold voting its 1.48 million shares from the entire board, vote them against ratifying Apple's auditor, and against a shareholder proposal limiting executive compensation, saying the "proposal is too restrictive."
There's more information in the full article at Yahoo!'s Web site.
Much of the tech boom of the 1990s was fueled by stock options, which created tens of thousands of millionaires, as well as many companies with a paper value in the billions, in a very short period of time. Companies like Cisco and Microsoft, for instance, practically built themselves with stock options by paying their workers very little cash and a big pile of stock options. Apple, too, has used stock options as compensation without expensing them, though nowhere near as aggressively as some.
On the other side of the fence are the tech companies themselves. As the Reuters article points out, opponents of expensing stock options say that options are difficult, at best, to value, which actually leaves room for more monkey business in the books.
The other major factor, however, is that the SEC as yet to issue any rules governing this practice. Tech companies that unilaterally start expensing options will be at a major competitive disadvantage with those companies that do not. In other words, this argument takes the position that it's not fair to make "our" company do this when no one else has to.
That has been Apple's opinion on this issue so far; it's also an opinion we agree with, and not because it is Apple. Any company that unilaterally expenses options will see either lower profits on paper, which makes shareholders tense, or will have to decrease the options it offers workers, which means they will lose workers to competing companies. That's reality.
The SEC needs to issue a ruling on this, and needs to do it fast. Indeed, it should have done so years ago, as this is not some new issue that has suddenly cropped up. It's merely come to the forefront because of the renewed look at corporate governance.
The worst thing about expensing options, however, is that it is rank and file employees that are most likely to get the short end of the stick. We would be very surprised if many companies were able to hand out as many options to the little guys after such a rule was put in place. Perhaps we are being overly pessimistic, but the fact is that stock options have made a lot of rank and file workers a lot of money. It's a Good Thing™ when a company's employees get to share in the fruits of their labor.
In the meanwhile, it is going to take pressure from investors like Calpers to put enough pressure on the system to get the SEC to issue guidelines on this, and other issues. The group's vote is largely symbolic, but it does bring added attention to the issue.