Numbers face scrutiny

Adam Geller

Tuesday, July 16, 2002 | 9:47 a.m.

NEW YORK -- The Coca-Cola Co.'s decision to count stock options as an expense steps up pressure on other companies to do the same, or to at least explain their position on the hotly debated issue.

Several firms said Monday that they are reviewing the way they handle options, including companies that have received shareholder proposals demanding options reform.

But many companies, particularly in the information technology field where stock options are widely used, remain vehemently opposed to a change that would have a devastating impact for their bottom line.

"We still believe there is no way to financially expense stock options without distorting earnings," said Chuck Mulloy, a spokesman for microchip maker Intel Corp.

Coke's move, though, will make it increasingly difficult for other companies to resist change, because investors and lawmakers will just continue to turn up the pressure, said Merrill Lynch analyst Adrian Redlich, who tracks options policy.

"Go and argue with your shareholders," Redlich said. "When things are going well, it's fine, you (companies) can get away with these things. But in a bear market" investors demand transparency and want to minimize risk.

None of the firms contacted Monday said the move by Coke, announced Sunday, had directly influenced their thinking. But most acknowledged the attention being paid to stock options -- widely used to compensate executives.

"Certainly there's a lot of interest around this whole subject right now," said Dave Reuter, a spokesman for Ford Motor Co.

"We are looking at the possibilities of including our stock options to employees as compensation and reporting them in our earning statements, but we have made no decision at present. We're simply evaluating," Reuter said.

Ford's decision to take a fresh look at the way it treats stock options was echoed to varying degrees at other companies.

A spokesman for General Electric Co., David Frail, said the company is considering numerous corporate governance reforms in response to recent scandals.

He would not comment specifically on whether GE will change the way it accounts for stock options. He noted that last week, company CEO Jeff Immelt sent an e-mail to employees endorsing proposals by the New York Stock Exchange to let shareholders approve options grants. Those proposals, though, do not call for a counting options as an expense against earnings.

"I am working with our board over the next 90 days to implement the best ideas," Immelt said in the e-mail.

Other companies said they also would be reviewing the options issue, including some of the 11 firms recently targeted by labor unions with shareholder proposals to change accounting on options.

"We don't typically follow the herd," said Carl Koella, director of investor relations for one of the companies, Clayton Homes Inc., a Knoxville, Tenn. mobile home manufacturer. "We'll see what makes the most sense for our company and proceed accordingly."

Art Slusark, a spokesman for one of the other companies, Meredith Corp. of Des Moines, Iowa, said his company was watching to see what its competitors might do.

"We continue to monitor the developments that are going on right now regarding the accounting treatment of stock options," he said.

The Washington Post Co. on Monday followed Coke in saying it will change its accounting for stock options. Warren Buffett, who sits on Coke's board and pushed for the change by the soft drink maker, also is on the Post Co.'s board. Buffett did not initiate the idea, but his strong views on the subject were key in the company's decision, which was made several months ago, said Donald E. Graham, the company's chairman and chief executive.

"We're doing this simply because we think it is the most accurate way to report our financial results to our shareholders," Graham said.

The change will be relatively easy for Coke and the Post Co., which make fairly limited use of options. Coke's earnings per share would've been about 5 percent lower last year had it counted options as an expense, at $1.51 per share instead of $1.60.

The change would be much harder to swallow for many technology companies. Intel's earnings per share last year would've been 80 percent lower -- 4 cents instead of 19 cents per share -- if it made the change. Yahoo! Inc. would have had to report 960 percent lower earnings -- down $1.73 a share, instead of a decline of 16 cents -- if options were included in its expenses.

"At Intel, all 83,000 employees are eligible for and get stock options. We use it on a much broader basis (than Coke)," Mulloy said. "It's more culturally integrated in our business."

Yahoo CEO Terry Semel told The Associated Press last week that his company would not expense stock options unless the government requires it. A company spokeswoman said Monday, though, that the company remained open-minded.

"We're going to watch the market closely and participate in discussions," the spokeswoman, Joanna Stevens said. "Nothing changes right now because it's (the) early days" in debate over the issue.

But corporate governance expert Carol Bowie of the Investor Responsibility Research Center said the pressure is unlikely to let up. While investors are sensitive to the damage a change might inflict on tech company earnings in a sluggish economy, they're unlikely to forget that options abuse exacerbated the earnings manipulation and questionable accounting that had depressed stock.

"Nobody wants to do anything to preclude the recovery of the market," she said. "But certainly for the sophisticated investor, one of the reasons we got into this mess is because options were overused and abused."