For Washington's high-tech lobbyists, the nomination of Representative Christopher Cox (R-Calif.) to head the Securities & Exchange Commission rings like the telephone linking Death Row to the governor's office. After a long fight, they're less than a month away from the launch of new rules that will force Corporate America to start deducting the cost of stock options from earnings -- a change that could lead to a 24% drop in profits for the information technology sector, according to Bear, Stearns & Co. (BSC ) Cox has recently opposed options expensing -- raising Silicon Valley's hopes for a stay of execution, if not an outright reprieve. Maybe, muses one lobbyist, Cox will demand a new study of expensing's economic impact. "You could slow things down pretty easily without an outright reversal," he notes.
Don't count on it. Politically and practically, the decade-long battle over proper accounting treatment for options is all but over. Scandals -- from Enron Corp. to American International Group Inc. (AIG ) -- have permanently tainted the boost-the-stock-at-any-cost mentality, and political meddling with options expensing could create an investor firestorm.
For much of Corporate America, the debate has moved on. Accounting analysts at Bear Stearns count more than 850 companies that have already begun subtracting options expenses. Five out of every six analysts who are members of the CFA Institute believe options should be expensed. "There would be considerable discontent" among analysts and investors if the rule change stalls, says Rebecca T. McEnally, market policy director for the CFA Institute.
Even in the epicenter of resistance, Silicon Valley, companies are acting as if expensing options is inevitable. In the last four quarters, 78 technology companies have vested their options more quickly to get them on the books before the expensing rule bites, says Jack T. Ciesielski, publisher of the newsletter Analyst's Accounting Observer. Tech companies also are sharply cutting back how many options and shares they hand out, as institutional investors demand that companies limit the dilution caused when they issue large blocks of options or stock, says compensation consultant Steve Patchel of Watson Wyatt Worldwide (WW ). "Tech companies are under pressure to quit diluting their stock," he says.
Smaller grants mean that expensing won't hit the market as hard as opponents had warned. "The impact will be much less than it would have been in 2003 on earnings per share and on market psyche," says Henry "Chip" Dickson, chief U.S. investment strategist at Lehman Brothers Inc. (LEH ).
The market momentum won't discourage Washington lobbyists. Pressure will shift from Capitol Hill to the SEC as soon as Cox is confirmed this summer. The commission already has granted most companies a six-month delay in expensing and given wide latitude on calculating the costs of options. The techies would still like to see exceptions for small firms and new valuation methods that they think would reduce the hit on earnings. One such idea is Cisco Systems Inc.'s (CSCO ) proposal of creating tradable derivatives that would let companies base their options' value on what investors would pay.
But even to modify the rule, Cox would need a nod from the White House. Since 2001, the Bush Administration has followed one simple rule on corporate scandal: Do what it takes to keep things quiet. Silicon Valley faces long odds in getting even a lame-duck White House to call off this execution.
By Mike McNamee, with Amy Borrus, in Washington and David Henry in New York