IBM investors back expensing stock options

By Caroline Humer

PROVIDENCE, Rhode Island: - IBM shareholders have backed a non-binding proposal that urges the company to treat stock options as an expense, an accounting change many tech companies have loudly resisted.

International Business Machines Corp (IBM), which also raised its quarterly dividend by 12.5 percent to 18 cents per share, said it plans to adopt the accounting treatment after new accounting rules are defined, backing an earlier position.

The Financial Accounting Standards Board has recommended the compulsory accounting of stock options by companies but it has not yet dictated what method they should use to do so.

"We intend to expense options once the new accounting rules are effective," Chief Executive Samuel Palmisano said, reiterating comments from the company's proxy in which IBM recommended against this proposal and seven others.

Tech companies have traditionally used stock options as an incentive for employees to spur growth, but now they are faced with hundreds of millions of dollars in costs associated with treating them as a compensation expense. IBM's 2003 net income would have been 15 percent lower if it had expensed options.

IBM said that of votes cast for the stock options rule, about 53.6 percent favored adopting the options rule, while 46.4 percent voted against it. The proposal was the only one of the eight that received a majority of votes from the shareholders.

Such proposals are not binding, but companies often weigh a majority backing because it reflects the mood of their investors. Similar proposals have garnered majorities at other companies, such as Hewlett-Packard Co. HP CEO Carly Fiorina said that HP would "carefully consider" the vote.

Investors have backed the idea of treating options as an expense, largely because it is difficult for the investor to weigh how much options affect the bottom line.

"We certainly think options should be expensed. There is certainly a cost to giving them out, so that cost should be reflected somewhere," said Victory Capital analyst Marty Shagrin.

But it's not that big an issue, he said, because the company discloses its costs in regulatory filings.

The vote comes at a time when shareholder activism at IBM has increased after a relatively quiet period that followed the campaign in the early 1990s by investors to break up the insider-controlled board and remove top executive John Akers.

Shareholders and retirees are concerned about jobs being moved from the United States to cheaper locations, often called offshoring, as well as the higher costs of medical benefits that many retirees are shouldering. IBM has said it would move about 3,000 jobs overseas this year and create 4,500 net new jobs in the U.S.

Dozens of protesters gathered outside of the IBM annual meeting in Rhode Island's capital on Tuesday, carrying placards that read "SOS stop offshoring" and "Stop Outsourcing, Save America" and wearing white collared shirts with the logo of Alliance@IBM, a group that is seeking to unionize Big Blue.

Glenn Taulton, a 53-year old technician from Burlington, Vermont, who has worked for IBM for 16 years, said this was the second shareholder meeting he has attended in recent years.

He said he came to show his support for shareholder proposals regarding pay and benefits. "I wanted to show that I'm not backing down," Taulton said.

Palmisano said during his remarks at the meeting that the company has changed its compensation model, pointing toward a move to issue stock options to executives that are only valuable if the stock increases more than 10 percent beyond its issue price.

He said that the Armonk, New York-based maker of everything from microchips to giant mainframes, which announced a 16 percent increase in earnings two weeks ago, was benefiting from an economy that is "steadily improving in many nations, including the U.S."

He pointed to company plans to introduce soon a revamped version of its high-end i-series server computer called "Squadron" that will be in full production by the end of May.

The proposal with the third highest backing, at 34 percent, dealt with cumulative voting in the election of directors.

Proposals that sought the return to earlier pension and retirement benefits, the further disclosure of executive perks and benefits, and the adoption of certain principles of doing business in China each received backing by less than 20 percent of the ballots cast.

A proposal by the Teamsters union's funds on disclosure on political contributions, which IBM said it does not make, was also defeated. A proposal that asked for a review of compensation policies was also defeated.

© Reuters