Optional Education


As the fall begins, let us reflect on a few summer corporate happenings and assess the current state of the economy.

The Stock Options Debate. Early in the summer, Microsoft took the dramatic step of terminating the grant of stock options to its employees, opting instead for a system of outright stock grants. Many in the popular press took the move as a sign that technology industry resistance to expensing stock options was coming to an end. After all, this was Microsoft – the late -20th century’s stock option equivalent of Candyland.

They were wrong. The next day Intel released a statement reiterating its position that stock options are a valuable, egalitarian compensation device, which Intel would not expense because available valuation techniques are inadequate and tend to artificially depress earnings. Intel’s statement failed to address a few minor details like how the company decides how many options to grant if they cannot be properly valued.

Shocking no one, the legions of no-earnings-now-maybe-later technology companies that actually do need to raise capital by selling shares on the public markets failed to follow the trail blazed by Microsoft, which has over $49 billion in cash to keep its lights on.

The expensing debate continues. Federal Accounting Standards Board (FASB) Statement 148, while adding new methods for voluntary conversion to an expensing regime, failed to universally mandate expensing. The FASB may do so when it issues another proposed standard for comment in the fourth quarter. Still, the likelihood of a universal mandate having the support necessary to pass has declined as the accounting scandals at WorldCom and Enron fade in the memories of investors. At the same time, the voluntary adoption of stock option expensing by companies like Coca-Cola has weakened the argument for mandatory expensing. Such voluntary moves suggest there is no insurmountable market failure that demands a mandatory rule for all companies. Moreover, it is once again becoming fashionable to believe that the suppliers of capital can judge what is in their best interest. Some blasphemers have even dared to suggest that companies are not all the same and that one-size-fits-all rules might hinder economic efficiency. Complicating matters, Congress has weighed in with H.R. 1372, which if passed would postpone the effectiveness of any standard change for three years while the S.E.C. conducts a study.

Economic and Market Performance. The gross domestic product (GDP) grew by 3.1 percent in the second quarter of 2003. The figure is much better than the 1.3 percent in the same quarter in 2002, or the 1.6 percent decrease during the 2001 recession. Even though partially inflated by increased defense spending, the number is promising. Economic growth in the third quarter of 2003 is expected to similarly improve, though the unadjusted figures will be impacted by the East Coast power blackout. The unemployment rate declined to 6.1 percent in August down from 6.2 percent in July and the 6.4 percent June high. Since June 1, the S&P 500 index is up more than three percent, as of this writing. The market for initial public offerings (IPOs) is looking better. There is even speculation, following the comments of co-founder Sergey Brin, that Google will finally go public. A Google IPO, with the company’s more than $1 billion in revenue and actual profits, would be an enormous psychological boost for a market still smarting from technology-related losses.

Frederick Pollock is a Recordnews analyst. His reports appear weekly.