Dollars and Jens
Thursday, August 16, 2007
Options Expensing
He didn't get the acquittal last week he was seeking, but the backdating defense mounted by former Brocade CEO Greg Reyes at least served the purposes of clarity. His team settled on an argument that using so-called "lookbacks" to create in-the-money options had been a routine, open procedure at Brocade, innocently aimed at winning and keeping valued employees (a story that seems to square with the facts).
So starts Holman Jenkins's column (link for subscribers) in yesterday's Journal.

A few paragraphs later:
If "in the money" options were a useful tool, then why not just issue "in the money" options and take the expense and rely on the markets to see through it?

Here we reach a question without which a historical verdict on backdating, if not a legal one, isn't complete. And a related question: Given the immateriality of options expensing, why did so many tech companies fight tooth and nail to oppose it for so long?

Yes, expensing would have meant tiresomely highlighting for analysts and investors the purely notional non-cash nature of the charge. But guess what? That's exactly what thousands of companies now do as matter of routine since expensing became mandatory, and the markets have digested the change without a hiccup.
Exactly right, so far, and that's actually the point I wanted to highlight.

It seems likely that, during the bubble and its aftermath, tech companies, their investors and analysts were in consensual alignment on the undesirability of introducing confusion into quarterly reports by expensing some options and not others. But there's also the fact that the then-raging battle over whether options should be expensed was driven partly by a motive to demonize options rather than by the pros and cons of accounting logic.
Is that how he remembers it? He gives a single weak example, which I won't copy here. But it seemed to me that people I discussed the issue with, not to mention Warren Buffett, acknowledged that sometimes options are a fine expense to incur, especially for start-up companies with financing issues. But that doesn't mean that something of value given to an employee in partial exchange for his services isn't an expense.

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