Chambers Attacks Accounting Plans
Chambers said that the changes, proposed by the Financial Accounting Standards Board (FASB), could have a devastating impact on the hightech community in the U.S., forcing some companies to move operations overseas.
Chambers' rant came at the end of a speech which up until then had been reminscent of previous performances. There'd been the usual breast-beating about Cisco's financial performance and its latest products. And he'd even demonstrated a few products launched at the show, including a wireless IP phone (see Cisco Launches WLAN Phones).
Towards the end of his keynote, however, Chambers got on his soapbox over the FASB's proposal to require companies to expense stock options granted to employees as part of their compensation -- a proposal that won unanimous support from the independent standards authority in a vote last month.
Under current U.S. accounting rules, companies are not required to book the cost of options to executives and workers. But they are expected to tell investors what impact the value of outstanding options would have on their bottom line in footnotes to their financial statements.
FASB’s decision to expense options, which is supported by many in Congress, came in response to outrage over top executives from Enron, WorldCom Inc. (OTC: WCOEQ), and Global Crossing Holdings Ltd. who reaped billions of dollars in cash when they sold their stock options before their companies plunged into bankruptcy.
In his speech, Chambers spoke out against this rationale.
“Expensing stock options will have no impact on senior management compensation,” he said. “To implement something like this without careful economic study would be a mistake.”
He said that the action would result in more job loss in the U.S., as companies would be forced to look overseas for cheaper labor. He warned that this trend in the U.S. technology community would be devastating.
“When engineers leave, it’s not long before companies follow,” he added. “I guess you can tell that I’m passionate about this topic.”
This is not Cisco’s first time publicly speaking out against the plan. The company has taken a leadership role lobbying against FASB’s plans on Capitol Hill.
The reason that Chambers and his counterparts at companies like Intel Corp. (Nasdaq: INTC) and Dell Computer Corp. (Nasdaq: DELL) are so opposed to this plan is because it will significantly cut into the companies’ stated profits by raising overall operational costs. Cisco and these other tech companies have built their businesses by offering executives and employees options as part of their compensation. This has allowed these companies to pay out less in actual cash compensation and make up for it in company equity.
“Expensing options goes against Cisco’s general philosophy and business model, which is to pay low real compensation and incent employees with options to work as a team,” says Alex Henderson, an analyst with Salomon Smith Barney. “But the truth is that the way they have accounted for it has been a little misleading to overall cash flow.”
If forced in 2001 to expense options, Cisco’s after-tax net income would have been reduced by $1.5 billion. Henderson adds that this new accounting method would likely reduce Cisco’s quarterly cash flow, which is about $1 billion to $1.3 billion a quarter, by at least a third.
“That’s pretty big hunk of change,” he says. But Henderson and other analysts say that the changes, if they actually happen, will likely have little impact on how the company’s stock is viewed. Other analysts agree.
“It will have zero impact on the company and its operations,” says Stephen Kamman, an analyst with CIBC World Markets. “We aren’t stupid. We can still look at the cash that is being generated through revenues to work out what is going on.”
Cisco ends its fiscal third quarter of 2003 tomorrow. Its revenues are expected to be down slightly -- between 2 percent and 4 percent.
— Marguerite Reardon, Senior Editor, Light Reading