Human Capital & Careers

Cisco and FASB: Options Showdown

Once the accounting standards-setter called for expensing options, employees at the maker of computer routers sent plenty of comments FASB's way.
Craig SchneiderMay 24, 2004

On March 31, the Financial Accounting Standards Board issued a proposed rule that would require companies to expense the value of employee stock options. As of last week, FASB had received 2,600 comment letters — more than two-thirds of them from employees of Cisco Systems.

About 1,800 Cisco employees, or 7.5 percent of the company’s domestic workforce, have submitted comments on the proposed rule; in a CFO.com sampling of 25 letters, all of them opposed it. But do these letters really represent a groundswell of individual indignation?

According to a Cisco source, the comment letters may have been inspired by a memo signed by chief financial officer Dennis Powell. That message alerted employees to FASB’s 90-day public comment period and invited employees to visit Cisco’s internal government-affairs Web site to learn how their opinions could be heard.

Kim Gibbons, a Cisco spokeswoman, insisted that the flood of letters is a voluntary, grassroots movement led by concerned employees in the United States, not a political mandate from senior management. “We have always encouraged employees to understand issues and be involved politically if they choose,” said Gibbons.

To be sure, Powell and chief executive officer John Chambers have long been outspoken critics of expensing stock options. Like many in the high-tech industry, they maintain that expensing options will make it more difficult to hire, motivate, and retain employees — especially at cash-poor start-up companies competing in a global marketplace. (Neither executive was available for comment at press time.) Many critics have also observed that stock options are difficult to value, and that current and proposed valuation methodologies are inadequate or inaccurate.

Nor is this the first time that FASB’s inbox has filled up with comments on expensing options. In 1993, when the board issued its exposure draft that led to FAS 123, the statement on equity-based compensation, employees of retailer AutoZone submitted 667 letters. Many of them, however, were form letters, recalls FASB administrative manager Len Tatore.

In CFO.com’s sampling of Cisco employee comment letters, some familiar phrases did stand out. For example: “The artificially high valuation for a stock option required by FASB will eliminate stock options as a tool which has driven innovation and productivity.” On the other hand, many of the letters include personal stories on what stock options mean to the authors, their financial futures, and their families.

At Intel Corp. — whose 200 or so comment letters are a distant second to Cisco’s total — top executives have also maintained that they will not treat options as a normal business expense until regulators insist. At Intel’s annual meeting last week, however, shareholders reportedly passed a nonbinding resolution calling for employee stock options to be expensed. Shareholders at the Hewlett-Packard Co. and PeopleSoft Inc. passed similar resolutions earlier this year, according to press reports, as did Apple Computer Inc. shareholders in 2003.

Gibbons, the Cisco spokeswoman, notes that the company’s government-affairs group keeps employees and shareholders updated on many issues that concern Cisco and the technology sector as a whole — for example, the Federal Communication Commission’s interest in regulating voice over Internet protocol (VOIP) technology. Cisco’s internal government-affairs website provides additional information for employees, she adds — such as discussions of proposed option-valuation methods — as well as links to external websites for further reading.

“Employees need to understand what the issue is and why it’s important and to have the information to make their own informed decision,” said Gibbons. She conceded, however, that Cisco has not yet educated its employees on alternatives to broad-based employee stock options, such as performance-based compensation plans, preferring to wait instead for a final options rule from FASB.

A final note: FASB has not yet posted a comment letter from CEO Chambers, CFO Powell, or any other top executive of Cisco. The comment period ends June 30.