Analog Shareholders Defeat Option Expensing Proposal

March 11, 2003 ( - Analog Devices Inc's proposal to expense stock options has been defeated by the company's shareholders.

The Norwood, Massachusetts-based semiconductor company said a preliminary vote at the corporation’s annual meeting showed approximately 171 million shares were cast against the non-binding resolution. However, shareholders still showed concern about possible corporate governance issues evidenced by the 103 million votes for the accounting change, according to a report by Dow Jones.

The proposal was sponsored by the United Brotherhood of Carpenters and Joiners of America, which has been organizing the shareholder campaign. Ed Durkin, director of special programs for the union, made a case for expensing, saying “we have historically seen options proliferate and the use of options needs to be reevaluated in corporate affairs. It’s been at the root of some bad corporate behavior” and some of the “short-term focus” at publicly traded companies.

However, Analog’s board of directors opposed the resolution.    The difficulty in measuring the cost of employee stock options and being put at a competitive disadvantage, were cited as reasons for the board’s opposition.   

Intrinsic Value

Analog is one of about 75 companies that face similar shareholder proposals this proxy season. Submitted by building trade union pension  funds, the nonbinding proposals calls upon companies to establish a policy of expensing future stock options.   And, l ike many of the other companies faced with similar proxy votes, Analog relies on stock options as a form of compensation, using the intrinsic value method to account for the value of the options.  Under this method, options are accounted for by taking the difference between the market price of the stock and the exercise price at which the employee may buy that stock.

Current US guidelines allow companies to choose between subtracting the expense of stock options from their income statements and disclosing their theoretical value in the footnotes of their financial statements.  With the exception of a handful of early volunteers and the approximately 130 recent coverts, most companies have opted to record the expenses in their footnotes (See  Fewer Companies Volunteer Stock Option Expenses ).   Theoretical results reported by the company revealed expensing options in fiscal 2002, would have turned Analog’s net income of $0.28 cents a diluted share into a $0.33 loss.

However, the International Accounting Standards Board (IASB) in November 2002 outlined a proposal that would require non-US companies to treat stock options as an expense by the year 2004 (See  IASB Releases Option Expensing Proposal ).  The splash of such a proposal has sent ripples across the pond as US accounting rulemakers, too, are now considering such a move (See  FASB Speeds Up Option Disclosure Effective Date ).