IBM Shareholders Reject Cash Balance, Expensing Proposals

May 1, 2003 ( - Shareholders at IBM Corp. have rejected five proposals that included pension plan options for workers and mandatory stock option expensing.

A nonbinding shareholder proposal that would have called for all IBM employees to get a choice between two types of pension plans, traditional or cash balance, garnered only 14% of the vote.  IBM announced a controversial move to the cash balance approach in 1999 (see Stuck in the Middle ), and not surprisingly, given the time that has passed, the proposal seems to be losing steam – garnering 19% of the vote last year (see  IBM Pension Protest Falls Short – Again ), compared with 27% in 2001.  

At first, IBM allowed only employees within five years of retirement to keep the traditional plan, but within months after the conversion in July 1999, IBM allowed employees ages 40 or above with at least 10 years of service to choose between the two types of plans.

cash balance plan is a defined benefit plan. However, since these plans also have some of the characteristics of a defined contribution plan, they are frequently called a “hybrid” plan.  In a cash-balance plan, employees get individual accounts and are generally provided regular statements showing their account’s value. The employer credits the employee’s account with income based on a pre-determined formula.  Conversely, in a cash-balance plan the company steadily funds the plan over the worker’s tenure. Thus, if employees decide to leave the company, the accounts can be taken with them. Opponents charge that the plans discriminate against older workers because they exclude the company’s hefty contributions at the end.

While opponents and benefits consultants agree that employees over age 40 are hurt most by a pension conversion, the IBM shareholder proposal wanted all employees to be able to choose between the two types of pension plans.  A recent survey commissioned by IBM showed that 80% of the firm’s national work force prefers the cash balance option to a traditional pension plan or none at all, according to a Durham, North Carolina Herald-Sun report. 

Close Option

However, the vote for stock option expensing – proposed by the National Automatic Sprinkler Industry Pension Plan, which owns 168,882 IBM shares – was much closer. Overall, 47% of votes cast were in favor of the proposal, according to a Reuters report.

Chairman and Chief Executive Samuel Palmisano told shareholders during a question and answer session that the expensing of options is very complicated, particularly the issue of how to fairly expense options and that IBM would comply with whatever accounting regulators decide.   Until then, Palmisano said the company has made a decision to stay out of the current debate.

The current debate intensified recently when the Financial Accounting Standards Board (FASB)  decided to require stock option expensing (See  FASB Says Yes to Option Expensing ).  The Norwalk, Connecticut-based accounting rulemaker will now move on to determining how to value options and said it expects to have a new rule in place sometime next year.

IBM shareholders also rejected a proposal that would ask shareholders for permission to adopt any poison-pill defensive measures used in preventing unwanted takeovers, with just 37% of the votes cast in favor of the proposal, according to IBM. 

So-called corporate gadfly Evelyn Davis once again submitted a proposal that was defeated on cumulative voting in the election of votes, which essentially entitles shareholders votes to carry more weight when they vote their board members. Davis, who sparred with Gerstner at meetings for years, didn’t attend, according to Reuters.

However, even if either of the motions had received a majority of the shareholder vote, IBM was not required to implement them.    The proposals were technically a recommendation to the board of directors and any passage is not binding.