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Leading the News: Coke to Expense Employee Options --- Move May Spur Others To Follow and Could Shape Current Talks in Senate By Betsy McKay 07/15/2002 The Wall Street Journal Page A3 (Copyright (c) 2002, Dow Jones & Company, Inc.) ATLANTA -- Coca-Cola Co. said it will begin in the fourth quarter to treat all employee stock options as an expense, a move that could accelerate debate in corporate boardrooms over whether to adopt that accounting practice. The beverage company's decision also could shape the outcome of discussions today in the Senate over whether to instruct a new accounting-oversight board to study the fate of stock options -- in particular, whether they should be expensed as other forms of compensation. Republicans tried Friday to block the measure, offered as an amendment to an accounting-overhaul bill. But Democrats say they will try again before final passage of the underlying accounting bill, expected late today. "We are in a new environment," Gary Fayard, Coke's chief financial officer, said in an interview. "There had been a loophole in the accounting, and we thought it was the right time to step up to the plate. "There's no doubt that stock options are compensation," he added. "If they weren't, none of us would want them." Coke said its decision, announced yesterday morning, will reduce earnings only slightly -- by about a penny a share -- for 2002. That reflects the fact that Coke doesn't grant options as extensively as do some other companies. And while Coke isn't the first public concern to make the accounting change -- Boeing Co. and Winn-Dixie Stores Inc. in recent years began calculating stock options as an expense -- its high profile could prompt other businesses to consider calls from investors, regulators and politicians for greater financial candor. Last week, AMB Property Corp., a San Francisco-based owner of industrial real estate, also said it would record stock options as an expense. Proponents of expensing say options are compensation and should be treated as such, especially since generous option awards dilute the value of shares outstanding. Opponents say options are difficult to value and argue that expensing would confuse investors, not enlighten them. Changing accounting rules would reduce earnings at some companies. In 1993, the Financial Accounting Standards Board tried to mandate the expensing of options but retreated in the face of stiff opposition from business leaders and Congress. The issue flared up again after Enron Corp.'s demise late last year and has taken on new life with recent disclosures of earnings misstatements at WorldCom Inc. Coke's Chairman and Chief Executive Douglas Daft raised the idea of recording stock options as an expense about two months ago, Mr. Fayard said, as news of financial scandals continued to unfold. About 10 days ago, with lawmakers calling for tougher accounting standards, Mr. Daft fielded the idea in phone calls to Warren Buffett and some other Coke directors. Mr. Buffett, Coke's largest shareholder, for years has been an outspoken proponent of expensing options. Mr. Daft pressed ahead with his proposal to make the accounting change last week after President Bush called in a speech for better corporate governance. Mr. Bush didn't embrace the idea of forcing companies to expense options, but numerous economists and financial experts, including Federal Reserve Board Chairman Alan Greenspan, have endorsed the move, and growing investor unease sent stocks plummeting last week. Mr. Daft convened a meeting at 7 a.m. Thursday in Sun Valley, Idaho, where he and several other directors were attending a conference. The discussion, over breakfast in the condominium of director Herbert Allen, was short. It wasn't hard to win the directors' support; Mr. Buffett, in particular, applauded the move. "Our management's determination to change to the preferred method of accounting for employee stock options ensures that our earnings will more clearly reflect economic reality when all compensation costs are recorded in the financial statements," Mr. Daft said in a statement. A spokeswoman said he wasn't available for further comment. "I'm delighted," Mr. Buffett said in a telephone interview. "This tells shareholders what really happens in terms of costs." The new plan, he said, also eliminates bias in structuring compensation packages, encouraging Coke to design packages that fit its and employees' needs without regard for accounting. While Mr. Buffett said he never pushed Coke to treat stock options as an expense, he said he did encourage the company last week to take a further step and use independent investment banks to determine the fair value of stock options that Coke grants. The move is intended to ease concerns over whether options that are expensed are being properly valued. Coke will ask two investment banks, Goldman Sachs & Co. and Citibank, to price options, and will expense the option value based on the average of those firms' quotes. Coke said stock options will be expensed over the period in which they vest, based on the value the day they are granted. Coke's 2002 options plan authorizes as many as 120 million shares, or 4.8% of the company's shares outstanding. The company usually issues 25 million to 30 million shares a year, however. For 2001, Coke's top five officers received options on 3.7 million shares, including options on one million shares for Mr. Daft. About 8,200 of Coke's 38,000 employees received options during 2001. Mr. Buffett predicted Mr. Daft's move could make him "unpopular" among other CEOs, but he also said that while business leaders had managed to quash efforts in 1993 to force expensing of stock options, the current environment could force them now to accept it. "I'm sure a few others will do it," he said. "It may be that good practices drive out the bad." Sen. John McCain (R., Ariz.) issued a statement applauding Coke's decision and expressing hope that "other companies will follow suit." Judy Fischer, managing director of Executive Compensation Advisory Services, in Alexandria, Va., said she believes other corporations will follow Coke. "If a corporation can do it without a lot of problems to their bottom line, I think a lot will follow suit," she said. However, it wasn't clear how other companies will react, particularly high-tech businesses that rely heavily on stock options. A spokesman for Santa Clara, Calif., semiconductor maker Intel Corp., where all employees are eligible for stock options, said he couldn't comment on Coke's move. One lobbyist was skeptical. "I doubt just because one company made this decision that other companies will follow suit," said Ralph Hellmann, top lobbyist for the Information Technology Industry Council, a high-tech trade association in Washington. "Each individual company is going to make its own determination."Looking beyond 2002, Coke's Mr. Fayard said earnings per share will be reduced by about three cents in 2003, with the reduction gradually increasing to about nine cents a share by 2006, he said. But the change won't affect the company's cash flow, he said. --- Shailagh Murray in Washington contributed to this article.
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