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American Journalism Review
So Many Options  | American Journalism Review
From AJR,   September 2002

So Many Options   

With corporate controversies aplenty, its time to look at how newspaper companies treat stock options.

By John Morton
John Morton (, a former newspaper reporter, is president of a consulting firm that analyzes newspapers and other media properties.     

Fair warning: This column is about stock options--why they exist, why they are important, and why they have become controversial. I got conflicts of interest off my chest in last month's column.

Stock options became controversial recently because they are said to encourage companies' executive suites, the major beneficiaries of options, to engage in short-term and even illegal shenanigans to ensure steadily rising earnings and stock prices. Options, for the uninitiated, are granted as a form of compensation and give the beneficiary the right to buy a stock at a set price at a later date--the expectation being that in the future the stock will be more expensive.

If the price goes higher, the holder exercises the option at the lower price and pockets the difference. This is the principal mechanism for corporate executives to get rich. Of course, if the price goes lower, the option is worthless.

Most of the recent controversy has involved technology firms, notably WorldCom, in which questionable and perhaps illegal accounting tricks were used to boost earnings. At some companies, executives are alleged to have exercised their options because a looming bad earnings report (information other shareholders were not privy to) likely would drive down stock prices. Some of these transactions involved tens of millions of dollars. The executives got rich; the ordinary shareholders got shafted.

Now, newspaper companies generally have stock options, too, but there have been no suggestions that they have cooked their books to boost earnings. Newspaper companies do for the most part agree with the main argument in favor of having options: that they align the interests of executives and other employees with the interests of shareholders. A reasonable counterargument is that any employee who does not already align his or her interests with those of shareholders should be fired.

But perhaps a more compelling reason companies have for adopting options, and another part of the controversy, is that it is a way to compensate executives handsomely without having to count this form of pay as an operating expense under current accounting rules. To its credit, the Financial Accounting Standards Board has tried to change this, but it backed off after an assault from Congress and a host of corporations.

Most options backers claim options shouldn't be counted as an expense because there is no accurate way to value them. Who can know what a stock price might be several years out? But mechanisms exist to price options that are no more speculative than a variety of devices used to account for other financial items.

As Warren Buffett, the Sage of Omaha, has commented: "If compensation isn't an expense, what is it? And, if expenses shouldn't go into the calculation of earnings, where in the world should they go?"

The expenses can be huge, up to 50 percent of reported earnings at tech companies that embraced options as a principal compensation device. At newspaper companies, the effect is less dramatic. Gannett estimates in its last annual report that had its options been treated as an expense, per-share earnings in 2001 would have been 4.5 percent lower, from $3.12 to $2.98. The Washington Post Co. said its earnings would have been reduced 1.6 percent, from $24.06 to $23.68.

The problem with this kind of information is that it appears in footnotes deep in the financial reports, and few investors bother to look there.

The accounting rules allow companies to treat options either way, as an expense or not, and two newspaper companies have announced they will start counting options as an expense: the Washington Post Co. (where Warren Buffett is a major shareholder) and Lee Enterprises (owner of 38 small and medium-size dailies).

Gannett's CEO, Douglas McCorkindale, has defended not counting options as an expense, but said that "if the world changes and we have to do it, that is fine with us."

The chance that the world will change is pretty slim. Business lobbyists are the most powerful on Capitol Hill (meaning they give the most money to politicians), and while they could not keep Congress from rushing to formulate tougher laws on corporate behavior, they did prevail on options. Congress scarcely debated the issue.

Yet the newspaper world, at least, might change. If enough companies follow the lead of the Washington Post Co. and Lee Enterprises, treating options as an expense may become so politically correct that all newspaper companies will do it. This would truly align the companies' reporting of financial performance with the interests of shareholders, who in this era of unease about corporate behavior need to be sure everything is accounted for.



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