Companies Killing Stock Options All By Themselves (UNH, VTSS, CMVT)

Includes: CMVT, UNH, VTSS
by: Belvedere

You know, it was supposed to be the accountants who were going to kill stock options.

Now it looks like companies are going to kill them all by themselves. Yesterday’s revelation of an internal investigation into the timing/possible backdating of grants at UnitedHealth Group Inc. (NYSE: UNH) led to a shocking proposal by CEO William McGuire: eliminate new grants of stock options as well as other forms of noncash perks. You can see his remarks in the 8-K here.

Yesterday, Vitesse Semiconductor (NASDAQ: VTSS) reports an investigation of its own, similar to UnitedHealth’s investigation of stock option grant timing. Which is similar to the one announced by Comverse Technologies (NASDAQ: CMVT) on Monday. That one might require a restatement of financials as far back as six years. The time needed to complete its review and restatement could lead to the company’s delisting from the Nasdaq.

Back in November, Mercury Interactive got the ball rolling on the investigations of option timing. Their CEO was quoted as saying he knew of about thirty other Silicon Valley companies being questioned by the SEC about their option granting practices. It looks like the investigations may have spurred firms in other regions and industries to take a look at their own practices. (Minnetonka, home of UnitedHealth, is a long way from Silicon Valley.)

The pending implementation of Statement 123R, combined with a stiffer internal control environment (courtesy of Section 404) may also be provoking companies to bring their option granting policies up to the level of a defensible practice. Note however, that these actions or influences do not require firms to abandon the practice of granting options.

Back in 2002, Coca Cola (NASDAQ:COKE) fired the shot heard ’round the world when it announced that it would adopt a policy of treating stock option compensation as a recognized expense. I’m wondering if UnitedHealth is firing a similar shot if their board takes up McGuire’s suggestion. Wouldn’t it be interesting to see firms try to outdo each other in trying to distance themselves from using stock options? (One advantage: the accounting would certainly be easier for them to maintain. There’d be less of a need for documenting the estimates of option values and all of the underlying assumptions. All by itself, that benefit could be a driver in any firm’s decision to abandon options.)