HP shareholders vote to expense option costs

A revolt by shareholders at Hewlett-Packard Co.’s annual meeting on Wednesday could push the company to become one of the first in the high-tech industry to change its accounting to reflect the cost of stock-option grants.

Over management objections, HP shareholders narrowly passed a shareholder-initiated proposal requesting that HP’s board establish a policy of expensing options in the company’s annual income statement. Around 1.2 billion shares were voted in favor of the resolution, while 921 million shares were voted against it.

“The board will continue to carefully deliberate on this matter,” Chairman and Chief Executive Officer Carly Fiorina said, after HP’s inspector of elections announced the tally.

The arcane financial issue has attracted the attention of investors in the past few years and become a cause célèbre for some corporate-governance watchdogs concerned about extensive options grants and the sometimes hidden nature of options’ cost. Technology companies, among the most prevalent users of stock options to motivate employees and executives, have generally resisted calls to record option costs as an expense in their financial statements.

Earlier during HP’s meeting, in Houston, Fiorina said that because most of HP’s rivals do not expense the cost of options, doing so would make HP’s financial results harder to compare to those of other industry vendors. The company already lists the cost of options in the footnotes of its financial statements, which should provide investors with the transparency they seek, she said.

Expensing options would have significantly affected HP’s fiscal 2003 earnings: The company reported net income for the year, ended Oct. 31, of $2.5 billion, but it would have reported income of $1.8 billion with options expenses included. The change would have cut HP’s per-share earnings from $0.83 to $0.59, it said in its annual report.

The HP resolution was introduced by the Massachusetts Laborers’ Pension Fund, which has sponsored similar resolutions at meetings of shareholders of more than 100 companies in the past two years, according to a spokesman. The fund said in a regulatory filing that it has won majority shareholder support for the proposal at 26 companies, including Veritas Software Corp. and Apple Computer Inc.

Apple shareholders passed a similar resolution last year, but the company’s management declined to heed the suggestion. Apple reiterated in its most recent annual statement that it will not expense option costs.

A few IT companies have added the costs to their balance sheets, including Computer Associates International Inc., which adopted the change for its 2004 fiscal year. Amazon.com Inc. also expenses option costs.

Regulatory changes could soon end the debate: The U.S. Financial Accounting Standards Board voted last year to require that options be expensed. The organization is now working to develop a standard for doing so, which it hopes to implement within the next few years.