TCS Daily

What Best Buy Teaches Us

By Daniel Clifton - June 28, 2004 12:00 AM

Last month, Best Buy Co. Inc. CEO Brad Anderson declined 200,000 stock options worth $7.5 million and instead awarded the options to non-executive employees who are helping the company thrive in the face of heavy competition. This bold decision by Mr. Anderson underscores the importance of stock options to companies, employees, shareholders, and the U.S. economy at a time when the Financial Standards Accounting Board (FASB) is seeking to end the use of stock options.

FASB has waged a war on stock options by seeking to require all companies to place an hypothetical future value on employee stock options. Although there is absolutely no way to determine the value of the options and wide disagreement exists on the issue, FASB is set to make the rule final. The rule, guised as a reform designed to help individual investors, will have the likely effect of ending the use of such options.

The facts, however, show ending stock options will hurt individual shareholders more than benefit them; and Mr. Anderson's action last month demonstrates why.

Best Buy, which is the nation's largest electronics retailer, is under heavy competitive pressures from non-traditional electronics retailers such as Wal-Mart, eBay, Dell others. To preempt the competitive challenge and ensure the company remains profitable for shareholders, the company has revamped its marketing strategy, authorized $50 million to redesign its stores, and has developed a strategy to retain its best workers.

The decision to redirect 200,000 options to employees helps to retain the best employees and aligns their interests with company shareholders. According to company documents, Best Buy first launched the program in August 2003 as "a new long-term incentive program for approximately 2,300 U.S. employees designed to help us attract and retain the best employees and to better align employee interests with those of our shareholders."

Empirical evidence backs up Best Buy's justification for the program: Companies with broad-based stock option plans boost a company's productivity compared to non-employee-owned companies, which in turn, boosts shareholder value on average by 2 percent.

Due to recent changes in public policy many companies have already moved to issuing restricted stock dividends for employees due to the significant reduction on the double tax on dividends signed into law by President Bush last year. However, the companies using dividends are already established major companies, while new start ups and growing companies depend on options.

The FASB rule is a one size fits all policy that treats the newest technology start up, the growing retail electronics store, and large Fortune 100 companies the same. These companies are clearly different in their means to raise capital and recruit employees.

Best Buy's announcement last week demonstrated a "one size fits all requirement" on American companies is imprudent. The use of options allows Best Buy to meet growing competition entering the industry. If the FASB rule was already in place, that flexibility would have been lost.

It is time for Congress and the Bush Administration to step in and block FASB's overbearing power grab. The benefits of stock options are undeniable, and Best Buy's actions symbolize the considerable opportunity cost that will be placed on the American economy, shareholders, and workers if FASB's rule becomes implemented.

Daniel Clifton is executive director of American Shareholders Association. Gillian Rundell is an associate at American Shareholders Association.


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