Piper Cole's Weblog

It Ain't Open 'til the Fat Lady Sings... Last week Microsoft announced that it will submit Office XML, Microsoft's proprietary XML format for Word, Excel and Power Point, to a European standards body for approval and submission to ISO as an "open standard". I say "Hooray, and Welcome to the party!" Sun is pleased to see anyone move to join the open standards community. However, there is a lot to be done between a press release and the realization of a truly open standard, and Office XML is far from being an open standard now. I think the letter sent from Sun's head of corporate standards, Carl Cargill, to Secretary Trimarco, Massachusetts Executive Office of Administration and Finance, sets out the concerns very well: The Honorable Thomas Trimarco Secretary, Executive Office for Administration & Finance Commonwealth of Massachusetts State House, Room 373 Boston MA, 02133 Dear Secretary Trimarco: The Commonwealth of Massachusetts has spent more than a year evaluating the most appropriate and available open standards to make sure that its office documents can be widely shared, read and saved for years to come. The focus on fairness and thoroughness throughout this process ensured that the best interests of its citizens were tantamount. It was only after this inclusive process that Massachusetts selected the OASIS-approved OpenDocument format (ODF). Recent press reports have suggested that Microsoft’s Office 12 XML-based format would also be an acceptable choice, despite the currently proprietary nature of the product. While Microsoft has promised to eventually submit Office 12 to a standards body, the Commonwealth must act on existing open standards to best serve its future needs for document exchange. Just as an agency would not purchase a product before its actual availability, so too would it be a mistake to rely on a single vendor’s promise to submit a new product to a standards body at some point in the future. The Commonwealth owes no less to its taxpaying citizens. It is clear to us that if Microsoft responded to the Commonwealth's decision in this matter by agreeing to include the ODF standard in future releases of the Office product, then the state could be assured of the many benefits of interoperability based on open standards. Those include healthy competition for desktop software within the agencies of the Commonwealth, increased choice and competition, and perhaps most importantly, the assurance of better pricing and greater innovation. But that is a business decision only Microsoft can make. The Commonwealth's process began as an effort to ensure that the documents created by its agencies would be owned by those offices and by its citizens for all eternity, without the need to negotiate or pay for continued access to them again in the future each time a new version of proprietary software is released. This process began as an effort to break away from the lock-in to certain expensive technologies, the costs of which ultimately accrue directly to taxpayers. This process began with a desire to create a level playing field so that innovation in the market would flourish, enabling better delivery of government services. This process should not end with the acceptance of a promise from those who seek to maintain a costly status quo, which accrues only to one company’s bottom line and denies the citizens of the Commonwealth the value they deserve from their tax dollars. Only after a specification has been approved by a broadly supported standards body – one that demonstrates acceptable levels of openness by being available to all competing products – should the Commonwealth consider including that open standard as one of its own. This "spectrum of openness" includes the ability of multiple, competing vendors to participate in creating the standard. It also includes the presence of a wide range of developers using the standard, including those from the open source community, who have sufficient rights to produce competing products. These are characteristics that the Commonwealth can only judge at the conclusion of a proposed standards process (e.g. standards body ratification). The Commonwealth must also carefully weigh the negative implications of having two competing standards for its office documents, especially since one of the primary goals of this process has been to guarantee the future accessibility and interoperability of those documents. We trust that the Commonwealth will continue to exercise due diligence in open standards evaluations and in its technology selections in the future. We look forward to assisting the state in any way we can to reach the laudable goals reflected in this move toward truly open standards. Sincerely, Carl Cargill Director, Corporate Standards Sun Microsystems, Inc. c: Governor Mitt Romney So, while we welcome this move by Microsoft, we have this word of caution: It Ain't Open 'til the Fat Lady Sings.

It's 2015, Do You Know Where Your Data Is...and more importantly: Can You Read It? As those of us who have used a computer for a number of years know, your data is useful and usable only to the extent that you can a) find it, and b) read it. Over the years, applications, each with their own proprietary data formats, have come and gone, and when they go, your data might just as well have gone with them, because you can't access it without the application that created it. Enter a new concept: a document format that can be freely (in both senses of the term) adopted by anyone, that was developed in an open process, and that will outlive any one application. When that document format is developed and approved by a vendor-independent standards body, then users get the best of all worlds: freedom of choice to select from a number of applications that adopt the standard and access to their data that survives any particular application. Doesn't this embody the essence of both competition and convenience? Isn't this the direction we should be going: toward freedom of choice and away from being locked to a particular "thing", whether that thing is an object (e.g. desktop computer, handheld) or an application? True freedom in a computing sense is the ability to keep and access your information, even when you change your device, application, or physical location. (To learn more about this issue, please read Tim Bray's response to Microsoft's opposition.) It makes perfect logical sense that, once we have this standard, governments, which are often our ultimate record keepers, should require that those records be kept in a format that ensures their continued availability. This is exactly what the Commonwealth of Massachusetts has done, and I salute them for it. In a bold move, that is not without the controversy that always comes from being first, the Commonwealth of Massachusetts has proposed mandating a standard document format for all documents produced and/or stored by the state by January 2007. What the state is doing here is saying, "Hey, this is our data, and we want to ensure that we can read it in the future." If you ask me, that's a pretty good idea. My only question is: why aren't more governments doing this?

Let's give the "Ownership Society" some meaning... The coalition that's fighting to save broad-based employee stock options (IESOC) is circulating a petition for President Bush, encouraging him to take steps against FASB's rush to require companies to expense stock options.  The petition points out that this Administration has touted the importance of policies that promote an "ownership society"  Unfortunately, if FASB has its way, broad-based stock option plans will be all but impossible for companies to continue. We hope the Administration recognizes that employee stock option plans are a perfect example of the "ownership" that the President has so vehemently supported. Consider that over the last five years, more than 87 percent of Sun's stock options have gone to rank-and-file employees below the VP level.  If this isn't the "ownership society" in action, I don't know what is.  What cannot be easily measured is the positive impact that employee stock option plans have on innovation and productivity.  It makes perfect sense that people work harder and smarter when they have an ownership stake in the company. More than 9,500 people have already signed the petition, and we are trying to get to at least 10,000 signatures before it is delivered to the White House on Monday, April 4.  I encourage you to review the petition and if you support the effort to preserve broad-based stock option plans, please let the President know how to feel. For those of you who have already signed the petition, thank you!

Joining the Chorus--Is the SEC Listening?

Add another hero to my growing list of policymakers, industry leaders, and economics experts who are taking a stand against FASB's rush to require companies to expense stock options.

In his letter to SEC Chairman Donaldson, Lawrence Lindsey has raised a clear warning about FASB's recommended (and complicated) formula for projecting option values. "If the rule were to be implemented as is and on the current timeline, the quality of the information available to the public regarding employee stock options would be inadequate and potentially misleading."

Former assistant for economic policy to President George W. Bush, Lindsey is certainly well qualified to point out the differences between good policy and "knee-jerk" rulemaking that may harm employees, limit innovation, and muddy the waters for investors.

If his perspective does not carry enough weight, Lindsey's point of view has been supported by a constellation of academics and accounting thought leaders including: University of Chicago professor Randall Kroszner, former member of the President's Council of Economic Advisors; Columbia University's Professor Charles Calomiris; and Dr. Kevin Hassett of the American Enterprise Institute.

We predicted that FASB's rules will result in companies eliminating their broad-based stock option plans. Unfortunately, we appear to be correct-a recent survey by the National Center for Employee Ownership has estimated that at least 40 percent of publicly held companies are reconsidering their broad-based stock option plans and nearly one third may discontinue plans within a few years.

As the deadline for SEC ruling draws near, this "chorus of concern" is getting louder. We hope for the sake of many that this siren song of caution is not falling upon deaf ears.

My New Hero...

I have a new hero: Dr. Tom Campbell, Director of California's Finance Department.

Last Friday Tom announced a state study to determine the impact on state revenues of FASB‘s decision to require companies to expense stock options. Tom joins my list of heroes, which includes Reps Anna Eshoo (D-CA), David Dreier (R-CA), Richard Baker (R-LA) and Senators Mike Enzi (R-WY), Barbara Boxer (D-CA), John Ensign (R-NV) and Harry Reid (D-NV), who saw beyond the hype about stock options and realized that expensing stock options won‘t either provide better information for investors or stop executive compensation abuses, but will hurt rank and file employees, innovation, and the US economy.

Tom‘s a smart guy: he earned a Ph.D. in economics from the University of Chicago and a Juris Doctorate from Harvard Law School, he is a former member of both the US Congress (he was selected by Rollcall as smartest new member in his freshman year) and the California Assembly, and he is currently on leave from his position as Dean of the Haas School of Business, at the University of California, Berkeley. But what is more important to me is that he has the wisdom to see that the impact of FASB‘s decision will go far beyond a mere accounting rule, and that it could affect the economic vitality of the State of California. And he followed those instincts with action to get empirical evidence to give the State justification to weigh in on this debate. The impact of this rule on rank and file employees has been the subject of op eds, testimony, letters, speeches, comments to FASB and multiple other forms of communications, but the impact to state revenues has not been as thoroughly explored. This study by California will provide further evidence that, on balance, mandatory expensing is a bad idea.

I hope that other states will follow California‘s example.

I Hate to Say We Told You So, But...

Last week Business Week, one of the financial press that supported requiring businesses to expense stock options, ran an editorial that began: "What have we wrought? Expensing stock options was supposed to provide a clear, consistent picture of earnings that can be compared across companies and industries. But that goal may now be fading." The gist of the editorial is that with the lack of agreement on any accurate method for valuing stock options, and the lack of guidance from FASB because they can't find an accurate valuation method,  investors aren't getting any better information as a result of expensing.  This is what industry has been saying all along.  Valuation of stock options is not just difficult, it's a shot in the dark, and a mere fraction of a difference in your aim will result in a widely dispersed shot group.

So if you don't have better investor information, then what do you have as a result of expensing? Do you have lower executive compensation? Not likely. There is still a competitive market for good executive talent, and having your executive compensation tied to the same metrics that affect a shareholders investment is still a good thing. But the real issue is the workforce. Sun distributes their stock options broadly within the company--over the last 5 years over 87% of the options have gone to rank and file employees below the VP level. It's these employees who are likely to be hurt by FASB's requirements, because even though there is no consistent expensing method, and therefore no comparability, any expensing method is likely to be expensive for the company--too expensive to continue the practice.

And then who loses?  The rank and file employees who won't get the same ownership incentive; the investor, who won't see the results of a motivated workforce of owners who are working for more than a salary, they're working to increase the value of the company; and finally the economy, because innovation, and with it competitiveness, comes from people who have a stake in the results.  And all of this is happening at a time when China and Taiwan have discovered the powerful motivator that stock options can be, and are luring away the most talented scientists and engineers.

So let's balance this out: one the one hand, even Business Week admits that there is no increased clarity for the investor; one the other hand we are losing competitiveness in the world market.

At this point, FASB has spoken. But there is still time for the SEC to weigh in and select a valuation method that will do two important things:  1)provide comparability for financial statements so that investors do have some useful information, and 2)provide a reasonable approach that won't destroy the ability of companies to continue their broad-based stock option plans, and offer the incentive of ownership to their employees.