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Dividends, the Ultimate Perk


Just when you thought there was no way to pile on more CEO perks, along comes yet another: Bush's plan to eliminate income tax on dividends. For CEOs of the nearly 350 companies in the S&P 500 that pay dividends, their tax savings would add up to more than $200 million. And that doesn't include the biggest beneficiary of all: Microsoft Chairman Bill Gates. Microsoft's (MSFT) plan to pay a 16 cents-a-share dividend for the first time would give Gates $100 million--and he wouldn't have to pay the $38.4 million tax on it. Microsoft CEO Steven Ballmer would get to keep $14.6 million of his dividend otherwise owed in taxes.

Other execs with big potential savings, based on the number of shares they own, are:

-- Micky Arison, Carnival cruises (CCL)--$36.8 million

-- Phil Knight, Nike (NKE)--$17 million

-- Sanford Weill, Citigroup (C)--$6.4 million

-- John Hess, energy company Amerada Hess (AHC)--$5.5 million.

With such windfalls in the offing, normally stingy CEOs may end up dispensing dividends more generously--for shareholders and for themselves. It wasn't so long ago that high-tech startup executives clamored to get an invite to investment banking boondoggles where they could ski and hobnob with bankrollers at locales such as Aspen. Now, some of these folks don't want to meet bankers even for coffee. At least, that's the case at online search engine Google. It's one of the few tech startups likely to go public later this year, and hungry bankers are viewing the offering like a lion eyes meat.

So Google's top brass has placed a veritable moratorium on talks with bankers. While there's no formal proclamation, bankers say they have been effectively shut out of discussions with senior staff. Google, expected to rake in revenues of more than $300 million in 2003, says it isn't in a rush to go public. It has plenty of cash and can afford to wait for a more stable market before launching an IPO. So execs there don't want to waste time chatting about something that's months away. "The idea is to stay focused on the business," says Cindy McCaffrey, Google's vice-president for marketing. Put another way: Back off, bankers. A new weapon is being added to the arsenal of what's likely to be the biggest accounting battle of 2003: whether companies should count employee stock options as an expense. A study of 1,445 companies over 30 years by compensation experts Sibson Consulting finds the most commonly accepted method of expensing and valuing options, Black-Scholes, is way off base: Only 3% to 5% of its estimates of actual gains proved accurate years later, and usually understated their value.

That's fueling the anti-options-expensing crowd: Silicon Valley and other big stock-options issuers that say options can't be properly valued. "There's no correlation between what Black-Scholes would predict and what actually happens," says Sibson study author Blair Jones.

But the new International Accounting Standards Board (IASB) is pushing for expensing to put options on a par with other compensation. IASB Vice-Chairman Tom Jones, former CFO at Citicorp (C), says the IASB wants companies to calculate option values only at their date of issue and doesn't care what happens after that. Does this mean stock options can be valued? "They sure as hell can be," says Jones, "certainly a lot better than they currently are, which is zero." Fighting words, and the fighting has just begun. Charles Schwab, founder and co-CEO of the firm that bears his name, spoke to Editor-in-Chief Stephen Shepard on Jan. 16 at BusinessWeek's "Captains of Industry" series at New York's 92nd Street Y. Excerpts:

Q: At President Bush's economic summit in Waco, you proposed ending double taxation of dividends.

A: I had four suggestions [for restoring investor confidence]. One was ending [the tax]. Glenn Hubbard, the President's chief economic adviser, also believed [in the idea] and glommed on to it. It has really taken on a life of its own.

Q: Do you think it has a chance of passing?

A: I think in some form it does. Every portfolio will rise 15% to 20% just with the very notion that dividends have some tax-exempt status. It will raise all boats. That will have incredible ramifications for investor confidence. Plus, it will change corporate governance. We can't just retain all our earnings. We'll have to pay the shareholders some reward.

It will bring more discipline to bookkeeping. The real companies will be the ones that have real earnings.

Q: What were the three other ideas?

A: The most you can write off on your personal income tax is $3,000 of net loss for a year. Most of us investors have a lot more losses than $3,000. We pay full taxes when things go up, [so] give us the ability, when things are bad, [to] take the write-off also on the negative side.

[Another] was to accelerate the time that 401(k)s and IRAs could add to their contribution at a faster rate. That's coming in the bill, but it's going to take a number of years. And I was calling for a code of conduct for every financial-services company. That didn't go too far.

Q: How do you divide up the CEO job with David Pottruck?

A: He carries a huge amount of weight in making the daily decisions. I work with him on strategy. I work with him on new products, new ideas, and so forth. He eventually will become [sole] CEO. With the stock market floundering, it's fair to say business news is in the tank. Financial-news network CNBC saw daily viewership drop 25% in 2002 from 2001, according to Nielsen Media Research.

But one show in the CNBC roster is picking up steam: the often-invigorating, oddly hip Kudlow & Cramer, which airs at 8 p.m. EST. Its hosts are the pinstriped, neo-conservative economist Lawrence Kudlow and the slightly disheveled, hyperbolic journalist, Democrat, and former hedge-fund manager James Cramer. Admittedly, its ratings are small, but viewership jumped 25% in the second half of 2002 vs. the first half, according to Nielsen. "It's an impressive spike," says independent media critic Jack Myers.

Media watchers say Cramer, with his artfully gesticulated, red-faced rants, and Kudlow, who is more reserved, are perfect spokesmen for badly burned investors. "Their anger may fulfill some sort of deep-seated need for those who have been screwed by the market," says Myers.

The two aren't exactly blemish-free themselves. In the early '90s, Kudlow resigned as chief economist for Bear Stearns, later citing cocaine and alcohol use. And Cramer has acknowledged unsavory trading practices in his recent book. Not everyone is a fan, either: Some wags refer to them as "Krudlow and Screamer."

Perhaps, as The American Spectator recently observed, their show is "just the acid bath Washington and Wall Street currently need." "Very disappointing. We've had Enron, Tyco, WorldCom. We've had the most tumultuous year ever in Corporate America. Despite all that, the [SEC] is softening, rather than toughening, the rules....It's just amazing."

--Lynn Turner, ex-chief accountant, Securities & Exchange Commission


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