Seeing Red (and Green) with Big Blue

By Steve Hamm Corporate-shareholder meetings were once tame affairs, where chief executives delivered palliatives to blue-haired folks in the audience. Well, no more. IBM's annual meeting in Providence on Apr. 27 had more in common with a contentious small-town school-budget meeting than a corporate snooze fest. Anti-offshoring protesters demonstrated outside, and inside the Rhode Island Convention Center, dissident shareholders raised objections to everything from executive compensation to retiree benefits to human rights in China.

The dissidents scored some points, too. A shareholder proposal to begin expensing stock options passed, with 53.6% voting for and 46.4% against. It's nonbinding, but IBM (IBM) has said it will comply with new rules from the Financial Accounting Standards Board, which says options should be expensed against earnings on corporate balance sheets. Another proposal that asked the board not to include income from overfunding of the pension plan when setting executive compensation, got 37.5% of the shareholder votes.

IBM signaled that it's listening to critics, too -- especially if they're employees. Chief Executive Samuel Palmisano invited employees and retirees to attend a "town meeting" hosted by two senior vice-presidents immediately after the annual meeting.

PENSION PEEVES. The employees and retirees had a lot to get off their chests. Before and after the meeting, the Communications Workers of America staged a demonstration outside to protest IBM's transfer of several thousand computer-services jobs to India and other countries to take advantage of lower wages. Carrying placards and shouting "Offshore the CEO," about 30 demonstrators paraded in front of the convention center.

Linda Guyer, a programmer at IBM's Endicott (N.Y.) facilities and president of the Communications Workers' Alliance@IBM, said the offshoring issue has become a rallying cry for the union, which has signed up 6,000 of IBM's 120,000 U.S. workers. Says Guyer: "Employees started to wake up and say, 'Uh-oh, I might lose my job.' There's tremendous fear about this."

Both inside and outside the hall, retirees objected to pension-plan changes that reduced their medical benefits. Sandy Anderson, a 36-year IBM employee from Burlington, Vt., who retired in 1997 and says his family's monthly health-insurance costs have risen this year from $157 to $561, accuses IBM of breaking its promise to maintain pension benefits. A federal court judge last year ruled that the way IBM changed its pension provisions violated age-discrimination laws. According to some estimates, its liability could be as high as $6 billion.

"WE AGREE CONCEPTUALLY." IBM plans to appeal the ruling, saying it doesn't expect to have to pay anything. Concerning offshoring, IBM points out that since it's a global business with employees in 160 countries, it locates jobs where skills and costs are most competitive. Of the 15,000 new hires Big Blue plans this year, approximately 5,000 are expected to be in the U.S.

"These are serious problems that need to be addressed," said Palmisano, who added: "We agree conceptually with a lot of what you're saying." He pointed out that IBM has set aside $200 million in retraining funds and created a special $25 million fund for retraining and placing people whose jobs may be affected by offshoring.

While IBM's response didn't mollify critics, shareholders were pleased when the board declared a cash dividend of 18 cents per common share. That marks a 12.5% increase, the largest percentage increase in seven years. IBM can afford to share the wealth because it performed well last year, and even better in the first quarter -- delivering a 16% improvement in earnings, to 93 cents per share. On Wall Street, IBM's stock closed at $91.11, up 64 cents on the day.

PAY AS YOU GO. The earnings increase is due, in part, to the fact that Palmisano's On Demand services strategy seems to be gaining momentum. Since he announced On Demand in October, 2002, dozens of companies have signed up to have their computers and networks managed by IBM -- and to get flexible pricing, paying for computing power only as they use it.

The On Demand strategy has helped the outsourcing-services segment grow to 40% of IBM's overall $42.6 billion global-services business. "Many of our competitors derided our On Demand announcement 18 months ago," said Palmisano, "but now many of them have strategies that sound suspiciously similar to what we're doing."

At the annual meeting, the strategy got a boost with the announcement of a major new deal with Morgan Stanley (MWD). The five-year, $575 million contract provides new services for the Wall Street firm's Individual Investor Group and Discover Financial Services. IBM will host Morgan Stanley's mainframe data processing in one of its new, highly automated data centers, and also manage 20,000 desktop computers from its data center, charging Morgan Stanley only for the PCs it's using at any given moment.

Now, if IBM could only satisfy its critics. Hamm covers technology for BusinessWeek in New York

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