Cisco’s Option-Valuation Plan Is Vetoed

Cisco Systems Inc.’s proposal to create and sell financial contracts for valuing employee stock options failed to win approval from the Securities and Exchange Commission’s chief accountant.

Donald Nicolaisen, using a study by the agency’s Office of Economic Analysis, said Friday that Cisco’s plan wouldn’t put a fair value on the options because it would be difficult to replicate the terms and conditions under which employees received the incentives. Critics of the computer network equipment maker’s proposal said it would let the company get away with underestimating its obligations.

Cisco’s proposed method seems “designed to get the minimum possible value (to minimize expense) rather than to determine the real value of the options,” proxy advisor Glass, Lewis & Co. said in a statement on the SEC action. Under a Financial Accounting Standards Board rule that took effect this year, public companies must assign a value to stock options and treat that amount as an expense on financial statements. Cisco’s idea was to create a security that mirrored the terms of its stock options, allowing traders to determine the value.

For Cisco’s plan to work, investors would have to behave like employees, the economic analysis office said. But it noted that employees have motives different from those of investors and that their livelihoods are more directly linked to a company’s performance. Also, job termination can affect the exercise of options.