Banking

CIOs need to pay attention to the Hill

It would be unwise these days to dismiss the growing interest and attention that the technology industry is getting from Uncle Sam. Columnist Tim Landgrave reviews the top issues drawing scrutiny and how regulatory action could impact your enterprise.


There’s nothing quite as chilling as hearing that the U.S. government wants to help you. After being left alone to grow and prosper, the technology industry is the next target for regulation and control.

I guess it’s not enough that the industry almost single-handedly raised worker productivity and created the economic boom that we’ve all enjoyed over the last ten years. Now our government wants to find ways to “reign in” what they perceive as an industry “out of control” and, most certainly, find a way to move more money out of the hands of consumers and workers and into government coffers.

As the technology leader for your organization, it’s essential that you participate in the political process surrounding the technology issues that will affect your company and its employees for years to come.

One good source for information about current technology issues and the government is the Association for Competitive Technology (ACT). According to Johnathan Zuck, the President of ACT, there are two hot issues being debated by Congress that require the attention of corporate IT leaders.

1. Reclassification of stock options
In the wake of Enron, Senators Carl Levin (D-MI) and John McCain (R-AZ) have introduced legislation that would require companies to expense stock options if the company takes a tax deduction when those options are exercised.

Proponents argue that the bill is necessary to address the disparity between book and tax accounting. Unfortunately, the way they chose to do it is by requiring companies to recognize an expense for book if they want to recognize an expense for tax. This is simply bad policy.

There are two significant impacts for the technology industry stemming from this bill. First, it would discourage issuing of stock options as a form of compensation. Nearly 100% of venture-funded companies utilize stock options as part of their compensation package. The Levin-McCain bill would require an option-by-option, employee-by-employee tracing of the financial accounting expense in order to determine what tax expense the company could deduct. The resulting administrative nightmare would be a deterrent to the continued use of broad-based stock-option plans, especially for small businesses. This would have debilitating effects on a technology company's ability to attract, retain, and motivate talent.

The real issue here, however, is that the bill amounts to a tax increase when companies in the technology industry can least afford it. Under the bill, a company’s tax deduction would be limited to the amount of stock-option expense reported on its financial statements. This would generally be less than the current tax deduction allowed under the Tax Code. By limiting the tax deductions for stock options, the bill amounts to a corporate tax increase. This tax increase would hurt small, midsize, and large technology businesses, and could dampen job growth in an already difficult economic climate. I understand the need to protect employees and investors from situations like those arising from the Enron debacle, but this is a case where the rush to fix the problem may make the cure worse than the disease.

2. Digital copyright protection under scrutiny
As a favor for buddies at Disney and Fox, Senator Fritz Hollings (D-SC) has introduced legislation called the Consumer Broadband and Digital Television Promotion Act (CBDTA).

The bill provides for (potentially) government-mandated technology standards for protecting digital content. If the private sector fails to agree on a standard, the bill would require the Federal Communications Commission to step in and create a set of copy-protecting standards. Once the final standard is in place, no device can be created or shipped unless it implements the copy-protection standard. Moreover, it would be a federal crime to create or ship a piece of software or hardware that removes copy-protection coding already in place. The content owners (Fox, Disney, NBC, etc.) and the software industry are nowhere close to agreement, even though open standards such as eXtensible rights Markup Language (XrML) are being developed.

In addition to the onerous process for approving and distributing rights-management software, there’s an even bigger issue for the software development community.

According to legal experts, media players are not the only types of software covered by the Act. CBDTA's very broad definition of "any hardware or software" includes word processors, spreadsheets, e-mail programs, operating systems, compilers, and programming languages. Not even code that is distributed for free would be exempt from this definition unless it had the FCC-approved technology. This goes well beyond the intention of protecting digital music and movies, and could result in a major slowdown in consumer software development and deployment.

In fact, a company distributing internally developed software for the use of its trading partners or customers could find themselves in a litigious situation for unwittingly violating the terms of the Act.

The technology industry is painfully aware of the costs of copyright violation—it loses about $12 billion annually from piracy. Therefore, no industry is more willing to work to protect copyrights. This is not an industry that needs more government regulation—it’s one that needs less.

There is proof that when industries work together, they can advance and deploy effective copy-protection systems for commercial products that consumers will buy. However, if software manufacturers have to contend with increasing government regulation, they will have no choice but to slow down their rate of innovation and pass the increased costs on to consumers.

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