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Crooks will still be crooks

Sun Microsystems CEO Scott McNealy explains why the current wave of corporate reforms are so much window dressing. He also gives his two cents on Dell Computer.

With Congress and the public in a punishing mood, the fall agenda in Washington, D.C., has included calls for expensing stock options and for holding CEOs personally accountable for the honesty of the numbers contained in quarterly earnings reports.

But Sun Microsystems' famously libertarian CEO, Scott McNealy, does not believe any of this will help stamp out corporate excess. Instead, he believes the best thing Uncle Sam can do is to leave well enough alone.

"Getting crooks to sign letters under oath is not going to keep them from being crooks," McNealy says.

McNealy also believes the call for expensing stock options unfairly penalizes technology companies like Sun, whose share price suffered mightily after the dot-com euphoria faded.

In the meantime, Sun is girding itself for another struggle. Earlier this month, the company confirmed plans to begin selling Linux-based desktops. The company, which says the systems will cost less than half to own and operate than comparable machines running Windows, is returning to familiar ground.

In the 1990s, the company promoted its JavaStation systems as an alternative to Windows-based computers. These so-called thin client systems came without hard drives and stored personal data and applications on servers. But customer enthusiasm for thin clients ebbed after prices on full-fledged PC systems fell sharply.

This time around, Sun believes the cost-feature comparison is in its favor, especially as it eyes selling client systems to large corporate customers that are already buying its more powerful servers. But as Sun looks to sell these less-expensive computers, it is sure to run up against Dell Computer. McNealy waded into these subjects during a recent visit to CNET News.com.

Q: What's your position on the push in Washington for tighter controls to promote better corporate governance?
A: Getting crooks to sign letters under oath is not going to keep them from being crooks. I'm glad it makes everyone feel good, but it's not going to do much.

Getting crooks to sign letters under oath is not going to keep them from being crooks.
Isn't there any benefit to making the CEO sign off on the numbers?
I will tell you every stock option that I ever gave out, at what price and on what terms and conditions, on what day. But don't ask me to value it. Let the investors and analysts do that. By the way, the accounting code is as unreadable as the tax code, and now you're forcing me to certify judgments.

I'm willing to say I have bought this many assets on such and such a date. And that it's located in such and such a place and still working. I will not tell you how much it is worth and how much you should depreciate. That's a judgment--and I will not make that judgment. I'll let investors and analysts make that judgment.

I can tell you how much money I am owed in receivables and will tell you everybody who's over the 90-day limit--I'll tell you exactly who they are, and how much they owe me, and how long it's overdue. I'm happy to publish that information so analysts can evaluate the likelihood of me collecting on those receivables.

There's a movement to expense tax options, but most technology companies have voiced disagreement. What's your position?
If you want to screw up investor understanding of how much money we're making, then come up with some random Black-Scholes evaluation, where we take options from two years ago and value them at some unbelievable number. I'm happy to sell you all my options from two years ago at half the Black-Scholes number right now.

Everywhere in Silicon Valley you'll find employees who are working very hard to make their options worth something. You can go visit any one of our labs. We have teams of engineers working all throughout the night, busting their humps. If I was a shareholder, I'd love that kind of effort.

But then you have a big investor like Warren Buffet who says it's a good idea to expense options?
He doesn't give out options in his company. This is just another tax on innovation.

Let's turn to your recent product announcements, where the comparisons at Sun's press conference singled out Dell by name. If you have this idea that Sun could build the de facto operating-systems platform, wouldn't you probably want Dell to adopt that platform?

You know, Dell should have bundled a Java Virtual Machine a long time ago.

You know, Dell should have bundled a Java Virtual Machine a long time ago.
So is Michael Dell a lost cause for you?
He has a pact with Intel and Microsoft to consolidate the entire distribution channel. He gets a special super deal from both that as long as he doesn't stray, they will give him enough advantage. This is my conjecture. They are very good now. They only meet in SCIFs (Secure Compartmented Information Facilities). But the whole deal is to consolidate IBM, HP (Hewlett-Packard) and Compaq and everybody else out of the business. And then, at some point, Intel disintermediates Dell just by putting all these white boxes on a Web site and auctioning them off to who ever wants. And then Dell will have a competitor called Intel.

What happens at that point?
At that point, Michael doesn't care. He's got his money. It's just a strict collapse of the supply chain. Ten years from now, you'll know whether I was on drugs or not.

But Dell must be doing something right. They're ahead of you guys in servers.
In brokering servers they are. Intel is the No. 1 server player.

We could go around and around on this but--
We're not going around. Those are the facts.

But Dell's ahead of you in server sales, isn't it?
Dell is a broker. That's like asking Coca-Cola if Safeway is ahead of it in cola sales. You have to go ahead and ask Pepsi.

The only reason I bring up Dell is that everybody thinks they're a competitor.
But they don't do any R&D (research and development).

But people buy from them instead of you.
Ok, nobody believes there's a difference between a food company and a grocery store. They're all in the food business but they're in very, very different parts of the food chain.

So where should Dell and Sun figure in that scenario?
Dell should be buying from us. They should be a great low-cost distribution channel for us.

Sun has $6 billion in the bank. Why don't you use some of that as a sweetener?
The game they've got going now is better than anything I could offer.