It was just this July that I authored a column praising Securities and Exchange Commission Chairman Christopher Cox for successfully navigating through a number of potentially sensitive issues during his first year on the job.Among one of the examples I cited was Cox’s handling of a number of investigations involving the practice of stock-options granting to executives. Now, just four months after implementing tough new rules on how companies have to disclose executive compensation, the SEC issued a quiet statement on Dec. 22 saying that it would take another look at those rules.
In that release, Cox said that the new requirements will make it easier for companies to prepare statements and for investors to understand the cost of stock options and more closely align the SEC’s requirements with the rules of the Financial Accounting Standards Board, which requires recognition of the costs of equity awards over the period in which an employee works for the award. Stock options often vest three to five years after being granted.
It was a curious way to make the announcement of the changes to the rule, which was adopted in late July rule after much discussion, and touted as the largest overhaul of benefit disclosure policy since 1992. The rule would have required companies to include the value of unvested stock options in executive pay disclosures beginning this year. The changes means that now only the cost of vested options must be accounted for as an expense. It’s a change that will considerably alter the end result of the very thing the SEC seemed to be attempting to accomplish with the rule -- turning options into a tangible expense that investors can easier understand.
Investor advocates and the incoming chairman of the House Finance Services Committee,
Rep. Barney Frank, D-Mass., have already spoken out loudly against the change, and most coverage of the SEC’s latest movements has been devoted to proposed changes on the Sarbanes-Oxley front, as well as the SEC’s investigations into the possible manipulation of stock options grants at more than 150 companies.
But Frank managed to grab a few headlines, saying that the change was a Christmas gift to the business lobby -- and delivering a quip that he wasn't aware "they had a chimney at the SEC."
And that’s what makes the changes seem so odd -- that they arrive at the exact moment that those investigations (which are also being conducted along with the Department of Justice and the Internal Revenue Service) seem to be heating up. By the calculations of a number of organizations, more than 150 public companies have already disclosed that their options-granting practices are being put under the federal microscope.
Whether criminal actions are to follow on a large scale remains to be seen. But it’s clear that investors are the ones who bear the brunt of shady accounting for options -- both through having to share wealth that’s been generated after-the-fact, and being unable to understand the true cost of a potentially bottom-line-altering charge.
According to reports, Cox has already called Frank to explain the initial plan might have made companies report pay that officials might never have collected. And for now, the smoothing over seems to have worked, with Frank backing off his previous criticisms. But whether or not backdating options is part of the business culture, it’s the SEC’s job to protect investors, and it’s a shame that the agency appears to have taken a pass on flexing its muscle on this issue.
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