by Ken Rankin
The options debate rages on and on.
Legislation aimed at short-circuiting plans by the Financial Accounting Standards Board for the mandatory expensing of stock option compensation “would undermine the board’s standards-setting processes,” and “send a clear and unmistakable signal that Congress is willing to interfere with accounting standards,” FASB chairman Robert Herz warned at a recent hearing of the House Financial Services Capital Markets Subcommittee.
The bill would require “enhanced disclosure” of stock options by corporations and effectively place a three-year moratorium on new accounting standards for stock options pending the result of studies of the effects of those disclosures.
In voicing the board’s “strong opposition” to that legislation, Herz further warned that a moratorium on new stock option standards would undermine FASB’s efforts to promote global uniformity in accounting rules - a concern that was echoed by other witnesses at the hearing.
International Accounting Standards Committee Foundation trustee and former Federal Reserve chairman Paul Volcker told the panel that congressional efforts to “override the decisions of competent professional standards setters” could result in a loss of credibility of accounting standards around the world and a “weakening of the fabric of the international financial system.”
Although he declined to take a position on the specifics of FASB’s plan, Volcker said that stock options are clearly compensation to employees “and, therefore, should logically be reflected as an expense in income statements.”
Advocates of stock option expensing, however, were in a distinct minority at the recent House hearing, which included a witness list weighted with critics of the FASB plan.
The lead-off witness, House Rules Committee chair David Dreier, R-Calif., told the subcommittee that any across-the-board effort to require corporations to expense stock options would have a “devastating impact on job creation and our economic life.”
Dreier, who is co-sponsoring the legislation along with Silicon Valley Democrat Anna Eshoo, warned the subcommittee that “mandatory stock option expensing not only threatens the high-growth sectors of our economy, but it will actually result in investors receiving inaccurate information about a company’s use of employee stock options.”
Stock option expensing has been a major flashpoint for the better part of a decade. In the mid-1990s, FASB’s proposal to require expensing was beaten down by the accounting lobby and several high-profile lawmakers, including Sen. Joseph Lieberman, D-Conn., and Sen. Barbara Boxer, D-Calif.
Although critics of the Broad-Based Stock Option Plan Transparency Act “have alleged that our legislation is an interference with the accounting-setting process,” Dreier countered that “we have an obligation to American workers and American investors” to prevent impediments to economic growth.
“This is a public policy issue, it’s not an accounting issue,” he said.
Eshoo echoed those sentiments, adding that efforts to force companies to expense stock options will not “rein in any excessive executive compensation” because 80 percent of stock options go to rank-and-file employees of public companies.
Although the major accounting firms have reversed course to support FASB’s efforts, and a number of major corporations have agreed to voluntarily expense stock options, Eshoo insisted that the high-tech growth companies in her district could be crippled by such a standard.
“It is relatively easy for companies like General Electric and Coca-Cola to expense stock options” because they make them available “only to a small number of senior executives and managers,” she said. In contrast, “New Economy” companies in the technology and biotech sectors offer stock options broadly in order to turn “their entire employee base into corporate partners who have a stake in the future success of their company.”
Eshoo bristled at the suggestion that her legislation would amount to an improper interference in the independent accounting standards process or undermine FASB.
“Our legislation does not set accounting standards,” she told the subcommittee, adding that “nothing in our bill requires Congress to get into the standards-setting business.”
Other witnesses at the hearing painted an even darker picture of the economic turmoil likely to be caused by a FASB rule mandating stock option expensing.
Calling the expensing plan “a bad idea whose time has come,” American Enterprise Institute resident fellow James Glassman warned that FASB’s proposal would be “a serious, even disastrous, mistake.”
“As a long-term strategy, mandatory expensing leads accounting policy in precisely the wrong direction,” he told Congress.
“By severely discouraging the use of a powerful incentive for employees at all levels, mandatory expensing is likely to have a dangerously adverse impact on innovation, economic growth and national competitiveness,” Glassman said.
The subcommittee’s ranking Democratic member, Rep. Paul Kanjorski, D-Pa., was one of the few members of the panel to openly support expensing of stock options.
He maintained that the legislation before the subcommittee would threaten the enhanced independence afforded to FASB under the Sarbanes-Oxley law, and undermine the board’s ability to make unbiased decisions.
“When the board last studied this matter a decade ago, meddling by some on Capitol Hill resulted in a retreat from an original proposal to require stock option expensing,” Kanjorski said. “This retreat allowed companies to continue hiding the true cost of stock options and contributed to the recent tidal wave of accounting scandals.”
