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STOCK OPTIONS: PUTTING GREED BEFORE ACCURATE FINANCIAL REPORTING

Efforts to improve the accuracy of financial reports were blocked by the House on July 20, when fierce lobbying by the high tech industry and their allies led members to vote 312-111 to pass H.R. 3574, a bill that blocks Financial Accounting Standards Board (FASB) proposal to require corporations to report stock options as an expense on their balance sheets and prohibits the voluntary expensing of stock options by companies that want to honestly report them on their books (currently over 575 companies -- including Ford, Microsoft, Citigroup, GM and others -- do so).

The battle now turns to the Senate, where a bipartisan coalition led by Senator Peter Fitzgerald (R-IL) has introduced a resolution to support FASB's independence and the public's right to straightforward and accurate financial information.

The use of stock options -- the "steroids of corporate greed" -- as a form of executive compensation increased as the result of a longstanding loophole in accounting rules which allowed corporations to avoid counting them in financial statements when they are issued. The fact that stock options do not have to be deducted from earnings as a compensation cost has encouraged their overuse or executive compensation and contributed to the widening pay gap between executives and ordinary workers. They promise all the benefits of share price increases without the risks that other shareholders assume of share price declines.

Options are in wide use among the high tech industry. (According to a Bear Stearns analyst, the 2003 reported earnings of the 100 largest Nasdaq-traded companies would have been reduced by 44 percent had they been required to expense stock option compensation). Shareholders at many of these companies have called on management to expense options. E.g. shareholders at Intel, PeopleSoft, Hewlett-Packard and Texas Instruments have all voted in favor of expensing options despite strong opposition from management. Intel, for example, has been a leader in lobbying efforts against FASB's proposal.

Although originally touted as a way to align the interests of executives with shareholders, the doling out of massive stock options packages motivated many executives to value the stock price (and earnings statements that would boost it) above the long-term health of the company. Many executives began to go to extreme lengths -- in some cases cooking the books in order to meet projected earnings and pump up the value of the company's stock -- thereby allowing them to cash in their options while the stock price rose to artificially high levels before crashing, as it did at so many companies.

As Alan Greenspan has suggested, "the incentives [options] created overcame the good judgment of too many corporate managers. It is not that humans have become any more greedy than in generations past. It is that the avenues to express greed had grown so enormously." (New York Times, 7/11/02.)

Fortune described the executives and directors of 1,035 corporations whose stock price fell by at least 75 percent from the highs they reached during the bubble years as a "Greedy Bunch" for making off with $66 billion - enough money to fund the entire FBI budget (including what it spends on corporate crime) for 16 years. At the 25 corporations where the executives cashed out the most, 466 insiders took a total haul of $23 billion. (Fortune, September 2, 2002.)

Others who have spoken out against the attempt to interfere with FASB's independent judgment on accounting issues include SEC chairman William Donaldson, Treasury Secretary John Snowe, former Federal Reserve Chair Paul Volcker, former SEC chairman Arthur Levitt, Charles Bowsher (chair of the Public Oversight Board), investment guru Warren Buffett, John Biggs (former head of TIAA-CREF), the Investment Company Institute, AFL-CIO, Council of Institutional Investors, the Consumer Federation of America, the Big Four accounting firms, and many others.

For a variety of statements from these and other people click HERE

Well over 500 major U.S. companies already expense options on a voluntary basis, including Coca-Cola, General Motors, General Electric, EDS, Dow Chemical, Amazon, Home Depot, and Wal-Mart. They do so without suffering the dire consequences that opponents of expensing have predicted.

But the many companies that use options -- especially many high-tech executives -- continue to fight to keep the accounting loophole open.

For more on options:
Executive Paywatch (AFL-CIO)
Testimony of Richard L. Trumka before Financial Services Committee
Citizen Works stock options page
Executive Excess 2003: CEOs Win, Workers and Taxpayers Lose by IPS/UFE

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