Showdown looms on stock options
By Michael Liedtke
Associated Press
SAN FRANCISCO — Corporate America's accounting rule-maker moved closer yesterday to forcing companies to deduct employee stock options from their profits, setting the stage for a congressional showdown pitting Silicon Valley against Wall Street.
Heeding the call for accurate income statements, the Financial Accounting Standards Board proposed a reform that would force publicly held businesses to treat all stock-based compensation as an expense — a change that would dramatically reduce the earnings of many well-known companies, particularly in the high-tech industry.
Under the current rules, companies simply must disclose the estimated costs of issuing stock options in footnotes to their financial statements. These obscure notes often reveal eye-opening swings of fortune.
For instance, the collective profits of high-tech bellwethers Intel Corp., Cisco Systems Inc., Oracle Corp. and Hewlett-Packard Co. would have been reduced by a combined $3.3 billion last year had they been required to expense stock options.
Rather than risk a hit to their earnings that could depress their stock price, many high-tech companies have warned they will curtail stock options and other similar stock-based perquisites that would have to be expensed under yesterday's proposed change.
If the expensing rules are adopted, Redwood Shores, Calif.-based Oracle plans to cancel a program allowing its 41,000 employees to buy company stock at a 15 percent discount twice a year, according to a memo sent earlier this week.
The huge stakes make yesterday's proposal among the most significant that the Norwalk, Conn.-based accounting board — widely known as FASB — has made during its 30-year history. The proposal is open to public comment until June 30; if approved, it would become effective for the fiscal years beginning after Dec. 15, 2004.
The battle lines have been drawn in a conflict that appears headed toward Capitol Hill.
Some of the nation's best-known investors, including Warren Buffett, contend that expensing stock options will produce more credible financial statements, an objective that has become even more important after a siege of disillusioning accounting scandals.
"This is a day the investment community has been waiting for," said Patrick McGurn, a senior vice president of Institutional Shareholder Services, which advises major investors. "This is the beginning of accounting transparency."
Hundreds of major companies already have agreed to expense stock options voluntarily, including some prominent high-tech companies such as online retailer Amazon.com.
But most companies that have been distributing bushels of stock options — a group anchored in Silicon Valley — depict the FASB proposal as an administrative nightmare that will muddy income statements even more and stifle future innovation in the United States.
"It's bad for the American economy," said Rick White, a former congressman who heads TechNet, a Silicon Valley group that represents 200 high-tech companies.
Stock options emerged as a gold mine for companies and employees alike during the past 15 years. The options allow workers to buy an employer's shares at a fixed price and then sell them at a profit if the company's stock rises.
Companies embraced stock options because they became an effective way to attract talented workers without increasing payroll costs or diminishing profits, under the current accounting rules.
Many rank-and-file employees regard stock options as their best bet for striking it rich — a phenomenon that occurred regularly in Silicon Valley during the bull market of the 1990s.
But the corporate chicanery of Enron Corp. and WorldCom triggered a backlash against stock options. Critics believe the options gave greedy executives an incentive to manipulate earnings so they could drive up their company's stock price and realize multimillion dollar windfalls.
Forcing companies to deduct stock options from profits would force corporate boards to become more judicious about doling out the awards, according to shareholder activists.
Bipartisan legislation gaining strength in the House would limit required expensing of options to those owned by the top five executives in a corporation. It also would prevent a new FASB mandate from taking effect until an economic impact study is done.
