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Industry Struggles With Stock Options
by Teri Rucker
Swirling amid the calls for accounting reform on Capitol Hill is the cry for recording the cost of stock options as expenses on company balance sheets. The technology industry has fought and won that battle in the past. However, the current spate of corporate misdeeds and the tech downturn have left many observers skeptical that the industry has the same clout to defeat the effort now.
Companies currently must include information on employee stock-option plans in the footnotes of their financial statements. Most companies update that information once a year in their annual reports to the Securities and Exchange Commission (SEC).
Since the issue of incorporating that information into actual balance sheets was last fought in the mid-1990s, the dot-com bubble has burst and the telecommunications industry has been in a prolonged downturn. Some of the companies suffering financial woes and accused of corporate misdeeds also hail from the new economy sector. WorldCom, for instance, filed the largest-ever U.S. bankruptcy case on Sunday.
Industry representatives admit that the climate has changed on Capitol Hill, but they say that is to be expected given the natural life cycle of an industry. They also said their opinions are still welcomed and valued as lawmakers form their opinions on issues affecting the industry.
A Rapidly Closing Window Of Opportunity
"I do think we are still in the white-heat period of the post-WorldCom announcement, and things have not quite settled down," TechNet CEO Rick White said. The industry will have a better sense of what Congress will do when lawmakers return from their August recess.
Sen. John McCain, R-Ariz., failed in his bid to add language on stock-options expensing to the Senate's accounting reform bill, S. 2673. He will continue to seek opportunities to attach the idea to other bills being considered by the Senate, his spokeswoman said. But there may be few opportunities, with only days remaining until Congress recesses and with a proposed adjournment date of early October.
"I think that the opportunities for this issue to come up again are somewhat limited," Matt Tanielian, vice president of government relations for the Information Technology Industry Council (ITI), said, with the caveat that one should never underestimate the ability of lawmakers to find opportunities.
Lawmakers from the House and Senate are trying to reconcile differences between their accounting reform bills, but observers do not expect the expensing issue to be addressed during that process. "To sneak something in in conference that wasn't passed by either the House or Senate would be unusual," White said.
If Congress does anything this session, they should vote to study the issue, White said. He supports language crafted by Sens. George Allen, R-Va., Barbara Boxer, D-Calif., Michael Enzi, R-Wyo., and Joseph Lieberman, D-Conn., that would require the SEC to study appropriate "accounting treatment for employee stock options, including the accuracy of available stock-option pricing models."
The proposal also calls on the agency to study the impact that stock-option expensing rules could have on the productivity and performance of companies, and their ability to recruit and retain employees. Senate Majority Leader Thomas Daschle of South Dakota would support a proposal by Sen. Carl Levin, D-Mich., that would require Financial Accounting Standards Board (FASB) to study the expensing issue.
"At a bare minimum, it is something the accounting standards board is better equipped to handle," Caroline Graves Hurley, tax counsel and director of tax policy at the tech trade group AeA, said of the issue. She noted that she was heartened by Federal Reserve Board Chairman Alan Greenspan's assertion that Congress should not legislate stock-options expensing but leave it to the appropriate standards-setting bodies. Greenspan supports such expensing.
The Realm Of The Impossible?
Industry remains confident that with careful study, the SEC and the FASB, the independent body charged with setting accounting standards, will find that stock-options expensing is not feasible.
Graves Hurley maintains that it is impossible to accurately evaluate the options. It is easier for a firm like Coca-Cola, which recently announced its plan to voluntarily account for stock options, to calculate its options because that company issues fewer and uses them to reward executives, she said. But tech firms traditionally have issued options to attract talented workers, she added.
For example, in its most recent annual SEC filing, Coke said it had 6.4 million outstanding shares of common stock and 2.4 million shares of Class B stock that can be converted to common stock. It had 3,311 holders of common stock and 13 Class B stockholders. Cisco Systems, on the other hand, had 7.33 billion outstanding shares of common stock and 222 million shares reserved for issuance as part of its employee stock-purchase plan, according to its most recent annual filing.
"From an analyst perspective, you see a lot of work now that provides a financial picture as if they have been expensed. If the goal is to provide an accurate picture, the market is already doing that," said Blair Levin, regulatory analyst at Legg Mason.
But Ken Bertsch, director of corporate governance at Teachers Insurance and Annuity Association College Retirement Equities Fund, said accounting has to be more transparent, and finding an accurate measurement is possible. Expensing options is no more inaccurate than evaluating depreciation or intangible assets, he said, and with expensing "right now it is a cost of zero. That clearly is wrong. It is as far off as you're going to get," he said.
Bertsch said industry might not be as successful defeating an expensing rule this time. The tech industry "still has a lot of clout but not on this issue," he said. "Congress has signaled it is not going to force FASB to back off when they revisit this."
Tech Sector Has Uphill Battle
The International Accounting Standards Board supports expensing and is in the midst of writing rules requiring it, and in the United States, investor Warren Buffet and Greenspan are vocal supporters of the concept. And a handful of companies such as Coca-Cola and The Washington Post have announced that they will voluntarily expense their options.
"As these firms switch over, it will be more difficult to make the case that it is difficult for them [the tech industry] and not the rest of the business community," a Senate source said.
Industry sources admit that the honeymoon period in Congress is over, but lawmakers still are interested in the tech industry position and recognize the importance of the industry to the overall economy, White said. "The fact that it is a young industry and a lot of our guys don't try too hard, we're doing better than we should" influencing Congress, White said.
One Senate observer said the problem is that the issue is complicated and that while lawmakers are not accounting experts, they do have a responsibility to respond to constituents and calm frightened investors. Tech officials have not done a good job explaining the issue, the source said.
"The shine has definitely come off the industry," the observer said, and their approach to expensing likely will be ineffective in the long run. "The approach has been to hit members hard and have them do the dirty work. That is a really dangerous thing to do because as soon as things go sour, the members just bail."
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