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Late last week we learned how straight forward and quickly the New York Stock Exchange (NYSE) board is attempting to address some internal corporate governance issues. We should all thank the NYSE board for recognizing their duty to the public in the areas of transparency (salary disclosure), board membership qualifications (true independence), conflict-of-interest standards (no NYSE officer allowed to be on the board of a listed company), and on down the line. Congratulations. But when it comes to corporate governance, why does it always seem like we’re moving one step forward, then two steps back? We also just learned (it was the small print in the Wall Street Journal) about a bill sponsored by two representatives to Congress from California that “would impose a three year ban on the new rules for stock options, pending study by the Securities and Exchange Commission and the Commerce Department.” The Financial Accounting Standards Board chairman, Robert Herz, was quick to warn lawmakers that “a bill to delay new rules on stock options would set a dangerous precedent of congressional interfering in accounting matters.” This sounds like the mid-1990s revisited. Back then, the issue of proper accounting of stock options was derailed by political forces. Can’t we, as a responsible society, expect from our agencies and our politicians the segregation of good accounting rules (that are fully analyzed through an open and just process) from the often-times denigrating politics of campaign contributions? While I and others love the public and private sectors, and growth companies in particular (either new, young, or old), stock options — a relatively new phenomena — never did, and never should, drive entrepreneurship. The two representatives from California should look at a study by the firm Sanford Bernstein, performed by strategist Michael Goldstein, on the subject of stock options and their effect on corporate earnings. In it the firm observed that “the entire margin expansion of 1995-2000 would have disappeared if options had been expensed.” Shareholders, who also are the voting public, need to be protected on these important issues. There are other counter-strategies to the aggressive use of stock options that can be devised. These can include the granting of authorized shares, cash bonuses, or combinations of the two — all tied to vesting and performance requirements. Maybe — before there’s a new FASB rule requiring, not just recommending, options-expensing in income statements — a grace period could be established for companies allowing them to write off worthless options. An industry should not fear an accounting standard that is simply promoting a higher standard of comparability and disclosure of shareholder monies. FASB standards, while not perfect, simply will not threaten any industry that has as its mission the achievement of revenue growth by way of successful product lines. The accounting agencies should be allowed to do their job. Corporate boards also need to do their jobs. In particular, they need to look hard at executive compensation, the bigger issue beyond stock options, in order to begin to narrow the ever widening spread between what a few fat-cat execs make and what the average employee takes home. — Patricia A. Small is a partner with KCM Investment Advisors [visit their new site], and is the former Treasurer, University of California. |
The accounting agencies should be allowed to do their job.