Politics & Policy

Running The Option

Democrats are stealing Silicon Valley voters from Bush and the GOP.

An accounting board is rushing to require companies to treat stock options as an immediate expense, thus reducing the profits they report to shareholders — even though no one has yet found a way to value options expenses accurately.

Sound esoteric? Boring?

Not to the companies of Silicon Valley and other high-tech centers. If the Federal Accounting Standards Board, or FASB, changes the rules, many of these firms say they will have to scrap their options programs, which have helped attract the best and the brightest talent and have created a revolution that has boosted the entire economy.

High-tech executives say that the new rules will force them to cut back sharply on their options programs, putting the economy at serious risk.

“This is a big competitiveness issue,” says John Doerr, one of America’s best-known venture capitalists and sponsor of investments in such companies as Sun Microsystems, Compaq, Lotus, and Netscape.

In recent testimony to Congress, Doerr added, “The innovation economy is where we’re going to get the growth in jobs and the economic security. … The use of broad-based employee stock ownership, which I contend will disappear if [options] expensing is mandated … delivers higher returns to the shareholders of the companies who use them, produces higher productivity, higher returns on equity, [and] higher returns on assets.”

Since next year’s election will almost certainly hinge on the economy’s recovery, you might think that the Bush administration would be vigorously opposing the attempts of FASB, an unelected board based in Stamford, Conn., to impose its will on the most innovative American firms.

But you would be wrong.

President Bush himself has gone on the record opposing the expensing of options — but that was a long time ago. In an interview with the Wall Street Journal in April 2002, the president said that stock options should not be treated as a corporate expense. Instead, he said, “they ought to be dilutive in [a company’s] earnings per share calculations” — which is the way the accounting rules work now.

But Bush has been silent on the issue for the past year and a half, and his SEC chairman, William Donaldson, who has authority over FASB, supports expensing of options.

Before his appointment as Treasury secretary, John Snow headed a business panel that recommended expensing options. In a speech Oct. 15, Snow indicated he still favors that position. He derided stock options as a “freebie,” claiming that, “in many cases, they shortened the time horizon of management and accentuated the ’short-term-itis’ that addicted the markets in the ’90s.”

There is no academic research to support Snow’s views, but what is truly remarkable — and deeply disappointing — is that the Bush administration is thumbing its nose at a powerful and energetic constituency: high-tech America.

Contrast the administration’s stance with that of the leading Democratic candidates for president.

Howard Dean says “he would not favor expensing stock options if at least 65 percent of the options were distributed widely throughout a company” — a reasonable position.

Rep. Richard Gephardt (D., Mo.) has “signed on to legislation to block the FASB from adopting the expensing rule.” That bill, introduced by Reps. David Dreier (R., Calif.) and Anna Eshoo (D., Calif.), would require FASB to study the issue longer before taking any steps. Gephardt said in a June speech that “stock options are a very important way to get employees to think and act like owners.” According to a report in the San Jose Mercury News, his “comments won an enthusiastic response from a Silicon Valley audience.”

Sen. Joseph Lieberman (D., Conn.) is a long-time opponent of expensing options, and he recently won the backing of several high-tech leaders, including Doerr.

Gen. Wesley Clark has not taken a position on expensing, but the two other major Democratic presidential candidates, Sens. John Edwards (D., N.C.) and John Kerry (D., Mass.), support expensing. Both make their cases with inflammatory populist rhetoric.

So, while three leading Democratic candidates aggressively oppose expensing — to the cheers of Silicon Valley — the administration’s position can best be called muddled.

The case against expensing options appears to me to be powerful. Expensing threatens to damage the economy at a critical time; it will confuse and mislead investors, rather than enlightening them, as current regulations do; and it will take accounting policy in precisely the wrong direction, toward the fixing of an arbitrary single number rather than toward the dissemination of more information.

Three years ago, I traveled to San Jose, Calif., the heart of American high technology, to give a speech at a Republican National Committee conference. The topic: “Why doesn’t Silicon Valley love Republicans?” After all, the GOP stands for entrepreneurship, lower taxes, less red tape, free trade. Shouldn’t the party find natural allies among tech executives?

It should, but it has failed, in this case as in others, to support issues that Silicon Valley considers critical.

Even if the case against options-expensing were not so powerful, it is inexplicable that the White House would allow the Democrats to steal this issue from under its nose.

Dean, Gephardt, and Lieberman understand that the way to the hearts and votes of Silicon Valley is not through making arcane accounting adjustments in a festival of corporate-bashing. It’s to support an industry that has created trillions of dollars in wealth and millions of jobs.

To remedy this situation is not difficult. The president is already on record opposing the expensing of options. He should reiterate his statement of April 2002. Then another administration official — say, Snow or Commerce Secretary Don Evans — should back congressional efforts to delay the FASB’s rush to judgment.

– James K. Glassman is a fellow at the American Enterprise Institute and host of TechCentralStation.com .

James K. Glassman, former Under Secretary of State for Public Diplomacy under President George W. Bush, is a member of the advisory board of the Infrastructure Bank for America, a proposed private institution to invest in U.S. infrastructure.


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