Tech giants rail at options rule
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by Donna Block in Washington
TheDeal.com
8 March 2005
Technology executives called on the Securities and Exchange Commission to delay implementing a controversial rule requiring companies to deduct the cost of employee stock options from profits, just as they do any other compensation form.
During a press conference Tuesday, March 8, to unveil its innovation policy agenda, TechNet, a technology-industry lobby group co-founded by Cisco Systems Inc. chief executive John Chambers, said it is essential that the SEC provide companies with guidelines that include a "realistic" way of valuing such options. The views of the group's membership, heavy with top executives from the biggest tech companies, are expected to wield strong influence with regulators and lawmakers.
"With the current models, we are significantly overstating the value of [employee] stock options," Chambers said. These types of options, he added, are inherently difficult to value and the models the Financial Accounting Standards Board have recommended "don't bring precision [to financial statements] at all."
Accounting rulemakers have long debated whether employee stock options should be considered an expense, but the spate of recent corporate scandals, in which executives enriched themselves at shareholder expense, helped decide the issue. In December, the Financial Accounting Standards Board, which sets accounting-industry standards and answers to the SEC, ruled that companies would have to start treating employee stock options as an expense.
But a number of companies, mostly in the tech sector, argue that FASB's expensing standard will not make financial statements any more meaningful and might even render them misleading.
Opponents of the rule got a significant boost on Monday when former White House economic adviser Lawrence B. Lindsey expressed misgivings about the rule. Lindsey, president and chief executive of the Lindsey Group consulting firm and formerly President Bush's assistant for economic policy, wrote in a Feb. 18 letter to SEC Chairman William Donaldson that if the accounting rule is adopted "as is," firms may find that their earnings reports are ultimately inaccurate.
"The analysis done by our panel of experts found that if FASB's rule were implemented on the current timeline, the quality of information available to investors would be inadequate and potentially misleading," Lindsey said in an interview.
Lindsey said the recommended models would produce earnings results that vary widely with different sets of assumptions. That, he said, could lead to misleading financial information and expose chief executives to legal liabilities. "These technical challenges should be addressed before stock-option expensing is implemented," he said.
Jeff Peck, a partner in Washington law firm Johnson Madigan Peck Boland Dover & Stewart and chief lobbyist for the International Employee Stock Options Coalition, concurred. He said CEOs and CFOs, legally, must certify the accuracy of earnings results, and yet they would do so using fundamentally flawed valuation models. "What is wrong with this picture?" he asked.
Peck said the SEC will need to take the matter into account when it issues guidance for implementing the expensing rule. SEC chief accountant Donald T. Nicolaisen said last week that the commission's accounting division intends to provide companies with some direction on valuing stock options.
"We received a request to provide implementation guidance, and we hope to be helpful in attempting to accurately and reasonably measure stock options," Nicolaisen said. He added that while he hoped the guidance would be in place before companies figure their first-quarter results, companies already able to adopt the rule should "do so."
Still, Peck said there is a compelling case for delaying the rule. "Companies will be focused on what guidance the SEC issues — this could be pretty close to rocket science to figure out," he said.
TechNet also warned U.S. policymakers that expensing options icould help jeopardize the nation's competitiveness. The group said that to maintain the entrepreneurial culture in the U.S. and retain billions of dollars in revenue, employee stock options must be preserved.
"The most important issue is to protect broad-based employee ownership in the form of stock options," said John Doerr, a partner in venture-capital giant Kleiner Perkins Caulfield & Byers. "At the minimum," he said, the SEC should delay implementing the rule.
Doerr said 80% of stock-option holders earn less than $75,000 a year and that "the middle class" holds 90% of outstanding options. But that is quickly changing. A number of companies have said the FASB rule is too expensive and too confusing to implement, so they are eliminating all stock options for rank-and-file workers.
Pfizer Inc., one of the world's largest drug manufacturers, said last week it will grant stock options only to senior executives.
Doerr also claimed that the rule would cost state and local governments more than $560 billion in revenue over the next decade, owing to personal income lost as companies curtail stock-option compensation. |
