Goldman's Paulson Says Options Likely to Be Expensed (Update7)
By David Wells
Washington, June 5 (Bloomberg) -- Goldman Sachs Group Inc. Chief Executive Officer Henry Paulson said he expects U.S. companies will be required to expense employee stock options as standards are tightened to restore investor trust after a series of accounting scandals.
``In my lifetime, American business has never been under such scrutiny,'' Paulson said in a speech at the National Press Club. ``To be blunt, much of it is deserved.''
His prediction on accounting for stock options may put him at odds with some of Goldman's biggest investment banking clients, particularly technology companies such as Microsoft Corp. Computer- related companies oppose treating options as an expense, arguing their value is unclear and expensing them would make it harder to attract workers.
Paulson said corporate oversight also needs to be strengthened to repair confidence in companies, which has been shaken by Enron Corp.'s collapse, accounting irregularities at companies including Xerox Corp. and federal and state probes of Wall Street research. Public companies should have a majority of independent directors on their boards, and audit and compensation committees should consist entirely of independent directors, he said.
The Goldman CEO, who also called for improved U.S. accounting standards and steps to reduce conflicts of interest on Wall Street, joins other executives in speaking out about the need to restore confidence in U.S. companies and markets.
`Convergence' of Systems
The CEO said U.S. and European accounting standards should be similar. That will require U.S. companies to account for stock options awarded to employees as an expense.
``The goal should be convergence of accounting systems, incorporating the best from both models,'' Paulson said, adding later in a question-and-answer session that he thinks ``ultimately options will be expensed.''
Frits Bolkestein, the European Union's financial services commissioner, met with Securities and Exchange Commission Chairman Harvey Pitt last month to discuss how to ensure that accounting standards between the U.S. and EU are close enough to allow investors to compare corporate performance.
The EU will adopt by 2005 rules set by the International Accounting Standards Board that will require stock options to be included on a company's income statement. Pitt opposes that requirement, and the ``generally accepted accounting principles'' that govern the rules in the U.S. say expensing options against income isn't mandatory.
Technology companies including Oracle Corp., Silicon Graphics and Microsoft Corp. and groups such as the American Electronics Association opposed an attempt in 1994 by the Financial Accounting Standards Board to force companies to expense stock options awarded as compensation. Senator Joseph Lieberman, a Connecticut Democrat, introduced a non-binding resolution that passed 89-9 against expensing stock options.
Some accounting experts are skeptical the U.S. standards board will try again any time soon. ``I don't think FASB is going to put this on the agenda again voluntarily after what happened the last time,'' said Robert Willens, an accounting analyst at Lehman Brothers Inc. The international board ``could give them some cover but I don't think that's even enough. They'll need goading from the SEC.''
Corporate Boards
Paulson's proposals on the composition of corporate boards come as the New York Stock Exchange readies new rules requiring a majority of board members at its listed companies to be independent.
The exchange will also require audit, compensation and nominating committees to be made up of independent directors, and require boards to prove -- and state in regulatory filings --that directors deemed independent have no material relationship with the company.
Goldman's own board consists of five Goldman employees and eight outsiders, some of whom represent companies that have hired the firm as an investment bank. ``The majority of our board is independent and the audit and compensation committee boards are also independent,'' said Baum, Goldman's spokeswoman.
He also called for a one-year ``claw back'' on any share sales by a CEO within a year of a bankruptcy filing. That would require chief executives to return any profits they may have received from selling shares while their company collapsed, said spokeswoman Kathleen Baum. Kenneth Lay, Enron Corp.'s former chief executive, sold $100 million in shares last year before the energy trader' bankruptcy, the largest ever.
Goldman, the third-largest securities firm by capital, last month announced steps it would take to prevent conflicts of interest faced by research analysts after rival Merrill Lynch & Co. agreed to pay a $100 million fine and reorganize its research division to settle allegations that its analysts misled investors by promoting shares of companies to win or retain investment- banking business.
``We have not done as good a job as we might have in preserving and protecting the appearance of independence of our research analysts who play a vital role in the investing and capital allocation process,'' Paulson said in the speech.
SEC Rules
Goldman tapped former New York Federal Reserve President E. Gerald Corrigan to prevent analyst conflicts. Shares of Goldman have dropped 18 percent year to date, while the benchmark Standard & Poor's 500 Index has dropped 9 percent.
The SEC, which has begun its own probe of Wall Street research, in May barred analysts from profiting from their stock recommendations and required more disclosure by brokerages. The rules are to be phased in over six months.
Citigroup Inc. Chairman Sanford Weill last month said the new rules may not be strong enough to reduce conflicts between analysts and investment banking.
Some investors said increased corporate oversight and better adherence to accounting ad other regulatory standards will help restore the trust of institutions and individuals. Still, it will take time, they said.
``The only thing that will make a difference is time,'' said Mike Vogelzang, who helps manage $2 billion for Boston Advisors Inc. and owns shares of Goldman and Citigroup. ``It's potentially 18 months to two years before we get confidence back, after a cessation of further bad stuff and a resolution of what we have.''
SEC Pay
Paulson called for pay increases for SEC staff, a move that is being blocked by the Bush administration.
``I think we sure need higher compensation levels for the SEC,'' Paulson said in an interview after his speech. The agency needs to be able ``to attract and retain talented professionals,'' he said.
Pitt, a Republican appointed by Bush, has asked the White House for $76 million to fund fiscal 2003 pay increases to bring SEC levels to those of federal banking agencies. The White House has pledged only $19 million more, citing the need to fund other priorities such as terrorism and defense.
Paulson also called for a ban on most auditors' consulting services to clients following Enron's bankruptcy, putting him at odds with Pitt and U.S. House Republican leaders.
Investor groups have said Enron's auditor, Arthur Andersen LLP, overlooked the energy dealer's accounting irregularities in an attempt to win more consulting business.
``It's even more than a perception (of a conflict of interest),'' he said in an interview. ``The most fundamental issue is who (auditors) think they work for.''
Pitt has said the SEC shouldn't try to limit auditor consulting further until audit-independence rules adopted by his predecessor, Arthur Levitt, are phased in later this year.
Paulson said that only audit-related consulting services, such as tax advice, should be allowed. |
