CALPERS to weigh in on expensing of stock options Monday..
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Friday June 14, 2:38 pm Eastern Time
Calpers To Weigh In On Accounting Of Stock Options
By: Judith Burns, Of DOW JONES NEWSWIRES
WASHINGTON -(Dow Jones)- California 's giant pension fund could be poised to give Silicon Valley a bad case of indigestion on stock options.
The 13-member board of the California Public Employees Retirement System, better known as Calpers, meets Monday in Sacramento , Calif. , to consider whether to recommend that U.S. corporations treat stock options as a business expense.
"We're bringing in some of the top names to talk through it," said Calpers spokesman Brad Pacheco.
Arthur Levitt, the former Securities and Exchange Commission chairman, and former SEC commissioner Steven Wallman, now head of Foliofn, an online brokerage firm, are among those invited discuss how to account for stock options. Levitt supports accounting for stock options as an expense, while Wallman has opposed it.
A vote by the Calpers board, which could come immediately after Monday's discussion, is likely to be closely decided in favor of expensing, according to some observers.
Action by Calpers would continue a trend of big, institutional investors prodding corporations to put the cost of options on their books.
In March, the Council of Institutional Investors, whose members manage $2 trillion of pension funds, reversed its position and endorsed expensing options. TIAA-Cref, the $274 billion teachers' retirement fund, also favors expensing.
Accounting for stock options consumed Washington policymakers in the 1990s, and the issue has returned with a vengeance after the collapse of Enron Corp. ( ENRNQ).
Calpers tackled the question earlier this year as it considered a package of post-Enron reforms, but the board postponed acting on a staff recommendation favoring expensing of stock options. After Monday's meeting, Levitt expects Calpers will embrace expensing and hopes other institutional investors will jump into the fray.
"I think it's the right thing to do," the former SEC chairman said in an interview. "It's going to happen, it's just a question of when, not if."
In retrospect, Levitt said his "greatest mistake" as SEC chairman was not encouraging the Financial Accounting Standards Board to require companies to treat options as an expense. Under intense pressure from Congress and corporations, the FASB, an independent board that sets accounting standards for U.S. companies, retreated, adopting a compromise rule that keeps options off the books but shown in a footnote.
Calpers' Influence
Unlike the FASB, Calpers can't force companies to abide by its views. Yet the fund, with 1.3 million members and $149.3 billion in assets under management, has clout that extends far beyond Sacramento .
"We're certainly watching it, because Calpers sets the tone for a lot of these debates," said William Patterson, director of the investment office for the AFL- CIO. He expects a decision shortly, saying, "I don't think the board will decide it's none of Calpers' business."
Proponents of expensing say options are compensation and should be treated as such, particularly since lavish option awards dilute the value of shares outstanding. Opponents say it would be difficult to value options and think expensing would confuse investors, not enlighten them.
Changing accounting rules would slash earnings at some companies. Cisco Systems, Inc. , which reported $4.6 billion of operating income in fiscal 2000, would have earned just $2.7 billion if it treated options as an expense, according to an analysis by Bear Stearns & Co .
As the debate rages, the use of options is on the rise. Across the board, companies granted more options in 2001 than they did on average in the three previous years, according to the Investor Responsibility Research Center.
Technology companies remain the heaviest users of options, with an average 20% stock dilution in 2001, compared with a 7.7% average for utilities, the lowest of any industry, the IRRC said.
"We think employee ownership is a good thing," said Rick White, chief executive of TechNet, a 250-member group of technology firms, about half in Silicon Valley.
White said "expensing just doesn't make sense," because the more options a company awards, the bigger the hit to its bottom line. If companies have to treat options as an expense, he expects them to cut back on options for rank- and-file employees while retaining them for top executives.
"You can't hire your key executives without giving them a piece of the action, " said White.
Expensing supporters reject that idea. "The bulk of the money's going to the top dogs," said the AFL-CIO's Patterson. "That's where the juice gets squeezed, and that's where the focus should be."
Backlash Against Options
Enron's bankruptcy and the collapse of the dot-com boom has created a backlash against CEOs who got rich while their companies cratered, White acknowledged. He said TechNet companies support a push to "claw back" any ill-gotten gains on stock or options trading, and may endorse proposals by the New York Stock Exchange and the Nasdaq Stock Market to require shareholder approval of options awards.
"We don't mind people getting rich, but we don't want them getting rich by fraudulent means," White asserted.
Technology companies draw the line at expensing options, but supporters think the time is ripe. If companies had to treat options as an expense, supporters said they expect little harm to individual stocks or U.S. markets as a whole.
Levitt, who headed the American Stock Exchange before becoming SEC chairman, calls that "a ridiculous argument."
"Options have been a very valuable compensation tool and will continue to be a very valuable compensation tool," regardless of the accounting treatment, Levitt asserted.
Former SEC chief accountant Lynn Turner, now director of the Center for Quality Financial Reporting at Colorado State University, agrees. If companies had to expense options, he expects they will continue to use them, but "make smarter economic decisions" about them.
"You're going to think longer and harder about when you give and how much you give," Turner predicted.
-By Judith Burns, Dow Jones Newswires; 202-862-6692; judith.burns@dowjones.com |
