Options Fray Goes to Washington

Will Capitol Hill's reform talk yield any fruit? And explain again why options is a 'woman's issue'?
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Congress is breathlessly moving on to the next financial area it knows little about: accounting.

The government is preparing to once again enter the decades-old fray over how companies should account for the stock options they grant to employees. In the 1990s, corporate America -- led largely by the technology industry -- successfully persuaded the Financial Accounting Standards Board (FASB) to back down from its effort to force companies to expense the cost of those option grants. Such a move would lower reported corporate profits. Technology companies have long championed the use of options as a cheap way of recruiting talent, and they were loath to recognize the dilutive effect of issuing them.

But FASB, the independent standards-setter of the accounting profession, is back with renewed vigor in its determination to require that companies expense the cost of stock option grants. And Congress is left squabbling over whether to muscle into an area it largely has no jurisdiction over.

California lawmakers, still responsive to the technology industry (i.e., still collecting some hefty contributions), have proposed legislation that would put a three-year moratorium on FASB's ability to require this new accounting. FASB, which is an independent regulatory board and

not

a government agency, would still be paralyzed in its standards-setting if Congress passes such a law.

"It's a highly charged issue -- FASB is the arbiter of what makes financial statements accurate, and Congress can't tell them how to do that," says Jim Scanella, an executive compensation consultant and associate principal with Buck Consultants, a human resources consulting firm. "But what the industry has convinced Congress of is that if options are to be expensed, it will have a dramatic impact on the economy."

That's why California's Rep. Anna Eshoo, a Democrat, and Rep. David Dreier, a Republican, have proposed the three-year moratorium in the House of Representatives. Similar legislation has been floated in the Senate by Nevada Republican John Ensign and supported by California Democrat Barbara Boxer.

Congressional arguments surrounding this topic are admirably loopy -- Boxer has repeatedly referred to blocking this accounting change as a "woman's issue." In a round-table discussion on Capitol Hill in early May, the Senator cited two remarkable examples to back her claim, as quoted in the

San Jose Mercury News

. Boxer told how

Sun Microsystems

(SUNW) - Get Report

options helped one woman to buy a house and set up a home office so she could spend more time with her daughter. Even better was the example of another (male) Sun employee who cashed in his options so his wife could pay off her college loans, buy a car and set up a business.

Congressional proponents of requiring companies to expense options have also taken an unusual -- and quite clever -- approach. Arizona Republican Sen. John McCain has said that if industry claims that options really don't cost a company anything are correct, then companies shouldn't be allowed a tax break for issuing them. This "you can't have your cake and eat it too" philosophy has also been argued by Michigan Democrat Sen. Carl Levin.

Most in the accounting field agree that while expensing options may be an imperfect solution to a growing problem, it is the sole remedy for ailing investor confidence. "It's the only way to put any kind of discipline on how companies pay their executives," says benefits consultant David Veeneman. Rampant abuses in corporate compensation are commonly thought to have led to or exacerbated some high-profile debacles in recent years, such as

Enron

and

WorldCom

.

But if regulators and lawmakers really have investors' interest at heart, they'll hold off on any major changes until the economy recovers, some say.

"The economy operates on P/E

price-to-earnings ratios," Scanella says. "And if companies have to expense options, it will have a dramatic effect on the 'E.' Earnings will plummet."