J. Carter Beese Jr., commissioner, Securities and Exchange Commission, from parts of separate addresses to the National Association of Corporate Directors, the Association of Publicly Traded Companies and the Association for Public Corporations.
I think we are making a big mistake if FASB's proposal is allowed to become final.
For most of us, the stock option accounting debate boils down to one thing: the cost of capital. Without a doubt, forcing companies to record an expense when they issue stock options will increase the cost of capital. Period.
I have trouble believing shareholders are truly disadvantaged under the current practice used to account for stock options. The new accounting standard will add no new information to the market. Not one shareholder is being fooled, misled or deceived by the current accounting for stock options. But put FASB's proposal in place, and stock prices will go down.
The effect of the stock options on corporate profits already is reflected in every public company's income statement, under the line item "earnings per share." If FASB's concern is protecting shareholders' ability to compare apples to apples, earnings-per-share figures already are available to make the necessary comparisons.
Of course, this comparison only measures the dilutive effects of options on earnings, and does not tell readers of financial statements what these options cost the company. But if FASB wants to expose the cost of providing options, then it should address that problem by adding more footnote disclosures, so readers of the financial statements are told precisely what costs are involved, at least to the extent these notional costs can be "precisely" guesstimated.
Indeed, that is the approach suggested by an extraordinary coalition of the Business Roundtable, Council of Institutional Investors and Big Six accounting firms. With such rare unanimity among Fortune 500 companies, their shareholders and their independent accountants, one wonders just who needs the help FASB so eagerly offers.
Supporters of FASB's action argue stock options are a form of compensation and, thus, should be reflected as an expense on corporate income statements. To do otherwise, they reason, misleads shareholders and other readers of financial statements, because two identical companies could report vastly different income if one paid salaries in cash and the other used stock options as a major part of the pay package.
Employee stock options provide unique benefits that salaries, commissions and other pay forms lack. These benefits - which include linking pay to performance and allowing cash-poor start-up companies to hire and retain key employees, and providing incentives for all employees to be more productive - are valuable to all companies and to our economy as a whole.
If FASB's proposal is adopted, the economic cost of using this valuable compensation tool will increase dramatically. Employee stock option plans are a critical component of the compensation packages of managers and employees in many companies, especially in young, high-tech and other emerging growth companies. These companies recently have provided the vast majority of all job creation. In this increasingly competitive global environment, all American companies would lose what arguably is one of their most effective recruiting tools.
For companies using stock options, the resulting hit to earnings will inevitably lead to lower stock prices, which in turn will raise their cost of capital. That could have serious repercussions on the ability of U.S. companies to compete with larger, better capitalized foreign competitors.
FASB's proposal could seriously impair the efforts of many American companies and, consequently, could seriously impair the country's economic performance for years to come. I hope all those involved in the process will seriously consider the collateral consequences of their actions as they strive for technical accounting purity.
Given time and full disclosure, the market will correct any abuses associated with using employee stock options as a compensation tool. We should not punish all American workers and hinder the country's potential for future economic growth by needlessly making employee stock options more expensive to provide.
We must weigh the ultimate costs and benefits of the FASB proposal. Considering that essentially the same information can be provided to shareholders by footnote disclosure, the question begged is what extra benefit can be gained by requiring an expense to be recorded, and at what cost is this extra benefit obtained.
At what point does public policy enter the accounting picture? According to FASB, the answer is never. But I think this is a misguided and unrealistic view. Congress should not be writing accounting standards. At some point, the SEC must inject itself into this debate, and help the FASB determine what accounting approach is ultimately in the best interests of investors as a whole.
Investors will be far better off if the value of stock options is reported in a footnote rather than on the face of the income statement. By allowing footnote disclosure, we will protect shareholders' current and future investments by not raising the cost of capital.