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Mccain proposal { July 12 2002 } Original Source Link: (May no longer be active)
http://www.washingtonpost.com/wp-dyn/articles/A58272-2002Jul11.htmlhttp://www.washingtonpost.com/wp-dyn/articles/A58272-2002Jul11.html
McCain Accounting Proposal Scuttled
Senate Rejects Listing Of Stock Options as A Corporate Expense
By Helen Dewar and David S. Hilzenrath
Washington Post Staff Writers
Friday, July 12, 2002; Page A01
Senate Democrats yesterday blocked a proposal that would have changed the way companies account for stock options, an initiative vehemently opposed by high-tech companies that have used such grants to award billions of dollars in compensation to their executives and employees.
Sen. John McCain (R-Ariz.) tried unsuccessfully to attach to a broader corporate accountability bill a requirement that companies subtract the cost of stock option grants from their reported profits. But the Democratic leadership prevented McCain's amendment from reaching a vote.
"The fix is in," said McCain, vowing to try to force a vote on the measure in the future. McCain's proposal faced bipartisan resistance in the Senate.
Majority Leader Thomas A. Daschle (D-S.D.) said he had misgivings about a "one-size-fits-all" formula for dealing with stock options, suggesting instead that the bill require the Securities and Exchange Commission and a proposed accounting oversight board to come up with regulations on the issue.
The broader corporate accountability bill appeared headed for approval, lawmakers said. The Senate is to vote today on a critical procedural move that would put the bill on track for approval by late Monday.
An earlier stampede to expand the bill and add penalty after penalty to the laws against corporate fraud reached an impasse yesterday.
Stock options give the holder the right to buy shares at a fixed price, usually the price at which the stock traded when the option was issued. They gain value as the stock price rises.
Unlike salaries and cash bonuses, option grants to executives and employees are not counted as an expense on corporate statements. If they were, many companies would report weaker profits, and some companies that now appear profitable would post losses.
The ability of companies to dispense options as if they had no cost has led to huge executive grants, giving corporate leaders added incentive to cook the books and artificially inflate stock prices, some politicians and business analysts say.
Business groups have lobbied hard to preserve the current accounting rules, arguing that stock options fuel business innovation and benefit workers as well as executives.
Sen. Mike Enzi (R-Wyo.), speaking against the McCain amendment, said investors could find information about the cost of stock options in the footnotes in corporate financial statements. However, some financial analysts say relegating such information to the footnotes contributed to the development of a speculative bubble in Internet and technology stocks.
Cisco Systems Inc., a Silicon Valley maker of networking equipment, reported operating income of $4.6 billion in the fiscal year that ended in mid-2000. If the cost of options had been reflected in the financial statement, Cisco's operating income would have been $2.74 billion, according to the investment firm Bear Stearns & Co.
Seibel Systems Inc., a software company, reported operating income of $359 million in 2000 but would have shown a $50 million loss if it had to include the expense of stock options, according to the Bear Stearns analysis.
In what amounted to a partisan game of tit for tat, the Democrats' blocking of McCain's amendment followed Republican efforts to defeat Democratic proposals, particularly one that dealt with rules for corporate lawyers.
After Republicans used parliamentary maneuvers to block Democrats' amendments, Assistant Majority Leader Harry M. Reid (D-Nev.) outflanked McCain. As a result, Reid spared senators the potential discomfort of going on record with a vote against the stock option amendment.
Daschle said he was "not adverse" to amendments to strengthen the bill but cautioned against going too far. "I would say this is a very good, strong bill," he said. "And I think we need to pass something that we know can be implemented . . . and expect that perhaps at some point later we may add to it."
Daschle said he believes the corporate accountability bill will pass the Senate "by a large margin," possibly even without dissent, but he expressed misgivings about its fate in negotiations with the House, which has approved a narrower measure. "I'm not as confident about surviving" the House-Senate conference, he said.
Sen. Phil Gramm (R-Tex.) predicted that the bill will change "dramatically" in conference.
"One of the problems with this bill is we've kind of gotten into a feeding frenzy," Enzi said. "I kind of think of Enron as this huge dead carcass," he said, referring to the energy-trading company whose misleading accounting and sudden collapse last year focused Congress's attention on corporate misconduct.
Many lawmakers say Congress should not write accounting rules, such as those concerning stock options. However, in 1994, by a vote of 88 to 9, the Senate passed a nonbinding resolution sponsored by Sen. Joseph I. Lieberman (D-Conn.) urging the Financial Accounting Standards Board, an industry-sponsored group that writes accounting rules, not to require that options be counted as an expense. The board yielded.
The use of stock options became widespread in the 1990s, when hundreds of millions of dollars of them were bestowed on some corporate chiefs. Before the dot-com bubble burst in 2000, many rank-and-file workers viewed them as a ticket to fortune and gladly sacrificed cash compensation for options.
Option grants initially gained currency as a response to investor criticism that executive pay was not tied to performance. In the early 1990s, some investor activists expressed outrage at the payment of millions of dollars to what they considered undeserving executives. In 1993, Congress passed a Clinton administration bill that stopped corporations from taking tax deductions for executive pay packages exceeding $1 million.
Some of the same investor activists now say the end result was executives getting even more outrageous pay. They say stock options can encourage executives to make risky or short-term business decisions to pump up stock prices.
Federal Reserve Chairman Alan Greenspan and billionaire investor Warren Buffett are among those who favor factoring option costs into corporate profits.
McCain noted that his proposal would not prohibit companies from issuing options.
On the other side of the debate, politicians and business leaders say it is difficult to estimate the cost of stock options before they are exercised. Yet companies assign a value to stock options to claim them as tax deductions.
The debate over corporate accountability took a detour early yesterday when Sen. Mitch McConnell (R-Ky.) proposed an amendment to regulate trial lawyers in federal courts -- including those McConnell described as "ambulance chasers who take advantage of grieving families when they are most vulnerable."
McConnell's amendment would have prohibited lawyers from soliciting legal work from victims and their families within 45 days of an accident and would have required them to give clients notice of their fees.
Other senators attacked the amendment as getting in the way of the corporate accountability legislation.
"It doesn't have any place in the accounting reform bill," said Enzi.
The Senate voted to table the amendment.
McConnell brought up his "client's bill of rights" as the Senate was considering an amendment by Sen. John Edwards (D-N.C.) to create new rules for corporate lawyers.
Edwards's amendment would require lawyers who come across credible evidence of wrongdoing to report it to top corporate executives -- and then to notify the board of directors if the executives fail to act.
Shareholders and employees of Enron Corp. sued lawyers who advised the energy-trading company, along with its auditor, Arthur Andersen LLP.
© 2002 The Washington Post Company
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