Stock Options Go Local

By James Gentry
November 19, 2004 05:29 PM

Shortly before Congress returned from its summer recess, William Donaldson, chairman of the Securities and Exchange Commission, asked the Senate to stay out of the debate over whether stock options should be expensed or not.

 

Donaldson sent 16 senators a letter that said the Financial Accounting Standard Board's independence is endangered by a recently passed House bill, which would block any FASB proposals that require public companies to expense the value of all stock options from their reported earnings on the income statement. (Interestingly, you can already find out how options affect a company's net income by reading the footnotes of the 10-K. But such FASB proposals would make the impact much more obvious.)

 

And while this might look like the classic national story involving complex concepts beyond the concern of the average local reader, it's not. That's because Donaldson's letter was prompted by a House vote that had overwhelming support, despite what many see as some awfully faulty logic.

 

Representatives from states across the nation -- states where stock options are almost never considered when entrepreneurs create a new company -- supported the bill, 312 to 111. The legislation, called the Stock Option Accounting Reform Act (HR 3574), was introduced by Rep. Richard H. Baker, R-La., and had 131 co-sponsors -- meaning that representatives from most states signed on as sponsors. 

 

Essentially, the bill's supporters argue that FASB's effort will stifle entrepreneurial activity and options are necessary to attract talented workers. Not surprisingly, groups and companies from Silicon Valley, which is notoriously addicted to options, were the force behind the effort to pass the bill.

 

Since I teach at the University of Kansas in Lawrence, I decided to explore the local angle from the perspective of Kansas and Missouri. All four Kansas representatives voted for the measure, as did eight of Missouri's nine representatives. The only negative Missouri vote was cast by Rep. Jo Ann Emerson, a Republican from Cape Girardeau, primarily an agricultural area.

 

Kansas and Missouri have two major metropolitan areas -- Kansas City and St. Louis -- and a mid-sized city in Wichita. Both states are heavily agricultural.

 

To find out what many entrepreneurs are thinking when they start a company, I called the University of Kansas Small Business Development Center. "In the majority of situations we deal with," says Curt Clinkinbeard, regional director, "people wanting to start or grow a business are trying to develop a growth strategy, just a strategic approach into business, and motivating and retaining top talent. The average entrepreneur is focused simply on the basics of blocking and tackling."

 

When I asked him how often people come to him and ask about using options in starting their companies, Clinkinbeard said, "Never."

 

Next, I turned to Rep. Dennis Moore, a Democrat who represents the district in which I live. After agreeing that entrepreneurs in Kansas are not driven by options when they start businesses, an aide to Moore said the congressman sees this as a national issue, one that will affect the national economy. "He is concerned that if we impact options as FASB has proposed, it will have broader impact," the aide said.

 

The aide said that although FASB has worked on the proposal for years, Moore was concerned that its economic impact had not been given adequate consideration. Hence, the bill requires that the Commerce and Labor departments conduct economic impact studies. Proponents of the bill also did not like how FASB proposes options should be valued.

 

In addition, the bill requires companies to count as expenses only those options they grant their top five executives. However, The Wall Street Journal reported in June that according to the "proxy statements of some of the biggest options issuers," "most of these companies give only a tiny percentage of all their options to their top five executives."  That means the House bill would exempt the vast majority of options that companies award.

 

The 312 representatives opposing FASB find themselves arrayed squarely against some of the country's leading business minds, including Warren Buffett and Fed Chairman Alan Greenspan. According to The Motley Fool, Buffett once said, "If options aren't a form of compensation, what are they? And if compensation isn't an expense, what is it? And if expenses shouldn't go into the calculation of earnings, where in the world should they go?"

 

Silicon Valley is driving the House legislation. In July, columnist Chris Nolan wrote in eWEEK.com that TechNet lobbyists, going under the name International Employee Stock Option Coalition and working with House Speaker Tom DeLay, R-Texas, have become much more effective in pushing legislation.

 

Of course, it doesn't hurt when you are funded by the National Venture Capital Association, the Business Roundtable, the NASDAQ, the Semiconductor Industry Association and corporations such as Aligent Technology, Cisco Systems, Intel, Qualcomm and Sun Microsystems. Only months earlier, the measure was given little chance of passage.

 

Since the lobbying was so effective, I asked Rep. Moore's aide about it. "There's been more lobbying on some things and less on others," he said, "but you could say the lobbying was very intense on this."

 

Since lobbying means that money changed hands, I decided to see if Rep. Moore, or any other member of Congress, had received funds from the TechNet lobbyists. My search was fruitless -- apparently those contributions haven't been filed yet. If I were writing a story on this, I would be checking these records periodically.

 

Neither side of the issue is free from hyperbole. Mark Heesen, president of the National Venture Capital Association, said in a press release, "The FASB's proposal reflects a blatant disregard for the challenges that small businesses will face in attempts to comply with this proposed standard."

 

By contrast, under the headline, "How the House of Representatives is Defrauding Small Investors," investment consultant Joshua Kennon wrote on the About.com website, "The bipartisan measure is, perhaps, the most deceitful and unethical piece of legislation passed within recent decades."

 

The rule has generated a lot of interest. By September, FASB had received nearly 14,000 comment letters on the proposal.

 

Many believe the measure has little chance in the Senate. Richard Shelby, R-Ala., and Peter Fitzgerald, R-Ill., are adamantly opposed to any interference with FASB. And Shelby is the chairman of the Senate Banking Committee, which will handle the bill. Fitzgerald recently issued a heated criticism of the bill on PRNewswire.

 

 

If you are interested in developing a story on this issue, here are some starting points:

 

* To find the basics on this issue, you can start with www.house.gov, where you can find a link to your representative's site and might find comments on HR 3574. You can also find a link to Thomas, which will take you to links about the legislation, its co-sponsors and how your representative voted. It will also link to the full text of the bill, which you should read before writing this story since I have simplified what is fairly complex legislation.

 

* To find how lobbyists have spread around their largesse, you can start with www.fec.gov. Thanks to my colleague, Assistant Professor Kristie Swain, here are several other sites on campaign contributions: Political Money Line (www.tray.com/fecinfo/), Follow the Money (www.followthemoney.org), Open Secrets (www.opensecrets.org) and The Money Map (www.fundrace.org/moneymap.php).

 

If you write a story on this issue, please let me know about your experience. You can reach me at jgentry@ku.edu.

 

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Copyright © 2008 Donald W. Reynolds National Center for Business Journalism