Bloomberg: SEC Allows Shareholders to Vote on Treating Options as Expenses

Bloomberg: SEC Allows Shareholders to Vote on Treating Options as Expenses

December 12, 2002

The Securities and Exchange Commission decided that shareholders should be able to vote on treating stock options as an expense in income statements, a boon for corporate-governance activists preparing for the 2003 proxy season.

The SEC told National Semiconductor Corp., a chipmaker for mobile phones and computers, that it can't exclude a proposal to treat options as a cost on grounds it's ordinary business, which can be barred from annual-meeting agendas.

The decision by the full SEC reverses the conclusion of an SEC division that initially backed the company.

"There are plenty of companies where CFOs and CEOs will be scared to death of this and any step that takes them closer to making stock options an expense," said Roman Weil, an accounting professor at the University of Chicago.

The SEC's decision gives momentum to a movement to change the way companies account for stock options, which have become a target following corporate scandals at Enron Corp., WorldCom Inc. and other companies. Investors including billionaire Warren Buffett say omitting options from the bottom line lets companies overstate profit and encourages executives to inflate results.

Current U.S. accounting rules require companies only to include an estimate of option costs in footnotes to income statements in annual reports. Moving that expense to income statements could erase millions of dollars from corporate earnings.

Labor unions are among shareholders who intend to press proposals on expensing stock options early next year, when most companies hold their annual meetings. The International Brotherhood of Carpenters, the International Brotherhood of Teamsters and the American Federation of State, County and Municipal Employees are preparing proposals.

Hundreds of Companies

"We can now put this issue forward in an aggressive way at hundreds of companies," said Ed Durkin of the carpenters' union, which plans to take the proposal to Bear Stearns Cos., Starbucks Corp. and Eli Lilly & Co.

The carpenters' union appealed a July "no action" letter from the SEC, informing National Semiconductor the commission wouldn't initiate an enforcement action if the company excluded the options proposal from its proxy. In October, when the appeal was still pending, National Semiconductor held its annual meeting and didn't include the proposal on its agenda.

In a response to the union dated Dec. 6, the SEC wrote that "in the future, we will not treat shareholder proposals requesting the expensing of stock options as relating to ordinary business matters." The SEC also said that National Semiconductor "relied in good faith" on its initial decision.

Pitt's Support

Comments by departing SEC Chairman Harvey Pitt in September foreshadowed the commission's latest decision. Treating options as an expense "is a topic of major concern to people," and shareholders should be able to vote on the issue, he said. Pitt resigned in November, and President George W. Bush today nominated William Donaldson, a co-founder of investment bank Donaldson, Lufkin & Jenrette Inc., to replace him.

Coca-Cola Co., Home Depot Inc., Wal-Mart Stores Inc. and more than 100 other U.S. companies have said they plan to voluntarily count the cost of stock options in their income statements.

Intel Corp., Cisco Systems Inc. and other technology-oriented companies, where options are a large part of compensation, have said they will disclose some information on options quarterly rather than annually, as required now.

Such information includes how many options have been acquired or exercised by executives. Those companies continue to oppose treating options as a cost.

"It turns a potential benefit for employees into a paper deficit for companies," National Semiconductor spokesman Jeff Weir said. "If options are expensed or gotten rid of, who benefits?"

The U.S. accounting rulemaking body, the Financial Accounting Standards Board, will require companies to disclose estimates of option costs quarterly, starting next year. Meanwhile, the International Accounting Standards Board is developing rules that will force companies to treat the cost of options as an expense.

The article originally appeared inBloomberg News on December 10, 2002 written by Laura Smitherman.