Investors Need Clear Picture of Profits: Corporations Must Be Required to Count Cost of Stock Options as Expenses

July 24, 2002

Investors Need Clear Picture of Profits: Corporations Must Be Required to Count Cost of Stock Options as Expenses

Statement of Public Citizen President Joan Claybrook

The conferees to the corporate accountability legislation should not meet in private on an issue that intimately affects the lives of so many Americans. The public is outraged about the current corporate crime wave and will be suspicious of any deals cut behind closed doors. A closed conference gives lobbyists the power to secretly and anonymously water down the reforms that are so badly needed. To root out corporate crime, we need sunshine in politics as well as in the boardrooms.

To restore investor confidence, the conferees must strengthen this legislation by slicing away the biggest incentive for corporate officials to cook the books. That incentive is stock options, the favorite vehicle for insiders to loot corporations and rob shareholders of their equity while hiding behind phony profit numbers. If the Congress is serious about cleaning up the systemic corruption infecting the body of Corporate America, stock options must be addressed. The McCain amendment forces companies to count stock options as the drain on corporate profits and shareholder equity that they really are. It should be adopted so that consumers can get an accurate reading of profits and so executives will no longer be rewarded with millions of dollars for creating bogus profits that drive short-term stock prices upward.

Exorbitant stock option packages are the common thread running through all of the corporate scandals that grace the headlines. Enron executives cashed in hundreds of millions before the company collapsed. Other companies, including many that have not been implicated in accounting scams, use these options to award obscene compensation to executives. Larry Ellison, the CEO of Oracle, for example, exercised stock options for a $700 million gain in 2001 ? a year in which his company?s stock fell by 52 percent. Try explaining that to the investing public. In the telecom industry, reported profits in 2001 would have been 23 percent lower if corporations had told the truth about stock options. That is a fraud on the public and it must be stopped.

Congress should take the lead on stock options. SEC Chairman Harvey Pitt said recently that it is no longer a matter of whether stock options should be expensed, but when and how. Just a week ago, the International Accounting Standards Board decided unanimously to require such treatment for stock options and it will be required by 2005 in the European Union and Australia. Some large U.S. companies also have decided on their own to make this change. But it should be done across the board so that investors can accurately compare profits from one company to the next.

The American people are closely watching the congressional poker game. These conferees hold the cards in their hands. It?s time for some honest dealing for a change.

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This statement was delivered at a press conference on Capitol Hill this morning.