Take Action--5 Things You Can Do

Digna Showers worked for Enron for 18 years but found out on December 3, 2001 that she had a half an hour to pack up and leave the building. Her savings in Enron stock, totaling $400,000, money that she counted on for retirement -- would soon be worthless. She later found out that her boss, Enron CEO Ken Lay, had raked in $53 million and cashed out on $123 million in stock options in 2000 as the company approached its downfall, all while he convinced his own employees to hold their Enron stock. [See AFL-CIO, www.aflcio.org/corporateamerica/enron/formerworker_ds.cfm.]

World Com laid off Cara Alcantar on July 3, 2002. Her stock options are now worthless, and WorldCom said it could not pay her severance benefits. Her retirement savings in WorldCom stock is also virtually worthless. "Not only were they not looking out for our interests," Ms. Alcantar told the New York Times in September, 2002, "they were so greedy they made sure the money went into their pockets." [New York Times, Steven Greenhouse, "USA: What Do You Mean 'Us,' Boss?", 9/2/02]

Neither Ken Lay nor Bernie Ebbers has been indicted or sent to jail. Nor have most of the other executives and directors of corporations who cashed out while their corporations cooked the books.

Although they were originally intended to align the interests of management and investors, it is now well recognized that the massive increase in the use of stock options as a form of executive compensation created a huge incentive for senior executives to seek short-term stock market gains, whether or not such a strategy was a sound approach to long-term corporate planning. Stock options have grown from 5 percent of shares outstanding at major companies to 15 percent in the last decade. For top executives the figures are even more obscene. In 1992, options were 27% of median CEO compensation, whereas by 2000, options were 60% of median CEO compensation.

We now know that executives at Enron cooked the books so that they could meet the expectations of investors and analysts, drive the stock price up and ultimately exercise over 1.4 billion dollars in 2000 in stock options before the stock crashed and the company declared bankruptcy. We also know that Enron was only one in an orchard of rotten apples.

It is no wonder that top executives at many companies became so focused on the stock price that they cooked up whatever accounting tricks they could think of to keep profits high and the stock price rising. Others cashed out before their company's stock price dropped. CEO Jeffrey Skilling took home $60 million. At Qwest, chairman Philip Anschutz made $1.9 billion in options and CEO Joe Nacchio made $232 million. At Global Crossing, Gary Winnick cashed in $735 million. At Oracle Corp., CEO Larry Ellison exercised a whopping $706 million in options while his company's stock dropped 50%.

We also now know that stock options fueled an epidemic of fraud and abuse at many major corporations. According to the Financial Times, 208 executives and directors from the 25 largest U.S. companies that filed for bankruptcy protection between January 2001 and July 2002 walked away with gross earnings of $3.3 billion, most of it in the form of revenues from stock sold before the company collapsed. (See "The Barons of Bankruptcy," Financial Times, July 31, 2002.)

Fortune reported that executives and directors of 1,035 corporations whose stock price fell by at least 75 percent from the highs they reached during the bubble years made off with $66 billion. At the 25 corporations where the executives cashed out the most, 466 insiders took a total haul of $23 billion. (Mark Gimein, "The Greedy Bunch," Fortune, September 2, 2002.)

As Senator Levin has said, "Virtually every corporate disaster that has struck in recent years has had a stock option component."

The problems caused by the massive distribution of options to top executives was not remedied by the Sarbanes-Oxley Accounting Reform Act. Financial regulators and other experts have been pressing since the early 1990s to close a loophole in the way corporations are allowed to treat options on their profit-and-loss statements. The companies that use them - especially many high-tech firms and financial services companies - have pushed hard to retain this loophole which lets them avoid counting options as an expense on the books at the time they are issued, though they are deducted from a company's taxes.

This is really a battle for a few executives to preserve enormous compensation packages. While CEOs like to note that more than 90 percent of those who receive options are average employees (10 million employees now have stock options, up from 1 million in 1992), 80% of the value of stock options has been given to the most senior executives. According to the Economist, stock options accounted for 58% of the pay of U.S. CEOs in 2001. That same year, the average CEO earned an outrageous $10.83 million - or 411 times the average worker.

The much touted "global settlement" with the big banks will result in a pittance for shareholders who have lost hundreds of millions of dollars because of corporate crime, fraud and abuse. We need to prevent these outrages from happening again.

Right now there is a battalion of lobbyists working Capitol Hill to stall the reform to expense options. How Congress reacts is a litmus test of how serious decision-makers are about corporate reform.

The expensing of options is recognized by most observers as a modest yet key step toward restoring investor confidence in the markets. The expensing of options is supported by both the current and former chair of the Securities and Exchange Commission, by the business-oriented Conference Board (which at the time of the recommendation included current Treasury Secretary John Snow), the Financial Accounting Standards Board (FASB) and more than 200 corporations who have voluntarily begun to treat options as an expense.

The FASB has been working on a rule that it expects to issue for public comment in October of 2003 which would propose how to expense options. The FASB expects to incorporate all public comment on this proposed rule and issue its final finding around March, 2004.

Many high-tech corporations that are opposed to any expensing of options have begun to lobby Congress to undermine the standards-setting body's efforts. These corporations (led by Intel, Cisco, Netscape, Microsoft, Seibel Systems, Apple and Oracle) have formed the International Employees Stock Option Coalition, an umbrella group that includes such trade associations as TechNet, the Semiconductor Trade Association, the Biotechnology Industry Organization and others, in order to coordinate its efforts on the Hill.

They have succeeded in getting Senator Barbara Boxer (D-Calif.), along with Senators Enzi (R-WY), Allen (R-VA) and Ensign (R-Nev) to introduce S 979, The "Broad-Based Stock Option Plan Transparency Act of 2003" to delay FASB's rule by requiring the SEC to study the issue for three years. (A companion bill, HR 1372, has been introduced by Rep. Dreier (R-Calif.) in the House).

Citizen Works is coordinating a public education campaign to counter these efforts to stall this important reform. Our contacts at FASB and on the Hill say that although they are hearing from constituents concerned that they are not doing enough about the corporate scandals, they haven't heard any specific complaints about stock options abuse.

Expensing of stock options is one of the many unfinished reforms that we can win now.

Support the Campaign Against CEO Greed.

These are five things you can do today:

1) Learn more by reading the fact sheet on executive compensation and stock options.

2) Sign up for the Corporate Reform Weekly today to get a weekly update on corporate reform and action items on this issue. Follow the action items.

3) Write a letter to the editor on CEO greed and stock options. See the sample here:

4) Write to your member of Congress about this issue. They are hearing from the lobbyists but not their constituents. See a sample letter here:

5) Donate now to fund this campaign. We need your help today!

To learn more, go back to the Stock Options Main Page.