The Corporate Reform Weekly
May 4, 2004
Vol. III, #16
In Short
In Washington
1. Battle over stock options continues to heat up in Washington
In Business
Scandal
2. Banker Quattrone convicted of obstructing justice
Executive Pay
3. High pay packages don’t match performance, study says
Corporate Governance
4. OECD agrees to revised Principles of Corporate Governance
This Week’s Action Item
Tell Congress to stand up for honest accounting and allow FASB to expense options!
In Washington
1. Battle over stock options continues to heat up in Washington
The battle over stock options continues in Washington, as tech companies are racing to line up more support for HR 3574/S. 1890, a bill that would essentially prevent the Financial Accounting Standards Board (FASB) from enacting a new rule that would require companies to count the cost of stock options as an expense. The rule is open for public comment until June 30.
HR 3574 has 107 co-sponsors (including Speaker of the House J. Dennis Hastert and Minority Leader Nancy Pelosi) and a number of lawmakers are making disingenuous assertions that expensing options will hurt small businesses and rank-and-file employees.
But at least one prominent opponent of expensing options last week signaled that he thinks that the new rules to expense options will likely go forward. Speaking to a Forum on Technology and Innovation policy workshop, Sen. John Ensign (R-Nev.) said, “We will unfortunately lose this battle, unless the house pulls off a miracle…I was much more optimistic three months ago.” Still, the tech industry is not close to giving up.
Meanwhile, at a senate hearing last week, FASB chairman Robert Herz said that, “The Board believes the proposal will significantly improve the financial reporting for equity-based compensation transactions in many ways, including eliminating the existing exception for so-called fixed plan employee stock options, which are the only form of equity-based compensation that is not currently required to be reported as an expense in financial statements.”
Alan Greenspan has also testified that he believes stock options should be expensed, noting that “it would be a bad mistake for Congress to impede FASB." And as Senator Levin (D-Mich.) has noted, Enron “probably could not have happened but for the role of stock options.”
Meanwhile, at least 576 companies are expensing options on their own, and last week a majority of shareholders at both Wells Fargo and IBM supported shareholder proposals to require their companies to expense options.
For full details on the proposal to expense stock options, see: http://www.fasb.org/
To view last week’s hearing on stock options before the Committee on Small Business and Entrepreneurship, see: http://sbc.senate.gov/hearings/108hrgs.html
To take action, see this week’s action item
In Business
Scandal
2. Banker Quattrone convicted of obstructing justice
Former Credit Suisse First Boston banker Frank Quattrone was convicted on Monday of obstructing a federal investigation into hot technology stock offerings by sending an e-mail to several hundred employees directing them to “clean up those files.”
The jury delivered the verdict after just seven hours of deliberation in the case. The case was a retrial of a case brought last October by government prosecutors. Last time, it ended in a hung jury. This time, Quattrone, who became famous for being at the center of the technology boom, could face two years in prison when he is sentenced in September.
At issue in the case was whether Quattrone’s e-mail was in direct response to the news that federal investigators were probing IPO allocation practices at CSFB. Government prosecutors tried to show that Quattrone knew about the investigation and was intending to destroy incriminating files. Quattrone's lawyers tried to show that Quattrone was just reminding employees of office policy, completely unaware that the federal investigation could implicate his department.
For more, see: “Wall St. Banker Is Found Guilty of Obstruction” by Andrew Ross Sorkin of the New York Times, http://www.nytimes.com/2004/05/04/business/04STAR.html
Executive Pay
3. High pay packages don’t match performance, study says
Though “pay for performance” may be the rhetoric of corporate America, a disturbing number of companies are still paying executives way too much for way too little, according to Glass Lewis, a proxy research firm that analyzed proxy filings for USA Today.
“We have been surprised by the degree to which pay at many firms continues to be disconnected from performance,” Glass Lewis CEO Greg Taxin told USA Today. “Poor-performing executives should not be rewarded with gobs of shareholders’ money.”
For example, at Schering-Plough, the five highest paid executives received $28 million last year, even though the firm lost $92 million. At Qwest, meanwhile, the management team earned $20.5 million (higher than the median pay for 34 telecom rivals), even though Qwest lost $1.3 billion last year and the stock fell by 14 percent.
For more, see: “Pay, performance don’t always add up,” by Edward Iwata and Barbara Hansen of USA Today: http://www.usatoday.com/money/companies/management/2004-04-30-exec-pay_x.htm
Corporate Governance
4. OECD agrees to revised Principles of Corporate Governance
The 30 OECD member nations have approved a new version of the OECD’s Principles of Corporate Governance that strengthen the regulatory framework and work to make corporations more accountable to their shareholders.
“The revised Principles emphasize the importance of a regulatory framework in corporate governance that promotes efficient markets, facilitates effective enforcement and clearly defines the responsibilities between different supervisory, regulatory and enforcement authorities,” said Veronique Ingram, Chair of the OECD Steering Group on Corporate Governance. “They also emphasize the need to ensure transparent lines of management responsibility within companies so as to make boards and management truly accountable."
Among the principles:
· The rights of investors must be strengthened. Shareholders should be able to remove board members and participate effectively in the nomination and election processes; They should be able to make their views known about executive and board remuneration policy and any equity component should be subject to their approval.
· Restrictions on consultations between shareholders about their voting intentions should be eased to reduce the cost of informed ownership.
· The principle covering board independence and objectivity has been extended to avoid conflicts of interest and to cover situations characterized by block and controlling shareholders, as well as the board's responsibility for oversight of internal control systems covering financial reporting.
See: “OECD Countries Agree To New Corporate Governance Principles,” OECD Press Release
http://www.oecd.org/document/22/0,2340,en_2649_201185_31558102_1_1_1_1,00.html
This Week’s Action Item
Tell Congress to stand up for honest accounting and allow FASB to expense options!
Now that the Financial Accounting Standards Board (FASB) has issued its proposal for accounting for stock options, the high-tech industry is desperately trying to block the FASB from implementing a rule that would require options to be expensed.
Their strategy is to get a bill passed (HR 3574 in the House, S 1890 in the Senate) that would require the SEC to study the economic impact of expensing stock options for three years, effectively blocking the FASB from requiring options to be expensed. The bill strikes a crushing blow at the independence of FASB by letting a handful of tech-company lobbyists use their political influence to keep open a loophole that allows for dishonest and misleading accounting.
High-tech lobbyists have won the support of House Speaker J. Dennis Hastert (R-Ill.) as well as minority leader Nancy Pelosi (D-Calif.) and HR 3574 is gaining momentum in the House. Though the Senate companion bill (S. 1890) is not gaining as much support, there is a good possibility it could get tacked onto a bill as an amendment. If both bills pass, we will have lost the battle for honest accounting.
These bills may move forward because members of Congress are being bombarded by high-tech industry lobbyists. They need to hear from citizens and small investors.
That is why it is essential that you contact your Senators and your Representative today and tell them to stand up against more Enron-style accounting. Tell them that you are counting on them to support FASB’s plan to require stock options to be expensed.
For a sample letter to your Representative on HR 3574: http://www.citizenworks.org/corp/options/congressletter3574.php
For a sample letter to your Senators or S 1890: http://www.citizenworks.org/corp/options/congressletter1890.php
For talking points, see: http://www.citizenworks.org/corp/options/s1890-talkingpts.php
For full details on the proposal to expense stock options, see: http://www.fasb.org/
For a complete resource on Stock Options: http://www.citizenworks.org/corp/options/options-main.php
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News summaries based on original reports in other publications are prepared by Citizen Works staff and are not created, sponsored, approved or endorsed by the publications to which the original reports are attributed.
