Saturday, May 04, 2002

Stop hiding those stock options, Greenspan says

By Martin Crutsinger
The Associated Press

        WASHINGTON — The lucrative stock options that showered millions of dollars on top corporate executives the past decade need to be treated as a business expense even though that accounting change could significantly reduce a corporation's reported profits, Federal Reserve Chairman Alan Greenspan said Friday.

        Mr. Greenspan, in remarks to a financial markets conference in Atlanta, continued his campaign to get accounting regulators to force a change in the way companies deal with options on their books.

        His proposal represents a rare break with the Bush administration, which has sided with corpo rate executives in opposing the accounting change.

        Mr. Greenspan's proposal is the major recommendation he has made in response to the collapse of Enron Corp., whose top executives made millions by cashing in their stock options before the company's stock collapsed, wiping out retirement benefits of thousands of the company's rank-and-file workers.

        Mr. Greenspan said under the current practice, which does not require companies to reflect the true cost of options in their annual reports, investors will continue to receive inaccurate information on the financial status of a company.

        “The failure to expense stock-option grants has introduced a significant distortion in reported earnings and one that has grown with the increasing prevalence of this form of compensation,” Mr. Greenspan said in a speech to a financial-markets conference convened by the Federal Reserve Bank of Atlanta.

        In his remarks, Mr. Greenspan expanded on arguments he made in late March that the current practice of not counting stock options as a business expense was inflating corporate profits and giving investors a false impression of the true value of the company.

        His campaign for changes is at odds with the administration. President Bush said in an April newspaper interview, “while I hate to get in a debate” with Mr. Greenspan, he did not believe stock options should be treated as a business expense.

        That puts the administration in line with corporate executives, who are lining up in force to fight legislation sponsored by Sen. Carl Levin, D-Mich., which would make such a change.

        The change would have a huge impact on U.S. companies. The Fed has estimated that annual corporate earnings growth between 1995 and 2000 was 2.5 percentage points higher for big companies because they did not have to count options as expense subtracting from their earnings.

        Stock options give employees the right to buy a company's stock, in the future, at a pre-determined price. The more the stock price rises, the more valuable the stock option becomes.

        Mr. Greenspan said the failure to treat the options as a business expense was depriving investors of a true picture of the claims outstanding against a company.

        “The seemingly narrow accounting matter of option expensing is, in fact, critically import for the accurate representation of corporate performance,” he said. “And accurate accounting, in turn, is central to the functioning of free-market capitalism — the system that has brought such high prosperity to our country.”

        Mr. Greenspan said he would prefer this be changed through decisions of the regulatory groups that set standards for the accounting industry rather than legislation in Congress.

        He also argued that companies should change the way they grant options to tie their value not just to how the company's stock price is doing but to some measurement of how the company is performing relative to its competitors.

        He said such a change would limit the temptation of executives to make questionable business judgments simply to drive up the price of the company's stock, an allegation that has been made against former Enron executives.

        Mr. Greenspan said nothing about the current status of the economy or the future direction of interest rates in his remarks.


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