[Congressional Record Volume 140, Number 26 (Thursday, March 10, 1994)]
[Senate]
[Page S]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: March 10, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                 FASB NEEDS TO RECONSIDER OPTIONS PLAN

  Mr. KERRY. Mr. President, the Financial Accounting Standards Board, 
which establishes the accounting principles for the private sector in 
this country, is currently in the midst of a major controversy. FASB 
has proposed a rule that will require companies to amortize the value 
of stock options and deduct them off of their earnings statements, with 
the values derived not from current market prices, but from estimates 
of future prices derived by computer models. FASB hearings on the 
subject will begin this week.
  Many of us have been reluctant to wade into this controversy, because 
of our fear of politicizing a process that must aspire to absolute 
clarity and fairness. After all, the day Congress begins devising the 
Generally-Accepted Accounting Principles is the day they become 
Generally Unaccepted Accounting Principles.
  Moreover, FASB's stock option proposal--and the considerable support 
it has received from our colleague from Michigan, Senator Levin--were 
catalyzed by a phenomenon that many of us decried throughout the 1980s, 
the relentless and often-spectacular increases in executive 
compensation and bonuses awarded by companies that were otherwise 
losing money, laying-off workers, and dragging down shareholders.
  Yet, however well-motivated FASB might have been at the start, I am 
now convinced that its effort has run off the rails. FASB's mandate to 
set standards devolves from the Securities and Exchange Commission.
  The SEC has been rather quick to wag a finger at us in Congress, 
warning us against interference in the FASB process.
  Mr. President, I think the time has come for the SEC to start wagging 
its finger in the other direction, and to compel FASB to take another 
approach to stock options.
  I have come to this conclusion for two general reasons: the rule's 
purported benefit to the investing public, and its apparent impact on 
companies. Strictly speaking, FASB's mission is to worry only about the 
first--the benefit of the rule to investors. Those of us in elected 
office must be worried about both.
  I am not an accountant, but I can do figures. I simply cannot see how 
the FASB rule, as proposed, will benefit the investing public.
  Consider, first, that FASB already requires companies to report their 
earnings-per-share based on a total number of shares that includes all 
the stock options they have granted. Consider also that the SEC now 
requires substantial disclosure to shareholders of the total 
compensation and incentives awarded to the top five executives of each 
firm, including their stock options. Companies must also demonstrate 
how compensation and incentives awarded over time compare to the 
company's financial performance and that of comparable firms. Finally, 
I might add this Congress capped the deductibility of executive 
compensation at $1 million as part of last year's budget act. I have to 
believe that the greater part of the stealth has now been removed from 
what had been an excess of stealth compensation.
  Contrast all this with the mechanics of the proposed FASB rule. 
Companies will have to choose from among six computer models to make 
estimates of the future value of their stock. It seems to me that 
requiring companies to choose between models is, by its nature, a 
requirement that introduces uncertainty into the financial reporting 
process. Then again, even FASB now concedes that the models can produce 
significant variations in expected values from company to company--yet 
another element of uncertainty.
  Thus, it is not clear to me what the investing public gains from the 
FASB rule. Clearly, in granting stock options companies grant something 
that must have value, although they do not represent a cash expense, 
they are not tradable, and ultimately they have value only if the 
company's stock price goes up--in which case ordinary shareholders 
benefit along with option-holders. Stock options must have value, but 
is the FASB rule the way to establish that value?
  In the absence of a clear answer to that question from FASB, we in 
the Congress have more than enough right to ask how the rule will 
affect companies and their workers. Here I fear that, while the rule is 
aimed at larger companies that abused options in years past, it is 
about to hit smaller companies that are creating new jobs in States 
like my own.
  Mr. President, in my State, just as in Silicon Valley, stock options 
serve as a fundamental means of financing the start-up of new 
companies. Employees forego salary and benefits in return for stock 
options. In doing so they bind themselves to the firm for a period of 
several years, and commit themselves to the goal of all investors: the 
company's success. Stock options allow the company to reserve 
critically-needed cash for other vital needs of a new or emerging 
company: for research and development, for marketing, and for getting a 
new product out the door.
  There is no more compelling testimony to the damage the FASB rule 
will do to these companies than the testimony of the venture capital 
community. After all, apart from company founders it is the venture 
capitalists who provide all or most of the ownership capital for 
emerging companies, so it is the venture capitalists who are giving 
away part of the store when they grant stock options. The venture 
capitalists tell me that the FASB rule will be granted less often, 
which will make recruitment of talent more difficult, and which will 
make the cost of starting a company rise.
  Now, this might be acceptable if some greater public purpose were 
served by the FASB rule, such as the provision of a clear benefit to 
the investing public. But as I noted previously, it is difficult to 
find such a benefit in the current FASB proposal.
  To the contrary, the evidence seems compelling that the FASB rule 
will disproportionately affect start-ups, smaller growth companies, and 
companies in new or break-through markets--that is, precisely the 
companies we are relying on in Massachusetts to make up for the 
thousands of jobs lost over the last five years. Companies in larger, 
more-established, and mature markets will be much less affected, 
because they have financial and stock market track records that will be 
more easily digested by these new stock option pricing models run by 
computer.
  Mr. President, I am proud of the steps this Congress has taken to 
support new companies and new jobs during the last two years, and was 
glad to be able to play a role in taking those steps. We have cut 
capital gains taxes for investments in new companies, we have reformed 
the Small Business Investment Corporation Act, we have strengthened and 
expanded the Small Business Innovation Research program, we have 
created the Advanced Technology Program, we have increased expensing 
provisions for small business taxpayers, and more. This week we will 
take another giant step forward with what I expect to be the approval 
of the National Competitiveness Act.
  The FASB proposal as it currently stands poses a real threat to these 
accomplishments, and all in the name of a standard of accounting purity 
that FASB has great difficulty explaining in simple English. As I have 
stated before, Congress should be in no hurry to dictate to FASB, but 
unless FASB can come up with a better and more defensible proposal on 
stock options, the Securities and Exchange Commission should exercise 
the authority it manifestly possesses and override FASB on its proposed 
stock option rule.

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