[Congressional Record Volume 148, Number 106 (Tuesday, July 30, 2002)]
[Senate]
[Pages S7581-S7582]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. WYDEN:
  S. 2822. A bill to prevent publicly traded corporations from issuing 
stock options to top management in a manner that is detrimental to the 
long-term interests of shareholders; to the Committee on Banking, 
Housing, and Urban Affairs.
  Mr. WYDEN. Mr. President, it seems like every morning, Americans wake 
up to another headline about the collapse of a big United States 
corporation. The failures have devastated the savings of millions of 
hardworking Americans, savings they were depending on for their 
retirement, or to pay for their kids' college education.
  When the smoke clears and the fall-out settles, the issue of stock 
options comes to the fore. Report after report details the massive 
fortunes amassed by the directors and top executives of so many of the 
companies that are at the center of the storm. So often, these 
executives were granted huge stock option packages, which they cashed 
out quickly for multimillion dollar payouts shortly before the company 
went over the brink.
  The landmark legislation that the Senate passed unanimously last 
week, and which I strongly supported, will curb significant corporate 
abuses and accounting scandals, but it does not touch the issues 
surrounding stock options. It is time the Senate acted to do so. 
Therefore, today I am introducing the Prevention of Stock Option Abuse 
Act.
  There is no question in my mind that some companies have abused stock 
options, using them as a vehicle for funneling large amounts of wealth 
to top executives. What's more, options have been granted in ways that 
fail to serve their intended purpose of aligning the interests of 
management with the long-term interests of the company. Instead, 
several of the massive option grants have created perverse incentives, 
enabling top executives to get fabulously rich by pumping up the 
company's short-term share price. The tactics they use to do so may 
jeopardize the company's long-term financial health, but by the time 
the long term impact is felt, the executives have already cashed out 
and left the firm.
  When an executive develops a big personal stake in options, it can 
lead to a big conflict of interest. Too often, the company's long-term 
interests take a back seat to the executive's desire for personal 
reasons to boost the short-

[[Page S7582]]

term share price. When the betting is between massaging the numbers to 
``manage'' quarterly profit projections and improving the quality of 
the business through such things as R&D investments, short-term 
profits, and the value of executive stock options, can be the odds-on 
favorite.
  But the abuse of stock options in the executive suite should not be 
taken as an indictment of stock options in general. I remain convinced 
that stock option plans, as long as they are broad-based plans that 
extend to rank-and-file employees as well as CEOs, can play a very 
important role in our economy. They can enable corporations to attract 
and retain good workers and top talent. And they can improve motivation 
and productivity, by giving employees a strong personal interest in the 
long-term success of the corporation.
  Therefore, the legislation I am introducing today aims to stop the 
abuses at the top while not gutting options that are so vital to rank-
and-file workers. It focuses on restoring the link between the long-
term interests of the company and those of senior management, and 
giving shareholders knowledge about and control over the stock options 
of corporate leaders.
  Specifically, the bill would direct the Securities and Exchange 
Commission to issue rules, applicable to all publicly traded companies, 
in three main areas.
  First, to increase shareholder influence and oversight with respect 
to grants of stock options, the bill calls for rules requiring 
shareholder approval of stock option plans. This would help prevent the 
all too common ``I'll-scratch-your-back-if-you-scratch-mine'' culture 
of clubby directors and top executives voting each other huge option 
packages with little or no shareholder input.
  Second, the bill contains tough provisions to ensure that stock 
options will provide incentives for corporate officers and directors to 
act in the best long-term interests of their corporations, rather than 
incentives to stimulate short-term run-ups in the stock price. It would 
do this by establishing substantial vesting periods for options and 
holding periods for stock shares, so that top executives do not have 
the ability to quickly cash out and jump ship.
  The holding period would be multi-tiered. Directors and officers 
would be allowed to sell up to one quarter of their shares six months 
after acquiring them, to permit a degree of diversification or to meet 
their current financial needs. But for the majority, they would be 
required to wait at least three years. And they would be required to 
hold on to some of their stock until at least six months after leaving 
the company.
  Third, and finally, to improve the transparency of stock option 
grants to directors and officers, the bill calls for rules to provide 
better and more frequent information to shareholders and investors. 
Shareholders deserve more information than that contained in the 
average footnote. Specifically, the bill would require stock option 
information to be reported quarterly, not just annually, and broken out 
into a separate, easy-to-find section in each company's public SEC 
filings.
  To date, there have been two paths offered to deal with the issue of 
stock options. Some think the problem is so severe that options should 
be pared back across the board and that Congress should dictate new 
accounting rules for them. Others say that business as usual should be 
the order of the day, and that no immediate action is necessary.
  The bill that I have introduced today seeks to lay out a third path. 
It offers a way to ensure that broad-based stock options can continue 
to be a useful tool for deserving workers, shareholders and the economy 
as a whole, while still curbing abuses by those in the executive suites 
whose conduct is over the line. I don't claim that the bill is the 
complete solution in its present form, but I believe it offers a strong 
framework for a new approach, and I look forward to working with my 
colleagues and others to refine and improve it as it moves through the 
legislative process.
  The job of cleaning up corporate corruption will not be complete 
until Congress acts to correct the abuse of stock options. I hope my 
colleagues will join me in this effort to put tough new rules in place 
that will retain broad-based stock options for workers and curb their 
abuse by top management.
                                 ______