[Congressional Record Volume 149, Number 64 (Thursday, May 1, 2003)]
[Senate]
[Pages S5670-S5672]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. ENSIGN (for himself, Mrs. Boxer, Ms. Cantwell, Mr. Crapo, 
        Mr. Craig, Mr. Allen, Mrs. Murray, Mrs. Feinstein, Mr. Reid, 
        Mr. Allard, Mr. Burns, Mr. Warner, Mr. Bennett, Mr. Smith, Ms. 
        Stabenow, and Mr. Coleman):
  S. 979. A bill to direct the Securities and Exchange Commission to 
require enhanced disclosures of employee stock options, to require a 
study on the economic impact of broad-based employee stock options 
plans, and for other purposes; to the Committee on Banking, Housing, 
and Urban Affairs.
  Mr. ENSIGN. Mr. President, I rise today, along with my good friend, 
the junior Senator from California, to introduce legislation on an 
issue that could have a significant impact on the economy.
  The financial scandals which occurred last year at Enron, WorldCom, 
and other corporations rocked our financial markets and greatly 
diminished investor confidence in this country. In response to abuses 
by a few high-profile corporate executives, Congress passed the 
Sarbanes-Oxley Corporate Responsibility Act, which closed loopholes 
that led to those scandals and sought to restore investor confidence in 
our markets.
  However, in the wake of those scandals, I believe that stock options 
have been incorrectly equated with abuse.
  Stock option plans reflect America's best business values--the 
willingness to take risks, the vision to develop new entrepreneurial 
companies and technologies, and a way to broaden ownership and 
participation among all employees.
  Last week, the Financial Accounting Standards Board made a tentative 
decision to mandate the expensing of stock options. This would 
effectively kill broad-based stock option plans which are used by many 
high-growth, entrepreneurial companies. Such board-based plans 
distribute options to rank-and-file employees, not just to senior 
executives. This is a very different approach than that used by 
companies associated with the scandals of last year.
  This issue was brought to my attention by a couple hundred chief 
executive officers and leaders in the high-tech world. This is their 
No. 1 issue because, when they are properly structured, stock options 
are valuable incentives for productivity and growth. They also help 
startup companies recruit and retain workers--an essential tool in a 
struggling economy.
  I think it is absolutely ludicrous that we would risk destroying 
growth when there isn't even a workable model available to accurately 
expense stock options. Not only is the plan wrong, it is not doable.
  The legislation that we are introducing today would provide 
shareholders with accurate information

[[Page S5671]]

about a company's use of stock options, while also preserving this 
critical tool for all company employees. It would enhance the 
availability of financial reporting by requiring the SEC to take very 
specific steps to give shareholders and investors the important 
financial information they need.
  Additionally, this bill places a 3-year moratorium on the mandatory 
expensing of stock options. This will allow the Department of Commerce 
to take a very detailed look at the negative impact that mandating 
expensing of stock options could have on our economy.
  It is important that we do not react to the corporate scandals of 
last year by stifling this vital tool for economic growth. It would be 
bad for the economy, bad for workers in this country, and bad for 
potential investors.
  Mr. President, before I yield the floor, I would like to thank the 
Senator from California, Mrs. Boxer, for her hard work on this issue. I 
would also like to recognize and thank my colleagues who have signed on 
in support of this bill, Senators George Allen, Mike Crapo, Larry 
Craig, Maria Cantwell, Patty Murray, Dianne Feinstein, Harry Reid, 
Wayne Allard, Conrad Burns, Gordon Smith, Robert Bennett and John 
Warner.
  I yield the floor.
  I ask unanimous consent that the text of the bill be printed in the 
Record in the appropriate place.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                 S. 979

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

        This Act may be cited as the ``Broad-Based Stock Option 
     Plan Transparency Act of 2003''.

     SEC. 2. CONGRESSIONAL FINDINGS.

        Congress finds that--
       (1) innovation and entrepreneurship, particularly in the 
     high technology industry, helped propel the economic growth 
     of the 1990s, and will continue to be the essential building 
     blocks of economic growth in the 21st century;
       (2) broad-based employee stock option plans enable 
     entrepreneurs and corporations to attract quality workers, to 
     incentivize worker innovation, and to stimulate productivity, 
     which in turn increase shareholder value;
       (3) broad-based employee stock options plans that expand 
     corporate ownership to rank-and-file employees spur capital 
     formation, benefit workers, and improve corporate performance 
     to the benefit of investors and the economy;
       (4) concerns raised about the impact of employee stock 
     option plans on shareholder value raise legitimate issues 
     relevant to the current level of disclosure and transparency 
     of those plans to current and potential investors; and
       (5) investors deserve to have accurate, reliable, and 
     meaningful information about the existence of outstanding 
     employee stock options and their impact on the share value of 
     a going concern.

     SEC. 3. IMPROVED EMPLOYEE STOCK OPTION TRANSPARENCY AND 
                   REPORTING DISCLOSURES.

       (a) Enhanced Disclosures Required.--Not later than 180 days 
     after the date of enactment of this Act, the Securities and 
     Exchange Commission (in this Act referred to as the 
     ``Commission'') shall, by rule, require, for each company 
     required to file periodic reports under section 13(a) or 
     15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m, 
     78o(d)), that such reports include detailed information 
     regarding stock option plans, stock purchase plans, and other 
     arrangements involving an employee acquisition of an equity 
     interest in the company, particularly with respect to the 
     dilutive effect of such plans, including--
       (1) a discussion, written in ``plain English'' (in 
     accordance with the Plain English Handbook published by the 
     Office of Investor Education and Assistance of the 
     Commission), of the dilutive effect of stock option plans, 
     including tables or graphic illustrations of such dilutive 
     effects;
       (2) expanded disclosure of the dilutive effect of employee 
     stock options on the earnings per share number of the 
     company;
       (3) prominent placement and increased comparability of all 
     stock option related information; and
       (4) a summary of the stock options granted to the 5 most 
     highly compensated executive officers of the company, 
     including any outstanding stock options of those officers.
       (b) Equity Interest.--As used in this section, the term 
     ``equity interest'' includes common stock, preferred stock, 
     stock appreciation rights, phantom stock, and any other 
     security that replicates the investment characteristics of 
     such securities, and any right or option to acquire any such 
     security.

     SEC. 4. EVALUATION OF EMPLOYEE STOCK OPTION PLANS 
                   TRANSPARENCY AND REPORTING DISCLOSURES AND 
                   REPORT TO CONGRESS.

       (a) Study and Report.--
       (1) Study.--During the 3-year period following the date of 
     issuance of a final rule under section 3(a), the Commission 
     shall conduct a study of the effectiveness of the enhanced 
     disclosures required by section 3 in increasing transparency 
     to current and potential investors.
       (2) Report.--Not later than 180 days after the end of the 
     3-year period referred to in paragraph (1), the Commission 
     shall transmit a report of the results of the study conducted 
     under paragraph (1) to the Committee on Financial Services of 
     the House of Representatives and the Committee on Banking, 
     Housing, and Urban Affairs of the Senate.
       (b) Moratorium on New Accounting Standards Related to Stock 
     Options.--During the period beginning on the date of 
     enactment of this Act and ending 60 days after the date of 
     transmission of the report required under subsection (a)(2), 
     the Commission shall not recognize as generally accepted 
     accounting principles for purposes of enforcing the 
     securities laws any accounting standards related to the 
     treatment of stock options that the Commission did not 
     recognize for that purpose before April 1, 2003.

     SEC. 5. STUDY ON THE ECONOMIC IMPACT OF BROAD-BASED EMPLOYEE 
                   STOCK OPTION PLANS AND REPORT TO CONGRESS.

       (a) Study.--
       (1) In general.--The Secretary of Commerce shall conduct a 
     study and analysis of broad-based employee stock option 
     plans, particularly in the high technology and any other high 
     growth industries.
       (2) Content.--The study and analysis required by paragraph 
     (1) shall include an examination of--
       (A) the impact of such plans on expanding employee 
     corporate ownership to workers at a wide-range of income 
     levels, with a particular focus on rank-and-file employees;
       (B) the role of such plans in the recruitment and retention 
     of skilled workers; and
       (C) the role of such plans in stimulating research and 
     innovation;
       (D) the impact of such plans on the economic growth of the 
     United States; and
       (E) the role of such plans in strengthening the 
     international competitiveness of companies organized under 
     the laws of the United States.
       (b) Report.--Not later than 1 year after the date of 
     enactment of this Act, the Secretary of Commerce shall submit 
     a report on the study and analysis required by subsection (a) 
     to--
       (1) the Committee on Energy and Commerce and the Committee 
     on Financial Services of the House of Representatives; and
       (2) the Committee on Commerce, Science, and Transportation 
     and the Committee on Banking, Housing, and Urban Affairs of 
     the Senate.
  Mrs. FEINSTEIN. Mr. President, I rise in support of legislation 
introduced by Senators Boxer and Ensign to improve disclosure of stock 
option grants in company financial statements while, at the same time, 
delaying the adoption of new accounting standards that could 
fundamentally distort reported earnings.
  I believe that at this time of continued economic weakness it is 
critical that we take action to both increase transparency and improve 
corporate governance, without which we cannot hope to restore investor 
confidence.
  The Broad-Based Stock Option Plan Transparency Act would increase the 
transparency of stock option grants at all levels of public companies, 
particularly executive compensation, and would provide investors with 
additional tools to make investment decisions.
  Increased disclosure provisions in the bill include: expanded 
disclosure of the dilutive effect of employee stock options on reported 
earnings per share; a ``plain English'' discussion of share value 
dilution, which would allow individual investors to understand the 
impact of options grants on their investment; more prominent placement 
and increased comparability of stock option-related footnotes; and a 
summary of stock options granted to the 5 most highly compensated 
executives of the company.
  These provisions help us fulfill the goal of greater transparency in 
our markets and improved corporate governance. With passage of the 
Sarbanes-Oxley accounting reform legislation last summer, we took a 
major step in that direction, and I believe this bill adds to those 
achievements.
  If individual investors do not feel comfortable with the information 
reported by public companies or the advice given by banks and other 
major players in our financial markets, they will not feel comfortable 
making new investments and our markets are unlikely to recover.
  In addition to requiring new disclosure of the impact of employee 
stock options on a company's earnings per share, this bill also 
requires the SEC to

[[Page S5672]]

monitor the effectiveness of increased disclosure requirements for 3 
years.
  The bill also specifies that the SEC must examine the impact of 
broad-based stock option plans on worker productivity and the 
performance of the firms which use such plans.
  As anyone who has spent time in Silicon Valley can attest, the 
phenomenal achievements of high tech companies in California and across 
the country would not have been possible without employee stock 
options.
  Stock options give employees a stake in the success of their company 
and create a degree of employee loyalty, productivity, and achievement 
that simply would not be possible if cash were the only form of 
compensation available. Moreover, it has allowed start-ups that are 
cash-poor to hire and retain talent that might otherwise have been 
available only to established firms.
  A mandatory expensing standard will sharply limit the use of stock 
options, particularly for rank and file workers, and will slow our 
economic recovery.
  Without a strong high tech sector developing new technologies and 
bringing new products to market, we cannot hope to return to the robust 
economic growth of the last decade.
  Moreover, mandatory expensing could actually decrease transparency 
for the average investor. The Financial Accounting Standards Board 
(FASB) has indicated it will implement such a rule within the next 
year, but has not come up with an adequate means of valuing those 
options for expensing purposes.
  The binomial pricing model currently used to value short-term 
derivatives, also known as Black/Scholes, does not work with the types 
of long-term, restricted options packages granted to employees. Without 
an accurate valuation methodology, we risk giving investors a much less 
accurate picture of a company's financial health than they would have 
otherwise.
  I have spoken with the chief executive officers of a number of 
companies in my state, including John Chambers, CEO of Cisco Systems, 
Craig Barrett, CEO of Intel, and Richard Kovacevich, CEO of Wells 
Fargo. Each one of those corporate leaders has told me that a mandatory 
expensing standard would lead them to sharply limit the number of 
options he grants to his employees.
  They also told me that it would lead them cut back on hiring and 
possibly send more jobs abroad. I found those comments disturbing, and 
they should give us pause and compel us to act prudently. That is why 
we should support further study of the accounting treatment of stock 
options, during which period no new accounting rules pertaining tot 
stock options could be adopted.
  I would like to describe briefly the impact of employee stock options 
on the value of an investor's holdings in the company that granted the 
option.
  In order for employee stock options not to be counted as an expense, 
they must be set at or above the average closing price of the company's 
stock during a fixed period. They are also generally restricted, and 
usually cannot be exercised for several years after their grant date.
  Should the value of the underlying shares fall during the life of the 
option, the options are underwater and are effectively worthless. 
Should the share price increase, however, the exercise of those options 
creates no cash charge to the company whatsoever. Instead, it increases 
the total number of shares outstanding.
  To take one concrete example, Cisco Systems recently reported 
approximately 7.3 billion shares outstanding in their latest annual 
report. They also reported approximately 600 million options to 
purchase shares that were ``in the money,'' or had an exercise price 
below the current share price.
  If all those options were exercised, and no shares were repurchased, 
each share would be entitled to approximately 8 percent less in 
dividends than before. In fact, the actual dilution would likely be 
somewhat less.
  If options are expensed, however, the impact on Cisco's bottom line 
would be dramatic, despite the fact that their only tangible impact is 
on the number of shares outstanding. Had Cisco expensed their stock 
options for the 2001 fiscal year, their reported profits would have 
been 171 percent lower. A roughly $1 billion profit would instead have 
been a nearly $1 billion loss.
  Yet the actual value of those options now is almost nil. They were 
all granted at exercise prices well above the current share price, and 
may never be exercised.
  Options are not a cash expense and represent no tangible exchange of 
assets. They are a form of incentive pay that may ultimately be 
worthless. In short, they are nothing like a cash salary.
  The legislation introduced by Senators Boxer and Ensign recognizes 
the need for further study, but does not place an indefinite moratorium 
on FASB action. It is a balanced bill that will help the average 
investor and ultimately strengthen our financial markets.
  I urge my colleagues to support the Broad-Based Stock Option 
Transparency Act.
                                 ______