[Congressional Record Volume 150, Number 101 (Tuesday, July 20, 2004)]
[House]
[Pages H5991-H5998]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
PROVIDING FOR CONSIDERATION OF H.R. 3574, STOCK OPTION ACCOUNTING
REFORM ACT
Mr. SESSIONS. Mr. Speaker, by direction of the Committee on Rules, I
call up House Resolution 725 and ask for its immediate consideration.
The Clerk read the resolution, as follows:
H. Res. 725
Resolved, That at any time after the adoption of this
resolution the Speaker may, pursuant to clause 2(b) of rule
XVIII, declare the House resolved into the Committee of the
Whole House on the state of the Union for consideration of
the bill (H.R. 3574) to require the mandatory expensing of
stock options granted to executive officers, and for other
purposes. The first reading of the bill shall be dispensed
with. All points of order against consideration of the bill
are waived. General debate shall be confined to the bill and
shall not exceed one hour equally divided and controlled by
the chairman and ranking minority member of the Committee on
Financial Services. After general debate the bill shall be
considered for amendment under the five-minute rule. It shall
be in order to consider as an original bill for the purpose
of amendment under the five-minute rule the amendment in the
nature of a substitute recommended by the Committee on
Financial Services now printed in the bill. The committee
amendment in the nature of a substitute shall be considered
as read. No amendment to the committee amendment in the
nature of a substitute shall be in order except those printed
in the report of the Committee on Rules accompanying this
resolution. Each such amendment may be offered only in the
order printed in the report, may be offered only by a Member
designated in the report, shall be considered as read, shall
be debatable for the time specified in the report equally
divided and controlled by the proponent and an opponent,
shall not be subject to amendment, and shall not be subject
to a demand for division of the question in the House or in
the Committee of the Whole. All points of order against such
amendments are waived. At the conclusion of consideration of
the bill for amendment the Committee shall rise and report
the bill to the House with such amendments as may have been
adopted. Any Member may demand a separate vote in the House
on any amendment adopted in the Committee of the Whole to the
bill or to the committee amendment in the nature of a
substitute. The previous question shall be considered as
ordered on the bill and amendments thereto to final passage
without intervening motion except one motion to recommit with
or without instructions.
The SPEAKER pro tempore (Mr. Boozman). The gentleman from Texas (Mr.
Sessions) is recognized for 1 hour.
Mr. SESSIONS. Mr. Speaker, for the purpose of debate only, I yield
the customary 30 minutes to the gentleman from Florida (Mr. Hastings),
pending which I yield myself such time as I may consume. During
consideration of this resolution, all time yielded is for the purpose
of debate only.
Mr. Speaker, the resolution before us is a well-balanced, structured
rule that makes in order a manager's amendment and three amendments
offered by members of the minority, including a minority amendment in
the nature of a substitute. It provides for 1 hour of general debate,
equally divided and controlled by the chairman and ranking minority
member of the Committee on Financial Services.
The rule waives all points of order against consideration of the bill
and provides that the amendment in the nature of a substitute
recommended by the Committee on Financial Services, now printed in the
bill, shall be considered as an original bill for the purpose of
amendment, and shall be considered as read.
It makes in order only those amendments printed in the Committee on
Rules report accompanying the resolution, and provides that the
amendments printed in the report may be considered only in the order
printed in the report, and may only be offered by a Member designated
in the report. They shall be considered as read, debatable for the time
specified in the report, equally divided and controlled by the
proponent and an opponent, not be subject to amendment, and not be
subject to a demand for a division of the question in the House or in
the Committee of the Whole.
Finally, the rules waive all points of order against the amendments
printed in the report, and provides one motion to recommit with or
without instructions.
Mr. Speaker, I rise today in strong support of the rule for H.R. 3574
as well as the underlying legislation. This bill offered by my good
friend from Louisiana (Mr. Baker) is carefully constructed legislation
that will help the United States to retain its global dominance in the
biotechnology and high-technology sectors while creating new jobs,
fostering innovation and enhancing productivity. It will also empower
rank-and-file employees to share in the
[[Page H5992]]
benefits of their hard work by allowing them to earn an equity stake in
the companies where they work every day to create new products and
technologies keeping America one step ahead of the rest of the world in
technological advances and competitiveness.
H.R. 3574 achieves this worthy goal by bringing some common sense and
discipline back to the debate over stock options expensing. First, it
requires the immediate expensing of the stock options granted to the
CEO and the next four most highly compensated executives of a company,
consistent with information that must be filed with the SEC.
Second, it requires that options granted to the five top senior
executives be valued in such a way that mitigates some of the most
severe problems with FASB's expected valuation models which are based
on valuation models for a type of option that differs fundamentally
from stock options by virtue of being freely traded on open exchanges.
Third, it exempts certain small businesses from what we call the top
five rule expensing requirement and delays option expensing for small
business issuers until 3 years after an initial public offering has
taken place, allowing a small business' stock to settle down from the
initial volatility of the initial public offering.
Fourth, it prohibits the SEC from recognizing any stock option
expensing accounting standard until the standard recognizes the true
expense of the stock option on a company's financial statement when the
option is exercised, expires or is forfeited, and a comprehensive
economic impact study has been completed by the Secretary of Commerce
and the Secretary of Labor.
{time} 1030
Finally, this legislation improves corporate governance and
transparency by requiring the SEC to issue a rule mandating that public
companies include more detailed information on stock option and stock
purchase plans in their public periodic reports, such as plain-English
descriptions that describe the effect that stock options will have on
earnings per share and the number of outstanding stock options.
Throughout the 108th Congress, the Republican majority in this House
has championed and advanced a legislative program full of efforts to
improve economic growth, corporate governance, and transparency on
behalf of investors across the United States. Unfortunately, the
Financial Accounting Standards Board's recent recommendation to mandate
the expensing of stock option runs contrary to this pro-investor
agenda. It represents a step in the wrong direction by providing
investors with less accurate information about public-traded companies
which will lead investors to a distorted picture of a company's
financial performance. Even worse, the mandatory expensing proposal
threatens to destroy broad-based plans and the productivity,
innovation, and economic growth they currently generate.
I do not believe that Congress should replace FASB or become suddenly
interested in micromanaging accounting standards; however, the proposal
to expense all stock options does not simply have an academic outcome.
It would have a negative real-world policy impact by destroying the
American partnership culture of distributing stock options to our
entire workforce. I believe that allowing such a proposal to go forward
will choke off job growth, innovation, and entrepreneurship that broad-
based ownership generates; and Congress does have a very real and
immediate response to prevent this from happening.
The research behind the economic benefits of stock options support
this view. As two Rutgers researchers recently concluded `` . . . using
broad-based options to create a partnership model of the corporation
will, over the long run, help to make most companies more competitive
and create more wealth for shareholders.''
Research also shows that companies with stock-based option plans
receive a one-time, but permanent, boost to their productivity of about
4 percent compared to what productivity would have been without
entrepreneurship and employee ownership. More importantly, total
shareholder returns go up by an average of about 2 percent. This kind
of growth is vital to improving our economy and creating jobs; and I
believe this kind of incentive should be nurtured, not eliminated.
Data on stock ownership also shows that the 100 largest high-tech
firms that focus on the Internet, average employees hold approximately
19 percent of their company's stock, 17 percent accumulated through
stock options. Top executives hold only 14 percent, demonstrating that
stock options have empowered rank-and-file employees and low-level
managers to acquire a stake in their work by accumulating more
ownership in their companies than their bosses. Ninety-eight of these
100 companies provide options to them or to most of their employees. In
Intel's case, for example, 98 percent of the options granted between
1998 and 2002 went to employees other than the top five executives.
More than 200 companies from more than 29 States have filed public
comments opposing mandatory expensing. The NASDAQ, which lists 3,600
companies, opposes expensing, and opposition to FASB's proposal comes
not only from the high-tech and biotech sectors but also from other
areas of our economy, such as from the National Association of
Manufacturers, the U.S. Chamber, America's Community Bankers, the
Business Roundtable, and the Association of Financial Professionals.
I would like to thank the gentleman from Louisiana (Mr. Baker), the
Committee on Financial Services chairman; the gentleman from Ohio (Mr.
Oxley); and the gentleman from California (Mr. Dreier), the young
chairman of the Committee on Rules, for all of their hard work, their
vision, and leadership on this issue on behalf of American workers and
investors. I believe this legislation improves the financial
information available to investing for the public while ensuring that
rank-and-file employees and middle management can still participate in
the great American tradition of a broad-based employee ownership of
their company.
The choice presented by this legislation is very stark and clear:
Should Congress allow inside-the-beltway accounting technicians to
implement standards with severe negative economic consequences, or
should we develop policies that encourage economic growth, job
creation, and international competitiveness? I say yes. I believe the
choice is clear and that Congress should take this opportunity to stand
up for American workers and business. I encourage all of my colleagues
to support this rule and the underlying legislation.
Mr. Speaker, I reserve the balance of my time.
Mr. HASTINGS of Florida. Mr. Speaker, I yield myself such time as I
may consume.
I thank the gentleman from Texas (Mr. Sessions) for yielding me this
time.
Mr. Speaker, while I would prefer that this be an open rule, I rise
today in support of the rule, as it makes in order those amendments
which were submitted yesterday evening during the Committee on Rules
hearing.
I note that this is the 149th rule that this body has considered in
the 108th Congress. Of those 149 rules, 18 have been procedural. Of the
remaining 131 rules, 106, or more than 83 percent, have been closed or
restricted. One can only hope that the majority will use this rule as
the template for future rules.
As my colleague from the majority pointed out, the underlying
legislation blocks the implementation of new accounting standards
recently proposed by the Financial Accounting Standards Board. These
new standards would require companies to deduct from their profits the
value of the stock options they issue to employees and executives.
Supporters of the Stock Option Accounting Reform Act will note that
their bill includes a compromise, requiring the inclusion of stock
options afforded to a company's top five executives in that company's
profits. The Wall Street Journal, however, has noted that such
disclosure would not adequately reflect a company's true profits. Top
executives of companies which offer stock options to their employees
typically only receive 2 percent of the options that are issued.
Another study found that in the year 2003, only 18 percent of the
options provided by the S&P 500 companies went
[[Page H5993]]
to the top five executives. The standard included in the underlying
legislation potentially leaves anywhere between 82 and 98 percent of a
company's stock option expenses hidden from the public. This failure to
disclose runs the grave risk of inflating a company's profits and
misleading investors.
For example, if this bill were law in 2003, Intel would have deducted
$3.5 million from its 2003 profits, although it actually doled out more
than $990 million in options.
Investors have a right to know the true profits and total expenses of
the companies in which they invest. The underlying legislation fails
them, in my judgment, in this arena.
In addition to my concerns about the policy of the underlying
legislation, I am equally concerned about the implications of Congress
overriding the rulings of the Financial Accounting Standards Board, an
independent governing authority. I echo the comments that have already
been made by the chairman of the Senate's Banking, Housing and Urban
Affairs Committee, who has noted that Congress has no business
undermining the Accounting Standards Board.
Independent boards, such as FASB and the Securities Exchange
Commission, exist to ensure the veracity of the financial services
industry. Efforts on the part of Congress to undermine their decisions
compromise the integrity and reliability of the industry. When
congressional pressure, political ideology, or legislative fixes play a
role in the decisions of boards such as the FASB and SEC, these boards
will cease to be independent.
The gentleman from Pennsylvania (Mr. Kanjorski), ranking Democrat of
the Capital Markets, Insurance and Government Sponsored Enterprises
Subcommittee, as well as the gentleman from Delaware (Mr. Castle) will
offer an amendment in the nature of a substitute that I intend to
support. Their substitute recognizes the roles of the FASB and SEC as
independent boards, and I urge my colleagues to support it.
Mr. Speaker, Congress has a role to play to regulate and observe the
financial services industry. The underlying legislation, however, runs
the risk of crossing the line that currently exists. I urge my
colleagues to strongly consider the implications of the underlying
legislation.
Mr. Speaker, I reserve the balance of my time.
Mr. SESSIONS. Mr. Speaker, I yield myself such time as I may consume.
What this legislation does do is run the risk of encouraging
entrepreneurs and companies and people to work harder, produce better
products for this country, to do the right thing for the investor, but
mostly it runs the risk of making sure that the person who would get
that stock option is able to then take advantage of that and better
their life and to better the life of America by making sure that people
have money in their pockets to where they can make their own decisions.
Mr. Speaker, I yield such time as he may consume to the gentleman
from California (Mr. Dreier), chairman of the Committee on Rules.
Mr. DREIER. Mr. Speaker, I thank the gentleman from Texas (Mr.
Sessions), my friend, for his fine management of this rule and his
commitment to the structure which will encourage innovation and
creativity.
We are on the verge of yet another very important bipartisan victory
for this institution and, most important, for the American people.
Mr. Speaker, I would like to begin my comments by extending my
appreciation to a couple of Californians on the other side of the aisle
who have played a very important role in getting us to the point where
we are. First and foremost, the gentlewoman from California (Ms.
Eshoo), my great friend with whom I have been privileged to work on
this issue for literally years now as we have been trying to tackle and
deal with this very important challenge. And also I would like to
praise the gentlewoman from California (Ms. Pelosi), our minority
leader, my fellow Californian who has joined as a cosponsor of this
legislation and understands how important it is not only for our State
of California and for the area that is represented by the gentlewoman
from California (Ms. Eshoo) and the gentlewoman from California (Ms.
Pelosi), but for the overall concept of encouraging innovation and
creativity. And I do know that we have a wide range of other Members on
the other side of the aisle who have followed the lead of the
gentlewoman from California (Ms. Eshoo) and the gentlewoman from
California (Ms. Pelosi) on this issue.
I also want to say, Mr. Speaker, that on our side of the aisle there
have been a number of people who have been great champions in this.
First of all, I want to express appreciation to the gentleman from
Illinois (Speaker Hastert) and the gentleman from Texas (Mr. DeLay),
majority leader, for working closely with me and ensuring that we would
have an opportunity to bring this measure to the floor; also to the two
committee chairmen who have been very involved in this.
The prime committee of jurisdiction is the Committee on Financial
Services. I would like to congratulate the gentleman from Ohio (Mr.
Oxley) and the gentleman from Louisiana (Mr. Baker) and other members
of that committee, including the gentleman from California (Mr. Royce)
and the gentleman from California (Mr. Ose) and the gentleman from
Arizona (Mr. Shadegg), who have worked very hard on this issue. And
also I would like to express appreciation to the gentleman from Texas
(Mr. Barton), who has just recently become the chairman of the
Committee on Energy and Commerce and is doing a great job and joins
with us in support of this important legislation.
I should also say that there are a number of staff people who have
been very involved as well, Mr. Speaker. I see a number of them on the
floor, but I do want to specifically mention the staff director of the
Committee on Rules, Mr. Pitts; and from the Speaker's office, Seth
Webb; and from the majority leader's office, Brett Shogren, who worked
very hard with us in making sure that we got to the point where we are
today, because this has been a difficult and a real challenge for us,
but it is the right thing for us to do.
Mr. Speaker, I want to state for the record that I am an ardent
opponent of mandatory stock option expensing.
{time} 1045
With all due respect to the wonderful people who are supporting the
Financial Accounting Standards Board's expensing proposal, the notion
that stock options are an expense is absolutely absurd. You do not have
to be an accountant to clearly understand that stock options result in
no cash outflows from a company, nor do they add to its financial
liabilities. But I recognize that in the wake of the corporate
accounting scandals, and I know many people are going to be talking
about that as we begin debate on this issue, a whole new environment
does now exist.
In this arena, those who have long opposed the use of employee stock
options, and recognize, there are many people, Mr. Speaker, who have
long been opponents of the utilization of employee stock options, they
have been able to artificially link the public's legitimate hunger to
rein in corporate abuse with their desire to kill the use of employee
stock options.
Let me say that again. We all are outraged at the corporate abuse
that we have seen over the past few years, but it is, to me, very
troubling that a number of people who are opponents of the utilization
of employee stock options are using that shared concern that we all
have to try and limit the opportunity for stock options to exist. In
effect, they are trying to use an accounting sleight of hand to
eliminate stock options in the name of investor interests and open
corporate reporting.
If stock option opponents succeed, innovation and ingenuity, the
indisputable drivers of our 21st century economy, will be
unquestionably undermined. Millions and millions of rank and file
employees will lose their ability to hold stakes in their company's
future successes. A troublesome precedent will have been set in the
promulgation of accounting standards.
Expensing proponents have successfully used what is supposed to be a
technical, a technical, determination of an accounting standard to
obtain what is really a corporate governance policy decision. That is
why I want to applaud, as I said earlier, the gentleman from Louisiana
(Chairman Baker) for crafting a bill that achieves a critical balance.
H.R. 3574, the Stock Options Accounting Reform Act, while
implementing stock option expensing for, as
[[Page H5994]]
has been pointed out by my colleague the gentleman from Texas (Mr.
Sessions), for the company's top five executives, does so in a way that
will preserve the continued viability of broad-based employee stock
option plans. It is one of two critical reasons why I am a proud
cosponsor of this Baker-Eshoo bill.
It is that latter objective, giving workers on the lower rungs of the
corporate ladder the opportunity to own a piece of the company pie,
that is so important to the health and growth of our ingenuity-driven
economy.
Remember, it is the estimated 14 million workers, 90 percent of whom
hold nonmanagement positions, who would be immediately affected by a
mandatory expensing standard. These are the rank-and-file workers, the
Americans who have invested their sweat equity in the hope, not the
guarantee, but the hope that their investment will provide future
retirement funds, college tuition or a housing downpayment.
I am reminded how my friend, the gentlewoman from California (Ms.
Eshoo), and I joined in getting a wide range of employees, from Sun,
Cisco, Intel and other companies, who have talked about the fact that
their opportunity to own a home, to pay for their college education for
their children, has come from the existence of these options.
Many argue that expensing will prevent CEOs from abusing stock
options. That is simply untrue, Mr. Speaker. Illegal accounting tactics
are just that, they are illegal. An accounting standard is not going to
stop an individual who is intent on breaking the law. Instead, FASB's
proposed accounting standard will eliminate what has been a valuable
employee incentive tool. That will not help the top managers. Similar
to what traditional companies, like Coca-Cola do now, we know that
executives will continue to receive stock options even with mandatory
expensing.
Speaking more broadly, if high-growth industries lose their
flexibility to use broad-based stock options, we will all lose. Stock
options align the employee interests with the company interest, and
that produces a motivated worker. Nowhere has that formula proven more
effective than in the technology sector of our economy, particularly in
California's Silicon Valley.
No matter what area of technology you look at, you will find that the
common thread to a company's success has been employee stock options.
Without that flexibility, we would lose a key motivator for would-be
entrepreneurs and existing innovative companies to take risks and
transform new ideas into industry. New industries create new jobs,
higher wages and increased standards of living.
That brings me to my other primary reason for supporting this
legislation, and that is the investor. Expensing proponents cite time
and time again the urgency of giving investors accurate information
about a company's use of stock options. I absolutely agree with that
goal, Mr. Speaker. Investors need meaningful and transparent
information. However, the real investor class issue here is a corporate
reporting issue, not an accounting issue. Options do not cost a company
money, but they do have an impact on share value.
We must stand on the side of investors and ensure that they have
clear and accurate information about how stock options dilute the value
of their shares. I want to commend the gentleman from Ohio (Chairman
Oxley) for adding provisions to this measure that will do just that.
His language will expand required disclosures to include plain English
discussion of the dilutive effects of stock option plans, increased
comparability information, the number of outstanding stock options and
the estimated number of outstanding stock options that will vest in
each year.
Many of us, Mr. Speaker, may have been following this issue closely
over the past few years. Actually, I know a number of our colleagues,
frankly, have not been following this issue in great detail over the
last couple of years, so it is for that reason I think it is important
to explain why stock option expensing will do everything but bring
clarity and accuracy to corporate financial statements.
The inability to correctly value options that have not been
exercised, may never be exercised and are not tradable in open markets
means investors will necessarily get wrong information from expensing.
Why? Because no one has been able to figure out how to value these
options. That, in and of itself, should make anyone question FASB's
fundamental premise that stock options are a corporate expense.
FASB set up an options valuation group earlier this year to come up
with one single method, but the group was unable to do so. FASB now is
preparing to recommend allowing companies to choose from two different
valuation models in its pending proposal.
Mr. Speaker, Professor William Sahlman from Harvard, commenting on
the Black-Scholes model said, ``If anything, expensing options may lead
to an even more distorted picture of a company's economic position and
cash flows than financial statements currently paint.''
One of the inventors of the other model, the binomial method,
recently said, ``I was one of the inventors of the board-proposed
model, and I say: Don't use it. It doesn't work.''
Mr. Speaker, I want to close my remarks by doing what I did when the
gentlewoman from California (Ms. Eshoo) and I testified before the
Committee on Financial Services subcommittee on this issue by taking us
back nearly two millennia to around 100 A.D.
During that time, a brilliant mathematician, astronomer and
geographer named Claudius Ptolemy, wrote a 13-volume treatise entitled
The Mathematical Compilation. It is also known as the Almagest. It
explained the movements of the sun, moon and five planets around the
center of the Earth.
For nearly 15 centuries, his work was the leading scientific
explanation of that ``truth.'' And based on the fact that the Earth was
at the center of the universe, scientists of that time developed very
complicated and precise answers to all types of questions, such as why
the visible planets take certain paths around the sky.
Mr. Speaker, geniuses like Nicolaus Copernicus improved on the
Ptolemaic work by proposing that the sun and Earth revolved around a
point near the sun. And Tycho Brahe explained how the planets revolved
around the sun, and the sun and planets revolved around the Earth. Even
Galileo did not break completely from the intellectual view
underpinning the 15 centuries of Ptolemy's astronomy.
What does Ptolemy have to do with stock options, expensing and the
FASB? Mr. Speaker, the accountants at FASB, good people that they are,
are determined to fit the entire universe around a world view that in
the end is flawed as much as Ptolemy's universe was. Their view is that
everything must be able to be scored and placed on a corporate balance
sheet. Well, the Earth is not the center of the universe, and
everything does not belong on a balance sheet.
That is not to say that given enough hard thinking, a smart person
could not figure out a way to put everything on a balance sheet.
Utterly brilliant people figured out a way to explain with amazing
precision how and why the sun and planets revolved around the Earth.
You can explain just about anything with mathematical precision, but
that does not make it true.
FASB is not populated by Ptolemy, Copernicus, Brahe or Galileo, and
you do not have to be a Johannes Kepler to know that FASB is just plain
wrong when it comes to stock option expensing.
Mr. Speaker, the Stock Options Accounting Reform Act is one of the
most important proeconomic growth, proemployee ownership bills that we
will consider in this Congress. Unlike the FASB, and I do recognize
their independence, we as elected officials have an obligation to
American workers and investors to preserve an environment that allows
entrepreneurs to grow our economy. A potential change in accounting
treatment may be arcane to some, but it is in the real world that the
negative impact of mandatory expensing will hurt the risk-takers who
are creating jobs and wealth in this country.
Mr. Speaker, we have made a rule in order that will allow for
consideration of all the amendments that have been submitted to us, but
I want to urge my colleagues to vote in opposition to those amendments
that could in any
[[Page H5995]]
way undermine the basis of this very important legislation.
So I urge my colleagues to support the rule and, of course,
enthusiastically support this measure as it comes to passage, and enjoy
a strong bipartisan victory at the end of the day.
Mr. HASTINGS of Florida. Mr. Speaker, I yield myself such time as I
may consume.
Mr. Speaker, the chairman has certainly given us an enlightened view
of the universe. I want to remind him that the Vatican did not agree
with much of what he talked about. But Ptolemy, I did not know he was
going to wind up being here with us on this important subject.
Mr. Speaker, I yield 3 minutes to the gentleman from California (Mr.
Stark), a good friend of all of us, to enlighten us perhaps in yet
another of the universal aspects of this business.
(Mr. STARK asked and was given permission to revise and extend his
remarks.)
Mr. STARK. Mr. Speaker, I thank the gentleman for yielding me time.
I really meant to talk about celebrating the 35th anniversary of
Apollo 11, but I can see that my distinguished colleague from
California was there with me. I thought we were really talking about
accounting, and we are talking about H.R. 3574, which is appropriate,
because it is sheer lunacy.
While our soldiers are fighting overseas, our children are crying out
for better schools, 45 million people have no health insurance, we have
set the goal today of ``Let's help the rich get richer.'' Yes, sir, Mr.
Speaker, let us give more money to the millionaires.
Frankly speaking, do you know how high gas prices have gone? Do you
know how much jet fuel costs? Do you know how much private jet pilots
earn? We must help those people so they do not have to go from $4,000
to $5,000 to fly those little things. And that is what this bill today
is doing.
I am glad to see we are helping. Why? Right now, corporations can
deduct stock options for tax purposes, ha-ha, and not pay the income
tax, but they do not have to report those expenses to shareholders on
their SEC financial statements. That is what I call sleight of hand.
You cannot have it both ways. If you want to not deduct options, then
do not take them off your income tax. It makes some sense.
This accounting loophole was encouraged by companies like Enron and
Cisco to artificially inflate the value of their company while
deceiving their investors and evading corporate income tax. It is much
simpler than moving to Bermuda. Even Alan Greenspan has criticized this
practice.
To fix this problem, the FASB board has drafted a rule requiring that
we expense the options. It makes some sense. But rather than following
FASB, a board made up of professional accountants, I might add, to
implement a sensible rule, why, Congress has decided to use their
accounting expertise.
I look around the room at my fellow Congressmen, and wonder how many
of them have taken the accounting course I took?
{time} 1100
And if they did, they all know that debits are in the column next to
the windows, except as one looks around this Chamber, there are windows
on four sides. No wonder we are confused.
So let the FASB rule be damned; we are going to set some rules of our
own about accounting around here. Do my colleagues know what? They
anticipate that there will be criticism that lets rich corporate
executives off the hook, so they are going to limit it to the top five
executives. I say to my colleagues, nice try, but as Warren Buffett
points out, that is like saying in a large company which gives everyone
a bonus, only five bonuses have to be expensed.
This bill requires companies to assume also that stocks have zero
volatility. Stocks with zero volatility? Now, that does not pass the
laugh test. Ask Martha Stewart about stocks with no volatility. She
knows something about stock volatility. I suspect Ken Lay could tell us
that it is a real phenomenon that we cannot do away with by
legislation.
So the bill perpetuates the Bush administration's failed economic
policies, while simultaneously lining the pockets of their fat cat
friends. And the sponsors of this bill should be proud. It increases
the deficit, it falsifies corporate earnings, and it serves the
millionaires in this country well.
Mr. SESSIONS. Mr. Speaker, I would like to notify my colleague, the
gentleman from Florida (Mr. Hastings), that at this time the majority
does not have additional speakers. I believe I have approximately 5
minutes remaining, and I would encourage him to utilize that time that
is necessary for him to close, and then I will do so myself.
Mr. HASTINGS of Florida. Mr. Speaker, just so that we can accurately
record it so that I may dispense time on our side, how much time
remains for both sides?
The SPEAKER pro tempore (Mr. Bonilla). The gentleman from Florida
(Mr. Hastings) has 21\1/2\ minutes remaining; the gentleman from Texas
(Mr. Sessions) has 5 minutes remaining.
Mr. HASTINGS of Florida. Mr. Speaker, I am pleased to yield 3 minutes
to the gentlewoman from California (Ms. Eshoo), my good friend, who is
an original cosponsor of this legislation; and she and I came to
Congress together, and she has worked actively. The first bill that she
introduced was a measure dealing with what we are discussing today.
Ms. ESHOO. Mr. Speaker, I thank the gentleman from Florida (Mr.
Hastings), my good friend and classmate, for yielding me this time.
I am very proud to be the Democratic lead sponsor of the Stock Option
Accounting Reform Act, and I want to thank the gentleman from
California (Chairman Dreier) for his partnership and his hard work, and
the gentleman from Louisiana (Chairman Baker), as well as colleagues
from both sides of the aisle for the work that they have done to bring
this issue forward so that we can take this up on the floor of the
House today.
The Financial Accounting Standards Board, FASB, has sought for years
to force public companies to expense stock options from their earnings,
and Congress has consistently turned away these efforts. This is not
the first time. I hope it will be the last time, but it is not the
first time.
Now, the board has seized on the recent corporate scandals to push
this controversial proposal through. But supporters of the FASB rule,
including FASB itself, are unable to identify a single instance where
the accounting treatment of broad-based stock option plans for rank-
and-file employees has contributed to corporate misconduct or
shareholder fraud. Stock options are already fully disclosed in
corporate financial treatments. They are not, however, deducted from
earnings.
The reason most companies reject the expensing of stock options is
that their actual cost is highly speculative and extremely difficult to
measure. Options have a direct impact on the dilution of shareholder
value, but the actual cost to the company is uncertain. Furthermore,
valuation of employee options is highly inaccurate, and FASB has yet to
come up with an acceptable means for estimating their value.
That is why this legislation is needed. It is needed to prevent
FASB's new rules from taking effect later this year, causing
substantial disarray in corporate accounting. Implementation of these
new accounting rules would have a disastrous impact on American
companies and, most importantly, American workers. If companies are
forced to expense stock options, most likely they will drop broad-based
stock option plans because of the prospect of taking a huge and
misleading charge against their bottom line.
So while corporate executives will undoubtedly continue to receive
lucrative compensation, rank-and-file employees will lose the benefits
of these employee ownership programs.
Congress, I believe, has the responsibility to ensure that a major
change in corporate accounting is appropriate and that it is
implemented prudently. Why? Because impacts on our national economy are
the business of the Congress. We would not have stepped in before, and
I would not be offering this legislation were this not the case. FASB
has acknowledged that to us, that they are in charge of accounting
rules; but they do not take into consideration the economic impacts.
So I urge my colleagues to look at this carefully. There are many,
many complications to this. More than anything else, this is not for
corporate executives. This is for rank-and-file employees who take a
risk in start-up
[[Page H5996]]
companies and say that when the risk is realized in a positive way that
everyone wins. Let us protect that, especially at a time where our
national economy needs to protect something that we know works.
Mr. HASTINGS of Florida. Mr. Speaker, at this time I am pleased to
yield 2\1/2\ minutes to my good friend, the gentleman from Oregon (Mr.
Blumenauer).
Mr. BLUMENAUER. Mr. Speaker, I appreciate the gentleman's courtesy in
yielding me this time, and I rise in strong support of the sentiments
just expressed by my good friend, the gentlewoman from California (Ms.
Eshoo).
This is about fundamental policy, not just accounting standards. I am
as reluctant as any to have Congress meddle in regulatory affairs, but
this legislation is most decidedly not about helping rich people. Enron
did not have a broad-based stock option program. Indeed, the evidence
is those companies that have broad-based stock option programs have a
countervailing force that militates against this sort of abuse.
I personally am not worried about the investor class. They hire smart
people to check what is already a part of company financial records.
The mutual funds, the pension funds, the venture capitalists all know
the status. Expensing would have a negative impact on the value of
these companies who use broad-based stock options, and retroactive
application would make it even worse. It would make it much less likely
that we are going to have these programs in the future, and many
current programs will be eliminated. This is a fundamental issue of
policy that Congress can and should be involved with.
I take modest disagreement with some sentiments that were expressed
here earlier. I do not know anybody who is against stock options per
se. I do not think Warren Buffett is a part of a conspiracy to
eliminate stock options, and there are legitimate issues about how they
are taxed.
But my concern is making sure that we have an entrepreneurial tool
that is available for start-up enterprises, particularly in high tech,
where people can invest their sweat equity, that are broad based, and
help not just the top of the financial heap. The top executives are
going to be taken care of one way or another. The enactment of this
standard is simply going to take it away from the vast majority of
employees in the broad-based program.
I think it is important for us to maintain this tool. It is currently
used by a minority of companies with no evidence of abuse. Strong
support here from Congress in being able to keep this going is going to
be good for the economy, it is going to be good for these
entrepreneurial efforts; and, indeed, the extent to which we transition
to broad-based stock options, I think it will be a tool against abuse
in the future.
Mr. HASTINGS of Florida. Mr. Speaker, I am pleased to yield 3\1/2\
minutes to the gentlewoman from New York (Mrs. Maloney), my good
friend, who represents the financial district of this country.
Mrs. MALONEY. Mr. Speaker, I thank the gentleman for yielding me this
time.
I am pleased that the Committee on Rules has decided to allow my
amendment to protect investors by making companies show their true
earnings in their public filings, and I am pleased that they have
placed this in order. This amendment keeps whole the authority of the
SEC to regulate the contents of public filings by companies issuing
stock. The SEC has had that authority since its inception, and for good
reason, to protect investors, to protect stockholders, and to protect
the safety and soundness of our financial institutions.
This bill would remove the SEC's existing power to regulate whether
stock options are shown as an expense. Simply put, a stock option is
either an expense, or it is not an expense. My amendment preserves
present law and the policy that Congress has followed since 1934, of
letting an independent agency make the rules about what information
companies must tell their investors and their filings. It preserves
transparency to the investing public.
Accounting standards, like interest rates, should not be set by
Congress, although we do have oversight. A host of the biggest names in
financial policy have spoken out against this bill and in support of my
amendment and in favor of preserving independent standard-setting for
corporate accounting: Alan Greenspan, Arthur Levitt, William Donaldson,
Warren Buffett, John Bogle; and the list goes on and on. Many
editorials across this country have come out against the bill that is
before us today. I will include the statements of these individuals and
the editorials in the Record.
Expensing is the overwhelming view of financial experts, even before
Enron. A 2001 survey of over 18,000 analysts and portfolio managers
showed that 83 percent agreed that stock options must be expensed. None
of these authorities stand to make a dime off expensing. They are
standing up for the right thing to do for investors and shareholders in
our country.
On the other hand, we have the corporate views of Cisco, Intel, and
others who will lose, at least on paper, a cool billion-plus each if
they have to show their options as expenses. Now, whose interests do
they have at heart? Is it the investors? I do not think so.
It is a tragedy that these few corporations have set up a false war
between investors and employees. Nothing in the FASB standard prevents
expensing. Over 600 companies in America voluntarily expense. These
companies tell the truth about the expense of stock options, but still
give them to employees. Other companies can do the same. Is showing the
true cost of stock options so damaging to these companies that no one
should know how much they are spending for them?
I have received several letters from employees. They say that they
need these options because they do not have pension plans or health
care plans; and I ask my colleagues, is this what we want to encourage?
Employees deserve pensions and health care. Hidden stock options should
not be used as a substitute.
Expensing stock options is the right thing to do for both investors
and employees; and as Arthur Levitt said, finally and plainly put, this
bill hurts investors and the financial markets of America.
I urge a ``no'' vote on this bill and a ``yes'' on the amendment.
Mr. HASTINGS of Florida. Mr. Speaker, I yield 3 minutes to the
gentlewoman from Oregon (Ms. Hooley), my good friend.
{time} 1115
Ms. HOOLEY of Oregon. Mr. Speaker, I thank the gentleman from Florida
for yielding me this time.
I rise in support of the legislation before us today. I would like to
give special thanks to the gentlewoman from California (Ms. Eshoo) for
working on this important legislation.
The legislation before us today is in response to FASB's proposed
rules that would require the expensing of all stock options. First, let
me quickly touch on the specific issue of accounting accuracy, which
proponents of the FASB rule argue is a primary motivation. They claim
that expensing options is right because in the accounting world, it is
the accurate way to do things. Well, this is wrong in two ways.
First, it is impossible to accurately value the expense of stock
options. That fact is indisputable.
Second, options are already reflected in the earnings per share
calculation with before-and-after dilution. Requiring expensing options
would be double-charging their issuance, once as an expense and the
second time as a dilution.
In a broader sense and somewhat separate from the accounting issue is
the larger problem with FASB's proposal, and that is why, by all
appearances, they have given no consideration toward the economic
consequences. Their proposal would seriously jeopardize the health of
the American economy. The issuance of stock options has allowed small
start-up companies to present the motivation, an essential tool for new
recruits. These new employees are literally given a piece of the
company, and consequently, they have a vested interest in the success
of that company.
The stock options have helped new businesses. They have helped start-
up companies. In fact, that is one of the ways that really makes those
companies go.
People have accused supporters of this legislation as being in the
pocket
[[Page H5997]]
of huge technology companies. Well, nothing could be further from the
truth. The fact is that when I talk to companies at home about stock
options, it is the small companies, it is the start-up companies, it is
the innovators that say we would be lost without this.
And it makes sense. Large companies already have the capital to
recruit the best and the brightest, and they do not really need to
offer stock options as an incentive, but the small companies, the new
start-ups who are struggling to meet the day-to-day costs, they are the
ones to rely on the prospect of future successes of the company. That
is the heart of this debate.
Preserving stock options is preserving an optimism in the growth of
our economy and our Nation. Stock options we know have increased
productivity. We know they have increased innovativeness, and they were
a large part of the emergence of the new economy in the 1990s. When we
are striving to have an economic recovery, the last thing we need is a
proposal to stifle the growth, productivity and the innovativeness that
stock options have provided. This bill is a vehicle to protect the
safety of the American economy, and it is vital that we support it
today.
Mr. HASTINGS of Florida. Mr. Speaker, I yield 2\1/2\ minutes to the
distinguished gentleman from Massachusetts (Mr. Markey).
Mr. MARKEY. Mr. Speaker, I thank the gentleman for yielding me this
time.
The problem with this bill is that it has so many flaws in it that it
just would not work in the real world. How can there possibly be an
argument made that the four highest paid executives, plus the chief
executive of a company, their stock options would be counted one way
and all the other stock options of the other employees would be counted
another way inside of the same company? It makes no sense at all.
But the biggest detour into accounting Never-Never Land that the bill
provides is when a company is calculating the expense of the options to
these five executives, it must assume that the stock price has zero
volatility. That is right, zero.
So let me read the language, which appears on page 4 of the bill.
``To the extent that an option pricing model is used to determine the
fair value of an option, the assumed volatility of the underlying stock
shall be zero.'' It will be zero. Volatility for stocks is zero. We are
legislating that here on the floor of Congress today.
Now, there are lots of assumptions, which this Congress could
actually begin to write right into the law, and I am sure the
Republicans would like to do that. When it comes to the budget, the
Republican Party is a great proponent of dynamic scoring as a way of
getting the numbers to come out right. Here is an alternative, static
scoring, no volatility whatsoever. Let us just legislate that.
How about the cost of the war in Iraq? We could assume that the
volatility is zero. It would be zero, after all, if we simply assumed
that we have already won the war, transformed Iraq into a pluralistic,
secular, capitalistic democracy. So easy, we just declare the war won
and we go home. No messy occupation, no truck bombs, no terrorism. Just
hold a big parade to celebrate.
Hey, I have got an idea for the banner too. It could just read,
``Mission Accomplished.'' No volatility in Iraq. Let us just legislate
that out here on the floor as well.
Al Qaeda, pay no attention to Al-Jazeera broadcast. We just assume
that terrorism has ended as well. We will just legislate. No volatility
in terrorism.
And while we are at it, let us just legislate that if we have a
couple of hot fudge sundaes every day, it will have no impact on our
weight, no volatility in our weight. We will just legislate it down
here. Let us just legislate.
That is what they are saying today, that stocks have no volatility.
Tell them who tune into CNBC and Bloomberg all day long with their eyes
glued to the set, no volatility.
What are we doing here in Congress? We have no right, we have no
right, ladies and gentlemen, in making that assumption for all of the
investors in our country.
Mr. HASTINGS of Florida. Mr. Speaker, I yield 2 minutes and 15
seconds to the gentleman from New York (Mr. Meeks).
Mr. MEEKS of New York. Mr. Speaker, I rise today in support of the
rule and in support of the Stock Option Accounting Reform Act. This
bipartisan legislation has widespread support on both sides of the
aisle. This bill is all about maintaining the leadership role of the
United States in emerging industries such as high technology and
biotechnology and by recruiting and sustaining the best available
workforce. This bill is about giving employees an incentive to be the
best that they can be and encouraging small companies, not stifling
them.
Mr. Speaker, this legislation ensures that the rank-and-file
employees who have benefited from broad-based stock option plans in the
past can continue to reap these benefits in the future. Broad-based
employee stock option plans benefit middle-class and younger workers
who have taken a chance on smaller companies right out of school with
the opportunity and promise to grow with that company and share in its
success professionally and financially.
In my congressional district, companies such as American Airlines,
Verizon, Time Warner and Jet Blue are just a few of the companies that
provide stock options as a benefit to their employees. And throughout
this debate, some have claimed that stock option benefits only benefit
senior corporate executives. The facts say otherwise; 14.6 million
American workers held stock options in 2002, representing 13 percent of
private sector workers nationwide. Eighty-five percent of stock options
are held by nonmanagement workers, and one out of eight employee
option-holders is either a union member or married to someone who is.
And 39 percent of the employees earning stock options earn only $30,000
to $75,000 a year.
Meanwhile, this bill is also about combating abuse in executive
compensation. The bill immediately requires the expensing of all stock
options given to the top five executives of a company, but exempts
small companies from this requirement for 3 years so that they do not
get penalized disproportionately, a balanced and fair compromise.
There are undoubtedly reservations about having Congress enact
accounting laws, and I share these reservations and counsel that we
should be prudent in our approach. However, the granting of stock
options to certain employees in the early and growth stages of a
company, particularly in a technological industry, has been a critical
component and the success of many technological companies and
technological innovations that many Americans utilize, including the
devices we carry around with us in the House.
Mr. Speaker, this is bipartisan legislation which reflects the kinds
of issues that this Congress needs to address to jump-start our economy
with quality jobs for all of American workers. I urge my colleagues to
join me in voting for this bill.
Mr. HASTINGS of Florida. Mr. Speaker, I yield 2 minutes and 15
seconds to the gentleman from Florida (Mr. Stearns).
(Mr. STEARNS asked and was given permission to revise and extend his
remarks.)
Mr. STEARNS. Mr. Speaker, I thank my colleague from Florida for
yielding me the time.
Mr. Speaker, I had an amendment to the Committee on Rules that
unfortunately did not get a part in this debate process. My amendment
to the bill of the gentleman from Louisiana (Mr. Baker) would allow
companies that voluntarily expense all employees' options to continue
doing so. I contend, and I submit, that the original bill, H.R. 3574,
would bar them from that practice.
At a recent hearing I held as chairman of the Committee on Energy and
Commerce Subcommittee on Commerce, Trade, and Consumer Protection with
jurisdiction over FASB, the Financial Accounting Standards Board, the
chairman of FASB said that 576 companies are currently expensing
options. Think of that, 576 are expensing options, and as it now
stands, H.R. 3574 would prevent these companies from continuing to
voluntarily expense stock options.
Now, my amendment would correct that, and I believe congressional
interference into FASB rule-making sets a
[[Page H5998]]
dangerous standard and a precedent and that the process should be left
to independent experts. And as the bill now stands, that is not true.
We hope we can correct it, but my amendment was not included as part of
this debate.
And I filed this amendment in the Committee on Rules to correct it,
and subsequent to that, I think the proponents of this legislation
realized the wisdom of my amendment. In fact, I think they have adopted
it as their own in the manager's amendment, and I consider that high
flattery that they would take what we offered and adopt it as a
manager's amendment, but I still believe that this stand-alone
amendment would make a better point in this case for why FASB should be
left intact, and we should not, as Members of Congress, go about the
process of instituting, by statute, written accounting rules.
In fact, I know of no occasion in history in which Congress, by
statute, has written an accounting rule, and so I do not think Members
are that confident that they can go ahead and disregard the unanimous
advice of the President's leading economic advisers and the most famous
investor in history.
When we think about it, the most famous investor in the country
indicated that in a sense this bill H.R. 3574 sets an accounting rule
that is in direct contradiction to the treatment of the same item in
the Tax Code. So Warren Buffett has 62 years of investing experience.
That seems to be a lot, a lot more, perhaps, than many of us here in
the House, and I think if his recommendation is that we not institute a
statute which changes the accounting rule, we should also abide by what
he is talking about.
We saw what happened with Enron and WorldCom, and they paid
themselves tens of billions of dollars in stock options. And they were
never accounted for, and I do not think this bill is going to do it.
And I think my amendment would have helped.
Mr. HASTINGS of Florida. Mr. Speaker, I yield back the balance of my
time.
Mr. SESSIONS. Mr. Speaker, I yield myself such time as I may consume.
I thank you for your indulgence in hearing this debate today and for
your wisdom and hard work to be with us through this process.
Mr. Speaker, what we have heard today is, Members of Congress from
all across this great country, California, Oregon, Florida, Texas and
other places, who have talked about the need and the desire for us to
pass this legislation that we have before us.
I am proud that our speaker, the gentleman from Illinois (Mr.
Hastert) and our majority leader, the gentleman from Texas (Mr. DeLay)
are fully in support of this bipartisan legislation, legislation that
has been brought to the floor through the leadership of the gentleman
from Ohio (Mr. Oxley) and the gentleman from Louisiana (Mr. Baker) and
the gentleman from Texas (Mr. Barton), who is the chairman of the
Committee on Energy and Commerce, and certainly the words from the
gentleman from California (Mr. Dreier), the chairman of the Committee
on Rules, in talking about how this excites America and workers to
achieve not only dedication and hard work, but also encourages biotech
firms.
I think this is exciting. I think this is the right thing. I think
this is what Congress should be doing in the leadership of the
gentleman from Texas (Mr. DeLay) and the gentleman from Illinois (Mr.
Hastert) to make sure this kind of legislation consumes our time, is
important to America and our future.
In 2002, nearly 15 million Americans held stock options, about 13
percent of private sector workers nationwide. About 85 percent of the
existing stock options are held by nonmanagement workers. This is a
whole lot to do about allowing people who get up and go to work every
day, Mr. Speaker, who care about not only this country and about their
families, but this offers them to protect that nest egg that grows.
I am proud of what the Republican Party is doing by bringing this
legislation to the floor. I am equally as proud that it is bipartisan,
because it is doing the right thing for people, and I stand in support
of this, encourage my colleagues to support the underlying legislation
in the rule.
Mr. Speaker, I yield back the balance of my time, and I move the
previous question on the resolution.
The previous question was ordered.
The resolution was agreed to.
A motion to reconsider was laid on the table.
____________________