[Congressional Record Volume 151, Number 19 (Friday, February 18, 2005)]
[Extensions of Remarks]
[Pages E289-E290]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




         ``THE BROAD-BASED STOCK OPTION PLAN TRANSPARENCY ACT''

                                 ______
                                 

                           HON. ANNA G. ESHOO

                             of california

                    in the house of representatives

                      Thursday, February 17, 2005

  Ms. ESHOO. Mr. Speaker, I'm very pleased to be the lead Democratic 
sponsor of the Broad-Based Stock Option Plan Transparency Act of 2005, 
and I look forward to working with my congressional partner 
Representative Dreier to move this proposal forward.
  As many of my Colleagues are aware, I've long been concerned about 
the impact of proposed accounting rules on broad-based stock options 
plans and the employees that benefit from this important employee 
ownership tool. For a number of years the Financial Accounting 
Standards Board (FASB) has threatened to require stock options to be 
deducted from a company's earnings. In fact the first bill I introduced 
as a Member of Congress in 1993 addressed this important issue.
  Last Congress, I was the lead Democratic sponsor of similar 
legislation sponsored by Representative Richard Baker, and cosponsored 
by Democratic Leader Nancy Pelosi, Majority Whip Roy Blunt, and over 
130 bipartisan cosponsors. The legislation passed the House by an 
overwhelming margin of 312-111, but the bill wasn't taken up in the 
Senate, and in December, FASB finalized its mandatory stock options 
expensing standard. Without this legislation, FASB's rule will take 
effect in June and companies will be forced to deduct the estimated 
cost of all employee stock options from their reported earnings.
  FASB's mandatory expensing rule would have a terrible impact on 
companies that rely on options to recruit and retain the most talented 
employees. Without stock options many of these companies, including 
some of the most successful high-tech and biotech firms, would not even 
exist today. As American companies struggle to stay ahead of our global 
competitors, it makes no sense to handicap them with these onerous new 
requirements.
  Stock options have become associated with corporate scandals and 
excessive executive compensation, leading to a call for expensing as 
the ultimate prescription for these problems. But stock options were 
not the cause of the corporate accounting scandals, and eliminating 
stock options would do nothing to instill corporate responsibility or 
accountability. Stock options are already fully disclosed in corporate 
earnings statements, and the crimes

[[Page E290]]

committed at Enron, Tyco, and other companies would not have been 
prevented if expensing had been the accounting rule of the day.
  If, however, companies are forced to expense stock options, most will 
drop or severely limit employee option plans because of the prospect of 
taking a huge and misleading charge against their bottom line in 
accounting statements. And if mandatory expensing is implemented, most 
stock options plans will likely be taken away from rank-and-file 
employees and reserved exclusively for top executives. This is already 
occurring in anticipation of the new FASB rule.
  It's ironic that many are calling for the expensing of stock options 
in order to reign in executive compensation, when expensing stock 
options would do little to accomplish tins. Stock option plans or other 
forms of lucrative compensation for senior executives will undoubtedly 
continue to be offered.
  Rather, rank-and-file employees would be the ones to lose, because 
they don't get to negotiate with a Board of Directors for their 
compensation package. Consider this: Only a small portion of employee 
held options--about 15 percent--are held by corporate management. 14.6 
million American workers (13 percent of private-sector workers 
nationwide) held stock options in 2002.
  Some have also argued that FASB's independence must be protected and 
accounting standards, like other technical rules, should not be set by 
Congress. While in general this is the case, there are many occasions 
when expert bodies fail to fully protect the public interest and it's 
essential that Congress steps in.
  For example, the Securities and Exchange Commission, an independent, 
expert agency, failed to adequately protect investors and the public 
from the corporate scandals of recent years: Congress stepped in to 
enact the reforms of the Sarbanes-Oxley Act.
  In this case, FASB has concluded this important rulemaking process 
without the transparency, deliberation, or justification that Congress 
and the American public should demand. At the outset of its 
consideration of the expensing rule, the Board Chairman and other 
Members announced their positions before a single comment from the 
public was solicited, proceeded to discourage comments on key 
questions, and disregarded the overwhelming majority of comments it 
received. The Board refused to conduct ``road tests'' of actual 
valuation models or of the real costs associated with implementing any 
new standard. They've also refused to respond to recommended 
alternatives and compromises.
  It's not reasonable to dismiss Congress's responsibility in these 
matters and ignore the serious shortcomings of FASB's rulemaking on a 
matter with such important and far-reaching consequences for our 
economy and our global competitiveness.
  The Broad-Based Stock Option Plan Transparency Act would simply 
ensure that the rules are not implemented before the potential impact 
of mandatory expensing is given full consideration. The bill includes a 
3 year moratorium to allow the SEC to study the impact expensing 
options may have on our economy and on small, entrepreneurial 
businesses.
  Given the radical change the new rules would establish and the 
potentially devastating impact on employee ownership programs, Congress 
has the responsibility to make sure that rules governing stock options 
are appropriate and implemented responsibly.
  Our bill would also enact new disclosure rules for companies who 
offer stock options. The legislation requires those who offer stock 
options to disclose additional information to every shareholder and 
potential investor, including plain-English descriptions of share value 
dilution, expanded and more prominent disclosure of stock option-
related information, and a summary of stock options granted to the five 
most highly compensated officers.
  I urge my Colleagues to support this legislation and protect broad-
based employee ownership programs.

                          ____________________