[Congressional Record (Bound Edition), Volume 150 (2004), Part 5]
[Senate]
[Pages 5989-5990]
[From the U.S. Government Publishing Office, www.gpo.gov]




                   STOCK OPTION ACCOUNTING REFORM ACT

  Mr. WARNER. Mr. President, I rise in support of S. 1890, the Stock 
Option Accounting Reform Act. I am pleased to cosponsor this important 
legislation, and I applaud the distinguished Senator from Wyoming, 
Senator Enzi, and the distinguished Democratic whip for their 
leadership.
  I urge all my colleagues to pay close attention to this legislation, 
and to join those of us who believe that the mandatory expensing of 
stock options would harm American companies, and more importantly, harm 
American workers who benefit from the issuance of stock options from 
their employers.
  The Financial Accounting Standards Board--FASB--may soon take action 
that would require public companies to record employee stock options as 
an expense. This will unequivocally impede economic growth and stifle 
the economic recovery of our high-tech sector as well as other 
industries.
  As a result of FASB's proposal, companies will take a massive 
earnings charge based on stock option ``costs''. Just as we hope to 
turn the corner, the tech industry will be disproportionately hit with 
phantom costs that will undermine general investor confidence in the 
tech recovery.
  Expensing will destroy our partnership culture of distributing stock 
options to our entire workforce. We know from empirical research that 
broad-based employee ownership delivers higher returns to shareholders, 
greater productivity, and increased returns on equity.
  In addition, small companies and start-ups, which depend on employee 
stock options to attract the smartest and brightest, will be dealt a 
detrimental blow. The costs associated with the implementation of this 
new rule will inhibit small business growth. In a time when the United 
States is struggling to keep more jobs in America, this proposal 
undermines U.S. competitiveness.
  Talented and skilled U.S. workers will be forced to look to our 
competitors, countries such as Taiwan and Singapore, for high paying 
technology based employment.
  It is imperative that the United States retains its status as a 
global technology leader. Innovation and hard work are two basic 
fundamentals that founded our country. Broad based employee stock 
options provide incentives for workers to work harder, promote savings 
and serve as an incentive for creating new ideas, which ultimately 
promotes economic growth.
  I commend my colleagues for introducing this important piece of 
legislation, and it is my hope that you will join me in voting in favor 
of S. 1980.
  Mr. ENSIGN. Mr. President, our worse fears about FASB's seemingly 
predetermined crusade against stock options have unfortunately proven 
true. As expected, FASB has released a proposed expensing rule for 
stock options that is a lose-lose for individual investors and the 
American economy.
  Trial lawyers are gearing up for the biggest windfall of the 21st 
Century. They will be the only winners in this misguided action. FASB's 
proposed rule would allow companies to either use Black Scholes or a 
Binomial method to expense options. Both are flawed models and will 
yield very different and certainly inaccurate results.
  There is no question that market capital will be destroyed when these 
flawed numbers hit financial statements. Because companies have to 
choose the method they use to expense, and the inputs that feed into 
that flawed model, they will most certainly be barraged by class action 
lawsuits from greedy trial lawyers who will exploit the difficult 
decisions that FASB is going to force companies to make.
  Ironically, despite FASB's stated goal of improving information for 
investors, individual investors will now have absolutely no ability to 
make meaningful comparisons between companies. Different companies 
using different flawed valuation models will

[[Page 5990]]

confuse and mislead the very people FASB purports to help.
  Our technology sector is on the cusp of recovery. We cannot afford to 
let bad accounting destroy jobs and cripple our global competitiveness. 
There are bigger picture issues here that FASB is neither tasked with 
examining, nor equipped to look at. That is the responsibility of the 
Congress and Administration.
  This move represents a tremendous threat to our global 
competitiveness. Communist China has, as a part of their 5 year plan, 
the use of stock options. They are setting out to duplicate the success 
of our very own Silicon Valley and stock options are at the very heart 
of the Chinese government plan.
  This is not about executive compensation. That is a separate and 
distinct issue. WorldCom and Enron had nothing to do with stock 
options. In fact, the Enzi-Baker bill says go ahead and expense for the 
top 5 executives. This is about small businesses and rank and file 
workers and preserving their ability to use this powerful tool for 
innovation and growth. This is about preserving broad-based employee 
stock ownership plans.
  Make no mistake about it. If FASB's rule goes into effect, rank and 
file workers are the ones that will suffer. We need to support policies 
that create jobs and wealth for Americans, not destroy them.
  Mr. ALLEN. Mr. President, yesterday the Financial Accounting 
Standards Board, FASB, released an exposure draft of a rule that will 
require companies to treat employee stock options as an accounting 
expense. I find this proposal fundamentally flawed for a number of 
reasons and urge my colleagues to support legislation to prevent this 
from becoming a reality.
  During my time as Governor of Virginia, I witnessed unparalleled 
growth in the technology sector of my State's economy. Many new and 
exciting businesses brought their products, services, and, most 
importantly, jobs to Virginia.
  Many of these technology companies that located to Virginia were 
small ``start-ups'' with little more than a good idea and the 
willingness to take a risk for the hope of reward later. These 
technology companies contributed greatly to the tremendous economic 
expansion witnessed during the 1990s.
  However, technology companies were able to attract and retain top 
talent and key directors without having to raise large amounts of 
capital by granting employee stock options. In the end, shareholders 
and employees won. Employee stock options granted by many technology 
companies were awarded broadly to employees not only to give them an 
ownership interest in the company, but also to better align the 
interests of employees and shareholders.
  I think employee ownership and incentives are great. It is desirable 
to have motivated employees caring abut the success of their company. 
Broad-based employee stock options give employees--from the newly 
graduated worker to the experienced CEO--ownership in the company. 
Indeed, a well-respected technology CEO has said that employees with 
stock options are like homeowners, whereas those without stock options 
are like renters--there is a difference in the attitude, commitment and 
level of entrepreneurial spirit. The proposed FASB action will destroy 
our partnership culture of distributing stock options to the entire 
workforce of a company. Broad-based employee ownership delivers higher 
returns to shareholders, greater productivity, increased return on 
equity, and higher returns on assets.
  Unfortunately, the unelected officials of the Financial Accounting 
Standards Board want to bring this era to an end. In their effort to 
treat employee stock options as an accounting expense, they are 
disregarding three fundamental issues. First, employee options are not 
freely tradable. How do you value something that has no market? How do 
you put a price on something if it is not for sale? The answer is that 
you cannot. There is no accurate way to value these options without an 
open market.
  Second, employee stock options are subject to lengthy vesting 
periods--typically between 4 or 5 years. If the employee changes jobs 
before the options vest, they are forfeited.
  Finally, employee stock options will be exercised only if the stock 
price rises above the strike price. How does one predict future stock 
prices with any degree of certainty? There are entire industries 
dedicated to such a practice, yet I am unaware of anyone who is able to 
predict with absolute certainty what a stock price will be over a given 
length of time.
  This news is sure to be greeted with joy by our competitors in the 
Pacific Rim. Entrepreneurs in Taiwan, Singapore and China will not just 
continue to focus on software development or gene sequencing there. 
They will create global competitors there which will be listed on those 
stock markets. They will be free to offer stock options without the 
burden of expensing and our most talented people will flock there, just 
as they flocked to the Silicon Valley and Virginia when our technology 
industries were built.
  I find it distressing that a communist country, the People's Republic 
of China, has companies attracting entrepreneurial people and customers 
with stock options. Meanwhile, here in America an unelected, 
prejudicial board wishes to stop such employee ownership, motivation 
and success to Americans. This proposal will harm the ability of 
innovative American companies to successfully compete.
  Despite the issues I have discussed, FASB is determined to make 
fundamentally flawed assumptions about future stock price and 
employment trends. What is more, according to a Bear Stearns report, 
there will be a 44-percent decline in NASDAQ 100 companies' profits if 
they would have been required to expense employee stock options in 
2003.
  I hope my colleagues are aware of the issues and risks posed by 
moving forward with this flawed proposal. At this time, we need to 
embrace efforts to keep people working and our economy growing. If FASB 
is allowed to proceed, the economic effects will be disastrous.

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