[Congressional Record (Bound Edition), Volume 151 (2005), Part 3]
[House]
[Pages 4262-4265]
[From the U.S. Government Publishing Office, www.gpo.gov]




              OWNERSHIP INSPIRES A VITAL AMERICAN ECONOMY

  The SPEAKER pro tempore (Mr. Dent). Under the Speaker's announced 
policy of January 4, 2005, the gentleman from California (Mr. Dreier) 
is recognized for 60 minutes.
  Mr. DREIER. Mr. Speaker, one of the hallmarks of our vibrant and 
growing economy is our continuing quest to give Americans more 
opportunities to become part of our ownership society. I am going to 
respond to some of the things that have been said by my colleagues on 
the other side of the aisle, but I think it is important to note that 
opportunity and ownership is what we are about.
  We are very proud of the fact that we have lowered barriers so that 
the rate of homeownership now stands at a record 69 percent; nearly 70 
percent of the American people own their own homes. And as a 
percentage, it is continuing to grow dramatically in the minority 
community.
  We have encouraged personal savings and investment through tax relief 
so families are better able to plan for their own future; and I will 
say that the comments of my colleagues who were just before us aside, 
we are working very hard to bring voluntary, and I underscore the word 
voluntary, Mr. Speaker, personal retirement accounts to younger workers 
so that they can better control their own financial destiny. Our past 
and future success depends on the ability of every person to realize 
the American Dream of being an owner.
  Now, last summer the President had a great statement on this issue of 
ownership, Mr. Speaker. He said, if you own something, you have a vital 
stake in the future of our country. The more ownership there is in 
America, the more vitality there is in America, and the more people 
have a vital stake in the future of this country. I think the President 
was right on target with that.
  Nowhere is that statement on the issue of ownership and vitality more 
true than in California's Silicon Valley, where broad-based employee 
stock options spurred the innovation and ingenuity that led the 
economic boon that we saw in that technology sector during the 1990s 
and is still in the process of coming back today. It was in the 
emerging technology industry that the idea of using employee ownership 
to attract talented workers flourished.
  Small laboratories of ideas with little capital could not afford to 
pay lucrative salaries to get highly skilled workers. So many of these 
ideas emerged from basements and garages and, obviously, high salaries 
were not an option for many of those who were creating new and 
innovative ideas that improve our quality of life. Instead of lucrative 
salaries, which they could not offer, instead they used the hope, the 
hope, not the guarantee, but the hope of success to incentivize smart 
workers to take risks on new ideas. And with that notion, the high-
tech, knowledge-based economy took off.
  It took off dramatically. It produced a thriving and innovative 
economy

[[Page 4263]]

over the past decade and a half that has generated millions of jobs, 
dramatically raised our standard of living, and made the United States 
of America the global leader in technology and service-oriented 
industries that it is today.
  This happened because, as we all know, when you have a stake in the 
future of an idea, a company, or a home, you are going to work more 
productively and more creatively to ensure its success.
  Now, Mr. Speaker, a good analogy is the mindset of the homeowner. 
Most of us who own homes recognize the value of taking good care of 
that investment, our home. If we protect them from damage, maintain 
their upkeep and improve their appearance, we think we have a good 
chance of making a profit on that investment. But all of us can admit 
that when we were renters, when we did not have a stake in maintaining 
or increasing a property's value, the level of commitment to improve 
that property was obviously quite low. There was zero motivation for us 
to do that.
  Like the homeowner, Mr. Speaker, the employee-owner wants to see as 
high a return as possible from his time and effort on the job. That 
motivates him to contribute more of his sweat equity to the company. 
That increases the value of the company to him personally, and it 
increases the value of the company for all shareholders. That tool for 
creating that risk-taking mentality and giving corporate ownership is 
the employee stock option.
  Today's stock options have allowed 14 million American workers to 
become corporate owners through broad-based stock option plans. 
Companies with broad-based plans give stock options to over 50 percent 
of their employees, many giving an even higher percentage. These owners 
are not wealthy people. In fact, Mr. Speaker, this is an incredible 
figure, 79 percent of all U.S. workers who hold stock options earn less 
than $75,000 a year. Again, I will say that, when we hear stock options 
as being criticized because they are something that has been abused, 
and high-paid, million-dollar executives get it, actually the numbers 
are 79 percent of stock options are held by Americans who earn less 
than $75,000 a year. The majority of these owners, 93 percent, to be 
exact, are lower- and middle-income workers who have converted their 
labor into financial rewards. It has allowed them to send kids to 
college, prepare for retirement, and put down payments on their homes.
  But the ability of rank-and-file workers to remain a part of our 
ownership society through stock options is tragically in jeopardy. When 
the Financial Accounting Standards Board issued its mandatory expensing 
accounting standard last December, it caused many companies to curtail 
and, in some cases, eliminate the use of broad-based stock option 
plans. This is before the standard has taken effect. That means as a 
result of the Financial Accounting Standard Board's action, a proven 
ownership tool for millions of Americans and their families will come 
to an end. That is what is on the horizon. That not only limits 
opportunities for workers; it is without a doubt going to negatively 
impact the future of our knowledge-based economy.
  The entire basis of our success in the last part of the 20th century 
rested on individuals taking risks. Those risk-takers have built some 
of the most innovative job-creating companies in America, and stock 
options have been the major ingredient for their success. But we do not 
want to stop there. We obviously want to see that type of 
entrepreneurial behavior continue into the 21st century. Our economy 
depends on the ability of future small companies to turn ideas into 
product or service.

                              {time}  1830

  And in so doing, we see the creation of jobs and wealth. We hope they 
will then grow into bigger companies and create even more jobs and 
greater prosperity.
  It is incredibly ironic that, at the very point in time, when 
maintaining our global competitive edge is so critically important for 
us in our future, we are severing the ability of America's innovators 
to use what has been a key tool for our success. It has been so 
successful, and this is just incredible, Mr. Speaker, this whole notion 
has been so successful, that our global competitor, the People's 
Republic of China, the People's Republic of China, has incorporated 
stock options into its 5-year economic plan to base its technology 
industry on.
  So why in the world are we doing the this? Why are we taking away an 
ownership opportunity for skilled workers and their families and 
hampering our future economic growth? The answer is plain and very 
obvious. There are those at the Financial Accounting Standards Board, 
those in the traditional business community and those in the media who 
simply do not like stock options as a business management tool.
  They seized on the aftermath of the Enron scandal and the public's 
legitimate hunger to curb corporate excess, and it is understandable. 
We obviously want to end corporate excess and the kind of abuse that we 
have seen. But they seized on that to stifle the use of broadbased 
employee stock options through the accounting standards setting 
process.
  Even though stock option expensing never would have prevented the 
corporate abuse at Enron, nor were broadbased stock option plans 
involved in that scandal at all.
  So in the name of accurate corporate reporting for investors, the 
Financial Accounting Standards Board stumbled down the paths toward its 
faulty December-issued standard. But, before I delve into that standard 
itself, Mr. Speaker, I wanted to address this idea that stock option 
expensing will curb excess at the top.
  Mr. Speaker, many expensing proponents argue that forcing companies 
to expense will reign in excessive compensation through stock option 
grants and ensure that CEOs will be unable to manipulate stock options. 
That argument is false for two reasons: First, we have proof that the 
Financial Accounting Standards Board accounting standard won't hurt 
CEOs and senior executives who will be able to figure out how to 
compensate themselves, but it will, in fact, eliminate a valuable 
ownership opportunity for rank-and-file workers.
  Listen to this sample of a recent press item: Now this was reported 
just a week or two ago by Reuters, on February 28. They said, and I 
quote, Pfizer, one of the great innovative companies in this country, 
obviously, in dealing with the area of health care, Pfizer said in its 
filing with the Security and Exchange Commission that ``in response to 
new accounting rules requiring employee stock options to be expensed, 
it plans in 2005 to reduce the number of options granted, `except to 
those of most senior Pfizer management.'''
  Now, on February 19, the New York Times reported that the Time Warner 
Company, one of our great companies in this country, they said in the 
New York Times piece, that Time Warner ``would no longer grant stock 
options to most employees, citing new accounting rules, new financial 
reporting standards which will require companies to treat stock options 
as expenses, `make it prohibitively expensive' to continue the practice 
for all of their employees.''
  So the Times also reported research and industry survey data 
estimates, the estimates that show at least 40 percent of publicly held 
companies are reconsidering broadbased option plans. And it goes on to 
say, and I quote, ``and as many as a third may discontinue them in the 
next few years.'' May discontinue them. A third of them may discontinue 
them in the next few years.
  Second, Mr. Speaker, senior managers who cook the books and abuse 
stock options are breaking the law. Accounting standards will not stop 
someone intent on engaging in criminal behavior. Individuals will 
simply find other ways to achieve his goal.
  Now, let us turn to the standard itself. Interestingly, the Financial 
Accounting Standards Board proclaimed its intention to come up with a 
mandatory expensing standard, a standard that would ensure accurate 
corporate reporting and transparent information for investors. Again, I 
underscore the last, transparent information for investors.

[[Page 4264]]

  In 2003 testimony before the House Financial Services Subcommittee on 
Capital Markets, the chairman of the Financial Accounting Standards 
Board, Bob Herz, stated the Board's intention to improve the financial 
accounting and reporting of stock options. He specifically noted the 
need to address, and I quote, ``the noncomparability and, thus, the 
potential lack of transparency created by the alternative accounting 
treatments presently available for reporting stock options.''
  So Mr. Herz talked about the need for greater transparency. Now, Mr. 
Speaker, unfortunately for investors, this standard will do everything 
but. This standard that they promulgated in December, set to take 
effect in June, will do everything but bring clarity, comparability and 
accuracy to corporate financial statements. It is, in fact, going to 
provide investors with misleading information.
  The Financial Accounting Standards Board's standard requires 
companies to make gross assumptions based on highly volatile factors 
and produce one number that will represent the so-called cost of 
employee stock options.
  We are talking about stock options that have never been exercised by 
the employee, may never be exercised, and are not tradable in open 
capital markets where value could be determined. The standard 
recommends that companies should use either the Black-Scholes or the 
binomial methods of accounting or an alternative method derived by 
their experts for calculating the value of the expense.
  Now, Mr. Speaker, it is instructive that the inventor of the binomial 
method stated last year that his method does not work for fixed price 
employee stock options and should not be used.
  Now, Mr. Speaker, the President's former National Economic Council 
Advisor, Larry Lindsey, led an expert panel in a study of Financial 
Accounting Standard Board's mandatory expensing standards that they 
promulgated last December. In its report to the Securities and Exchange 
Commission last month, the Lindsey panel found that the two valuation 
models are inherently flawed when used for employee stock options.
  And, in fact, in a letter that was sent to the Chairman of the 
Securities and Exchange Commission, Mr. Donaldson, the Lindsey panel 
members conclude, and I quote, ``if the rule were to be implemented as 
is and on the current time line, the quality of information available 
to the public regarding employee stock options would be inadequate and 
potentially misleading.'' And again that is the Lindsey panel report.
  And this is the letter that was sent to the Securities and Exchange 
Commission. They said it would be inadequate and potentially 
misleading. Those are the regulations that have been promulgated by 
FASB.
  They went on to state that ``the investing public would not be able 
to compare the impact of stock option plans across companies because 
the recommended models produce such wide results with different 
plausible sets of assumptions.''
  Now, that is a pretty compelling indictment on what has been put 
forward, Mr. Speaker. What happened to the FASB's determination to give 
investors, as I said just a moment ago, accurate, comparable and 
transparent information?
  Let me go back to what Chairman Herz said the Board wanted to 
address, the noncomparability and thus the potential lack of 
transparency created by the alternative accounting treatment presently 
available for reporting stock options. But the Financial Accounting 
Standards Board is not helping investors with the new expensing 
standard.
  They are actually hurting investors. The new rule set to take effect 
this June will actually lead to just plain wrong numbers on corporate 
financial statements. So much for creating transparency for our 
investors, which is what the FASB Chairman said was the goal. And 
instead of implementing one method for calculating option expensing, 
they have perpetuated what they had previously viewed as problematic, 
alternative accounting treatments.
  With this standard, companies will have a choice between two bad 
valuation models, or be able to pick one all on their own. How can 
investors compare numbers with companies who choose their own method of 
calculation? The fallacy of the Financial Accounting Standards Board's 
expensing standard could not be more transparent.
  You do not have to be an accountant to understand that stock options 
are never a corporate expense. They are a right given to employees to, 
at some point down the road, buy shares of the company's stock at a 
fixed price at a set period of time. They cost a company absolutely 
nothing.
  As the Lindsey panel noted, it disagrees with the premise that 
employee stock options, and I quote from the Lindsey panel report, are 
``a net cost to the firm and that this cost can be measured precisely 
and reliably.''
  So they point to the fact that it is not a net cost to the firm, and 
it is also specious to believe that they can be measured precisely and 
reliably.
  But, Mr. Speaker, I will acknowledge stock options do dilute the 
value of shared held by existing shareholders of a company. So while 
there is no cost to the company, there is in fact a cost to the 
shareholder in the form of what is called share dilution.
  That said, it is clear to me that there are problems with how stock 
options are reported in financial statements today. Let my say that 
again. I do believe that, today, we do have problems in the way that 
stock options are actually reported. That said, it is clear that there 
are problems of how they are reported in those financial statements.
  Investors really do need accurate, comparable and meaningful 
information about how those broadbased plans affect the companies. 
Expensing provides none of this information. By contrast, uniform 
disclosure requirements would be what we need to actually help the 
shareholders. It is critically important that we do share that goal 
with Mr. Hertz, but his plan is not the way to deal with the issue of 
transparency.
  We believe that we have a better solution. That is why we must stand 
on the side of investors and implement rules that will give meaningful 
information and make it public. The Lindsey report supports mandating 
increased disclosures. And, Mr. Speaker, that is exactly what this 
House has gone on record doing.
  My distinguished colleague, the gentlelady from California (Ms. 
Eshoo) from the other side of the aisle and other Democrats have 
introduced supporting legislation.
  Mr. Speaker, the gentlewoman from California (Ms. Eshoo) and many of 
our colleagues have introduced last month a strongly bipartisan bill 
which would require that the Securities and Exchange Commission 
implement uniform disclosures so that we can get at that issue of 
transparency.
  Specifically in our bill, Mr. Speaker, at a minimum, companies would 
have to include in their footnotes a plain English discussion of share 
value dilution. They would have to expand disclosure of the dilutive 
effect of options on the company's earnings per share number. And all 
stock information would have to be placed prominently in a way that 
allows investors to easily compare information among different 
companies.
  Finally, to ensure that stock options for executives are transparent, 
companies would have to provide a summary of stock options granted to 
the top five most highly compensated executives in that company.
  This is the kind of information that will help investors clearly 
understand the impact of employee stock options on share value. On the 
completely opposite side is the Financial Accounting Standards Boards 
actions, which will actually do harm. Not only will it result in 
misleading expensing numbers, it will remove the current disclosures 
used by companies that do offer broadbased stock option plans.
  So the useful information we currently see in financial statements 
will disappear after this standard takes effect. Literally, investors 
will have nothing to go on but a flawed and unreliable number mandated 
by our Nation's accounting standards board.

[[Page 4265]]

That is indeed disturbing for those who care about the integrity of our 
financial markets.
  Although this change in accounting treatment may be arcane to many in 
the real world, the new rule will hurt the risk takers who are creating 
jobs and wealth in this country and improving the standard of living 
and quality of life for so many people with creative, innovative ideas.

                              {time}  1845

  It will hit particularly hard the small businesses, skilled workers, 
and entrepreneurs who form the backbone of America's infrastructure. No 
matter what high-growth sector of the economy you look at, you will 
find that the common thread to its success has been employee stock 
options. Without that motivating incentive, would-be entrepreneurs and 
existing innovative companies will be less likely to take risks and 
transform new ideas into industry.
  Now, I and many of my colleagues, as I said, have co-sponsored our 
bill, H.R. 913; and we believe that we need to stand on the side of 
investors and the partners and the workers in our Nation's ownership 
society. FASB, the Financial Accounting Standards Board, has issued its 
mandatory expensing rule. That part is done. But the SEC and the 
administration have an opportunity to finally provide investors with 
improved information and at the same time prevent the FASB from killing 
off stock options for rank-and-file workers.
  Mr. Speaker, I sincerely hope that the Securities and Exchange 
Commission will pay heed to our concerns when they provide guidance on 
the FASB rule later this month. They need to listen to the 312 House 
Members of the 108th Congress who supported legislation that we worked 
on with our colleagues, the gentleman from Ohio (Mr. Oxley) and the 
gentleman from Louisiana (Mr. Baker) from the Committee on Financial 
Services. We were able to reach, working together, a legislative 
compromise that again enjoyed Democrat and Republican support; 312 
Members of that bill effectively addressed concerns about executive 
compensation and protected rank-and-file corporate ownership.
  Mr. Speaker, preserving broad-based plans and enhancing stock option 
disclosures are key to continuing the pro-growth, pro-ownership society 
and economy that Congress and this administration have worked so 
diligently to achieve.
  Mr. Speaker, I call on the Securities and Exchange Commission to take 
action to prevent the Financial Accounting Standards Board's misguided 
standards from harming workers and investors. America's 21st century 
expansion and growth that we are all pursuing and encouraging so 
vigorously, we should realize that it will hinge in large part on this 
decision that will be made. So I hope very much that they make the 
correct decision so that we can continue to see our economy thrive.

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