Lots of Noise, Little Action
by Mark Lacter
Well, you knew it was bound to happen. Washington has a crisis on its hands and suddenly everybody is an expert this time on accounting and corporate governance. Who knew so many of our legislators understand the difference between LIFO and FIFO?
There’s no less than three dozen pieces of legislation before Congress that in some way engages corporate hanky-panky from the high-profile reform package by Maryland Sen. Paul Sarbanes to a lesser known proposal by L.A. Rep. Maxine Waters to compensate employees for Enron-like shenanigans involving retirement plans.
From among this legislative bounty no doubt will come one or more measures that will increase oversight and crack down on corporate lawbreakers. President Bush will sign the measures into law, flanked on each side by members of Congress. And yes, there will be lots of chatter about bipartisanship in the midst of these difficult times.
Very nice. But also very ineffective when it comes to true reform. As usual, Washington is counting on quick-fix solutions rather than reasoned public policy a classic example of crisis intervention that focuses on extraordinary events (Worldcom, Enron, Global Crossing, etc.) rather than systemic issues that, in ways large and small, have corrupted the ways of doing business.
Issues like stock options, a concept fueled by greed and perpetuated by the inflated returns that they helped create. By not having to deduct the cost of employees exercising those options even though reasonable minds would consider it an expense corporate bottom lines are much higher than they should be.
As The New York Times’ Gretchen Morgenson reported last week, had WorldCom last year accounted for its options as an employee expense, its earnings would have been 57.4 percent lower. Add to this two more outrages: that companies can use the sale of exercised options as a tax deduction and as a means of generating excess cash flow (never mind that options have nothing to do with day-to-day performance).
And for all that, there’s little chance that the reforms now being considered will include any overhaul in the way options are calculated despite admonitions by no less than Federal Reserve Board Chairman Alan Greenspan that overall economic growth is hindered by not expensing them.
Why the holdup? Blame it on relentless lobbying by the tech industry, which just so happens to be an increasingly important source of campaign contributions on Capitol Hill. For months now, their minions have been traipsing from one Congressional office to another in opposition to a bill by Sens. Carl Levin and John McCain that would require companies to treat options as an expense. The techies argue that expensing options would hurt their ability to raise capital and eliminate what had been a lucrative benefit for all employees, not just the fat cats.
At a time when the market is in virtual freefall and most options are long since underwater anyway, it’s discouraging that such blatant self-interest would still carry the day. But it does, cloaked by concerns among politicos that range from the legitimate (tax revenue implications) to the ridiculous (revenue bills normally originate in the House). Bottom line: Forget about reform on stock options, which might not be the sole cause of the scandals but would have to rank among the top three.
It’s now around 11 a.m. on Thursday and the market is down another 110 points. Politicians are yammering about change on CNBC, but this appears to be one crisis where everybody is on their own.
Mark Lacter is editor of the Business Journal. He can be reached at