BYLINE: By John Doerr and Frederick W.
Smith; John Doerr is a partner in the venture capital firm of Kleiner
Perkins Caufield Byers. Frederick W. Smith is chief executive of the FedEx
Corporation.
BODY: Political leaders
in Washington are casting about for measures to ensure that the Enron debacle
will never be repeated. Unfortunately, one of the main ideas being considered --
requiring companies to treat stock options as expenses on financial statements
-- addresses an issue that not only had nothing to do with Enron's failure but
is, in fact, not a problem at all.
The proper purpose
of any reform should be a clearer, more accurate picture of a company's
financial health. Instead, counting options as expenses -- "expensing" them --
would actually distort and confuse that picture considerably. It could also
prevent millions of workers from sharing in the success of their firms through
employee ownership.
Stock options give employees the
future right to purchase shares at a predetermined price. When employees
exercise and sell options, they get the difference between the option price and
the market price of the stock. When an option is exercised, a company's total
number of shares increases, thereby reducing earnings per share. And while
salaries reduce a company's cash, options do not. When options are exercised,
cash actually increases by the exercise price paid by the worker. This debate is
about how an employee's potential gain is recorded in financial statements.
Current accounting rules correctly require that companies
report their earnings per share on a diluted basis (i.e., counting the potential
decrease in the ownership of existing shareholders due to the granting and
exercise of stock options). If expensing were also required,
the impact of options would be counted twice in the earnings per share: first as
a potential dilution of earnings, by increasing the shares outstanding, and
second as a charge against reported earnings. The result would be inaccurate and
misleading earnings per share.
Another difficulty with
proposals to expense options is that there exists no remotely accurate way to
calculate the expense. Some proposals would expense options when they are
granted -- without knowing whether the worker will ever exercise the options or
what the future stock price will be. Other proposals would expense options when
exercised, with any increase in the stock price over the option price being
subtracted from otherwise reported profits. Thus, the better the company's stock
performs, the worse the company's earnings will look. Surely, this makes no
sense.
Accounting rules already require companies to
disclose detailed information about their stock option programs. If new stock
option legislation were enacted, the misleading understatement of corporate
earnings would make it prohibitively expensive for most firms to continue broad
stock option programs.
This would be a terrible
mistake. Stock options have been crucial to venture-capital-backed companies
that have created more than seven million jobs over 30 years and generated more
than $1.3 trillion in revenue in 2000 alone. Today 90 percent of large companies
issue stock options.
Options embody a principle that
the Enron scandal does nothing to diminish: that the financial interests and
responsibility of workers, management and investors be aligned. Not only
executives are rewarded with options; last year 10 million American workers got
them, and according to a 2000 survey, 44 percent of the companies that have
options programs make grants to all employees.
Proponents of legislation to expense stock options believe that Enron's
cooked books had something to do with stock options. We disagree. Such
legislation would only encourage misleading financial statements. There are
legitimate public policy responses to the Enron debacle. Expensing stock options
isn't one of them.
Document 19 of 19.