FOR IMMEDIATE RELEASE
March 25, 2002
Contact: Peg O'Hara or Ann Yerger
Phone: 202-822-0800

COUNCIL OF INSTITUTIONAL INVESTORS BACKS EXPENSING OF STOCK OPTIONS

WASHINGTON, DC, March 25–The Council of Institutional Investors today threw its support behind efforts to get companies to include the cost of stock options as an expense on their reported income statements.

Council members voted at their annual spring business meeting to adopt a policy requiring the expensing of all options.

"Since stock options granted to employees, directors and non-employees are compensation and have a cost, companies should include these costs as an expense on their reported income statements with appropriate valuation assumptions disclosed," the new policy reads.

The action represents a reversal of the Council's previous position on how stock options should be accounted for. In the mid-1990s, when the U.S. Financial Accounting Standards Board recommended requiring companies to expense the estimated fair value of all option awards, the Council opposed the proposal and instead endorsed requiring disclosure of the pro forma effect of stock option awards. The FASB ultimately backed off from requiring all options to be expensed.

But times have changed since the initial debate. The size of option programs has exploded, the true costs of fixed-price options are obscured, and shareholders have lost their right to vote on many option plans, so many feel that disclosure-based solutions are no longer adequate. Two years ago, the Council's Executive Committee directed its Policies Committee to reassess the Council's position. The committee considered a variety of studies and analyses, sponsored a debate on the issue and surveyed Council members before recommending the change. (The survey respondents favored the new policy by a 5 to 1 margin.) The Executive Committee accepted the recommendation in January and moved it be forwarded to the full membership for approval.

The new policy is based on the principle that options should be expensed on income statements because they are a form of compensation and they have value–sometimes significant value. Studies have shown that expensing options has a material effect on the bottom line and that this information is currently hidden in the footnotes to financial statements. Expensing would improve the comparability of reported compensation numbers, and would eliminate the inequitable two-track system that now requires the expensing of only some kinds of options, including the performance-based indexed options investors favor, thereby discouraging their use.

Recognizing that valuing stock options is complex and controversial, the Council did not advocate a specific valuation model. Instead, it has urged the International Accounting Standards Board (IASB), which is considering global standards on option accounting, to hold roundtables on the valuation issue and to seek input from the corporate community, institutional investors and others.

The Council of Institutional Investors is an association of some 120 public, corporate and Taft-Hartley pension funds (the voting members) and over 100 money managers, law firms and other financial services firms. Council members manage over $2 trillion in retirement assets.