Advocate Summary

Issue:  Stock Option Expensing
Advocate:  American Benefits Council – John Scott
Date of Interview: 8/6/02

Basic Background
Our organization got involved in the Fall of 2001 and the overall goal is to avoid a mandate that would require companies to recognize stock options on their company’s financial statement. That’s not to say that our members are against recognition of stock option in fact some companies do that already. But I think the concern is with a legislative mandate from Congress or a mandate from the International Accounting setting body. 

Prior Activity on the Issue 
None mentioned.

Advocacy Activities Undertaken
A lot of this has been coalition based, so there are basically activities through the coalition and then through our own offices. I’m not sure if there are any significant difference if the activities are done through the coalition or through an individual organization. The main avenues have been meeting with policy makers, putting out position materials – that could be press releases, talking points, papers that are more detailed then a sort of news release, so communication activities. As well as participating in the drafting of legislation, providing an alternative to what our opponents are proposing.  

Future Advocacy Activities Planned
No specific activities mentioned.

Key Congressional Contact(s)/Champions
I would say Senators Enzi and Lieberman, in the House I’d say there hasn’t been a real need. Those are the two main champions and also Senator Gramm from Texas. 

Targets of Direct Lobbying
None mentioned.

Targets of Grassroots Lobbying
None mentioned.

Coalition Partners: Names/Participants
We’ve been working with the American Electronics Association, better known as AEA, Software Finance and Tax Executives Council, really a host of the technology associations here in town, the National Venture Capital Association, the Chamber of Commerce, the National Association of Manufacturing – I think it is fairly broad, it includes the technology based associations, it includes sort of the broader business associations like NAM and the Chamber, as well as pro-business but narrowly defined organizations like ours which is large employer but focused on benefits.   

Other Participants in the Issue Debate
None mentioned.

Ubiquitous Argument(s) and Evidence
I think there are really two main points of contention with the other side. One is sort of philosophical contention, as to whether these instruments – stock options – should be part of the company’s financial statement, are they really an expense that requires recognition or are they a different type of entity altogether that sort of defies accounting conventions. And then there’s a more practical level of the debate, the second point of contention, if you accept that they should be expensed in theory, practically can it be done?, can you find a value in the present time for options that aren’t tradable on the market. So there is sort of a philosophical debate and a more practical debate about – how can it get done. 

Secondary Argument(s) and Evidence
[In response to the opposition’s arguments:]
stock options don’t really represent a decrease in the assets, because they are not a cash account, they are not machinery, and so on, they are really a right to buy or become an owner of the company, that’s sort of where the debate bogs down because if you think of expenses as being detractions from a pie and the pie is maybe getting smaller so you have to recognize that decrease, really stock options determine how the pie is divided up amongst the share holders. If you grant a lot of stock options, the pie is being dived up amongst more owners of the company, it’s not increasing or decreasing the size of the pie in the end.

Targeted Arguments, Targets, and Evidence
I think it is kind of always the same, there hasn’t been a real differentiation in the arguments, I think we try to be comprehensive, and it depends on who we’re talking to on the Hill but the arguments are always essentially the same. We want those who favor your position or leaning toward your position, you want to provide them with a range of arguments for them to use on the floor of Congress and then when you are talking to the other side you sort of go through all the levels of debate so you tend to cover all the issues and don’t really differentiate. 

Nature of the Opposition
Senators Levin and McCain have really been leading the other side, and though it hasn’t been as much in the House, Congressman Stark from California. Outside of Congress you’ve got the standard setting bodies which are in favor of expensing stock options, and that’s the Financial Accounting Standards Board as well as the International Accounting Standards Board, the IASB, sort of outside of those governmental and quasi-governmental institutions you have others who in the private sector or non-profit secotr that are targeting stock options for recognition, those are institutional investors, like Warren Buffet – and his organization the Council of Institutional Investors and they’re concerned about stock options diluting their own investment holdings, their own equity holdings of their companies or the companies in which they invest. You probably also have support from organizations that are share holder activist but their names are escaping me at the moment. So those are the main ones that, not just passively, but are really pushing for the change. 

Ubiquitous Argument(s) and Evidence Articulated by the Opposition 
Their argument goes something like this: that stock options are a form of compensation, they reward employees for services and compensation needs to be recognized as an expense on company financial statements. There is a basic accounting principle that whenever there is an activity that produces revenue then you should recognize all the inputs that go into that activity or that salary or depreciation of machinery, and well obviously stock options are given to employees that produce the goods and services, and that’s where we get into the philosophical debate, because an expense is a decrease in assets in a company, stock options don’t really represent a decrease in the assets, because they are not a cash account, they are not machinery, and so on, they are really a right to buy or become an owner of the company, that’s sort of where the debate bogs down because if you think of expenses as being detractions from a pie and the pie is maybe getting smaller so you have to recognize that decrease, really stock options determine how the pie is divided up amongst the share holders. If you grant a lot of stock options, the pie is being dived up amongst more owners of the company, it’s not increasing or decreasing the size of the pie in the end. But then again, you go back to their position, it is a form of compensation, compensation is expensed as a rule on company financial statements therefore stock options must be expensed. 

Secondary Argument(s) and Evidence Articulated by the Opposition
The other kind of argument is I think more time specific, do to all the recent activity with Enron, Worldcom, the accounting irregularities, the fraud, that’s in the news – a lot of people attribute the accounting fraud and other corporate misdeeds to stock options. And that theory goes like this: companies began to give out stock options in larger and larger numbers beginning in the early 1990s and that trend increased for the rest of the decade, and that gave an increasing incentive to executives to inflate the price of the shares of their company, because if the price went up then their stock options became more valuable, hence they would get more compensation so that was the incentive effect and people were really, what they are trying to say is that you are giving this huge incentive out there but you aren’t recognizing it on the statement of the company. So there has to be a balancing between giving out these stock options to executives and recognizing them on the company’s financial statement and so really it is a cause and effect argument. These options have been “free” in the past but they’ve provided this incentive that has cause a number of companies’ executives to engage in illegal or improper activities. 

Targeted Argument(s) and Evidence Articulated by the Opposition (and Targets)
None mentioned.

Described as a Partisan Issue
No.

Venue(s) of Activity
House Senate

Action Pending or Taken by Relevant Decision Makers
No action pending.

Policy Objective(s) and Support for/Opposition to the Status Quo
Supports the status quo, opposes forcing companies to expense stock options. 

Advocate’s Experience: Tenure in Current Job/Previous Experience
I’ve been here three years, I’m an attorney by training and I’ve worked in the financial industry as an in-house attorney, that’s about all. 

Reliance on Research: In-House/External (Code for Organizational Advocates Only)
We outsource, the types of research we’ve commissioned in the past have been economic studies looking at secondary data analysis, not really doing original research we have done some surveys in the past of our members but by and large the stuff we have supported has been to fund an academic to look at a database and answer a specific question related to an issue, whether it is pension usage or whatever it might be, the issue of the data, but that’s the basic format of how we’ve done research in the past. Although, that is changing we have a 501 C3 non-profit institute which has some funding but we plan to expand that so we can do more outsourcing but do mor in house as well. 

Number of Individuals Involved in Advocacy (Code for Organizational Advocates Only)
Not obtained.

Units in Organization Involved in Public Affairs/Policy (Code for Organizational Advocates Only)
We are generally organized between health care and retirement, and more or less within each of those it is divided up legislative and regulatory, issue specific and then more governmental function.   

Advocate’s Outstanding Skills/Assets (Code for Organizational Advocates Only)
None mentioned.

Type of Membership: None, Institutions, Individuals, Both (Code for Organizational Advocates Only)
Institutions 

Membership Size (Code for Organizational Advocates Only)

Organizational Age (Code for Organizational Advocates Only)

Miscellaneous