Advocate Summary

Issue:  Stock Option Expensing
Advocate:  Office of Senator Carl Levin (D-MI) – Timothy Henseler
Date of Interview: 8/12/02

[This is paraphrased he was very uncomfortable with being taped]

Basic Background
No background offered.

Prior Activity on the Issue 
Senator Levin got involved on this issue back in ’93 or ’94 when the issue wasn’t quite as popular. The Financial Accounting Standards Board (FASB) wanted to propose that stock options should be expensed. Well before that was Senator Sarbanes bill that changed FASB, it has its own funding now. FASB is supposed to be an independent agency but before Sarbanes’ bill it was financed by the companies it oversaw through contributions. So that was an easy way for the companies to strong arm FASB, you know, if you propose that we have to expense our options we’ll take away your funding. And then they were also strong armed by Congress, the companies would go to their representatives and ask them to tell FASB not to propose that. And Senator Lieberman managed to get a vote, a sense of Congress that FASB should force companies to expense stock options, and it was like 88 to 8. Senator Levin was one of those eight, share holders weren’t getting the full picture. So FASB was getting heat form companies and Congress. Senator Levin didn’t like the idea of Congress telling FASB, an independent agency what to do, it should be independent. So Senator Levin tried to change stock options again in late ’98 or ’99. It didn’t go anywhere though. The Wall Street Journal blasted Levin for even thinking that stock options should be expensed. A bit after that is when Warren Buffet got involved. 

Advocacy Activities Undertaken
Then last year, Senator Levin and McCain got the support of Durbin, Dayton, and Fitzgerald, S 1940, which was ending the double standard on stock options. This was a new way to look at it. It basically was setting the rule through the tax code instead of regulation through FASB. How it works is that a company is allowed to take a tax deduction when they choose to exercise and option, because it is an expense, but then they don’t show the stock options on their financial statements. That’s a double standard because they are saying it’s an expense to the federal government here and taking a tax deduction but then later they are saying it’s not an expense. Senator Levin drafted the bill here. And opportunity arose with the corporate reform legislation and McCain tried to introduce it as an amendment, but it wasn’t allowed. So McCain came up with a new way to look at the issue, to have language that would have FASB look at the issue within the year, not a regulation about what they had to do, just that they would seriously look at the issue. This measure was much more supported than the ending the double standards legislations because it is fairly difficult to say, “no, we don’t want FASB to seriously look into the issue” so this route was more politically palatable. The rule was found germane but it didn’t get to a vote because Senator Gramm blocked it because he didn’t want to see it go to a vote. Our office worked with some outside groups, and they supported it and gave us input but I can’t really think of any of the names right now. 

We’ve written up all sorts of things, did a lot of op eds, Buffet did an op ed in the Washington Post, April 9, 2002, that really laid out the logic well, here I’ll just read it, it’s hard to refute the logic of this: “1) If options aren’t a form of compensation, what are they? 2) If compensation isn’t an expense, what is it? 3) And if expenses shouldn’t go into the calculation of earning, wher in the world should they go?”
[article in folder]

Also we saw that one of the analyst groups did a study that was really supportive of expensing. So we contacted them and got their survey. So we keep our eyes out for that sort of thing and if we see something that is supportive of our position we get it and it becomes part of our stock pile of ammo, our support.

Future Advocacy Activities Planned
So now Senator Levin has said he will try to attach the rule, that FASB look into this issue, to whatever he can attach it to. 

Key Congressional Contact(s)/Champions
Then last year, Senator Levin and McCain got the support of Durbin, Dayton, and Fitzgerald, S 1940.

Targets of Direct Lobbying
None mentioned.

Targets of Grassroots Lobbying
Not applicable.

Coalition Partners: Names/Participants
Names not mentioned.

Other Participants in the Issue Debate
Momentum has really shifted since the whole Enron Worldcom fiasco. Prior to Enron only two companies voluntarily expensed them, but since Enron, and since some big names - Greenspan and Buffet - have come out and said they should be expensed, a lot of companies have begun to voluntarily expense them, it’s up to about 20 or 35 companies now, including GM and Citibank. In the past they were vehemently opposed as well but they’re starting to see that the tide has changed and I supposed have decided to act preemptively, so they can say look we’ve done this voluntarily we didn’t have to be forced to do it through legislation. 

Ubiquitous Argument(s) and Evidence
Let me make clear, Senator Levin isn’t opposed to stock options, they are good in many ways in business, but they are an expense and should be treated as such. He sees them also as a form of stealth compensation for corporate executives. They provide a strong incentive to puff up the earnings, which isn’t looking at the long term but at the short term. And so as the price goes up executives are exercising these options and making all this money.  JP Morgan said many years ago that the CEO should be receiving about 20 times the compensation of the regular employees, with stock options now it is something like 500 times, it is so out of whack. FASB had a compromise a while back, during the Sarbanes bill, and Senator Levin was on the floor a number of times back then too, that said you could put it in a foot note, and they are saying “well it is out there, it is in the footnote so it is already disclosed.” Well if it really is out there then why not just add it to the balance sheet? – because no one really looks at the footnotes. This is allows companies to lawfully hide it.

Secondary Argument(s) and Evidence
[See counters to each of the opposition’s arguments]

Targeted Arguments, Targets, and Evidence
None mentioned.

Nature of the Opposition
The high-tech companies were vehemently, I mean to the point of hysteria, opposed

Ubiquitous Argument(s) and Evidence Articulated by the Opposition 
They argue One, that it would result in taking stock options from the rank and file employees, because no company is going to want to give stock options if they have to expense them. We strongly believe this is not the case, companies are still going to use stock options. Two, they argue that it’s just to hard to quantify, there are a number of counters to that. First, there are a lot of other things on financial statements that aren’t that solid or set in stone and they are included, second there is a method that has been developed that we feel does a good job, not perfect but a very good job of quantifying them, the Black-Shols method, it won a Nobel prize or something, and third companies are quantifying this stuff all the time in places other than the balance sheet so it could be done there as well. And three, they argue that it doesn’t involve a cash outlay so it’s not an expense, well to that – there are a number of other things that a clearly expenses that are included on financial statements that also don’t involve a cash outlay. So those are there arguments and then there is just this general: it will really harm companies that rely on venture capital, these startups and such are going to have to not offer options because if they have to expense the stock options their balance sheet would look so bad they couldn’t get any money. You can’t say well it makes us look bad so we don’t want to show them, that’s not enough. They make it seem like its going to be the end of the world, it has really been a shrill over-reaction. 

Secondary Argument(s) and Evidence Articulated by the Opposition
[Multiple, not secondary, see above.]

FASB had a compromise a while back that said you could put it in a foot note, and they are saying “well it is out there, it is in the footnote so it is already disclosed.”

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

Described as a Partisan Issue
No.

Venue(s) of Activity
Senate

Action Pending or Taken by Relevant Decision Makers
No action pending, Senator Levin is going to try to attach the request that FASB look into the issue of stock options to whatever legislation he can get it on.

Policy Objective(s) and Support for/Opposition to the Status Quo
Opposed to the status quo, working to require companies to expense stock options on their financial statements. 

Advocate’s Experience: Tenure in Current Job/Previous Experience
I’ll be here a year in August. I was a lawyer, I came from a law firm in Boston. I’m a LA here, I work on tax and budget and other economic related issues, I’ve worked a lot on the Enron issue; a lot of late nights and a lot of banging my head against the wall. I don’t have an economic degree, history actually, and so being here in this office has been like another degree from everything I’ve learned on economic issues, a graduate degree from working on Enron. 

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