Thursday, August 01, 2002

Two Cheers for Corporate Honesty

Today’s New York Times reports that General Electric has joined Coca-Cola, the Washington Post, Bank One, and among a select group of companies that have decided to count stock option grants to executives as a business expense. This change combined with others requires executives to hold substantial amounts of the stocks they purchase with such options for at least a year. Such changes will reduce the temptation for executives holding substantial amounts of options to artificially inflate apparent profits in order to drive up stock prices, so that they can make large profits by exercising their options and immediately selling the stock purchased with them. Large numbers of executives tempted by huge, poorly-regulated option grants, hid losses through questionable accounting, created various off-the-books entities, booked loan proceeds as profits, and otherwise cheated investors by making company profits look better than they really were.

These companies, whether driven by investor demands for a more honest accounting of the true costs of options or their own consciences, are blazing a path toward corporate honesty that may well serve as a guide for the entire market. The Financial Accounting Standards Board is now considering whether to require all companies to count the grant of stock options as an expense. Such a change would be the most important step toward restoring investor confidence in the fairness and transparency of the market.

It is a shame that Congress, unduly influenced by lobbying pressure from industry groups such as TechNet (as reported here on July 20, 2002) has lagged behind the public in demanding reform. Sen. Joseph Lieberman of Connecticut, now exploring a possible bid for the presidency in 2004, was instrumental in forcing the SEC to relax proposed rules that would have forced companies to properly account for the expense of options back in 1994.