Until recently, few small investors knew much about — let alone spent time writing to — the group that sets U.S. accounting rules out of a small office in the sleepy New York suburb of Norwalk, Connecticut.
Spurred by a raft of accounting scandals in the past year, however, retail investors are bombarding the Financial Accounting Standards Board (FASB) with letters and e-mails on the contentious issue of stock option expensing.
Some experts believe stock options — which give their holders the right to buy or sell stock at a set prices after a future date — gave some executives the incentive to cook their companies' books to keep stock prices flying high.
With the stock option debate heating up, shareholders are now leading the push to require companies to treat options as an expense, while much of corporate America, afraid of a hit on profits, lobbies against the move. Earlier this week, FASB added a project aimed at overhauling stock option rules to its agenda, the first step toward possibly mandating the expensing of stock options.
In response to FASB's request for feedback on stock option rules, 76 percent of responding investors wrote in favor of expensing options, while 88 percent of the responses from corporate America voiced opposition to the move.
“Investors have learned their lesson,” said Ann Yerger, deputy director at the Council of Institutional Investors, which represents pension funds. “Too often the only folks commenting (on proposed accounting rules) are the accounting firms and the companies.”
FASB Chairman Robert Herz, who refers to the e-mails still pouring into his mailbox as his “daily love notes” from investors, recalls one investor who called stock options “steroids of corporate greed.” Others, like Brecksville, Ohio, corporate director Richard Schulte, wrote that the chairman of the Nasdaq stock exchange, who opposes the expensing of options, is “selling smoke.”
Retired Canadian banker Robert Korthals chimed in to add that Nasdaq boss Hardwick Simmons had urged him to write to the board opposing the mandatory expensing of options. Nevertheless, Korthals declared that he was 100 percent in favor of expensing them.
Nasdaq, which lists thousands of technology companies, has said expensing stock options could hurt small companies that do not have earnings but need to attract qualified employees.
Corporate America, particularly tech companies which lavished employees with stock options during the Internet boom, have long fought against options expensing. In 2001, for example, profits at Standard & Poor's 500 companies would have dropped 20 percent if they had expensed options, according to a Bear Stearns study.
CHANGE IN HEART
The current investor enthusiasm for stock option expensing also reflects a change in attitude since accounting rulemakers last waded into the contentious debate.
At that time, in the mid-1990s, shareholders were largely silent on the issue, and Silicon Valley's political muscle successfully beat back FASB's proposal to mandate expensing.
The Council of Institutional Investors, for example, was against expensing options in the 1990s but is supporting the move this time around. The group says it reversed its stance last year after surveying its members, who voted 5-to-1 in favor of expensing options.
The Investment Company Institute, which represents mutual funds, has also written to FASB several times supporting compulsory stock option expensing, a spokeswoman said.
Many institutional investors are throwing their weight behind FASB's latest proposal partly because it is now seen as a corporate governance issue rather just a technical accounting issue. FASB, however, has vowed to make a final decision only based on what it considers the right accounting approach.
Under Herz's leadership, the board has also opened its arms to more feedback from investors and others who use financial statements by setting up a new advisory panel of analysts and fund managers.
“This is not a corporate governance issue,” FASB board member Ed Trott said at the board's meeting earlier this week. “It's not an issue of good or evil.”
FASB itself had shied away from the topic of stock options since the defeat of its proposal in the mid-1990s, until a small but high-profile list of companies led by Coca-Cola Co. KO.N voluntarily switched to a policy of expensing options last year.