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Pitt Backs Shareholder Votes on Options

September 21, 2002|From Bloomberg News and Reuters

Securities and Exchange Commission Chairman Harvey L. Pitt said Friday that shareholders should have the right to vote on how companies account for stock options, signaling a shift in SEC policy that could lead to a wave of proxy votes on the controversial issue.

Treating options as an expense on corporate income statements "is a topic of major concern to people, and I think shareholders should have the chance to express their views on it," Pitt said in an interview with Bloomberg News.

For the last decade, the SEC has allowed companies to simply reject stockholder proxy proposals on accounting for stock options, saying the issue falls under "ordinary" business exempt from shareholder votes. Billionaire Warren Buffett and a growing number of business leaders have advocated treating options as an expense to guard against inflated profits and diluted shareholder value.

Pitt didn't endorse treating options as expenses, but he agreed that shareholders should be given a voice on the issue.

"My personal view is that I want to see options be required to be approved by shareholders in all cases," he said.

Representatives of unions, which have billions of dollars of members' pension funds invested in stocks, say a shift in the SEC position in favor of proxy resolutions will lead to a wave of shareholder proposals pressing companies to deduct the costs of options from net income.

In the last year, the SEC has allowed seven companies to exclude shareholder proposals on the options-expense issue. The first test case for reversing that policy may come in an appeal of an SEC decision in July that allowed National Semiconductor Corp. to throw out a proxy on the topic.

Shareholders led by the United Brotherhood of Carpenters are appealing the National Semiconductor decision. Ed Durkin, director of the union's corporate affairs, said the change in Pitt's position will lead to "hundreds" of proxy requests to switch option accounting.

Because most companies hold their annual meetings in April and May, deadlines for many shareholder proxy proposals will be due in the next two months.

Pitt declined to say how he would vote on the National Semiconductor appeal.

Two SEC commissioners--Democrats Harvey Goldschmid and Roel Campos--have supported calls for requiring companies to treat options as expenses.

The other two commissioners--Republicans Paul Atkins and Cynthia Glassman--have urged the Financial Accounting Standards Board, which sets U.S. accounting rules, to reexamine the issue, which FASB is doing.

Options--which grant the holder the right to buy shares at a fixed price--became extremely popular in the 1990s as a way to reward company executives and rank-and-file workers alike. Unlike salaries and bonuses, the cost of option awards is not deducted from corporate earnings under current accounting rules.

The rules require companies to include only an estimate of the cost in a footnote on financial statements.

But since July 1, more than 95 U.S. companies--including General Electric Co., Coca-Cola Co. and Washington Post Co.--have announced they will voluntarily include option expenses in their income statements.

Opposition to treating options as an expense has been led by computer-technology companies, including Cisco Systems Inc. and Intel Corp., which have made options a major share of executive compensation.

In July, the SEC reversed course on another issue involving options, allowing shareholder votes on stock option compensation plans if they would dilute shareholder interest in the company.

Separately on Friday, Pitt said he hopes the SEC would name the members of the new accounting industry oversight board by the end of September, which would be one month earlier than the deadline Congress has set.

The new oversight board was ordered by Congress in the Sarbanes-Oxley corporate reform bill that President Bush signed into law July 30. The SEC was given until Oct. 28 to pick the five board members.

The board will have the power to regulate and discipline the accounting industry, taking over for a much weaker oversight board that dissolved itself earlier this year.

Sources say the SEC had hoped that former Federal Reserve Chairman Paul Volcker would chair the board, but he has declined.

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