Big Names in Finance Seek Repeal of Option-Cost Rule
Amid a deepening federal investigation into companies' past stock-option practices, a group of prominent economists and finance experts has stepped in with a surprising proposition: It wants to repeal an option-reform measure adopted last year.
The rule at issue requires companies to deduct from their earnings the value of options granted to employees. Supporters of the measure, including billionaire investor Warren Buffett, say it simply forces companies to account for the cost of stock options as they would any other expense.
Silicon Valley technology companies have vigorously opposed option expensing, and their cause has been taken up anew by a group that includes Los Angeles venture capitalist Kip Hagopian, former U.S. Treasury Secretary Paul H. O'Neill and Nobel-Prize-winning economists Milton Friedman and Harry Markowitz.
Hagopian acknowledged that trying to restart the option-expensing debate during the government's probes of possible option abuses might appear to be a case of bad timing. But he said the issue of accounting for options was entirely separate from whether executives handed out options improperly.
Writing in the latest issue of a UC Berkeley business school journal, Hagopian argues that stock options aren't an actual corporate expense but rather a "gain-sharing instrument."
The cost of issuing options is borne by shareholders rather than by the company, Hagopian says, because shareholders face potential dilution of their ownership stake if employees exercise options and add to the total of outstanding shares.
By forcing companies to formally include an option cost on their income statements, accounting rule makers "simply made a mistake," said Hagopian, a well-known Wall Street figure who helped launch Los Angeles-based venture capital giant Brentwood Associates in 1972.
Hagopian's opinion piece in the Berkeley journal was co-signed by 29 other finance professionals and economists, including O'Neill and Friedman. The group plans to petition the Securities and Exchange Commission to revisit the option-expensing rule.
An option is the right to buy stock at a set price for a specific period. Prosecutors in recent weeks have filed criminal charges against former executives of two technology companies in connection with option grants, and the SEC has said it is investigating more than 80 companies.
