- The Washington Times - Thursday, July 25, 2002

The nation's largest institutional investor called on corporate America yesterday to treat stock options as expenses to improve the integrity of their books.
New York-based TIAA-CREF, a huge pension fund and asset-management group that handles $265 billion in investments, wrote the chief executives of 1,754 publicly traded companies yesterday, urging them to account for options as liabilities.
"Corporate America should adopt a strategic policy strongly encouraging accounting of the highest quality," wrote John Biggs, the TIAA-CREF chairman, president and chief executive. "One important element of this strategy would be for companies to employ an accounting model that reflects a realistic cost of stock options."
A vast majority of U.S. companies regards stock options, which are rights to buy new stock at a fixed price regardless of current market value, as having no effect on a company's bottom line.
But omitting stock options from income statements allows companies to inflate profits by understating expenses and encourages executives to use improper accounting to boost the value of their options, according to TIAA-CREF.
A study released yesterday by Bear Stearns and Co., a New York investment bank, concluded that expensing stock options would have sliced 20 percent off the earnings per share of the Standard & Poor's 500 companies. Profits in 2000 would have dropped 8 percent, the study said.
After accounting scandals at Houston-based Enron Corp. and other major companies, the approach has come under fire from investors who say stock options, a major component of executive pay, drove corporate chiefs to inflate earnings to drive up share prices.
Federal Reserve Chairman Alan Greenspan has advocated treating options as expenses, as has legendary investor Warren Buffet. Coca-Cola Co., Bank One, Fannie Mae, Freddie Mac and Amazon are among the major companies that already have taken this step.
But technology companies, many of which use stock options to substitute for cash compensation, have fought a legislative mandate to expense options. In particular, they helped defeat legislation pushed by Sens. Carl Levin, Michigan Democrat, and John McCain, Arizona Republican.
"My industry is always going to be opposed to expensing stock options," said Caroline Graves Hurley, tax counsel and director of tax policy at AeA, a high-tech industry association.
Instead, AeA wants legislation requiring the Securities and Exchange Commission to study how to treat options in financial statements.
TIAA-CREF, which handles pensions for employees of educational and research institutions, appears to be settling in for a protracted campaign to convince major companies to list their options as expenses. Peg O'Hara, managing director of the Washington-based Council of Institutional Investors, a trade association, said TIAA-CREF has a history of getting its way.
"They're very dogged," she said. "They will keep on an issue until they get results."
Kenneth Bertsch, TIAA-CREF's director of corporate governance, said the company will follow up with selected blue-chip firms in the hopes of getting a critical mass of companies to follow the lead of Coca-Cola and others. He added that many of these companies' directors, who have been making the case for a change in financial report of options, have urged TIAA-CREF to jump into the fray.
"Our sense is that this issue will move pretty quickly," Mr. Bertsch said.
TIAA-CREF will also solicit support from other major institutional investors, he said. The Council of Institutional Investors in March endorsed the change in accounting for options, but TIAA-CREF is the first major player to begin pressuring individual companies.
In June, the board of directors of the California Public Employees' Retirement System, which manages $149.3 billion in pension money, rejected a proposal similar to the one TIAA-CREF is making.

Sign up for Daily Newsletters

Manage Newsletters

Copyright © 2020 The Washington Times, LLC. Click here for reprint permission.

Please read our comment policy before commenting.


Click to Read More and View Comments

Click to Hide