- The Washington Times - Saturday, May 4, 2002

Federal Reserve Chairman Alan Greenspan argued yesterday that in light of the costly collapse of Enron Corp., regulations should be changed to force companies to treat lucrative stock options for top executives as a business expense.
Mr. Greenspan said that without the change, investors will continue to receive inaccurate information on the true financial status of a company, which he called central to the functioning of a free-market economic system. The change is opposed by the business community.
The debate over stock options has taken on new urgency since the collapse late last year of Enron Corp., the largest corporate bankruptcy ever in the nation. Enron executives reaped millions of dollars in profits by cashing in their stock options before the company's share price plummeted.
"The failure to expense stock option grants has introduced a significant distortion in reported earnings and one that has grown with the increasing prevalence of this form of compensation," Mr. Greenspan said in a speech to a financial markets conference convened by the Federal Reserve Bank of Atlanta.
In his remarks, Mr. Greenspan expanded on arguments he made in late March that the current practice of not counting stock options as a business expense was inflating corporate profits and giving investors a false impression of a company's true value.
His campaign for changes was a rare break for the Republican chairman of the Fed from the Bush administration's position on the issue.
President Bush, in an April newspaper interview, said "while I hate to get in a debate" with Mr. Greenspan, he did not believe stock options should be treated as a business expense.
That puts the Bush administration in line with the views of corporate executives, who are readying to fight legislation sponsored by Sen. Carl Levin, Michigan Democrat, that would make such a change.
The seemingly arcane accounting debate would have a huge impact on U.S. companies. The Fed has estimated that annual corporate earnings growth between 1995 and 2000 was 2.5 percentage points higher for big companies because they did not have to count options as expenses subtracting from their earnings.
Stock options give employees the right to buy a company's stock, in the future, at a predetermined price. The more the company's stock price rises, the more valuable the stock option becomes.
While expanding on his arguments for a need to switch to expensing stock options, Mr. Greenspan said he would prefer that the change be accomplished through decisions of regulatory groups that set standards for the accounting industry.
Mr. Greenspan also argued that companies should change the way they grant options to tie their value not just to how the company's stock price is doing but to some measurement of how the company is performing relative to its competitors.
He said such a change would limit the temptation of executives to make questionable business judgments simply to drive up the price of the company's stock, an allegation made against former top Enron executives.
"There have been a few dismaying examples of CEOs who nearly drove their companies to the wall and presided over a significant fall in the price of the companies' stock relative to those of their competitors," Mr. Greenspan said. "They nonetheless reaped large rewards because the strong performance of the stock market as a whole dragged the prices of the forlorn companies' stock along with it."
Mr. Greenspan, who delivered his speech via satellite to the Atlanta conference, said nothing about the status of the economy or the future direction of interest rates. His remarks were made available in Washington.

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