ACTION NEEDED ON STOCK OPTION DODGE

By Edward Cone

News & Record

July 21, 2002 Sunday ALL EDITIONS

Something for nothing is an excellent deal for those who can get it, but somebody else always gets stuck with the hidden costs. In the stock options scam, corporate executives get rich and investors get hosed.

President Bush and Congress don't find this to be a problem. They talk about the integrity of financial accounting and restoring public confidence in the stock market but do nothing about options.

W says the stock market is suffering a hangover from its binge years, but he isn't about to cut off this particular bar tab. It must be one of those accounting issues he identified in his disastrous corporate responsibility speech as not "exactly black and white."

Companies say it is difficult to assign an accurate price to stock options. You have to love their boardroom logic: The options we granted could be worth tens of millions, but we can't price them exactly, so let's just say ... zero.

Under current accounting rules, a company is able to grant options to its employees without charging the value of those options against its earnings. That means executives can pay themselves with enormous amounts of stock without reducing reported profits.

Not only does this misrepresent actual expenses, it gives executives an incentive to manage for higher stock prices instead of real and sustainable success in business. And it allows executives to pay themselves enormous amounts that don't show up as salaries in financial and media reports. The spread between CEO pay and everyone else's pay has grown to the point of absurdity, not because the market values executive brilliance but because the executives are getting something for nothing.

Options can be good and useful things, but they should be accounted for honestly. That's what Alan Greenspan told Congress on Tuesday. It's also what sage investor Warren Buffett thinks, and as of last week expensing options is policy at Coca-Cola and The Washington Post, two companies where Buffett is a board member.

(Full disclosure: I got some options from a media company I worked for during the bubble years. When I asked the chief financial officer recently what their value was, he said, "Confederate money." He was wrong, though, because you can still sell Confederate money for a modest amount on eBay.)

You can see why this line of discussion makes the White House uncomfortable. Vice President Dick Cheney and Army Secretary Thomas White got rich off stock options as executives at companies that are now under investigation for suspect accounting.

Cheney was chief executive of the Texas energy services firm Halliburton when the company changed its financial reporting methods and began to take a more aggressive stance on booking certain profits. Cheney cashed out millions of dollars worth of Halliburton options. Halliburton shares have since done even worse than the woeful stock market averages, losing two-thirds of their value over the last two years.

White ran a division of Enron that is being investigated for manipulating energy prices before the tainted trading company collapsed. His eight-figure options package was even bigger than Cheney's. White, who enjoys the support of the famously loyal Bush, was grilled by a Senate committee Thursday about his role in the Enron debacle.

Forget about W's friendship with Enron chairman "Kenny Boy" Lay - Bush has forgotten it - and put aside questions about his casual compliance with Securities and Exchange Commission rules on the Harken Energy deal. White and Cheney are problem enough for a president trying to calm investor fears.

(Can you imagine what the reaction would have been if any member of Bill Clinton's administration had been involved in this kind of stuff? Rush Limbaugh would be shouting himself hoarse and Jerry Falwell would have a video out claiming that the Enron exec who committed suicide was actually murdered by Hillary Clinton.)

And Congress doesn't seem to be any more interested than the White House in pressing the Financial Accounting Standards Board into action. Despite proposals from John McCain and others, GOP senators with the help of Democrat Tom Daschle twice stifled attempts to change options accounting in the past week. In this noble effort they were merely carrying on the work of Democrat Joe Lieberman, who led the successful Senate fight against expensing options eight years ago.

Lieberman is not the only Democrat with a soft spot for sweet stock deals. Democratic National Committee chairman Terry McAuliffe, for example, made a mint on his Global Crossing shares. But neither man is the vice president of the United States. You can't just point fingers from the White House and say that everyone else does it, too, although we did learn a lot about the sex lives of GOP congressmen when Clinton's people tried that strategy.

Bush, our self-styled CEO president, is going to have to think hard about who he and his men really work for, or else they may end up out of a job.


Edward Cone (efcone@mindspring.com, www.edcone.com), a magazine journalist and Greensboro native, contributes a column to the News & Record each Sunday.