Why All the Fuss About Stockholders?

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Private Sector Accounting

Standard Setting At Risk-Again

by Edmund Jenkins, Chairman FASB

In numerous articles of late, magazines and newspapers have been remarking over the huge numbers of stock options that workers around the country are receiving and their worth. A particular focus is on the enormous amounts being granted to high-ranking company officials. Forbes, in a cover story, even went so far as to say that options are not a free lunch, that options were really a cost to the company. However, the magazine went on to say, option costs are hidden from shareholders because their cost is not reflected in the income statement, only hidden away in a footnote.

Members of the Financial Accounting Standards Board have taken a great deal of interest in these articles. In 1993, the Board proposed that the value of options granted to employees be charged to earnings as an expense, just like any other compensation. We argued that options represented a cost to the company and that shareholders had the right to know the amount of that cost.

The furor caused by this proposal was unprecedented in FASB history. Companies claimed that this would cause stock option grants to cease and that companies would lose all their talented employees. Employees would no longer enjoy the windfalls they reaped from exercising options. The markets would collapse and a general depression would ensue. Employees, incensed at the FASB because they believed the Board was going to outlaw options (we were not - even if we could -but that's what their employers told them), staged a protest rally in downtown San Jose, California, while Board members were there holding public hearings on the subject.

Eventually, the uproar became so loud that it caught the attention of Congress. Bills were introduced that would have taken away the FASB's independence and ability to set standards. A "Sense of the Senate" non-binding resolution was passed declaring that the Board should cease and desist with its proposal. Ironically, on the same day, the Senate voted almost unanimously that Congress should not interfere with the independence of the FASB.

Unfortunately, only a few stepped into the fray on our behalf. The Board backed away from its original proposal because Board members were fearful that a strong sentiment in Congress might have a detrimental effect on the Board's viability.

I think the Board was wrong to back away from what some are belatedly recognizing was a good standard. The Board's mission is to establish and improve accounting standards so that the resulting financial information is useful to investors in making decisions about where to allocate their capital. While we have given investors better information about options than they had before, we failed to give them the best information.

Capital allocation decisions are essential to the efficient running of our capital markets in the United States. The U.S. capital markets are the envy of the world. They are the deepest, broadest and most liquid anywhere. And they both reflect and are the supporters of the most effective economy ever.

Now, there are a number of reasons for this, including the very effective guidance and structure provided by the Federal Reserve. But, there is another very important reason for the efficiency and effectiveness of our capital markets and that is the confidence provided by the credibility and thoroughness of our financial accounting and reporting - the completeness and transparency of information provided to investors and creditors.

Recently, there has been some movement in Congress to stifle another of the Board's projects - this time on derivatives. Two bills have been introduced in Congress, both of which would take standard setting out of the private sector and put it squarely in the hands of the federal government. Both bills would require explicit SEC approval, including the Commission's own due process, over all accounting standards - including those issued by the FASB.

To put the politicians in charge of accounting standard setting would destroy the independent system with its multiple opportunities for public input that we enjoy today. Without that independent system, U.S. investors would not have the wealth of useful information they now have for their investment decisions. Our capital markets would suffer from a lack of consumer confidence.

Is this what American investors really want? I doubt it. So I ask that you support the FASB as an institution. Participate in our public process. Make your views known. You may not always like the answers, but we hope that you will always support the process.

Editor's note: The bills referred to by Mr. Jenkins are HR 3165 by Richard Baker (R-Louisiana) and S 1560 by Senator Lauch Faircloth (R-North Carolina).

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		Private Sector Accounting Standard Setting At Risk-Again by Edmund Jenkins, Chairman FASB In numerous articles of late, magazines and newspapers have been remarking over the huge numbers of stock options that workers around the country are receiving and their worth. A particular focus is on the enormous amounts being granted to high-ranking company officials. Forbes, in a cover story, even went so far as to say that options are not a free lunch, that options were really a cost to the company. However, the magazine went on to say, option costs are hidden from shareholders because their cost is not reflected in the income statement, only hidden away in a footnote. Members of the Financial Accounting Standards Board have taken a great deal of interest in these articles. In 1993, the Board proposed that the value of options granted to employees be charged to earnings as an expense, just like any other compensation. We argued that options represented a cost to the company and that shareholders had the right to know the amount of that cost. The furor caused by this proposal was unprecedented in FASB history. Companies claimed that this would cause stock option grants to cease and that companies would lose all their talented employees. Employees would no longer enjoy the windfalls they reaped from exercising options. The markets would collapse and a general depression would ensue. Employees, incensed at the FASB because they believed the Board was going to outlaw options (we were not - even if we could -but that's what their employers told them), staged a protest rally in downtown San Jose, California, while Board members were there holding public hearings on the subject. Eventually, the uproar became so loud that it caught the attention of Congress. Bills were introduced that would have taken away the FASB's independence and ability to set standards. A "Sense of the Senate" non-binding resolution was passed declaring that the Board should cease and desist with its proposal. Ironically, on the same day, the Senate voted almost unanimously that Congress should not interfere with the independence of the FASB. Unfortunately, only a few stepped into the fray on our behalf. The Board backed away from its original proposal because Board members were fearful that a strong sentiment in Congress might have a detrimental effect on the Board's viability. I think the Board was wrong to back away from what some are belatedly recognizing was a good standard. The Board's mission is to establish and improve accounting standards so that the resulting financial information is useful to investors in making decisions about where to allocate their capital. While we have given investors better information about options than they had before, we failed to give them the best information. Capital allocation decisions are essential to the efficient running of our capital markets in the United States. The U.S. capital markets are the envy of the world. They are the deepest, broadest and most liquid anywhere. And they both reflect and are the supporters of the most effective economy ever. Now, there are a number of reasons for this, including the very effective guidance and structure provided by the Federal Reserve. But, there is another very important reason for the efficiency and effectiveness of our capital markets and that is the confidence provided by the credibility and thoroughness of our financial accounting and reporting - the completeness and transparency of information provided to investors and creditors. Recently, there has been some movement in Congress to stifle another of the Board's projects - this time on derivatives. Two bills have been introduced in Congress, both of which would take standard setting out of the private sector and put it squarely in the hands of the federal government. Both bills would require explicit SEC approval, including the Commission's own due process, over all accounting standards - including those issued by the FASB. To put the politicians in charge of accounting standard setting would destroy the independent system with its multiple opportunities for public input that we enjoy today. Without that independent system, U.S. investors would not have the wealth of useful information they now have for their investment decisions. Our capital markets would suffer from a lack of consumer confidence. Is this what American investors really want? I doubt it. So I ask that you support the FASB as an institution. Participate in our public process. Make your views known. You may not always like the answers, but we hope that you will always support the process. Editor's note: The bills referred to by Mr. Jenkins are HR 3165 by Richard Baker (R-Louisiana) and S 1560 by Senator Lauch Faircloth (R-North Carolina). Back to the top