Joe Lieberman Is a Big Fat Idiot
by Clay Risen

Who says Democrats don't shill for The Man? On the July 21 New York Times op-ed page, Sen. Joseph Lieberman (D-Conn.) argues why companies should not be required to list stock option disbursements on their balance sheets — a proposal that was shot down in Congress twice in the last three weeks, thanks in part to the combined efforts of Lieberman, Senate Majority Leader Tom Daschle (D-S.D.) and a bevy of interest groups, from the Business Roundtable to the National Association of Manufacturers to the aptly named Coalition to Preserve and Protect Stock Options.

Lieberman's arguments are not, in any sense of the word, new — in fact, they are largely the same ones he made in 1993 when he led opposition to a similar bill. Nor are they particularly persuasive, given the seemingly endless perp walk of CEOs who took advantage of lenient stock-option accounting rules to line their pockets. But rather than unfairly summing up Lieberman's arguments in my own words only to strike them down, I thought it might be better to let the senator speak for himself:

One popular solution to the current crisis of corporate crime is to fix the accounting rules for stock options. Force companies to count those whopping stock option packages as expenses when they are granted, many say, and the fraud will recede. I wish it were that easy.

Lieberman wastes no time in setting up his straw man, telling us that proponents see option expensing as a panacea for corporate fraud. But no one argues that putting stock options on the balance sheet is the be all and end all of corporate reform; rather, it's part of a larger movement to remove incentives for corporate crime. Nevertheless, as long as CEOs are given free money in the form of unexpensed stock options and access to insider information, there will be an enormous incentive to cheat. This is exactly what happened at IMClone, Enron and WorldCom, among others. Lieberman is, however, correct to call the proposal "popular" — Alan Greenspan, Warren Buffett, former SEC Chair Arthur Levitt, Standard & Poor's and a growing number of major companies support it, and the International Accounting Standards Board began requires companies from nations under its jurisdiction to expense stock options (American companies are exempt).

The reality is that giving options to employees is an innovative idea that has been abused by greedy executives. But changing the accounting rules won't change their behavior; it will only deny options to average workers who have done nothing wrong. Our goal should be to deter the abuse of stock options without discouraging the use of a tool that plays a valuable role in the American economy.

Lieberman apparently lives in an alternate reality where executives do things for their employees out of the goodness of their hearts. In the real world, the major reason companies started giving stock options to non-executive employees in the 1990s was to lower cash salaries, receive cash inflows when employees exercised their options and arrange nifty tax write-offs. (For example, by reporting its options disbursements on its tax returns but not its balance sheet, Enron took a $112 million tax bill and turned it into a $278 million refund in 2000.) The only way changing the rules would affect the flow of options would be by closing off a gaping accounting loophole.

My familiarity with this arcane issue dates back to 1993, when the Financial Accounting Standards Board, an independent group that sets rules on how to account for business transactions, first floated a plan to require stock options to be treated as an expense against earnings on profit-and-loss statements at the time they are granted.

Here Lieberman borrows directly from lobbyist lingo; by calling the issue arcane, casual readers will think it both too dense and not important enough to understand. Actually, it's neither — if a company reports a dollar amount of stock options on its tax returns (thereby lessening the amount of taxes it must pay), it should also have to do so on its balance sheets (thereby better reflecting its costs). It's that simple.

I opposed this rule change. Options are a valuable tool for attracting talent and spreading wealth because they give employees a greater stake in their companies. And business leaders, particularly from the high-tech community, said they would have to issue fewer options if they had to subtract their estimated value from their profits. In addition, there is no accurate way to value an option on the day it is granted. Options only become valuable several years later, when they are exercised.

Lieberman conveniently ignores the fact that countless companies already do value stock options — on their tax returns. The only thing that recent proposals by Sen. Carl Levin (D-Mich.) and Sen. John McCain (R-Ariz.) would require is that those companies also expense the same value on their balance sheets. There are many ways to accurately value stock options, and investor Warren Buffett argues that it is no more difficult than estimating depreciation for capital expenses like computers and office furniture — something companies do all the time. The only problem arises when different companies use different methods in their calculations, but this is easily resolved by adopting standard formulas.

The circumstances have surely changed since I worked to defeat the board's plan. But the problems with the board's approach have not. Requiring firms to predict the value of options is still bad accounting, and it would still have damaging repercussions: It would significantly reduce earnings for many companies with large option plans, which in turn would reduce the value of their stock in particular and the market in general. That is the last thing we need now.

"Reduce earnings for many companies." Well, yes. But taken by itself that's also an argument against investigating any company ever — after all, by going after Enron and WorldCom, the government directly contributed to the two largest bankruptcies in American history. For shame. Besides, now is the perfect time to do it — how much worse could investor confidence get?

Faced with such a change, businesses would almost certainly decide to grant fewer options. And in all likelihood, the first to be cut out would be middle-class workers — millions of whom, thanks to options, have seen their wealth grow substantially over the last decade.

But this belies the fact that most employees who do receive options get only a token number — according to the research firm iQuantic, only 28 percent of all stock options go to non-management employees. Nor are stock options a cornucopia of wealth for the common man. Employees rarely receive advice on how to manage their options, and options only work as an employee incentive in a bull market, when there's a chance their company's stock will rise high enough for them to cash in. There are, however, alternatives — The Motley Fool's Whitney Tilson, for instance, advocates a plan practiced by a number of companies that gives employees low-interest loans to buy company stock outright, removing a dense layer of confusion and risk.

There clearly is a problem with the abuse of options that demands a legislative response. But the solution has little to do with accounting. The fact is that some greedy executives, loaded up with tens of thousands of options, engage in all manner of fraudulent and deceitful accounting tricks to jack up earnings and their share price, cash in at the right time, and then leave the company.

How do you stop this from happening? The bill the Senate passed last week, by establishing independent oversight and tough new criminal penalties for bad behavior, will go a long way toward preventing the particular corruptions that may have been driven by large option packages.

No serious liberal thinks that the package passed by the Senate is anything more than a starting point. Because so few CEOs ever actually receive penalties, toughening criminal punishments has little deterrent effect. And the bill will most assuredly be watered down in committee, as senators rush to merge it with the more lenient House version before the August recess begins at the end of the week.

We also should adopt new policies that change the way options are allocated, sold and approved. The number of people receiving options has grown significantly in the last decade — the National Center for Employee Ownership estimates that between 7 million and 10 million people now hold options, and a number of companies, like Intel and Sun, have broad-based plans that distribute most options to rank-and-file workers, not senior executives. But the majority of options are still awarded to a small number of high-level managers. We need to stop this hoarding of options at the top of the corporate food chain.

In the past I've proposed changes in tax policy to encourage the expansion of broad-based option plans. But in light of this wave of corporate crime, it's time for more forceful measures. One sensible idea is to prohibit companies from deducting the cost of options when exercised if they do not offer the majority of them to rank-and- file workers. Another way to deter the misuse of options is to set up a mandatory holding period and curtail top executives from selling their shares while they are still employed by the company. We should also give shareholders a greater say in the design of option plans, particularly for company leaders, by requiring a majority approval of such plans by shareholders.

I intend to propose legislation in the weeks ahead that encompasses these reforms. I am confident that if we broaden our discussion, we can reach a consensus that will end the abuse of stock options without jeopardizing an effective tool that has played a critical role in the democratization of capitalism in this country.

These are all good ideas, and it's too bad Lieberman didn't propose them as amendments to the current corporate reform bill. But the chance that he will turn around and actually impose such a policy on the corporate hands that feed him — that virtually fed him this op-ed — is next to nil.

Of course, Lieberman is far from the only senator defending big business; he's not even the only Democrat — The New Republic reports that soon after the Levin Amendment was defeated, Daschle received a letter from the Information Technology Industry Council thanking him for his "support for the high-tech industry's position against the expensing of stocks." If you want evidence of Congressional kowtowing to corporate America, it's everywhere these days; a good place to start looking is last Sunday's Times op-ed page.

E-mail Clay Risen at risenc@yahoo.com.