TCS Daily

Green Eyeshade Killers

By James K. Glassman - February 19, 2004 12:00 AM

Candidates are obsessed with "outsourcing," the alleged loss of tech jobs overseas. In fact, outsourcing is a sideshow. Since 1999, U.S. tech jobs have been rising, and the Labor Department projects they'll double by 2010. Yes, IBM is hiring programmers in India, but IBM is hiring them at home too, and, as India's prosperity increases, it becomes a new billion-person market for U.S. goods.

There's a far, far more dangerous threat to our global preeminence in technology. It involves an accounting change.

Don't touch that dial! Accounting is boring, but this is important. Your job may depend on it.

In Norwalk, Conn., you'll find the headquarters of the Financial Accounting Standards Board, or FASB. An unelected group of green-eyeshade nitpickers, FASB has enormous power. On Feb. 11, the board told its staff to draft a proposal to require companies to record as expenses their grants of stock options to employees.

If this change is enacted, its effects are likely to be immediate and devastating.

Tech CEOs have said they will reduce or eliminate their options programs -- a step that will damage a critical industry at a critical time. New tech firms may never get off the ground. "This is a big competitiveness issue," says venture capitalist John Doerr. Options attract the best and the brightest -- people willing to take big risks for big rewards, and boost the economy in the process.

Over the past 20 years, we have enjoyed the greatest boom in history -- low unemployment, high growth, low inflation. A big reason is the creation of a new high-tech industry, as vital to broad economic development as the railroads and electricity were in their time. Are we ready to cripple that industry through an unnecessary accounting change?

It seems that way.

Worried that U.S. jobs will go overseas? Here's a guaranteed way to make it happen. George Chamillard, the CEO of Teradyne, maker of electronic testing equipment, points out that in the 1980s and 1990s, stock options helped attract "talent away from mature companies and into start-ups," igniting the boom in Silicon Valley. Now, as options have come under attack by American politicians and bureaucrats, "elsewhere the stock option as a recruiting tool is on the rise." Options are drawing scientists from the U.S. to Asia. And, just as our policymakers are denigrating options, China is officially encouraging their use in its latest five-year plan.

What's an option? It's compensation that allows a worker to buy shares of his employer's stock at a specific price after a number of years have elapsed. It's an incentive to help your company succeed, so you can reap the benefits. Options are also attractive to businesses because they don't require an immediate outlay of cash -- which can instead be used to hire more workers, increase research and development, and build new factories.

Who would want to upset this virtuous circle?

The accountants at FASB. Says Paul Atkins, an SEC commissioner, "My own fear is that FASB is basically getting into an area that's more of a political issue than a technical or accounting issue."

Political? Yes. At a time when business-bashing is back into vogue, misguided politicians are pressuring FASB to make it harder for companies to issue options.

Currently, options are discussed, at great length, in the footnotes of financial statements -- which smart analysts and investors read more carefully than other numbers. When options are exercised, companies increase their stock outstanding, thus lowering their earnings per share.

This system has worked for 30 years. But now FASB wants to assign a specific number to the value of the options when they are issued. That's impossible. FASB concedes there's no single formula for valuing a complicated employee option. "The real question," says Atkins, "is whether expensing stock options will enhance...reliability and integrity or have the opposite effect."

Since expensing will distort and depress their earnings, CEOs will simply cut back on issuing options -- and the U.S. economy will suffer. It's time to stop the green eyeshade killers.

If they really care about the exodus of tech jobs, Lou Dobbs of CNN and politicians who complain about outsourcing should instead campaign to keep current accounting rules on stock options. Talk about "exporting America"! That's just what FASB is about to do.


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