TCS Daily

Kerry Flip-Flops... Again

By James K. Glassman - June 30, 2004 12:00 AM

The House of Representatives is ready to pass a bill that would sharply limit an attempt by an unelected accounting board in Norwalk, Conn., to force U.S. companies to guess the costs of broad-based employee stock options and write them off as expenses when they are issued.

If the Financial Accounting Standards Board gets its way and stock options are expensed, it's almost certain that many businesses, including high-tech firms, will stop issuing them, and American innovation and competitiveness will suffer.

It all comes down to the Senate, where the House bill is being blocked by a few key legislators. Among them, according to an article in Monday's edition of National Journal's Technology Daily, is John Kerry, who, a month from now, will become the Democratic nominee for president.

In a speech in Silicon Valley last Thursday, Kerry extolled the benefits of stock ownership but, in the words of his economic policy director, Jason Furman, the Senator "believes that companies should be required to expense stock options."

As Drew Clark wrote in Technology Daily: "Some believe that Kerry's lack of support for an issue that TechNet CEO Rick White calls the 'number one, two and three issue' current of interest to technology companies could cost him support within the sector." By contrast, said White, "The president is clear that he is against expensing stock options."

Kerry is, at least for now, clearly in favor of expensing. But he did not always take that position.

In fact, in 1994, the last time the options-expensing issue was under consideration by FASB, Kerry took the opposite stance. He was against expensing and urged the SEC "to compel FASB to take another approach."

What a Difference a Decade Makes

Flip-flops like this are common for Kerry, but what is remarkable in this case is the powerful and eloquent argument he made in opposition to options expensing in a speech on the Senate floor on March 10, 1994.

It's worth looking at what John Kerry said 10 years ago since he so effectively demolished the contentions of FASB backers today -- including those of John Kerry himself.

Kerry began his speech by saying that he and others had been "reluctant to wade into this controversy because of our fear of politicizing a process that must aspire to absolute clarity and fairness." But, he said, "however well-motivated FASB might have been at the start, I am now convinced that its effort has run off the rails." He asked the Securities and Exchange Commission, then chaired by Democrat Arthur Levitt, to stop wagging its "finger at us in Congress, warning us against interference in the FASB process" and, instead, "for the SEC to start wagging its finger in the other direction" -- at FASB.


Two reasons: first, the options-expensing rule won't really help the investing public since FASB "already requires companies to report their earnings-per-share based on a total number of shares that includes all the stock options they have granted." The SEC also has substantial disclosure requirements on options. That, of course, is still true.

But, Kerry said, "Consider all this with the mechanics of the proposed FASB rule. Companies will have to choose from among six computer models to make estimates of the future value of their stock." This requirement, "by its nature...introduces uncertainty into the financial reporting process.... Thus, it is not clear to me what the investing public gains from the FASB rule." This is the same argument made by my American Enterprise Institute colleagues, Kevin Hassett and Peter Wallison, in a recent paper.

The second reason that Kerry opposed the FASB measure 10 years ago was that it would adversely affect companies and their workers, especially "smaller companies that are creating new jobs in states like my own."

In Massachusetts, "just as in Silicon Valley," he said, "stock options serve as a fundamental means of financing the start-up of new companies. Employees forego salary and benefits in return for stock options. In doing so, they bind themselves to the firm for a period of several years, and commit themselves to the goal of all investors: the company's success."

Kerry continued, "Stock options allow the company to reserve critically needed cash for other vital needs of a new or emerging company: for research and development, for marketing, and for getting a new product out the door."

True then and true now.

Then Kerry said, "There is no more compelling testimony to the damage the FASB rule will do to these companies than the testimony of the venture capital community.... The venture capitalists tell me that the FASB rule...will make recruitment of talent more difficult,...which will make the cost of starting a company rise."

Indeed, venture capitalists still say that. For example, America's best-known venture capitalist, John Doerr, said in testimony in 2003 that he thought "broad-based employee stock ownership... will disappear if expensing is mandated."

Kerry said in his speech, "This might be acceptable if some greater public purpose were served by the FASB rule, such as the provision of a clear benefit to the investing public. But as I noted previously, it is difficult to find such a benefit in the current FASB proposal."

The Senator finished by calling the FASB proposal "a real threat" -- a change that "will disproportionately affect start-ups, smaller growth companies, and companies in new or break-through markets."

While Congress should not dictate to FASB, said Kerry, it should direct the SEC to "exercise the authority it manifestly possesses and override FASB on its proposed stock option rule."


Why the Change of Mind?

Only one question remains: Why did Kerry change his mind? After his brilliant defense of high-tech firms that use stock options, he is now trying to block the House effort to stop FASB from enacting almost precisely the same proposal it advanced in 1994.

As Technology Daily put it: "Kerry opposes the very legislation that technology companies are desperately pushing as a way to thwart a looming decision by the...FASB to change the way companies account for the value of employee stock options." The legislation, sponsored by "House Financial Services Subcommittee Chairman Richard Baker (R-La), passed the full committee on a 42-13 vote on June 15." It's expected to win 300 votes or more when it comes to the floor in the next week or two.

So why did Kerry flip-flop? He'll have to answer that question himself, and I hope President Bush asks him in one of their debates -- if not sooner. I think, however, that I know the real explanation. Kerry, like too many other Senators, is afraid to appear to be defending any corporate practice in the wake of the scandals involving Enron, WorldCom and the others.

This is rank cowardice and cynicism. The result is poor public policy, which harms investors, technology companies and the economy.

Unfortunately, there are others in the same boat with Kerry. We can only hope that after the House overwhelmingly passes the Baker bill -- and after fence-sitters read Sen. Kerry's grand speech of 1994 (Kerry himself could benefit from a re-reading of it) -- the Senate will come to its senses.


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