Show Us Your Options

A new SEC ruling may be helpful for shareholders, but it means a whole lot more work for corporate finance departments.

The Securities and Exchange Commission’s 2001 end-of-year meeting gave investors an unexpected bonus — and corporate finance departments additional work. The SEC ruled that starting in April, companies must include tables in their 10-K reports disclosing information about all employee stock option plans. Historically, only plans voted on and approved by share- holders had to be disclosed, and then only in footnotes. There was no requirement to disclose nonapproved plans, and investor advocates are increasingly concerned that use of such plans is growing rapidly.

“I know our members are going to be looking closely at this disclosure,” says Ann Yerger, director of research for the Council of Institutional Investors (CII), which has pressed for such a ruling for years. “There’s been real concern among our members that shareholders don’t have a clear picture of the prevalence and potential dilution of stock option plans.”

The rule mandates that the new tables comprise the number and weighted-average exercise price of outstanding options; warrants and rights; and the number of securities available for future issuance under a corporation’s existing equity compensation plans. Companies must also include the information in proxy statements if they are asking shareholders to approve a compensation plan. Shedding light on stock options giveaways isn’t just a compensation issue, says Yerger; it’s also a way for CII’s members to evaluate the stewardship of corporate directors. “There is a general sense that companies are adopting more and more non[shareholder]-approved plans,” she says.

While some firms may not be thrilled about the added disclosure requirement, many may consider it the lesser of two evils. A proposal by the International Accounting Standards Board that stock options be expensed raised howls of protest in mid-December. The International Employee Stock Option Coalition, which represents trade associations and organizations ranging from the U.S. Chamber of Commerce to Oracle Corp., sent a strongly worded letter of objection to IASB chairman David Tweedie. “If the IASB continues on this controversial track,” the letter warned, “the debate on this one issue could endanger the current consensus supporting the IASB.”

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