Standards Bearer

The chairman of the IASC shares some caustic comments on stock options, corporate boards, and the relative merits of GAAP.

The FASB-IASB agreement makes it appear that the United States is willing to compromise U.S. GAAP. Is that actually the case? Where do you think the resistance will come from?

It’s much more the case now than it would have been a year or two ago. I would not have done this if I did not think that the United States was sympathetic to it. Some people in the United States are not, but the SEC at that point said it was. The interesting thing is, I think FASB itself is supportive.

My observation, or my assumption, is that FASB has come to the conclusion that it may be easier to work out some of the problems internationally rather than domestically, because [board members] were being subjected to very heavy political influence, and I don’t think they liked it much — understandably.

As the IASB and FASB work together, where will the opposition come from?

Well, that depends on the standard. On the table right now are proposals for handling derivatives. Most countries don’t have a standard; the United States does. It’s quite evident that the big problem there is not going to come from the United States, it’s going to come from Europe and elsewhere, where institutions that have not had a standard like it that way.

The standards on stock options, which everybody expected to be very explosive, are still going to get big opposition, and most of the opposition there will be in the United States — I believe from high-tech industries. But they’re much less controversial today than they were a year ago.

Why would accounting for derivatives be controversial?

I’m not supposed to comment on technical things, but I will tell you what the issue is here. In general terms, banks are active users of derivatives, and, although it’s more complicated than that, they fear that accounting for the changes in value in derivatives will create a lot of volatility on their earnings. They also argue that it will make it harder to engage in activities that provide a good hedge.

I think [banks] probably also are opposed to fair-value accounting on a wider basis. Again, you have to expect it. Outside the United States, this will be a new standard. People doing business a certain way don’t like change.

What about the opposition to stock options?

When I look at stock options, I am more and more convinced that in a basic sense, the trouble is not whether you expense or not — stock options are just a bad instrument. They’re so subject to abuse, you want to get rid of them. There ought to be better ways of compensating people. There are better ways. Because the results are so capricious, so fortuitous, depending upon what the overall market is doing.

I want to discourage the use of stock options. Expensing them would somewhat discourage it. If I’m not going to do it by law, then I’m going to do it the way it should be done: What is accepted good practice? What should stockholders insist upon? What should public opinion insist upon? If a company is going to give stock options, [there had better be] some damn good reasons why that company, at that particular time, finds it desirable to use an instrument that is so subject to abuse.


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