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March 27, 2002
Investor Council Reverses on Stock Options
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a reversal, many of the nation's largest pension funds threw their weight Tuesday behind efforts to persuade companies to count the cost of executives' stock options as an expense when they report their income, the Washington Post reports.

The Council of Institutional Investors, whose public, corporate and labor pension fund members manage more than $2 trillion in assets, made the switch on a voice vote.

The council was meeting in Washington, epicenter of the expanding controversy over executive options.

As the Post notes, some investors argue that options encourage executives to take risks that will boost the stock price regardless of the long-term impact on the company.

Some members of Congress have sought to require companies to report stock options as an expense at the time they are issued. But congressional sources tell the newspaper that the legislation is unlikely to pass.

The fact that corporations are able to use options to attract and retain top executives without taking a hit to their bottom line contributed to the proliferation of such incentives during the past decade, with the percentage of stock represented by options increasing from 5 percent of the shares outstanding to 15 percent.

"Stock options can be used to turn companies into gambling devices that allow executives to take the money in and let the company collapse," said Sarah Teslik, executive director of the council. Although some of CII's corporate pension funds were opposed to the resolution, it passed easily and quickly, according to a CII staff member.

Over the years, the CII has pushed for measures that would increase the power of shareholders in determining how companies are run. This year, the Enron collapse and other corporate debacles have "slightly altered the balance of power" in favor of shareholders, Teslik said.

Members of the council raised other concerns, including the corporate focus on short-term results, the independence of board members and auditors, and the difficulty of raising some shareholder issues. Kenneth A. Bertsch, director of corporate governance for financial-services provider TIAA-CREF, said the Securities and Exchange Commission had ruled that shareholders at corporate annual meetings couldn't call for a vote on whether investors should approve stock options, ruling that the issue was "ordinary business."

To view the Washington Post article, click here.

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