CalPERS Delays Action on Stock-Option Policy
The board of the California Public Employees’ Retirement System, the biggest U.S. pension fund, Monday postponed action on a recommendation from its staff that would compel companies to deduct the cost of employee stock options from earnings.
Citing arguments from technology companies that there is no standard methodology for valuing options, the fund’s directors asked the staff to develop alternative stock-option disclosure practices.
“I do wish somehow options could be shown as an expense because they are, but I don’t think we know enough to adopt that today,” said William Crist, president of CalPERS.
The decision by the fund is a blow to corporate governance reform efforts stemming from Enron Corp.’s collapse and alleged financial abuses by a host of other major companies in the late 1990s.
Federal Reserve Chairman Alan Greenspan, Berkshire Hathaway Chairman Warren Buffett and John Biggs, chairman of the Teachers Insurance & Annuity Assn.-College Retirement Equities Fund, have pressed for companies to expense options.
But CalPERS, which has $149 billion under management, was lobbied by venture capitalists and tech companies to reject the staff proposal. John Doerr, a general partner of venture capital firm Kleiner Perkins Caufield & Byers, said before the vote that stock options would disappear as a recruiting tool for start-up firms if their potential value had to be deducted from earnings, reducing companies’ reported profit.
In directing its staff to devise alternative executive compensation disclosure practices, CalPERS asked them to include ways in which the fund could punish companies that aren’t forthcoming with certain financial items.
Sens. Carl Levin (D-Mich.) and John McCain (R-Ariz.) introduced a bill this year that would deny option-related tax benefits to firms that don’t expense option costs.
Greenspan said in May that companies’ “failure to expense option grants has introduced a significant distortion in reported earnings--one that has grown with the increasing prevalence of this form of compensation.”
