Why Ohioans Should Care About Stock Options
The news hasn't been good for Ohio businesses lately. While it is true that high taxes have stood in the way of this state's economic growth for decades, in recent years the share of Ohio's taxes paid by businesses has increased. [1] In 2003, the Small Business Survival Committee ranked Ohio just beyond the top 10 least friendly states in which to run a business. [2] Now, an obscure accounting rule that threatens stock options may deal another blow to Ohio firms. [3]
Following the high profile accounting scandals in recent years, many have called for increased regulation of businesses to prevent these in the future. Serving as a gatekeeper between regulators at the Securities and Exchange Commission and private industry, The Financial Accounting Standards Board (FASB) is a national organization that sets the basic accounting guidelines. [4] This places the FASB in the uncomfortable position of calling for a one-size-fits-all accounting standard for stock options as an answer to Enron and WorldCom. While it is understandable that the group would seek to fend off heavy-handed government regulation, this particular method of achieving that goal has serious unintended consequences for businesses, especially those least able to absorb the additional costs of compliance.
Up until now, standard practice with regard to accounting for stock options involved acknowledging their issue and then later incorporating their impact once employees cashed them in. FASB's plan is to require that companies record these options at the time of issue. Placing an accurate value on options before they are exercised is problematic at best, however, and newly established businesses likely will not have the upfront capital to afford such a measure.
At the same time, this is not to say that it might not make sense for some companies to expense stock options. In fact, it's becoming more and more prevalent, especially among Fortune 500 firms. [5] But just because some companies find it useful to expense options, doesn't mean it's appropriate for all companies.
In fact, while the loss of stock options altogether may seem like an issue of little importance to corporations such as Microsoft, GE and Coca-Cola, they are tools that small businesses, particularly those in the high-tech sector, rely on. They allow companies to bring in and hold onto their best employees, and have the effect of investing those employees with a strong desire to see the business grow and succeed.
Dick Cook is chairman of the American Electric Association, the United States' largest high-tech trade association, and also President and CEO of MAPICS, a software developer. In a recent article, he explained the significance of this tool for the companies he represents: "High-tech companies like ours need stock options for attracting and retaining the most capable workers. Stock options, given to the vast majority of our employees, provide our companies with a competitive edge for keeping skilled workers." [6]
All regulation bears a cost to society. It is an unfortunate trend that additional regulation is nonetheless seen as a costless tool to correct "market failures," when often previous regulation is responsible for these unforeseen consequences. The FASB is in the unenviable position of middleman in this case, but it should carefully weigh the potential harm of its current pre-emptive approach. As Ohio attempts a transition into the technology-based "Third Frontier," the last thing its fragile economy and fledgling businesses need is to be unfairly targeted as a way to atone for the sins of huge corporations elsewhere.
Footnotes:
[1]See Richard Vedder, Grinding to a Halt: Ohio's Tax Policy and its Impact on Economic Growth, The Buckeye Institute, September 2002. Also, see Matthew Hisrich, "Ohio Businesses Bear The Majority of Recent Tax Increases," The Buckeye Institute, 6 February 2004.
[2] Raymond J. Keating, Small Business Survival Index 2003: Ranking the Policy Environment for Entrepreneurship Across the Nation (Washington, D.C.: The Small Business Survival Committee, September 2003). Available at: http://www.sbsc.org/.
[3] Karen Kerrigan, "Will small business pay price of reform?," The Cincinnati Business Courier, 25 November 2003. Available at: http://www.bizjournals.com/cincinnati.
[4] For more information on the Financial Accounting Standards Board, visit http://www.fasb.org/.
[5] Daniel Gross, "Out of Options," Slate, 26 March 2004. Available at: http://www.slate.com/.
[6] Kerrigan, "Will small business pay price…"
