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SPECIAL ANNEX NEWSFLASH
Chairman Harvey Pitt Calls for Stricter Controls of Stock Option
to Tighten Stock Option Rules
Speaks Out at Northwestern University
IL, Apr. 5 - Further to our own analysis of IBM insider trading and
self-enrichment through stock options (see below), the SEC chairman Harvey
Pitt has now also voiced his concerns publicly. Enclosed is an excerpt
from today's Wall Street Journal article about a speech he gave last night
at Northwestern U. We've taken the liberty of highlighting some salient
passages in red.
THE WALL STREET
JOURNAL - FOR FAIR USE ONLY
April 5, 2002
SEC Chairman Harvey Pitt Calls
For Stricter Controls
By GREG IP, KATE KELLY and JOANN
Staff Reporters of THE WALL STREET
Amid mounting scrutiny of the role
stock options have played in recent corporate controversies, Securities
and Exchange Commission Chairman Harvey Pitt called for stricter
controls over how such options are doled out to senior management.
The move by Mr. Pitt comes even as
the New York Stock Exchange and the Nasdaq Stock Market move closer to
strengthening their oversight of the companies listed on the country's
two biggest stock markets.
In a speech Thursday night, Mr.
Pitt said a special compensation committee
of a given company's board, made up of independent directors, should
decide whether to grant stock-option plans for top company executives
and directors and the terms of those plans. Then those plans should be
submitted for shareholder approval. At present, the NYSE and Nasdaq
require some but not all option plans to be submitted for such approval.
Options are meant to align
managers' interests with that of
shareholders, but "if
managers can reap profits from their options while shareholders are
losing some or all of their equity stake, the options create
conflicting, not aligned, interests," Mr.
Pitt said in a speech at Northwestern University in Evanston, Ill.
"If a company chooses to grant options to corporate managers to
create incentives to build value in the company, the options actually
work as intended, rather than create
an unearned windfall for those managers."
Boards should consider requiring
executives to show
long-term growth before they
can exercise their options, to "help abolish the perverse
incentive to manage earnings, distort accounting or emphasize short-term
stock performance," he
Mr. Pitt didn't say how these
controls should be implemented, but in his speech he indicated he
preferred private-sector bodies, such as the NYSE and Nasdaq, to
establish the duties of corporate officers rather than federal
regulators. He said that government can outlaw fraudulent practices but
it can't easily
"legislate integrity or ethics."
In closed-door meetings Thursday
and Friday, the NYSE and Nasdaq have been hammering out a range of
proposals for tightening the governance of publicly traded companies.
The brainstorming sessions are taking place, at least in part, at the
behest of Mr. Pitt, who in mid-February asked both markets to look
closely at their requirements regarding companies' disclosure of
potentially material information and the structure of their boards of
directors, among other issues.
Following a string of corporate
scandals, the big markets have caught some criticism for not responding
more quickly to tighten the governance rules on big companies. Mr. Pitt
asked both markets to share their findings with him as early as April
Leon Panetta, the former chief of
staff for the Clinton administration and one of the NYSE board members
leading the review committee, said in an earlier interview that the
panel's job is to "try to look at the obvious issues that have been
raised by the whole Enron debacle, and try to get ahead of the curve in
[seeing] what needs to be done in terms of corporate governance."
Generous grants of options have
become increasingly controversial as disclosures emerge that senior
executives of companies such as Enron Corp. reaped
millions of dollars in profit by exercising stock options,
even as public investors and employees held on to stock that eventually
became worthless. Some lawmakers in Congress and Federal Reserve
Chairman Alan Greenspan have argued that companies should be required to
treat option grants to employees and executives as an expense, which
would depress reported profits. Mr. Pitt has been cool to that idea.
For a direct URL to this article, click
Annex Ed. "Reaped
millions of dollars in profit by exercising stock options?"
How about nearly half a billion dollars by a single individual? Or by more
than a dozen of top officers who all decided to scratch
the same itch at the same time, and bail out by exercising their stock
options in 2001? (just before IBM reported its
worst growth quarter in Gerstner's nine-year tenure).
And by the way, the "independent
Pitt was talking
about are practically never really independent. They may not be
drawing an employment salary, but they are appointed to the Board by the
chairman, and are indebted to him, as the members of the IBM Executive
Compensation Committee have proven (just click on the above image to read
their pitiful "justification" for huge stock awards).
Now extrapolate such travesties that across
the entire landscape of corporate America, and you will understand why the
SEC chairman is feeling a little heat under his feet, and is passing it on
to the NYSE and Nasdaq boards. Who, in turn, are likely to pass it on to
the corporate boards.
For our own report on IBM insider stock
option trades, check out:
An Analysis of IBM Insider Stock Trading in 2000-2001
Lou OutLayed Lay!"
Outgoing Chairman of "IBM Greed, Inc." Dumped
About $238M of Big Blue’s Stock in Last Two Years While Hyping Up Big
Blue’s Bright Future; Other Top Insiders Followed Suit in 2001 and
more details on "financial engineering" -- a new IBM line of
business, as we put it back in 1997 -- see "Big
Blue Starting to Unravel," (Apr. 8, 2002), “SEC
to Tighten Stock Option Rules” (Apr. 5, 2002), "Sir
Lou OutLayed Lay!" (Apr. 1, 2002), "IBM
Pension Fund Vapors," (Mar. 23, 2002), Is
IBM Cheating on Taxes, Annex Bulletin 99-17 (May 1999), Fortune
on IBM (June 15, 2000), Annex
Bulletin 98-14 ("Wag the Big Blue Dog"), Armonk's
Fudge Factory (Apr. 9, 1999), Where
Armonk Meets Wall Street, Greed Breeds Incest
(November 1998), Stock
Buybacks Questioned: Is IBM Mortgaging Its Future Again?, 97-18
Insiders Cashed In On IBM Stock's Rise, Buybacks" 97-22, 7/27/97,
Djurdjevic’s Forbes column, "Is
Big Blue Back?," 6/10/97; “Executive
Suite: How Sweet!,” (July 1997), "Gerstner:
Best Years Are Behind", Aug. 10, 1999), "IBM's
Best Years Are 3-4 Decades Behind Us" (July 1999), "Lou's
Lair vs. Bill's Loft" (June 1999), "Corporate
Cabbage Patch Dolls," 98-39, 10/31/98; Djurdjevic’s Chronicles
magazine October 1998 column, "Wall
Street Boom; Main Street Doom" etc.].
Or just click on
and use "financial engineering" as keywords.