Editorial: Bill fails to restore full trust

Wednesday, July 17, 2002 | 8:53 a.m.

The House and Senate have each passed legislation aimed at providing more investor confidence in the wake of ruinous corporate scandals. We believe the tougher Senate bill should prevail as the two houses confer before sending one bill on to the White House. While most of the Senate bill's provisions would be welcome to investors, lawmakers missed a huge opportunity to restore even more of their trust.

Neither the House nor the Senate included a requirement that stock options lavished on executives be carried on corporations' books as expenses. So, billions of dollars remain invisible. Investors never get to see them as counterweights to profits and are therefore deluded about a company's actual profit/loss ratio. Fortune 500 companies would have had their annual profit margins decline from 12 percent to 9.4 percent if stock options had been counted from 1995 to 2000. With no reportable cost attached to stock options, they are granted liberally, providing incentive to executives to increase their personal worth by covering up any fact that would tend to result in the stock price dropping. Instances abound of executives selling off their stock just before reality strikes, enriching them but impoverishing their stunned investors.

A new Time/CNN poll shows that 72 percent of Americans think the recent wave of corporate scandals is a widespread pattern. Against this backdrop, which includes questions about the past corporate behaviors of President Bush and Vice President Dick Cheney, Congress should have left nothing out of its bill. Sen. John McCain, R-Ariz., had few supporters in leading the fight to have stock options listed as expenses. Other congressional leaders see such a requirement more the province of the Securities and Exchange Commission or the industry itself.

If such a regulation is not passed by the SEC, our hope is that other companies follow the lead of Boeing Co., which began listing stock options as expenses in 1998, Coca-Cola, which announced Sunday it would begin doing it, and a few other companies that on their own have seen it as the correct way of doing business.