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July 19, 2002
Bank One to Count Stock Options as an Expense
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"We think it's accurate, fair and reasonable," said James Dimon, chairman and chief executive of Bank One, the sixth-largest banking company in the country. "It's recognizing reality. It's real simple. What's important for shareholders is at least you know the facts."
Bank One is the first bank to adopt the change, and the Washington Post reports that other banks will probably follow suit.
The move also undermines the argument that options can't be properly valued, said Patrick McGurn of Institutional Shareholder Services, a Maryland firm that advises pension funds and other institutional shareholders on how to vote on proxy issues.
"It's significant because that's the first financial-services company to do this," he told the Post. "It breaks the united front and that argument in that sector."
In responding to investor calls for clear and complete financial statements, Bank One joins a handful of firms that have broken ranks with most of corporate America, which has relied heavily on options to compensate executives over the past decade but has not deducted them as an expense. Options give recipients the right to purchase stock in the future at a set price.
Analysts and politicians have blamed the use of large numbers of options that aren't reflected in earnings for creating powerful incentives for executives to artificially inflate stock prices.
Thirty-eight companies would have experienced an earnings decline of more than 50 percent last year if required to deduct options as an expense, and 20 percent of the profit reported by Standard & Poor's 500 companies would have been erased, according to a report by Bear Stearns & Co.
Coca-Cola Co. and The Washington Post Co. - both of which have billionaire Warren E. Buffett, an advocate of counting options as expenses, on their boards - said this week that they will begin expensing them. AMB Property Corp., a San Francisco real estate company, said last week that it would do so. Boeing Co. and Winn-Dixie Stores Inc. already treat options as an expense. Many others companies are discussing the issue, Wall Street sources tell the Post.
"Bank One is the first financial institution in the United States to take this step, but I hope it is not the last," said Sen. Carl M. Levin (D-Mich.), who tried to force the Senate to address the stock-option issue in an accounting reform bill it passed Monday. "I congratulate them on standing up in favor of honest accounting of stock options."
To read the Washington Post article, click here.
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