The Association of Publicly Traded Companies
1200 G Street, N.W.
Washington, D.C. 20005
Writer's Direct Dial (202) 263-3374
Email: firstname.lastname@example.org Writer's Direct Fax (202) 263-5374
April 2, 20001
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: Release Nos. 33-7944, 34-43892; File No. S7-04-01 Disclosure of Equity Compensation Plan Information
Dear Mr. Katz:
The Association of Publicly Traded Companies ("APTC" or "the Association") is made up of small-cap and mid-cap companies, most of which are traded on the Nasdaq Stock Market or the New York Stock Exchange. APTC's strength is derived from its diversity--it represents a range of companies of various sizes and from various industries. The shareholder bases of our companies vary greatly as well. Many of our companies have several large shareholders, while others are widely held. Many have a large number of individual shareholders, while others are held primarily by institutional investors.
APTC wishes to note, at the outset of this comment, our exception to the use of the phrase "equity compensation" in the title of the release. APTC members do not view the granting of stock as compensation, but rather a means by which companies may further align the interests of employees with those of shareholders.
Compensation, as the word suggests, compensates employees for work which has been performed in the past. Stock options, on the contrary, motivate an employee to increase shareholder value in the future. Simply put, APTC does not view stock options as a means of compensating employees for work performed, but rather as a method of motivating employees to develop a greater commitment to the future success of the enterprise and as a public company.
II. Summary of Views
APTC supports the SEC's proposal as a means of providing investors with the type of straightforward information that investors need to evaluate the quantitative side of an issuer's employee stock options program. The Association conditions it support on the implementation of this new disclosure requirement explicitly providing issuers with the opportunity to provide qualitative information about their options plans and options philosophy in the immediate proximity of the required quantitative information. Along with its conditional support, APTC strongly suggest that the Commission attempt to eliminate existing disclosures about stock options and executive compensation that are duplicative and unnecessary with a goal of making this proposal "burden neutrality." APTC believes that the additional cost of these new disclosures could be offset through the elimination of similar existing disclosure requirements in a way that will be a net improvement for investors.
III. Members' Use of Stock Options
APTC members employ stock options in many ways. Regardless of the reasons for their use, the objective of employing stock options is invariably the same: aligning the interests of management with those of investors. APTC believes that such an alignment is both desirable and necessary.
Recent studies demonstrate how employee equity helps to align these interests.1 This has created a built-in incentive encouraging these corporate managers to act in the interest of their fellow shareholders. Option plans represent an "entrepreneurial bargain" made between investors and employees. This entrepreneurial bargain has had a profound impact on our national economy during the past decade.
APTC believes that in the quest to align the objectives of shareholders and investors, clearer disclosure is always a goal worth seeking. Boards of directors are chosen by shareholders to manage the company and maximize the company's overall value. In making this selection, the shareholders essentially give their imprimatur to a group of individuals, implicitly placing great trust and confidence in their wisdom, expertise, and decision-making abilities.
A company in which the core values of management and shareholders are closely aligned is best able to make the key decisions essential to increasing shareholder value over the long haul. To the extent clearer disclosure illuminates a difference of interests or philosophies, most shareholders will be in a position to simply "vote with their feet" if they so choose.
IV. Information Currently Available
While current accounting rules do not require companies to disclose aggregate stock option figures in footnotes to their statements, most of this information is still generally available. A substantial amount of information about stock options plans is currently required to be in the company's financial statements, as well as in its proxy statement. For instance, Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (Oct. 1995), requires that a corporate entity divulge the number of shares authorized for grants of options or other equity instruments in its financial statements.
Most of the information required by the SEC's proposal is currently available to shareholders. Unfortunately, the sheer volume and complexity of most corporate compensation proposals, coupled with stock option plans, makes it difficult for the average investor to interpret and effectively utilize the information provided.
It is also noteworthy that many publicly traded companies already disclose the number of shares available for future awards under their employee stock plans.2
V. The Whole Picture on Stock Options Plans
APTC believes that each company should have the opportunity to describe, in whatever detail it sees appropriate, how its stock option grants fit into the company's overall policy of governance. The new rule should explicitly provide that each company has the opportunity to describe, on a voluntary basis, its overall stock options policy at a place in the Form 10-K or proxy report near the required new disclosures. This would "round out" the austere picture painted by the disclosure of hard financial numbers, thereby providing another dimension through which to view the company.
VI. Consolidation of Similar Data
Disclosure of stock option plan information is helpful if it aids investors by providing a clearer picture of the company's overall managing philosophy. Since the SEC's proposal seems to promote this goal, APTC lends its support. However, APTC questions the necessity of many of the disclosures currently required by Forms 10-K, 10-KSB, and proxy statements.
While transparency through disclosure is always an objective worth seeking, the accomplishment of this objective may afflict the average investor with an acute case of "informational overload." The sheer volume of information currently required by Forms 10-K, 10-KSB, and proxy statements is extensive, often hiding the essential information. APTC recommends boiling down the labyrinthine system of stock option and executive compensation disclosures to the bare essentials needed by the average investor. We recommend that this new rule set an example of a new approach to adding disclosure--one where new disclosures replace unhelpful information that is already required.
The annual hourly burden of the current Form 10-KSB, as described in the SEC's disclosure, is 1,072,378 hours. The current Form 10-K burden is calculated at 4,467,194 hours. At $175 per hour--the conservative billable rate used in this Release --corporations currently spend almost three billion dollars a year on mandated disclosures.3 While APTC does not dispute the value of the much that is required, certainly the Commission has, or could readily identify some marginal information that is currently required.4
While initially it may appear that merely requiring a few more numbers requires only minimal corporate effort, the Commission's own estimate says that the total annual burden of completing a 10-K will be increased by $583,450, and the annual burden of completing a 10-KSB will be increased by $336,700. APTC recommends that the SEC offset that cost by eliminating required disclosures in the proxy and annual reports. In other words, the net increase in the compliance burden could, and should be zero.
APTC appreciates this opportunity to comment on the issues raised in the SEC's very thorough request, and hopes that the Commission will find these comments helpful. We encourage the Commission to take this opportunity to encourage companies to provide a full picture of the purpose of their option plans. We also strongly recommend the elimination of an offsetting amount of unneeded regulatory burden at the same time. We look forward to providing any additional information or assistance we can.
If I can be of any assistance, please do not hesitate to contact me.
Brian T. Borders
|1||See generally Thomas, Randall S. and Kenneth J. Martin, The Effect of Shareholder Proposals on Executive Compensation," 67 U. Cin. L. Rev. 1021 (1999).|
|2||A recent Investor Responsibility Research Center, Inc. ("IRRC") study noted that about 20% of surveyed companies do not disclose this information. It logically follows that almost 80% of companies surveyed already provide this information to their investors--in spite of the absence of a regulation requiring such disclosure. See Potential Dilution - 1999, The Potential Dilution from Stock Plans at the S&P Super 1,500 Companies, Investor Responsibility Research Center, Inc. (2000).|
|3||The total outside counsel costs of comply with Form 10-K expected from the proposed amendments are estimated to be $2,344,093,450, an increase of $583,450 from the current burden. The total outside counsel costs of comply with Form 10-KSB are estimated to be $562,324,700, an increase of $336,700 from the current annual burden. (Release No. 33-7944 at 9-10).|
|4||A recent report by the Financial Accounting Standards Board, Business Reporting Research Project, GAAP-SEC Disclosure Requirements, (March 6, 2001) offer suggestions for eliminating redundancies in GAAP financials and SEC Disclosures and for eliminating certain categories of require disclosure like "properties."|