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. Last Updated: 07/27/2016

Stock Option Reform Is the Real Thing

With President George W. Bush digging in his heels in defense of accounting tricks that hide the true cost of stock options, and Congress equivocating under intense corporate lobbying, reform has come from an unexpected place -- the Coca-Cola Company. Coke announced this week that it would start counting against its yearly earnings the options it grants employees. It is a bold commitment to reform, and one that, particularly given the stock market meltdown in recent days, the White House and Congress should take to heart.

Stock options can be worth hundreds of millions of dollars in the case of top executives, but unlike salaries and bonuses, they almost never show up as expenses on corporate balance sheets.

In 1994 the Financial Accounting Standards Board, which sets U.S. accounting rules, was on the verge of requiring companies to count options as expenses. But under heavy pressure from Congress, the standards board backed down. In the wake of the Enron and WorldCom scandals, the board has made it known that it is once again considering mandating that options be counted as expenses. If it does so, as it should, Congress will probably be reluctant to put up a fight.

Coca-Cola, to its credit, is not waiting. (In making the shift, it joins other companies, including Boeing and Winn-Dixie, which have counted options as expenses in recent years, and The Washington Post, which made the decision in May.) Coke has also done something else of considerable value -- it has developed a new method of pricing stock options. Opponents of the reform warn that it will drive down stock prices, by lowering companies' annual earnings per share. There may be some truth to the charge. But what Coca-Cola gains is credibility with investors, who have been fleeing the stock market because they have lost faith in corporations' accounting methods.

Bush, speaking on Monday in Alabama, assured the nation that "our economy is fundamentally strong." Like his speech on Wall Street last week, this address was long on rhetoric and short on substance. With the Dow down and a deep malaise settling on Wall Street, what the economy needs now is not presidential cheerleading but serious reform. The White House and Congress ought to be embarrassed that it took a soft-drink company to lead the charge.

This comment appeared as an editorial in The New York Times.