Pitt: Let Shareholders OK Options

Securities and Exchange Commission Chairman Harvey Pitt on Thursday called for giving shareholders a greater voice in corporate decisions to award stock options to employees.

Pitt’s comments, in a speech in Chicago, came in advance of a vote the commission plans for next week on tightening corporate disclosure requirements.

In a related development, the New York Stock Exchange, under pressure from investors and the SEC to better protect shareholders, is considering rules to reduce conflicts of interest on corporate boards.

The SEC will vote Thursday on whether to propose rules that would force companies to disclose more information about their finances and do it more quickly.

Under the proposal, companies would have to file quarterly and annual reports sooner after the end of a fiscal period. They also would have to provide timely information about trading by company executives in the company’s stock and other securities.

Currently, only the insiders themselves must disclose such information--not the companies. For some kinds of transactions, insiders have until 45 days after the end of a company’s fiscal year before they must report. Other transactions must be reported within 10 days after the month in which the transaction took place.

The proposed rules also would require firms to disclose in their annual reports whether they provide access to this information on the Internet or, if not, to explain why.

One proposal would cut the deadline for filing annual reports to 60 days after the end of a fiscal year from 90 days. Quarterly financial filings would be required within 30 days instead of 45.

The proposals are among several Pitt has supported since Enron Corp.’s collapse, amid calls from Congress and others for stricter financial reporting.

Pitt had advocated speeding up corporate disclosure before the Enron crisis.

If the SEC votes to propose the rules, they would be open to public comment before the commission votes to make them permanent.

In his speech Thursday, Pitt said conventional wisdom has long held that granting options to corporate managers was supposed to align their interests with those of shareholders. But investors sometimes can be left holding the bag when a firm fails, he said.

Companies do not have to account for option grants as employee costs, yet they can take tax deductions as employees exercise options. In addition, companies can establish broad options plans without asking for shareholder approval.

“Companies should be required to make full disclosure and submit such plans to a shareholder vote,” Pitt said.

Corporate boards also would do well to consider requiring officers to demonstrate long-term growth and success before they can exercise their options, thus helping to abolish “perverse” incentives to manage earnings or engage in fraudulent accounting, Pitt said.

“It seems to me that options are potentially troublesome if they are structured to reward short-term performance,” he said.

Pitt also said the SEC has asked the NYSE and the Nasdaq Stock Market to conduct a review to determine whether companies that list in their markets meet the highest ethical standards.

The NYSE’s board may require that companies listed on the exchange have only independent directors sit on their audit and compensation committees, according to people familiar with the matter.

At a meeting Thursday, the board also discussed requiring listed companies to separate the job of chairman from that of chief executive. Other proposals include writing new rules for external auditors and codes of conduct for internal auditors as well as forging a stronger definition of independent director, the sources said.

An NYSE spokesman declined to comment.

In February, the world’s biggest stock market appointed a 13-member panel to examine corporate governance issues. The panel will report its findings in June. The suggestions then must be formulated as rules to be put before the board and NYSE members before becoming official.