By Cyrus Mehri and Steven Berk,
* Reprinted with permission from Labor & Corporate Governance, Vol. V, Iss. 7

A great debate continues in many quarters on the issue of whether stock options should be expensed. Proponents maintain that expensing would lead to a higher level of corporate transparency and more accurate financial reporting -goals that have become priority one in the face of cascading billion dollar scandals. Those against expensing, notably Senator Joseph Lieberman, cast the issue as one of democracy and economic freedom. They argue that adding the cost of expensing to options will deny small and new companies the ability to attract and retain executives. Without the free and unfettered flow of stock options, he and others argue. economic growth will be in jeopardy. But in debating this issue, the glare of public and private scrutiny must not be squandered on the issue of expensing alone.

A more ambitious examination -one that truly looks at the implications of stock options on economic growth, democracy, and how we see ourselves as Americans, must take place. That examination begins with the question of who receives stock options? Who has benefited from the tremendous creation of wealth in the past decade? Who has been invited into the ownership club with open arms and who has not? The answers point to yet another enormous corporate scandal -one you haven't read much about - where Corporate America has systematically excluded African Americans, Latinos and women from all but a tiny fraction of the millions of stock options that were distributed during a time of unprecedented growth in the economy.

Our experience representing minority managers and professional employees of leading companies such as Texaco, Coca-Cola, Johnson & Johnson and Bell South leads us to a conclusion that the grant of options -and in many cases the subsequent transfers of vast wealth -continues to be a bastion largely reserved for white males. As part of our settlement with the Coca-Cola Company, highly qualified experts determined the amount of back pay required for "make whole relief' to African-American employees, and the payments to many class members for that back pay included an amount for lost stock options.

Our investigations of many other highly regarded Corporate giants, such as Johnson & Johnson, reveal that few if any, Compensation Committees of the Board of Directors ask for a breakdown of stock option distributions based on race, gender and ethnicity. Notwithstanding highly publicized Corporate Credos, few, if any, Chief Executive Officers require their human resource managers to prepare reports examining whether stock options are distributed in a way that does not adversely impact female or minority employees.

Despite some gains by minorities and women over the past decade in obtaining managerial positions, the percentage of ownership, through stock options they are offered and received remains a pittance. When we interview groups of Latino and Mrican American employees and the topic of glass ceilings comes up, we tell our clients: "Tell us what pay grade usually receives stock options and we can tell you where the glass ceiling is. " Invariably, minority employees are locked out of the stock option eligible positions where the greatest opportunity for real wealth exists. Even those minority employees who obtain the higher echelon positions by pay grade are channeled away from the profit and loss centers of the Companies -due to glass walls -and as a result receive fewer stock options than their white counterparts.

We are at a moment in time when real and positive change can be effectuated. Major shareholders in increasing numbers are public, private and union pension funds with millions of minority and female beneficiaries. These investors must demand a greater voice in how the corporations they own are being managed, and distribute the wealth they create. They must be able to analyze the distribution of stock options to insure that those plans promote fundamental fairness and diversity .

Moreover, the driving concept behind most corporate reform is greater transparency. What better way to promote transparency then to illustrate to shareholders, customers and the public that the company's stock option policy promotes and fairly rewards the efforts of all employees without bias based on race, gender, and ethnicity .

There is a simple way to begin the process of bringing "equity" to the distribution of stock options: Require that every publicly traded Company's annual report contain a Stock Option Equity Report Card disclosing the total number of stock option shares distributed in the last fiscal year and a break down based on race, gender and ethnicity .

A growing number of informed investors recognize there is a correlation between fairness in the workplace and management performance. With these Report Cards they will have another important yardstick upon which to judge management's performance and ultimately be in better position to make informed decisions about where to place their money.

But action is needed on several levels to make stock option equity a reality .

- Congress should request that the General Accounting Office (GAO) prepare a report and analysis on the distribution of stock options among public companies. Through subpoena, the GAO can require disclosure of records illustrating the distribution of stock options based on race, gender and ethnicity to examine the extent of bias.

- National legislation requiring each public corporation complete a Stock Option Equity Report Card requiring corporations to disclose the total number of stock options with a breakdown based on race, gender and ethnicity should be introduced.

- Voluntary initiatives spear headed by the Business Roundtable, the New York Stock Exchange and other leading business organizations calling for publicly available Stock Option Equity Report Cards should be promoted.

The heightened scrutiny on all corporate conduct coming out of the scandals of Enron, Worldcom, Adelphia, and Tyco must not be wasted. A great opportunity is upon us. The use of the Stock Option Equity Report Cards can be an important tool in the demolition of glass ceilings and walls that unfortunately continue to retard the progress, profitability and value of too many corporations.

ABOUT THE AUTHORS: Mr. Mehri was Class Counsel in landmark race discrimination cases against Texaco and Coca-Cola. Mr. Berk is a former Federal Prosecutor and Attorney with the Securities and Exchange Commission. They are both at the law firm of Mehri & Skalet in Washington, D.C.

* Labor & Corporate Governance is a publication of Proxy Voter Services (PVS), a division of Institutional Shareholder Services. PVS provides a full range of proxy-voting services to multi-employer plans and investment managers, based on AFL-CIO Guidelines.