Not too be too cynical about it, but are we the only ones wondering if it was just a coincidence that the report on backdating at Apple, and Steve Jobs role in it, came out just a few days before the conference where Jobs announced the headline grabbing Iphone?
Still, it seems that even this, uhm, well-timed announcement hasn’t completely drowned out the critics of Jobs. Daniel Gross takes note of the disparity between the way many CEOs have been treated after revelations that they received backdated options grants and Apple’s exoneration of it’s CEO.
So let’s review. Jobs recommended some backdating dates for other employees. He received a massive grant that was approved at a phantom board meeting, though he didn’t know about the phony meeting. And he never cashed in those options because they were replaced in 2003 by a grant of restricted stock.
CEOs at other companies have been forced to resign for such activities. So why is Jobs getting off so easy? His job may be saved by the fact that he did not directly profit. More likely, though, he’s been saved by his special status. Jobs is Michael Jordan in the 1990s, Citigroup in the 1980s, Walter Cronkite in the 1960s. He’s a revered Hall of Famer who doesn’t get whistled for fouls that send other pros to the bench.
Jobs is too big to fail. He is too popular—among investors, journalists, employees, analysts, and in the culture at large—for anyone to recommend that he be deposed.
Apple doesn’t want you to pay any attention to the man behind the backdating curtain. You know, the man named Steve Jobs. And the adoring business media—otherwise frothing with outrage over executive compensation and the backdating “scandal”—have pretty much danced liked dervishes to Apple’s spin. Thankfully we have the (newly minature) Wall Street Journal’s Holman Jenkins to once again point out that Jobs is pretty much “a typical miscreant” when it comes to backdating. It isn’t that jobs wasn’t involved in scandalous backdating, it’s that most of this backdating business isn’t really so much of a scandal at all.
The markets have finally had their say about the wonderfully overblown backdating scandal. When Apple filed its latest mea culpa on Friday along with a board expression of confidence in Steve Jobs’s leadership, the company’s shares jumped four bucks. Message: The market doesn’t give a hoot about backdating. It gives a hoot whether Mr. Jobs might be run out of his job.
This ought to cast a light on whether the drop in market prices of companies in the backdating scandal reflects the shock and horror of investors at the details of backdating — or shock and horror at the meal that trial lawyers, prosecutors and the media are making of companies caught up in this episode…
Backdating, let’s recall, was simply an artifice to allow companies to issue “in the money” options (the terms of which were accurately reported to shareholders) without taking an accounting expense. That’s all backdating is. Does it matter in the teensiest whether options are expensed? No, expensing has no probative value whatsoever for evaluating a company’s shares or its compensation policies. Expensing creates a junk number, of zero analytical value.
We pointed out last week that Apple has admitted that Steve Jobs played a role in backdating stock options at the company that is very similar to that of CEOs who have been indicted on criminal charges. And, as it turns out, Holman Jenkins—one of the smartest business writers around—agrees with us. “All in all, [the Apple backdating case is] a fairly typical case of backdating judging by the two detailed indictments, of executives at Brocade and Comverse, issued so far.”
His longer description of the likely motives of Steve Jobs and Apple for backdating is worth reading.
“Backdating” has become the convenient formulation, but what we’re really talking about is options granted “in the money.” That is, the exercise price is lower than the market price, so the options appear to represent an instant accretion of wealth to the holder as long as the stock price holds up through the vesting period.
“Backdating” entered only as way to allow these options to receive the same preferential accounting treatment as “at the money” options.
Now if Apple’s statement means anything, it means Mr. Jobs knew that selecting “favorable grant dates” allowed certain employees to receive “in the money” options. Let’s not play dumb: He would have been the one deciding which employees got this benefit. Backdating, for all the confused huffing and puffing of the media, is not functionally different from grants of restricted stock — and Mr. Jobs has shown himself a believer in such outright grants of incentive wealth: In 2004, he awarded four top executives (most likely the same ones who earlier received backdated options) restricted stock worth $25 million.
Mr. Jobs is not an accountant, but Apple’s claim that he didn’t understand the accounting implications of backdating should test our credulity for an obvious reason: Then why not just issue “in the money” options? Why adopt the baroque artifice of selecting a past date when the share price was lower?
Mr. Jobs clearly knew the purpose of selecting “favorable grant dates” was to produce “in the money” options. Is Apple simply saying he didn’t understand that backdating was an improper way of making sure these options received the accounting treatment prescribed for “at the money” options? If so, his defense is the likely defense of several CEOs already in the dock. Luckily for him, we have signals from prosecutors that they intend to focus on “egregious” cases — read “small companies without celebrity CEOs.”
There’s another twist to this. The people who are arguably hurt by Apple’s backdating—who the SEC would be seeking to protect through a (highly unlikely) prosecution of Steve Jobs—would be the Apple shareholders. In theory, backdating deprived the Apple shareholders of material information about stock options grants at the company, making Apple’s compensation costs seem less than they otherwise would have been. But in reality, any move to prosecute Steve Jobs would be a possibly lethal blow to Apple’s share price. A Typical Backdating Miscreant [Wall Street Journal]
So Steve Jobs apologized for the stock options chicanery at Apple today, which the company admitted he knew about at the time. Weirdly, the coverage we’ve come across on this keeps focusing on the fact that Jobs did not “receive or otherwise benefit” from the backdated options. But we know from Comverse that this is a red-herring. Kobi didn’t get backdating options either. He just authorized them. And that landed him on Interpol’s most wanted list and eventually in a Namibian jail.
And it’s also not accurate. A chief executive doesn’t need to actually get backdated stocks to benefit from them. The benefit to the chief can be the ability to retain valuable employees at a lower cost than would otherwise be possible. That’s the theory behind the Kobi indictment, and it could become the theory behind a Steve Jobs indictment.
There is, however, a crucial difference. At Comverse, Kobi seemed to have set up his own private options granting committee. So far, it doesn’t seem that Steve was as directly involved in backdating at Apple. Apple CEO Knew of Backdating [LA Times]
John Dvorak kicked up quite a dust storm by speculating that seating Google’s Eric Schmidt on Apple’s board might precurse (is that a verb?) an merger with Sun. Jeff Matthews calls bullshit on that idea.
Eric Schmidt is a guy who for one brief shining moment after leaving Sun had one of the biggest stacks of chips at the high-tech poker table, when he was CEO of Novell during its late-1990 glory days. Then Microsoft came along and destroyed Novell’s networking franchise in about as much time as it takes to say “I call.”
After Schmidt spent what must have seemed like a couple of decades, but was in fact only a year or two, missing earnings, laying off engineers and taking hits from Wall Street’s Finest, he left Novell, took his few remaining chips and went all-in by taking a job as CEO of a funky little search engine called Google.
And as everybody including Dvorak knows by now, Eric Schmidt drew an inside royal straight flush on the river card at the final Texas Hold ‘Em table at Binion’s. For one thing, he’s a billionaire; for another thing, he runs what many people think is the coolest, most revolutionary, and most zealously missionary technology company in the world right now.
So Eric Schmidt is going to give up all that (excepting the billion dollars) in order to figure out which software engineer from Sun should get which cubicle in Cupertino?
I don’t think so.
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