And speaking of Steve Jobs…wait for it…backdating is back! As we mentioned this morning in the Opening Bell, the Wall Street Journal reported this morning that back in his Pixar days Steve Jobs had a role in negotiating a contract with film director John Lasseter that included stock options dated months before the contract negotiations even began. The news here is not the backdated stock options grant—those were acknowledged by Pixar-owner Disney months ago—but Steve Jobs role in the contracts. First Apple, now Pixar. This guy is starting too look like more than just a "typical backdatingmiscreant." He's practically the Typhoid Mary of backdating.
And look at how both Apple and Disney are trying to manage today's news. Apple refers all inquiries to Disney on the grounds that Disney now owns Pixar. Disney refers all inquiries to Apple on the grounds that that's where Jobs works these days. This kind of circular buck-passing can't go on forever. Soon someone will have to announce that it's all okay because Steve Jobs might have known about the options grants and the backdating but he didn't know about the legal or accounting implications and so that makes it all okay. And that's an idea that sounds pretty reasonable but vanishes in the presence of thought.
Did Jobs think that all this backdating going on around him was just because those dates were the birthdays of the accountants or something? What did he think was going on when the agreements he was negotiating for himself and Lasseter kept including options grant dates fixed at some point in the past?
We have no idea but we can take a guess. The advantage of fixing the date and therefore the price of the stock options was not that it let Jobs and other executives secretly steal money from the company or its investors. It's that it let them negotiate other things, like price points, without worrying about getting screwed by day-to-day movements in the stock-prices.
Let's go through this one more time. If we agree you should get $10 million in options today, and write that down at today's numbers of 10,000 shares, but the price jumps 10% by the time we finalize the agreement, you either better be on the ball and make sure you are getting 11,000 shares or you'll end up with less value than you negotiated for. If you're a busy executive, or say a film-director, you probably are doing more important things than watching the day to day fluctuations of the stock price. So odds are you are going to get screwed.
But if we fix the options grant at a certain date in the past, everyone knows exactly how many options equals how many dollars. We can all move on to thinking about more important things. As it happens, many companies were under the impression that accounting rules allowed them to account for these as "at the money" if they pegged these to earlier dates with historically low share prices, even though they were in fact granted on dates when they were "in the money." This turns out to have been wrong but it depends on an obscure, poorly understood and widely misunderstood, somewhat arbitrary accounting rule.
So here's what the Apple-Pixar-Disney people should really say: This isn't a bid deal. Not because Jobs was too ignorant to understand it, but because it just isn't a big deal. We'll fix the financial statements. But nothing criminal or fraudulent happened here. Time to move on. Have we mentioned we're coming out with the iPhone?
Larry Ribstein wonders if this latest revelation will test the strength of the "Apple Rule"—which holds that scandalous misdeeds by popular CEOs are neither scandalous nor misdeeds. He concludes with the most pertinent question:
Now we have both Jobs and Lasseter, and possibly Michael Dell. So are we going to lock up America's most popular entrepreneurs, make untenable distinctions in who gets prosecuted, or finally understand that the criminal justice system is a wildly inappropriate way to deal with agency costs like those involved in backdating?
Pixar Pay Package to Lasseter Included Well-Timed Options [Wall Street Journal]
The Apple rule gets a workout[Ideoblog]