Beware the captains
A while back, one of my father's best friends told him this: "Major corporations are run primarily for the benefit of those in the executive suite. Don't forget it." Though his position as a top-level exec at many of the world's biggest pharmaceutical companies made him an expert on the topic, I always kind of hoped he was wrong.
Yesterday, Apple (Nasdaq: AAPL) proved to me, once again, that he was speaking the truth.
Last night, the company admitted through a statement that superstar CEO Steve Jobs "was aware that favorable grant dates had been selected."
No harm done
Yet, in a bizarre semantic exercise, it simultaneously concluded, "The investigation found no misconduct by any member of Apple's current management team."
Apple's special investigation unit apparently decided that there was neither harm nor foul, because Jobs "did not receive or otherwise benefit from these grants and was unaware of the accounting implications."
What a load. Jobs began his life as a programmer. Surely he's capable of doing the basic math that reveals the following simple truth: When you backdate (or springload) options, you hand the recipients potential monetary gains in excess of those they actually deserve.
Excusing Jobs simply because he didn't benefit personally looks like another flimsy exercise in self-serving corporate-speak. Let me see if I get this straight: It's OK for Jobs to know about and condone (whether explicitly or through inaction) options backdating, because he didn't see any extra greenbacks flow into his wallet?
That's a bit like saying it's OK for my boss to head down the corner grocery, crack the safe, and haul back wads of cash -- as long as he hands out all of his ill-gotten gains to the rest of us. Right?
Wrong. These options scandals aren't just about executives stuffing their own pockets. In one of the most notorious cases, that of Comverse Technologies (Nasdaq: CMVT), the SEC alleges that a primary goal of the backdating scheme was to attract and keep executives. (Late last month, Comverse's ex-CEO, Jacob Alexander, was apprehended by Interpol after fleeing the U.S. for Namibia, a few months after the U.S. government alleges that he wired nearly $60 million to an account in Israel.)
Steve and the sacrificial iLamb
Of course, Jobs is too important to answer for shenanigans under his watch, even if he was aware of them. Instead, Apple served up perhaps the world's scrawniest sacrificial lamb. CFO Fred Anderson fell on his sword, but don't worry -- it's only a flesh wound. He's already the former CFO, and now he's just resigning from the board of directors.
The only consequence for Jobs so far is the need to have his name appended to a terse apology from Apple corporate:
"I apologize to Apple's shareholders and employees for these problems, which happened on my watch. They are completely out of character for Apple," said Steve Jobs, Apple's CEO. "We will now work to resolve the remaining issues as quickly as possible and to put the proper remedial measures in place to ensure that this never happens again."
Fools should note that the remedial measures that ensure this never happens again have pretty much already been mandated by the SEC through more timely options-grant disclosure rules.
Business as usual
And as for this sort of behavior being "out of character for Apple," go ahead and pull the other one, Steve. I've always felt that Jobs put shareholders at the back of the line while building his iEmpire. Just take a look at the share dilution, running nearly 9% per year for the past two years. Apple is incredibly generous to insiders. Directors, for example, get $50,000 per year in cash, plus 10,000 options, immediately vested and exercisable -- that's worth another $750,000 per year at today's prices. Oh, yeah, and because $800,000 a year is such a hardship, directors also get two free Apple computer systems per year.
And remember the long-running, media-friendly farce about Jobs' salary? Apple would tout that $1-per-year sum while letting the naive newshounds out there conveniently ignore insanely huge options grants and other minor perks -- like a $90 million Gulfstream V jet, plus hundreds of thousands of dollars in operating costs.
Of course, over the past couple of years, Apple shareholders have seen gains large enough that they could forgive just about anything. But it's easy for everyone to be sanguine when the good times roll. It's only in lean times -- during which many of Apple's largest option grants seem to have been given, at suspiciously depressed prices -- that we see management's true colors. (The Wall Street Journal has some interesting graphs -- login required -- showing when such grants were made.)
Teflon Steve
I have no doubt that this brouhaha will fade quickly. Jobs maintains his enviable spot as the media's darling. Personally, I'd love to see what the response would be if this statement came from some Wall Street punching bag -- say, Microsoft (Nasdaq: MSFT), Home Depot (Nasdaq: HD), Hewlett-Packard (NYSE: HPQ), or -- heavens to Betsy -- an oil company. Gates, Ballmer, Nardelli, Hurd, or any oil exec would have been tarred and feathered before morning.
And let's contrast Apple's inaction with recent events at Boeing (NYSE: BA), which fired CEO Harry Stonecipher for having a consensual affair with a subordinate. No harm here, right? Certainly no crime. That's not the issue. It broke the company's code of conduct, and that was enough to warrant the dismissal. Leadership, Boeing has decided, begins at the top.
Ditto Raytheon (NYSE: RTN). Its response might have been a bit late for some tastes, but when the company finally realized just how much plagiarism went into CEO Bill Swanson's (freely distributed) mini-tome on management, Swanson came clean with a real apology, and more importantly, the board came down with real consequences -- it docked his pay to the tune of a full $1 million. And keep in mind, the board did this even though Swanson was its chairman.
One rotten Apple .
Neither plagiarism nor improperly granted stock options represent victimless acts -- though the lack of an easily identified, cash-deprived victim may make it seem that way.
That's why Apple's board ought to step up here. I'm not saying Jobs should be run out of Cupertino on a rail, but given Apple's tough-talking code of ethics, and Jobs' admitted knowledge of cherry-picked grant dates, it's clear to me that something other than a pain-free apology is in order. Maybe public-minded board (and compensation committee) member Al Gore could take a breather from global warming and divert a little of that righteous indignation of his toward cleaner corporate governance?
And risk one of the easiest $800,000-a-year take-homes in America? Yeah, I'm not holding my breath, either.
At the time of publication, Seth Jayson was long Microsoft calls and common, as well as Home Depot common, but he had no positions in any other company mentioned. View his stock holdings and Fool profile here. See what he's Digging these days. Microsoft and Home Depot are
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