Apple's Rotting Core?

Will Steve Jobs be able to survive Apple's (Nasdaq: AAPL  ) backdating scandal? More importantly, should he be allowed to survive?

My colleague Anders Bylund reported last week that with Apple's stock-option backdating investigation coming to a close, the computer maker was able to get back to business. But in truth, there are many more investigations still ripening. Aside from the internal investigation, the SEC has launched a probe, and the company faces shareholder lawsuits from the scandal.

And scandal it is, even if it happens to involve an icon of Silicon Valley. The probe by Apple found that not only was Jobs aware of the backdating that occurred at the company, but also intimately involved in selecting some of the dates at which an option was granted. That the committee investigating the matter absolved Jobs of any culpability seems a tad premature, if not silly. The SEC may reach a different conclusion, and you can be sure the trial lawyers will, particularly if it helps advance their case.

But as investors, why should we be so protective of Steve Jobs if he was engaged in a practice that gave away shareholder money to management and other employees? Yes, it's recognized that Jobs has done a magnificent job of reviving a company that had long looked moribund. And the consumer products it is pushing out under his tutelage are at the cutting edge of technology and design. Yet that does not absolve him of his actions.

Consider the fallout of William McGuire, CEO of UnitedHealth (NYSE: UNH  ) , who had guided the health-care company to superior returns over 15 years but was ultimately undone because of his role in that company's backdating scandal. McGuire grew UnitedHealth from a $600 million insurer to one valued at more than $70 billion, a 37% annual rate of return.

Supporters will say, however, that the difference between Jobs and McGuire is that Steve Jobs supposedly did not personally benefit from his role in backdating the stock options, whereas McGuire ended up holding options worth $1.8 billion at the end of his tenure. While he may not have directed his compensation like McGuire did, Jobs still benefited from it.

The probe found that Jobs was granted 7.5 million stock options at a special board meeting that occurred on Oct. 19, 2001. Problem is, no such meeting ever occurred. They were actually granted on Aug. 29, when the shares were $17.83, and finalized on Dec.18, when they were at $21.01. They were then backdated to Oct.19 at an exercise price of $18.30. Apple has said it will take a $20 million charge related to those shares. If Jobs didn't benefit, why is Apple incurring an expense?

Moreover, Jobs returned those options to Apple in 2003, along with another set of options granted in 2000, in exchange for five million shares of restricted stock worth $70 million. Certainly, in the interest of shareholders, Apple's board should try to recoup at least some of those restricted shares. McGuire at least asked the board to stop issuing options to senior managers. Along with his successor, Stephen Hemsley, he also agreed to give back a combined $390 million in stock option compensation. Small potatoes, yes, but a nod in the right direction.

Steve Jobs is obviously a brilliant innovator, but that should not excuse his role in Apple's scandal. Down the road, when the other investigations and lawsuits are ready to conclude, it certainly won't help shareholders that Apple's own audit committee found that its CEO knowingly participated in fraudulent accounting maneuvers, but absolved him of complicity in the crime.

I'm not necessarily saying that Jobs should not be forced out of his position, but by the same token, I don't think he should he be allowed to remain at the helm without some recompense to shareholders.

Compensate yourself with these related Foolish articles:

UnitedHealth is a recommendation of Motley Fool Inside Value, which despite the scandal is still beating the market by nine percentage points. A 30-day guest pass gives you full access to all of the market-beating value stocks that have been recommended.

UnitedHealth is also aStock Advisorselection.

Fool contributorRich Dupreydoes not own any of the stocks mentioned in this article. You can see his holdingshere. UnitedHealth is also aStock Advisorpick. The Motley Fool has adisclosure policy.


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