I've got some sour news for you, Apple (Nasdaq: AAPL ) shareholders. It doesn't matter how many iPods you buy, iPhone apps you download, or black mock turtlenecks you wear: Steve Jobs couldn't care less about you.
And that's why -- despite great products, a killer brand, and mouthwatering growth potential -- I would advise against owning shares of his company.
Hey, Steve, the Jerk Store called
There's plenty of anecdotal evidence to suggest that Jobs is a jerk. Stories of Apple's CEO throwing temper tantrums, berating his employees, taking credit for others' ideas, and even parking his Mercedes in handicapped spaces are nothing new. But Jobs' personality flaws are not legitimate reasons to avoid Apple shares. In fact, I don't even mind that Jobs is a jerk. After all, there is a long list of corporate leaders who managed to create significant shareholder value despite seriously deficient personalities -- from John Rockefeller to Henry Ford to Microsoft's (Nasdaq: MSFT ) Steve Ballmer.
Instead, I mind that the Apple CEO has demonstrated a pattern of decidedly shareholder-unfriendly behavior over the years. With his company's stock trading for $200 per share, that's a risk that I'd rather not incur. Here are three prime examples of why I think Jobs' decisions have done his shareholders no favors:
1. All about Steve
In early 2000, along with a fancy private jet intended for his personal use (total cost to shareholders: $88 million), the Apple board gave Jobs an options grant allowing him to purchase 40 million (split-adjusted) shares at $21.80 a piece. According to Bloomberg, "the strike price of that grant was equal to the lowest closing price of Apple stock in the 56- and 30-calendar day periods preceding the grant and in the 30- 56- and 90-day periods following the grant."
In case you're tempted to chalk that convenient strike price up to chance, remember that during Jobs' stint as CEO of Pixar (now a part of Walt Disney (NYSE: DIS ) ), key executives received options grants priced at the stock's yearly low in 1997, 1998, 2000, and 2003. A Merrill Lynch analyst placed the odds of that happening purely by coincidence at one in 112 million.
I don't begrudge Jobs receiving high compensation. He has created a lot of value for Apple shareholders over the years, and deserves to be compensated accordingly. But I would prefer that compensation to be commensurate with the value that Jobs creates, preferably in the form of restricted stock units awarded if Apple achieves predetermined performance-based criteria. Backdating stock options enriches executives independently of their performance -- since the bar is set so low, and at the expense of shareholders -- since the company ultimately foots the difference.
Of course, alignment with his shareholders' interests has historically not been much of a concern for Jobs. After Apple's stock plummeted during the dot-com crash, Jobs went back to the board and demanded another options grant, giving him the right to purchase 15 million (split-adjusted) shares at the new low price of $9.15 a piece. Apple shareholders did not enjoy such a luxury when the value of their holdings declined.
According to the SEC, Apple went to extraordinary lengths to disguise the details of these options grants (including allegedly creating bogus paperwork and minutes of a nonexistent board meeting). Although Jobs has pleaded ignorance to the accounting implications, former Apple CFO Fred Anderson -- whom the SEC forced to repay $3.5 million of "ill-gotten gains" because of his involvement in the options scandal -- insists that Jobs was deeply involved in the decision-making process and had been alerted to the accounting ramifications of his actions.
2. Too much of a good thing
Apple has a rock-solid balance sheet, with a $23.5 billion cash hoard at its disposal and no debt. In and of itself, this is a very good thing. However, Jobs has been content to park that cash in short-term investments earning a paltry 1.7% return. That's peanuts.
Smart managers will keep a small amount of excess cash on hand to cushion against the impact of a possible business downturn or fund an opportunistic acquisition. But Apple can easily cover its R&D expenses and off-balance sheet purchase commitments with its free cash flow, and $23.5 billion is enough money to buy a competitor or two, the Washington Redskins, and a medium-sized Central American country.
As partial owners of the company, Apple's shareholders have a proportional claim on that cash hoard. If Jobs does not have a legitimate operational need to maintain such a significant cash balance, he should follow the lead of tech titans like Intel (Nasdaq: INTC ) or IBM (NYSE: IBM ) and pay his shareholders a dividend, or mirror Cisco (Nasdaq: CSCO ) and use some of Apple's copious free cash flow to repurchase shares.
3. Unhealthy disclosure policy
Unfortunately, no discussion of Jobs is complete without a reference to his health issues. According to a Fortune article, although Jobs was diagnosed with pancreatic cancer in October 2003, he put off surgery for nine months while he explored a number of alternative approaches. During that time span, he did not disclose his condition to Apple or Pixar shareholders -- in fact, he reportedly didn't even tell the Pixar board.
Rumors of Jobs' health issues resurfaced in 2008, but Jobs dismissed these concerns first as "a common bug," and later as "a hormone imbalance." In April 2009, Apple shareholders were surprised to learn that Jobs had received a liver transplant -- a condition far more serious than the company had led them to believe.
But Jobs' body is Apple's business. Apple's annual report sums it up best: "Much of the Company's future success depends on the continued availability and service of key personnel, including its CEO." This is surely a sensitive issue, but if Jobs is a material factor in Apple's future success then shareholders deserve to know his health status. By withholding this vital information, Jobs subjected his shareholders to significant risk.
Close, but no cigar
Over the years, Steve Jobs has repeatedly demonstrated indifference for his shareholders' well-being. While his poor stewardship hasn't hurt shareholders too badly yet, I believe it's only a matter of time.
That's why -- despite a strong brand and obvious growth potential -- we passed on purchasing Apple shares at Motley Fool Million Dollar Portfolio, where we run a diversified real-money portfolio populated with the best recommendations from The Motley Fool universe. In addition to business models, competitive advantages, financial statements, and cash flow projections, we spend a lot of time evaluating a company's leadership, and thanks to Jobs, Apple didn't make the grade.
Instead of Apple, we'd rather own shares of a company like Under Armour (NYSE: UA ) , which not only boasts a great brand, innovative spirit, and tremendous growth potential, but also a leader -- CEO Kevin Plank -- whose interests are clearly aligned with his shareholders. Not only does Plank own 25% of his company's shares, but last year he voluntarily reduced his salary from $500,000 to $26,000, since Under Armour failed to achieve its revenue and operating margin targets. That willingness to prosper or suffer along with his shareholders makes us proud to call Plank our partner.
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