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The WSJ: New Look, Same Blind Spot

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By WatchingTheHerd
January 10, 2007

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light. How are these posts selected? Click here to find out and nominate a post yourself!

(also posted at: http://watchingtheherd.blogspot.com/2007/01/wsj-new-look-old-blind-spot.html )

Dow Jones updated the look and feel of The Wall Street Journal to make the content easier to read but seems to have done little to make the editorial content easier to stomach.

If you subscribe, you might want to save the January 3, 2007 issue. It could become a collector's item. First, it includes President Bush's call to Congress to help save his presidency with a helpful note at the bottom of the piece reminding the busy executive that Mr. Bush is the President of the United States. Uhhh, THANKS for that reminder.

It also contains the latest installment in a continuing series of columns by Holman Jenkins that wink at stock options backdating as a sign of honest compensation committees competing in a healthy market for executive "talent" so they attract nothing but the best and brightest to loot -- I mean lead -- their companies.

I've written about this before:

http://watchingtheherd.blogspot.com/2006/07/wsj-wrong-wrong-wrong.html
http://watchingtheherd.blogspot.com/2006/07/wsj-still-wrong-on-options.html
http://watchingtheherd.blogspot.com/2006/08/wsj-three-strikes-on-options.html

and will probably have to write about it again when Jenkins writes his next installment on the desperate plight of executives struggling to survive in retirement on $20,091 a day.

In the installment for January 3, 2007, Jenkins provides a bit of an update on the backdating saga at Apple Computer but quickly reverts to his prior arguments that backdating is a ethically harmless way to provide the economic equivalent of a comforting psychological "sippy cup" to executives by ensuring their options are "in the money" during their entire vesting period.

Soooooooo... Lemme get this straight.

We have executives who are supposed to possess the cutting edge financial savvy and nerves of steel required to make decisions about BILLIONS of dollars of revenue streams denominated in dozens of world currencies, choose investment strategies for capital investment across dozens of countries with varying tax rules and depreciation rules, and select hedge fund investments to protect BILLIONS in free cash belonging to stockholders that they've decided to horde in the company treasury.

These are the same executives who need to have options granted "in the money" because they are NOT sophisticated enough deep down in their morally and ethically pure souls to understand the true economic value of an option grant worth a few piddly million dollars?

Seriously.... ARE YOU KIDDING US?

The coup de grace of Jenkins' flawed thinking is his lead paragraph which states that the four dollar jump in Apple's stock price on December 29, 2006 when the Apple board released its report and its vote of confidence in Jobs proved "the market doesn't give a hoot about options backdating."

First, the report from Apple's internal investigation was exactly that -- an internal investigation, not an external legal / criminal investigation. The board report amounted to a puzzling "no one did anything wrong and we'll never do it again" statement that stated

a) Jobs had a hand in setting some of the specific bogus favorable grant dates for grants to some subordinates
b) in many of these cases, the grants were withdrawn so no one really profited from these grants anyway
c) oh yea, in one particular case someone filed documents implying full board approval of a grant when full attendance did not occur (#1)

The admission by the board that documents about board meetings were falsified in the process of operating Apple's option grant program should put the Apple case on a new level of legal concern for authorities and financial concern for investors, yet Jenkins glosses over this for the most part.

Coincidently enough, Jenkins also has the luck to again have his piece published on a day when the news of the day refutes much of his faith in the integrity of Corporate America. In this case, on the same day Jenkins argues that shareholders don't really care about options backdating and larger issues of outsized executive compensation, the board of Home Depot announced the resignation of CEO Robert Nardelli after years of pressure from shareholders about skyrocketing pay coupled and a slumping stock. Nardelli is leaving with $210 million, $20 million of that in cash. (#2) Previously, an August 16, 2006 column coincided with stories of accounting oddities at Dell and Rambus.

Jenkins also makes the mistake of trying to identify a collective motive in the decentralized herd that is the stock market by claiming the $4.00/share jump after the news was due to investors waiving off concerns about the ethical / legal lapses in the management of Apple. An equally likely (more likely?) explanation for the stock price is the following:

1) Apple's stock went from about $75/share 1/1/2006 to a peak of $93.16 during the year, making it a high gainer in the market
2) Investors dumped the stock on 12/27/2006 after hearing news of the board findings (constituting a more likely indication of investor sentiments about the board and Jobs), depressing the stock 6%
3) Mutual funds engaging in their own portfolio "apple polishing" picked up Apple shares on sale on the last day of trading in 2006 to make their portfolios look more sexy to potential investors looking at their next printed prospectus.

Investors, you cannot claim you weren't warned.

Repeatedly.

If you own stock in company A and company A's board collectively issues false information about YOUR company to you the shareholder and you continue to hold the stock without a change in the board, YOU DESERVE TO LOSE EVERY PENNY YOU HAVE. With cheerleaders like Holman Jenkins and the editorial board of The Wall Street Journal egging on Corporate America from the sidelines, you probably will.


WTH

===========================

#1) http://news.yahoo.com/s/nm/20061228/bs_nm/apple_options_dc

#2) http://biz.yahoo.com/ap/070103/home_depot_nardelli.html

 


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