Apple CEO Bit into Temptation
Steve Jobs should share the blame for the computer maker’s mishandling of stock options. Pro or con?
Pro: Dubious at the Core
Does Steve Jobs deserve some of the blame for the options backdating at Apple (AAPL)? Of course he does. The seriousness of the accounting shenanigans at Apple, not to mention basic fairness, demands it. Accounting irregularities seem to have occurred nearly routinely at Apple after Jobs’ return in 1997; the company admitted to more than 6,428 separate instances between that year and early 2003. And one massive 7.5 million share grant in 2001 to Jobs himself was backdated, making it one of the most glaring examples of potential CEO self-enrichment in a scandal that has engulfed more than 200 companies.
Based on these facts alone, there’s no way to give him a hall pass on this when so many other CEOs have paid with their jobs for less-troubling situations. To be clear, I’m not suggesting Jobs deserves to get the boot from Apple. That truly would be nuts, in that it would hurt the countless investors who’ve benefited from the 1,000% increase in the value of Apple shares under Jobs’ expert leadership since 2001.
And I’m not calling Jobs a crook. Based on the facts so far, it looks as though he did what many hyper-competitive tech executives did in the pre-Sarbanes-Oxley era: He ordered his company to make aggressive use of stock options, and relied on high-priced lawyers and accountants to prevent it from crossing any legal lines. If we really want to assign blame, I think those advisers deserve far more of it than they’ve gotten. Instead, they’re making hay on the scandal by advising companies on how to clean up the mess.
Still, blame is being doled out to executives, and Jobs deserves his share. For starters, difficult factual questions have arisen in recent days—particularly in connection with the Securities & Exchange Commission complaint on Apr. 24 against two of Jobs’ most trusted former lieutenants, former Apple Chief Financial Officer Fred Anderson and chief counsel Nancy Heinen.
While Jobs was not charged, Anderson, who settled the charges the same day without admitting guilt or innocence, issued a statement claiming he explicitly warned Jobs about the accounting complications if Apple issued a grant to top executives in early 2001 at anything other than the fair market value of the stock on the day the grant was finalized. This flies in the face of the account issued by Apple’s board last December, which exonerated Jobs of any intentional misconduct in part because he did not “appreciate the accounting implications” of backdating.
One Apple insider denies Anderson ever gave Jobs such a warning, and that may well be true. But that wasn’t the only troubling incident. There’s also that huge 7.5 million share grant to Jobs that the SEC says was finalized in December, 2001—and then backdated by two months to October 19 by Heinen, who is charged with creating false documents to suggest a board meeting occurred on that fictitious grant date.
Heinen’s reasoning, according to the complaint: She wanted to secure a stock price closer to the lower price initially approved by the board that August, before a four-month tiff erupted about the vesting schedule by which Jobs could cash in. If the terms of the grant were the subject of so much debate, wouldn’t Jobs have been apprised of the final grant date? If so, wouldn’t he have known that no board meeting actually occurred that day?
We won’t know the whole truth until Heinen’s trial (unless she settles), and it’s possible Heinen never told him about any forged documentation or about accounting charges that should have been taken in connection with the grant. Even so, some experts say Jobs needs to take responsibility for a company where such a fraud allegedly occurred. “I think the CEO needs to be the first one held accountable—because it is he who sets up the culture,” says Lynn E. Turner, a former chief accountant of the SEC who now runs research at investment advisory firm Glass, Lewis & Co.
So what’s the right allotment of blame? I say Apple should do what it should have done from the start: Come clean with all the details of Jobs’ involvement. Also, Apple should ask Jobs to pay back the $20 million the company has assumed to cover the expense had he been able to exercise his backdated shares (in the end, the board let him trade in these underwater options in exchange for restricted shares worth $75 million). Having pocketed billions upon selling his Pixar Animation Studios to Walt Disney (DIS) in early 2006, Jobs can well afford it, and it would serve as a public acceptance of responsibility and a penalty commensurate with the alleged crime—and do so in a way that wouldn’t harm Apple’s shareholders and customers.
Con: Stop with the Sourness
How many different ways can Steve Jobs be found completely innocent of any and all wrongdoing in the backdating of stock options before the doubters among the public at large will let him off the hook?
Jobs certainly would be a juicy target for regulators. A household name, widely credited with rescuing Apple from the brink of oblivion following his return to the company in 1997, he’s one of just a few technology company executives with sufficient cultural weight to be made fun of regularly on Saturday Night Live.
First, the company and its outside directors, having conducted their own investigation, using an outside law firm, exonerated him. Then the Securities and Exchange Commission, the government regulatory body responsible for enforcing these matters, implicitly exonerated him by suing two former executives, former CFO Fred Anderson and former general counsel Nancy Heinen, but not Jobs. Anderson settled, and Heinen’s lawyers have promised a vigorous defense.
Steve Jobs is not now, and has never been, either a lawyer or an accountant. Hence Apple employed a chief financial officer and a general counsel whose job descriptions presumably included advising the CEO on the finer points of many business issues that fall within the areas of their given expertise. If they felt at any time the stock options grants in question were even slightly improper, they should have clearly advised Jobs of their opinions.
In a public statement issued through his lawyers on the heels of his settlement, Anderson claims he did just that, advising Jobs that in the case of one of the disputed grants, the date of the board approval and the date of the grant for pricing purposes would either have to match up, or be expensed if the grants were “in the money.”
Relying upon statements by Jobs, Anderson assumed that Jobs and Heinen were making sure that grant was being handled properly, and that the appropriate board approvals had been secured, when in fact they had not. However, now that he feels compelled to blast Jobs in public and shell out $3.5 million to get the SEC off his back, one wonders why he didn’t feel strongly enough at the time to go out of his way to ensure the options were handled properly in the first place, and if it proved to be the case that they weren’t, threaten to resign?
Something similar could be said of Heinen. The SEC’s complaint against her portrays her as caught in the middle of a lengthy negotiation between Jobs and Apple’s board over the vesting period of his 2001 options package. And her attorneys have said in public that actions taken by Heinen to get the grant approved took place with the full knowledge and understanding of the board of directors.
That may turn out to be the case, as the full extent of her defense against the SEC’s charges hasn’t come to light. Yet if at any point Heinen felt there was something improper taking place related to the granting of any of these options, it would have been her duty to call it out to those higher up in the chain of command. If anyone instructed her to do something improper, be it a CEO or a board member, she could have refused.
There’s a reason chief executives often try to stay out of compensation discussions and leave those issues to a committee of directors. Jobs, though a director, has never served as a member of the compensation committee squarely responsible for making decisions and recommendations to the full board. If anyone is to blame for anything that may have been amiss at Apple during the last several years, it is those directors, and the Apple employees who advised them.Opinions and conclusions expressed in the BusinessWeek Debate Room do not necessarily reflect the views of BusinessWeek, BusinessWeek.com, or The McGraw-Hill Companies.