December 30, 2006
Steve Jobs and Options Back Dating
Apple Computer has a problem. The company's founder and star, Steve Jobs, may have participated in back-dating executive stock options. The back-dating scandals are past history, as a change in the timing of disclosure of executive stock options under SOX in 2002 has take out the timing slack that made back-dating possible. The task? How to keep Jobs in place at Apple. The solution: an internal investigation, run by outside directors who are notable public figures (Vice President Al Gore is one of the three), that issues a statement with three claims 1) problems are corrected 2) the panel has complete confidence in Steve Jobs and 3) Jobs did not personally benefit from the back-dating. A fourth claim is tactfully and skillfully noted but not highlighted -- we have fired those primarily responsible for the misdeeds (we have turned out the scapegoats). The third claim is the problem. First, It appears that Jobs still holds stock received in exchange for a cancellation of the tainted options. He does not hold the options but he still holds their derivatives. Second, the third claim acknowledges by omission that Jobs may have approved explicitly back-dating of executive options for others. What is interesting is what Al Gore, et al. could not do -- the right thing. The third claim should have been 3) Jobs apologizes for an error in judgment, has fully revealed his participation, recognizes it was the wrong thing to do, and has given back all the fruits of the grants and a substantial portion of his other compensation for those years as well as a penalty and asked the company to rescind any illegal grants to others. Then the report could have concluded that the company is better off with Jobs still on the payroll. If the panel had done this -- what was right-- the panel knew that would have encouraged the Justice Department and private plaintiff's attorneys to sue Jobs (and the company). The threat of litigation makes the full private accounting problematic. So the panel had to issue a report that minimized the threat of subsequent litigation -- spin the report. The spin is what ordinary people do not understand; lawyers and sophisticated executives do. This presents a monumental quandary: fess up completely and the company and its executives are maximally exposed in the subsequent litigation. This loss of available defenses to the litigation, in essence, throwing oneself on the mercy of the court, is unpalatable to companies and their senior executives. A potential solution to this mess is for the legal system to formalize some benefits for those who are honest with the capital markets. We seem to have done so on the criminal side (criminal proceedings are less likely and penalties reduced) and need to do so on the civil side (both in administrative proceedings and in private actions). One can argue that administrative proceedings are so muted (but it should be formalized) and we are left only with private litigation. A full internal investigation followed by an accurate summary and effective internal penalties should provide an effective affirmative defense in some form to private actions.
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