Al Gore's Dilemma

Ex-Vice President (and perhaps soon to be second time candidate for President) Al Gore found himself recently in a nettlesome dilemma.  He is an outside director of Apple Computers Inc. and chaired a three person subcommittee of the board investigating the company’s executive stock option practices.

An internal investigation by outside lawyers discovered in October that the company’s founder, CEO, and intellectual center, Steve Jobs, was involved in back-dating executive stock options.  Other CEOs have been fired for such conduct, but the Apple is worth much more with Steve Jobs at its head than without. 

The crime appeared to be victimless.  Back-dating executive stock options permitted the company to hide from Apple shareholders $84 million in compensation expenses on its income statements over five years, but Apple shareholders, whom the disclosure rule is intended to protect, did not care.  They overwhelmingly wanted to keep Jobs and forgive the technical disclosure violation. Moreover, new reporting laws adopted in 2002 have made options back-dating all but impossible – there is no danger of the infraction being repeated.

In other words, the stock price of Apple has been depressed by five percent or so since October not by the financial impact of back-dating but by the prospect of losing Jobs. 

What to do? Chairperson Gore could chose to stonewall, mount a full, blown technical defense, relying on lawyers to use whatever legal maneuvers they had in their arsenal to blunt any prosecutions and civil suits.  Eventually the company and Mr. Jobs, having worn down the opposition in over five years of litigation could settle for cash and little or no admission of wrongdoing.

Or Chairperson Gore could choose a mea cupla plea, baring all the facts for the world to see and throwing, literally, the company and Mr. Jobs on the mercy of the courts (more accurately, several courts and numerous prosecutors).  Tough choice.

Too tough apparently for Vice President Gore.  He chose a middle road – blame two other officers (the Chief Financial Officer and the Chief Legal Counsel) who are no longer with the company for the problems, admit that Jobs was involved but only minorly involved, and express “complete confidence” in Mr. Jobs.  Bad choice.  The incomplete admission will both encourage further digging by prosecutors and compromise the integrity of pleas for leniency in court.

The Apple report concluded that "[a]lthough the investigation found that CEO Steve Jobs was aware or recommended the selection of some favorable grant dates, he did not receive or financially benefit from these grants or appreciate the accounting implications." 

There are at minimum three problems with the conclusion.  First, the report is very nonspecific about many, many important details in the option grants practices.  Second, the only reason the report could claim that Mr. Jobs did not benefit from the tainted options is because his tainted options were canceled and replaced by five million shares of restricted stock, which he later sold for a cool $300 million.  The reports use of the word “benefit” is very literal and technical.  Third, Mr. Jobs as the CEO sets company policy, he cannot, by definition of his position, be minimally involved once he “recommend[s]” the practice.

Finally, readers of the report will note that the two tainted option grants that the report admits Mr. Jobs did receive each had some very unsavory aspects.  The January 12, 2000 grant of 10 million shares was one of the biggest option grants in American business history and had an immediate positive value, hidden, of millions of dollars.   The second tainted option grant in October of 2001 came from a completely fabricated board of directors meeting.  The board minutes were counterfeited.  Faking board meetings took the scam to a whole new level.

    Vice President Gore was in a tough spot.  Both avenues he could have taken had substantial risks in exchange for the desired outcome, but the intermediate avenue he took accepted the maximized and cumulated the risks from both choices.  Jobs and Apple, and Gore himself perhaps, may come to regret this transparent effort at waffling damage control.  The truth is inconvenient.