Financial Times Editorial - The nasty taste left by Apple’s options

Financial Times Editorial - The nasty taste left by Apple’s options
Copyright The Financial Times Limited 2006
Published: December 29 2006 22:05 | Last updated: December 29 2006 22:05




Investors in Apple breathed a sigh of relief on Friday when the company largely exonerated Steve Jobs, its chief executive, from blame in the backdating of share options at the company. But the way in which Apple conducted, and disclosed details of, its inquiry leaves a lot to be desired.

Other US chief executives have had to resign because they knew about options backdating at their companies. Options were adjusted in order for the recipients to gain from a lower strike price, while allowing companies favourable tax and accounting treatment. It was a widespread form of deception that reflects badly on US attitudes towards corporate governance.

One of Apple’s priorities, after it uncovered options backdating between 1997 and 2001, was to retain Mr Jobs as its chief executive. More than any other executive involved in options backdating, Mr Jobs personifies his company. He co-founded it and it languished after he was forced out in 1985. Only after he returned in 1997 did it start the recovery culminating in the success of the iPod music player.

The special committee of directors, chaired by Al Gore, the former US vice-president, put the blame on two unnamed former officers of the company. This was announced in October after a three-month inquiry, along with the resignation as a director of Fred Anderson, Apple’s former chief financial officer. Apple also said that Mr Jobs had been “aware” of some options backdating but had not received or benefited from these grants.

That seemed clear enough until on Friday when Apple amended its story in two respects. First, it said that Mr Jobs had been “aware [of] or recommended” some backdating of options that were awarded to others. In other words, he was not simply the passive observer of misconduct by others but an active participant himself. Even if he did not know that this was illegal, it was an error of judgment.

Second, Apple disclosed details of a backdated option grant that Mr Jobs received himself – but never exercised. He got a grant of 7.5m options that was finalised on December 18 2001 but was backdated to October 19. Not only did this happen, but the grant was recorded as having been approved at a special board meeting that never took place. In fact, Apple’s board had provisionally approved Mr Job’s options grant that August.

The get-out clause is that Mr Jobs did not know that his own grant had been backdated. This casts a better light on his behaviour than if he had rewarded himself by amending options, but it leaves questions unanswered. Why, for example, was none of Apple’s directors aware that a board meeting had been made up? At the least, it suggests that they do not read the board minutes very carefully.

It also makes Apple’s October statement seem disingenuous. The company’s options practices are being investigated by the Securities and Exchange Commission and it was making a closely watched statement to investors. So it might have found room in its summary of the “key points” for Mr Jobs’ own backdated grant and that he had recommended some backdating.

It is characteristic of Apple in its every day affairs to guard information closely and to say as little as possible about its products until the time and place of its choosing. Mr Jobs likes to announce everything himself. There is nothing wrong with that, but investors deserve greater openness and timeliness when it comes to Apple’s finances and corporate governance.

The final aspect of the affair that leaves a nasty taste is the singling out of two individuals to take the blame. It may be that they were at fault but Mr Jobs is hardly someone who delegates control easily and the company has admitted that he was actively involved in some option repricing. At other companies, chief executives have had to resign because of their involvement in similar financial abuses.

On the facts disclosed by Apple so far, Mr Jobs can stay. Investors in the company would clearly suffer if he were to resign and he was not found knowingly to have broken the law. But he came close to doing so and the company’s board must now ensure that nothing of the sort is allowed to occur again on his watch, no matter how valuable he happens to be.