Over the past years, the intrepid duo of James Bandler and Charles Forelle at the Wall Street Journal have helped unearth dozens of examples of options backdating at companies large and small. Their investigations of the dishonest practice have led to the resignation of dozens of top executives and investigations by the Securities and Exchange Commission and federal prosecutors. But the options scandal has never touched a more exciting company than Apple or a more thrilling executive than Jobs.
Here's what's happened so far. In June 2006, a special committee of Apple outside directors, chaired by former Vice President Al Gore, hired its own attorneys to investigate options backdating at the company. The committee filed a report on Oct. 4, and on Dec. 29, Apple discussed the report and accounted for the impact of the earnings restatements in its 10-Q.
The report, which leads with the highly convenient conclusion that there was "no misconduct by current management," doesn't reflect well on Jobs.
It turns out there were literally thousands of examples of backdating at Apple—6,428 options grants on 42 dates over a period of several years. After accounting for forfeitures, Apple was forced to recognize stock-based compensation expense of $105 million on a pretax basis that it hadn't done so previously.
Apple has essentially blamed former chief financial officer Fred Anderson and former general counsel and board secretary Nancy Heinen, both of whom are no longer with the company. But Apple makes clear that Jobs was directly involved in some instances of backdating. The investigation "found that CEO Steve Jobs was aware or recommended the selection of some favorable grant dates." The committee hastens to add that Jobs "did not receive or financially benefit from these grants or appreciate the accounting implications." In other words, he didn't recommend backdating his own option grants. Still, given that (a) backdating helps make earnings look better than they are; and (b) Jobs is a huge shareholder of Apple (10.12 million shares, as of last April), how could he not benefit from this behavior?
It turns out that Jobs did, indeed, receive backdated options—just not at his own direction. On Dec. 18, 2001, when the stock stood at $21.01, the company gave Jobs a monster 7.5-million-share options grant dated Oct. 19, 2001, when the stock stood at $18.30. By doing so, the company gave Jobs $20 million in compensation for which it did not account properly. Fudging the date wasn't the only chicanery. It also pretended the options grant was approved at a special board meeting, when no such meeting occurred. Jobs did not know about the ghost meeting.
So let's review. Jobs recommended some backdating dates for other employees. He received a massive grant that was approved at a phantom board meeting, though he didn't know about the phony meeting. And he never cashed in those options because they were replaced in 2003 by a grant of restricted stock.
CEOs at other companies have been forced to resign for such activities. So why is Jobs getting off so easy? His job may be saved by the fact that he did not directly profit. More likely, though, he's been saved by his special status. Jobs is Michael Jordan in the 1990s, Citigroup in the 1980s, Walter Cronkite in the 1960s. He's a revered Hall of Famer who doesn't get whistled for fouls that send other pros to the bench.
Jobs is too big to fail. He is too popular—among investors, journalists, employees, analysts, and in the culture at large—for anyone to recommend that he be deposed. Without Jobs, after all, there would be no Apple. The scandals at Enron, WorldCom, Adelphia, and everywhere else ended the era of the rock-star CEO. But Jobs is the lone exception, as revered today as he ever was. Apple's 30-year history is divided into three phases: the golden early years in which Jobs and co-founder Steve Wozniak revolutionized the computer industry (1976-1985), the dark ages in which the company floundered after Jobs was ousted (1985-1997), and the glorious restoration (1997-present), in which Jobs ushered in a new golden age, making hip new computers and revolutionizing the music and entertainment industry with the iPod.
Everybody loves Steven. Employees love their visionary leader who has spread options throughout the company. Stockholders and analysts love him for delivering stunning returns. Consumers adore him for liberating them from the tyranny of expensive CDs and crappy radio. Creative types love Jobs for creating the iMac, a hipper alternative to the blocky PC. As Jack Shafer noted in 2005, even the press loves Jobs. Nobody—no board member, or analyst, or hedge-fund manager, or columnist—will step up to say that Jobs should go. A future without Jobs is simply too grim to contemplate. Writing in New Yorkthis week,John Heilemann cites an analyst who believes the company would instantly lose $14 billion in market capitalization if Jobs were forced out.
In the 1990s, nobody—officials, opponents, NBA Commissioner David Stern, television announcers—suggested Michael Jordan be called for traveling when he palmed the ball and took an extra step while driving to the basket. Just so, which midlevel investigator at the Securities and Exchange Commission would have the temerity to recommend to Chairman Christopher Cox that the agency haul the most successful Silicon Valley entrepreneur into court? Which junior federal prosecutor will recommend indicting the guy who smashed the PC monopoly?
As with Jordan, a different set of rules seems to apply to Jobs. "At the worst, Steve Jobs directed his company to issue him stock options on favorable terms, without bothering with the silly legal necessity of having a board meeting to approve it," wrote Thomas Donlan in Barron's.
Silly legal necessities? Some people call them laws.