One Bad Apple

Friday, January 5, 2007

THE SCANDAL at Apple Computer presents a dilemma with no easy solution. On the one hand, the company has changed its story on its use of manipulated stock options, which boosted executive salaries at the expense of shareholders, and Apple still appears to be bending over backward to protect Steve Jobs, its storied chief executive. On the other hand, if Apple's board were to come clean and oust Mr. Jobs, the shareholders would be punished yet again, since Apple is worth more with him than without him. Or, to put the dilemma a little differently: It doesn't seem right to let an executive float above corporate governance rules, but it seems equally perverse to enforce those rules if doing so would damage the investors for whom such rules exist in the first place.

That said, it would be easier to sympathize with Apple's directors if they described this dilemma honestly. Instead, they have dissembled. In October a special committee of the company's board, chaired by former vice president Al Gore, minimized Mr. Jobs's involvement in the granting of backdated stock options -- ones whose issue date is chosen retrospectively and designed to maximize their value to executives. But last week the company offered a subtly different account, explaining that Mr. Jobs had been personally aware of such grants and may have recommended the choice of dates in some cases. Moreover, Apple also disclosed that Mr. Jobs himself had received a large helping of backdated options. The company's documents stated that this award had occurred at a special board meeting. Apple now says that this meeting did not happen.

Apple argues that Mr. Jobs never benefited from his options grant. It has not disclosed sufficient information to determine whether this is true. The options were later swapped for restricted stock that was apparently worth considerably less -- perhaps this was Mr. Jobs's way of refunding the company. But neither he nor Apple has said as much. So for the moment analysts are left wondering why, even if Mr. Jobs deserves the chance to stay on, he does not explicitly reimburse shareholders.

The grant to Mr. Jobs, and the fictitious board meeting, both date from 2001 -- the year before a wave of corporate scandals drove the Sarbanes-Oxley corporate governance reform through Congress. Like the options backdating scandals at more than 100 other companies, they serve as a reminder of the rule-bending free-for-all that made reform necessary. Half a decade later, some business lobbyists are aiming to roll back Sarbanes-Oxley, and Treasury Secretary Henry M. Paulson Jr. has made comments that could signal the administration's sympathy for that agenda. The stench from Apple shows the danger of a return to the old system.


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