Apple backdating option

January 24, 2007

The Steve Jobs Effect...on the Backdating Scandal

Peter Burrows

Call it a hunch, but I think there’s going to be a lot of Silicon Valley CEOs and other executives that owe Steve Jobs a big debt of gratitude in coming weeks and months—and not because they received an iPhone before the rest of us. Rather, it’s because of Jobs’ involvement in the options backdating scandal.

Here's why. For whatever reasons—and they could range from a principled belief in his innocence, to a pragmatic understanding of his importance to Apple’s financial well-being--Apple’s board has backed Jobs despite pressure that would have led many companies to have asked him long ago to resign for the good of the team. Certainly, plenty of lesser known CEOs have been forced out, based on far less evidence (publicly-disclosed evidence, anyway) of involvement in backdating than Apple has admitted about Jobs. Now that Apple’s board has decided to stand by its man, other boards will feel more free to stand by theirs, as well.

Take the news from networking supplier Foundry Networks. The company announced on Jan. 22 that Bobby Johnson would give up the title of chairman, but remain as CEO and president. While CFO Timothy Heffner resigned, why didn't the board push out Johnson entirely, as has occurred at companies from Brocade to McAfee to United Health?

Foundry didn't return my phone calls, but the company's explanation certainly seemed similar to Apple’s. Both Johnson and Jobs were clearly involved in a hands-on way in handing out options at artificially-sweetened prices (the lower the grant price, the more the recipient makes should the company’s stock rise). Foundry says Johnson assigned dates on backdated options “in a substantial number of cases.” According to Apple, Jobs knew about and even recommended dates on some of 6,000-plus backdated grants. But like Jobs--at least according to Apple’s board--Johnson did not personally benefit from any backdated grants. And Foundry said that Johnson, also like Jobs, did not understand the accounting rules that should have led Foundry to properly expense and pay taxes on these backdated options. (Remember that backdating is not illegal, so long as the backdated grants are accounted for properly and disclosed to shareholders).

I don't know if Foundry's board was consciously trying to draft in Apple's wake, but you couldn't blame them if they were. Could there possibly be any better excuse for keeping Johnson employed than the "we didn't do anything Apple didn't do" defense? If Jobs can remain on the job—even amid press reports that he was interviewed last week by federal investigators—why not Johnson? He may not play on the grand stage that Jobs plays on (nor does he have Al Gore on his board, which could also tend to keep the Feds at bay. Even the boldest prosecutor would have to think hard before bringing charges against one of America’s most famous business icons, while also challenging the findings of an investigation co-run by a former and possibly future Presidential candidate). But Johnson is of similar relative importance in Foundry’s world. He co-founded the company in 1996, and is considered its architect and spiritual leader.

Of course, not every company that has admitted to backdating has thrown out its CEO. That could be because all CEOs are not created equal. "Boards that have successful CEOs tend to be more forgiving," says Xilinx CEO Wim Roelandts. "When you don't much care for the CEO, [the fact that backdating occurred on his or her watch] can be an excuse to get rid of him." By this yardstick, Apple's decision to circle the wagons around Jobs makes sense. He's unique, by most experts' calculation, in terms of his ability to get the most out of Apple.

Still, I predict Apple's handling of its backdating problem will impact decision-making in many other boardrooms. Before Jobs became embroiled in the scandal, the default response was to play it safe: announce a big restatement and oust the highest-ranking executives with any involvement, to show proper contrition and intention to reform to the Feds. Now, so long as evidence shows their CEO was less involved in backdating than Jobs was at Apple, there will be less pressure to automatically take the "throw-the-bums-out" route.

So is this a good thing? I think yes. A rush to judgment is never a good thing. Until government investigators turn over all the rocks to get all the facts, it's good for shareholders that neither Jobs or Johnson has gotten the boot--especially in the case of Apple, where analysts think the shares would plummet by 25% or more on such an announcement.

By the way, my sources continue to insist that Jobs is not a target of the government’s scrutiny.