HolidayBuyer's Guide

Why Apple's board is standing by Jobs

Some companies have ousted their CEOs for merely being around during stock option scandals. Those companies weren't led by Steve Jobs.

For the hundreds of companies accused of inappropriately backdating stock options, there's no pat answer for what to do.

Some, like security software maker McAfee, have asked their CEO and other top executives to step down, even without acknowledgement of wrongdoing or of executives benefiting financially from the backdating. Others, like Apple, have taken the opposite approach, defending the actions of their CEO, Steve Jobs, and taking a wait-and-see approach to federal investigations.

Is one approach right and the other wrong? A stickler for corporate governance would say McAfee and other companies, including CNET Networks (publisher of News.com), have done the right thing by shareholders. But a realist would say some CEOs have been unfairly booted with a career-damaging footnote to their resumes and that the public doesn't know the details of what's really going on inside a company and shouldn't try to judge.

"As you would expect, boards have different tests for this kind of stuff."
--David Larcker, accounting professor, Stanford University

Even the Securities and Exchange Commission hasn't figured out the proper penalty for companies and executives embroiled in the scandal, according to recent reports. Some executives may have known they were doing something illegal, some might have known it was a murky area, and still others might have had no idea of the accounting mess they were in store for later on.

A realist would also say it's foolish to kill the golden goose unless it's absolutely necessary. At Apple, the golden goose is Jobs, and it is, of course, a board's duty to act on behalf of shareholders.

"Steve Jobs is so closely tied to the success formula of Apple that nobody is going to believe nearly as much in the future of that company the day he walks out the door," said Stephen Mader, vice chairman of executive search firm Christian and Timbers.

Federal investigators are looking into Apple's practice of backdating stock option awards. Hundreds of companies--including CNET Networks--have become embroiled in the problem, in which companies preparing stock option awards occasionally cherry-pick a grant date when the stock price was low, rather than using the price on the date the options were actually awarded.

Technically, backdating is legal (though certainly controversial) if properly accounted for and disclosed, Mader said. Apple has revealed that Jobs was aware that favorable grant dates were being selected, and personally approved some of the dates. However, an investigation conducted by the board of directors and outside counsel found that Jobs did not profit from the backdating and was unaware of the accounting implications, Apple said in announcing the results of its internal inquiry.

Apple has also admitted that someone invented minutes for a meeting that never took place--the one in which Jobs' grants were supposedly approved. The company has said it found no evidence that current members of the company's management team were aware of the fictitious meeting, but the incident clearly occurred on Jobs' watch, as he said when announcing the resignation of former Chief Financial Officer Fred Anderson from Apple's board of directors. An Apple representative declined to comment beyond the public statements about its internal investigation.

In the case of McAfee, Chairman and CEO George Samenuk was said to have "retired" in the company's press release announcing his departure, while President Kevin Weiss was "terminated." Samenuk made a statement that didn't touch on his involvement in McAfee's backdating, but included this line: "I regret that some of the stock option problems identified by the Special Committee occurred on my watch."

So why does Jobs get a pass when other have gotten the boot? Of course, it's difficult to say what exactly each board knows beyond its public statements. But experts say a high-flying company like Apple would likely suffer more pain from the departure of its iconic CEO than it would if the board continued to defend Jobs--as long as no criminal charges are filed as a result of the investigations.

"When the stock price is going down, the improprieties seem to be a bigger deal than when the stock price is going up," said David Larcker, a professor of accounting at Stanford University and director of the university's Corporate Governance Research Program.

Apple is certainly on a roll. The company's stock is up 14 percent over the last 52 weeks, after several quarters in which it has exceeded Wall Street's financial expectations with strong iPod and Mac shipments. And it's got analysts buzzing about the potential for a product--the iPhone--that isn't expected to ship until June.

Also, there's no formal standard for board members to follow in this situation. "As you would expect, boards have different tests for this kind of stuff," Larcker said. "If a company is having a lot of trouble, and something happens, it seems to me they are much quicker to pull the plug on the CEO."

No doubt, Apple has talented designers, technical wizards and savvy marketers on its payroll. But perhaps more than in any other company in technology, Jobs gets more credit for Apple's successes than other CEOs, based on his track record, demanding management style and the famous reality distortion field--the mix of charm, charisma and marketing Jobs uses to get projects done.

As a result, Jobs is perhaps Apple's greatest asset.

For a company its size, Apple has a relatively small, seven-member board. Besides Jobs, it's a who's who of San Francisco Bay Area business, including Arthur Levinson, CEO of Genentech; Intuit Chairman Bill Campbell; Google CEO Eric Schmidt; former Gap CEO Millard Drexler; and Jerry York, the former CFO of IBM who is now the head of the venture capital firm Harwinton Capital.

But the best-known member of the board is documentary maker, Internet entrepreneur and former Vice President Al Gore. He has taken a prominent role in the backdating investigation, as co-leader of the investigation with York. Given that Gore likely continues to harbor political ambitions, his public stance on this issue suggests he had the full backing of Apple's board, said Patrick McGurn of Institutional Shareholder Services, a proxy firm.

Said Stanford's Larcker, "Ultimately, the professionalism of the directors has to come into play. If you're a board member, what is it you view as totally out of bounds?"

Boards also need to consider public opinion when making these types of decisions, and it would be hard to find an Apple customer or shareholder who thinks the board should take a tougher stand with Jobs. "It's fine for boards to say, 'It would be a bad thing for shareholders (to remove a CEO), and we're going to fight this thing until it's a criminal issue of major proportions.' There are other times when its more inconvenient to fight the PR battle," Mader said.

Of course, Apple's devoted fans are unlikely to care about what Jobs may or may not have done. Financial analysts have been quick to seize upon the results of Apple's internal investigation exonerating Jobs, and investors know how important Jobs is to Apple.

"They (the board) may be as likely to get sued if they removed Jobs at this time than if they didn't," McGurn noted.

It's no surprise, then, that there appears to be little pressure on Apple's board to take any action.

"Unless the evidence it found was absolutely black and white that he had committed some sort of fraudulent act, then the chances would be good the board would give him a pass," McGurn said. "Then they would cross their fingers that the regulators would come to the same decision."

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