Apple
This Apple has a worm
Apple managed to beat expectations with its latest financial results, boosting its profit by 27 per cent and setting a new record for Mac sales. Everyone seems pretty excited about the whole thing, and happy to talk about how great the iPod and iTunes are, etc. If they mention it at all, most news stories mention the whole options backdating problem way at the bottom as a kind of throwaway. Most blogs don’t mention it at all.
In fact, the options-backdating issue might as well not even exist as far as most coverage of Apple is concerned — and that goes for much of the mainstream media as well as the blogosphere, where Apple fandom reigns supreme. Blogging Stocks is about the only place that has consistently written about the issue in depth (and Soxfirst), instead of just worrying about whether some bad official will make Steve Jobs go away and kill the golden goose.
Can you imagine what kind of stink there would be if Microsoft was involved in something like this? People would be burning Steve Ballmer in effigy (ok, they already do that, but you get my point). But because it’s Apple, the assumption is — if anyone even bothers to think about it — that it’s some kind of misunderstanding, a book-keeping irregularity that Steve couldn’t possibly have known anything about.
Is that the case? No. Apple has said that Steve knew about it, but didn’t benefit from it. Is that really supposed to make it all go away? We’re not talking about Enron-style arcane book-keeping tricks here — we’re talking about pricing stock options just before blockbuster quarterly results are issued, so that they instantly soar in value, and back-dating them in other cases to ensure a big payout.
Sure, everyone else was doing it too, but that doesn’t make it right. Apple has been getting a free ride on the whole issue, as far as I’m concerned. I guess the legendary Steve Jobs’ “reality distortion field” extends pretty far.
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This Apple has a worm via Mathew Ingram: mathewingram.com/work October 19th, 2006 at 03:45
Old news and sour grapes…find something current to write about.
Thanks, Eric — that’s the most pathetic comment I’ve seen in a while. I guess being old makes it less wrong, is that how it works? Or maybe you’d rather I found something else to write about because Apple is above criticism.
I think Apple is reaping the benefits of great karma right now. I wonder though how long this period of invincibility will last (zune release, something else?). And add to this the nonchalance with which Apple handled the issue of virus infected iPods, we have a perfect candidate for an almost ‘arrogant’ company. I love Apple and would normally defend them, but their actions of late haven’t been really what you would expect from Steve Jobs and co.
You are right, it would have been open season on Microsoft if there were even an inkling of financial misdemeanor on their part.
[...] Ingram: option backdating the worm in Apple. [...]
Don’t think you’ve got this one quite right, Mathew. Backdating is not illegal. Generally, it’s an issue for the company and its shareholders - if it wants to grant in-the-money options, there’s no reason in th world why it shouldn’t.
The issue is disclosure to shareholders and regulators.
The worst cases have featured active concealment by executives for the purpose of giving themselves special bonuses. The mildest cases have featured erroneous financial disclosure as people struggle, in good faith with the correct accounting treatment. The FT story you link to describes the new rules as arcane, actually.
In Jobs case, it may well be that though he knew of the practice, but didn’t realize that Apple was not accounting properly - which would be understandable - as the FT article’s expert suggests.
I didn’t say it was illegal, Rob. But legal or not, options backdating and re-pricing are still a sleazy way for companies to compensate executives without making it obvious how much money they are really getting — in most cases for doing nothing. Giving your CEO $150-million to get the hell out of Dodge (as Disney did for Michael Ovitz) isn’t illegal either, but that doesn’t make it right.
I wasn’t saying you said it was illegal. That was a point along the way to my comment that there isn’t necessarily anything even “wrong” with it, on whatever scale you measure it. You’re assuming that they are not “making it obvious”. Well, you’re answering the question with the question. If the shareholders approve, and its properly accounted for, there’s no reason why it shouldn’t be done. And companies have done that, and simply tripped over the technical requirements of accounting treatment. Others have actively concealed. My point is that you’re lumping them all together - ie - what I said in the parts of the comment that you didn’t respond to.
Okay, but you started off by saying “I don’t think you’ve got this quite right. Backdating is not illegal.” I don’t know how else to read that.
Let me take another crack at the rest of your comment: I don’t care whether it’s legal, and I don’t care whether it’s disclosed, or even whether a majority of shareholders approved it, since disclosure of that kind of thing is so poor at the best of times that most shareholders would have no clue what they were approving. I think it’s wrong, period.
Well, read it in context, I suppose - honestly. Not jabbing you, but I was building an argument, as I thought the balance of the comment made clear.
So your comment really isn’t about option backdating, it’s about disclosure, which makes it about corporate governance generally. Well, the entire philoshophical underpinning of governance laws, actually. And of course western theories about free will and man as a rational economic actor. :) But, at least as it applies to this, executive salaries, insider disclosure, financial statement requirements and so on. Doesn’t strike me as being particularly realistic, frankly. Rightly or wrongly, if anything, markets are pushing back on SarbOx and the like, not moving beyond it.
And I disagree with you re “most shareholders” - or at least, I’d be surprised if that were true, and wonder if you have data. Maybe with individual shareholders - it’s hard for them to follow, certainly. But really, no surprise there, surely. You could say that about the core disclosure - financial statements - no one reads them except the pros. “Most shareholders” probably don’t inquire and don’t know; prolly don’t care. Prolly invested because they like the product, or because their friend did. Baby, meet bathwater.
But more to the point, I suspect that most people invest in the stock market through intermediaries, such as mutual funds and the like, which kind of changes the disclosure issue, I think. I mean, if the investor is a seasoned professional who represents individuals, that’s another story, isn’t it? Particularly in the age of increasingly activist institutional investors? I don’t know the numbers, but I would be very surprised to hear that true individuals were a substantial part of personal investment in the markets - maybe I’m wrong, but I’d sure be surprised.
I think you should read my comment again, Rob. I specifically said that it’s not about disclosure. In my opinion, options backdating and repricing is wrong whether it’s disclosed or not.
I’ll ping you offline.
[...] My friend Mathew covers the ground on the topic, though for the sake of precision I’ll note that well-timed or backdated options don’t “instantly soar” in value (except perhaps in a strict option pricing sense) or “ensure a big payout”, unless they’re already vested and in the latter case are exercised - I’m pretty sure there have been cases where backdated options have expired without value because of later price drops in the underlying stock price. [...]
Pathetic is this post. This is nothing more then Blogging 101…It’s obvious that you’re taking this stand to try and stir up controversy to generate traffic. It’s baiting, pure and simple. I don’t for a minute believe that you’re so morally indignant over it. Your smarter then this, and this is a laughable effort!
Oh, no dice, I’ve got all kinds of criticism for Apple.
Hey Eric — did you even read the six comments or so before your latest one? I guess I spent all that time arguing with Rob in a pathetic attempt to drive traffic too, right? In fact, he’s probably in on it! Man, you sure have me figured out. I should know better than to try and pull one over on you, buddy.
Sometimes you just can’t win, Matthew.
:-)
Thanks, John. But I always win — it’s my blog, so I always get the last word :-)
[...] Bearish signal or not, I think it’s a great idea. One of the difficult issues with stock options — apart from the fact that companies hand them out like candy and then allow executives to reprice and extend them at will, which I’ve discussed here — is arriving at a value for them. Since they only really have value in the future when they are exerciseable, it takes a fair bit of hoop-jumping to arrive at a current value, which quite quickly gets into Black-Scholes pricing theory, etc. [...]
Bearish signal or not, I think it’s a great idea. One of the difficult issues with stock options - apart from the fact that companies hand them out like candy and then allow executives to reprice and extend them at will, which I’ve discussed here - is arriving at a value for them. Since they only really have value in the future when they are exerciseable, it takes a fair bit of hoop-jumping to arrive at a current value, which quite quickly gets into
[...] Of course, it’s possible that everyone is willing to overlook the Apple case because a) they are tired of the whole options-backdating issue, b) they don’t think it’s really that important — or even wrong, as my friend Rob argued in the comments on my previous post — or c) the company has absolved Jobs of any direct liablity, and therefore the whole issue is effectively closed. [...]