Among the hallowed rituals of American business life, few are as satisfyingly predictable as Steve Jobs’s annual January keynote at the MacWorld Conference & Expo in San Francisco. First, there’s the buildup: the weeks of rumors and speculation about what sleek new world-changing wonders the maestro will unveil. Then, the gathering of the faithful: some 40,000 salivating cultists crammed into the Moscone Center, hanging on his every word. And, finally, the Jobs performance itself: the costume (the deep-blue 501s, the black mock turtleneck), the demos, and the trademark tease (“One more thing…”), followed by the sound of chiming cash registers at Apple stores across the land.
But this year’s MacWorld promises to be different. For hovering over the festivities will be questions of even greater moment than whether Apple will finally cough up its long-awaited iPod–cum–cell phone. Questions emanating from a federal investigation of stock-option jiggery-pokery—and Jobs’s role in it. Questions such as, “How deep is the shit he’s in?” And if the answer to that turns out to be, “Up to his neck,” could Apple survive without him?
A bit of background: In June, Apple disclosed that it was part of the widening scandal over backdating options—that is, resetting their start dates to make them more valuable to employees. After submitting a number of filings to the SEC, the Apple board this past fall launched an internal investigation headed by two of its members: former vice-president Al Gore and former IBM and Chrysler chief financial officer Jerry York.
On December 29, Gore and York issued a report declaring that they’d “found no misconduct” by Jobs or any current Apple executive. Yet the report stated that Jobs had known about some of the 6,428 options that were improperly dated between 1997 and 2002, and that he had even recommended some of the “favorable” (i.e., bogus) dates. It revealed that he received a 10 million-option grant in January 2000 that was backdated by six days, greatly to his advantage. Also that a 7.5 million-option grant to him in 2001 had been backdated by two months—and that company records were falsified to create the impression that a special board meeting had taken place to approve the grant when no such meeting had ever actually occurred.
If these details strike you as somewhere between troubling and damning, you can rest assured you’re not alone. Far from quelling concerns over Jobs’s actions, the Gore-York report caused corporate-governance referees to throw red flags all over the field. As NYU finance professor David Yermack commented bluntly in The Wall Street Journal, “They have pretty much admitted that he was directly involved in a fraud.”
Neither Jobs nor Apple is saying anything for the moment beyond what’s in the Gore-York report. And there the defense of the company’s chief boils down to a single bald assertion: Jobs is basically in the clear because “he did not receive or financially benefit from these grants or appreciate the accounting implications.”
Put aside the matter of whether this statement—the first half of which is open to considerable debate and the second beside the point—is, strictly speaking, true. What’s more interesting about it is the way it rhymes with the company’s broader strategy in dealing with the options mess. Over 30 years, Jobs has carefully, famously honed his image as the archetypal un-businessman. As an aesthete, an idealist, a man for whom money was peripheral. And now he and Apple are relying on that image to shield him from imputations of financial chicanery. The thrust of their message is that we should believe that Jobs is innocent because he is … Steve Jobs.
The trouble is that Jobs, above all and before anything, is a flower—maybe the perfect flower—of the Silicon Valley culture. And in the valley during the Internet boom, the backdating or repricing of stock options wasn’t merely commonplace but practically de rigueur. Indeed, upon retaking control of Apple in 1997, Jobs apparently concluded quickly that rejiggering its options was crucial to preventing its best people from fleeing to Internet start-ups. Or so Jobs told Time magazine that August: “To restore morale, Jobs says, he went to the mat with the [Apple] board to lower the price of incentive stock options,” the magazine reported. “When the board members resisted, he pushed for their resignations.”
Whether this particular piece of options engineering was illegal is an open question. But it clearly suggests that Jobs was more intimately involved in Apple’s finances than is commonly assumed, and that evidence of his direct participation in tweaking Apple’s option plan may not be terribly hard to come by. The question is how hard regulators will look—and what they might do with what they find.
The problem is that Jobs is above all a flower of Silicon Valley culture—where options backdating is common.
No doubt, Jobs should be worried by a statement the other day by SEC chairman Chris Cox that when it comes to options-backdating cases, the government would focus on those “cases of serious fraud with elements such as deliberately lying or forging documents.” Yet for all the noise that the options scandal has so far created—more than 200 companies have been implicated to date—the government has brought criminal cases against only five executives. And Jobs can surely take comfort in the obvious waning of the political appetite to prosecute the excesses of the bubble. In Albany, the Spitzer era may be just beginning, but in the realm of financial regulation, it seems well and truly over.
Jobs, of course, is a special case—a kahuna big enough to stir the juices of even the most torpid prosecutor. But taking him on would undoubtedly be a notably fraught endeavor. More than perhaps any other CEO in America, Jobs has made himself indispensable at Apple; to a startling degree, the company is a pure reflection of his brains and sensibility and ego. And that Jobs has purposefully failed to groom a successor has only made him less expendable. According to an analyst at Piper Jaffray, were Jobs to be forced out of Apple, the stock would take an immediate 20 percent hit, a $14 billion whipping—every dime of it on the hands of whatever federal agency was responsible for taking Jobs down. Think such considerations don’t factor in at the SEC? Be serious.
But although Jobs may be indispensable, untouchable he is not. As the past six months have demonstrated, the SEC and the U.S. Attorney have nearly endless means of making a CEO’s life miserable short of filing criminal charges. All of which is why the Gore-York report struck so many observers as such a wasted opportunity. Here you have a situation begging for a mea culpa; for an admission that Jobs made some unfortunate errors, but ones all too common to the era; for an offer to do whatever regulators see fit to make financial amends.
Sorry has never been a word prominent in the Jobs lexicon, however. And in this case, an apology would be especially hard for him to swallow. It would require Jobs to admit not only that he’d done something that was wrong. Even worse, it would require him to admit that he’d done something that was pedestrian.
E-mail: jheilemann@gmail.com.