Wow...I guess I shouldn't be surprised by now, but I was momentarily taken aback by today's news that Apple (AAPL) had discovered "irregularities" in stock options issued between 1997 and 2001. Apple has hired outside counsel to further the investigation and the company has also notified the SEC of the pending investigation.
Apple is just the latest in a slew of companies, mostly technology vendors, that are now undergoing some measure of investigation into options policies. I'm not going to speculate on the culpability of any specific company but it's difficult to defend the industry for what's starting to appear like a fairly pervasive practice.
I've heard some other investors make the contention that "it's no big deal" because "everyone was doing it." Yet, I have a real problem with that logic for several reasons:
1) Everyone is NOT doing it...even if another 200-300 companies come forward in the coming months as having committed some measure of backdating, that's but a small fraction of the overall public equity universe and hardly excuses the practice
2) Anything that misaligns company interests with that of its outside shareholders IS a big deal...while backdating wasn't technically illegal (as long as it was disclosed to shareholders and properly accounted for), the irregularities we're seeing are, at best, misaligning the motivations of management with outside shareholders and, at worst, far more nefarious. As a public equity investor, there is an implicit fiduciary responsibility that public company executives maintain a fairness to all their constituencies, backdating does not - in any way - do that
3) It's a blow to the technology industry...It's foolish to think that technology companies are the only ones who committed backdating offenses, but clearly the industry is suffering the brunt of the initial inquiries. Given the aggressive use of options by technology companies (which helped fuel growth), it's as equally foolish to think tech won't be among the most egregious offenders when the dust settles. For an industry that is already struggling to gain relative support by asset allocators, this is a most unwelcome revelation.
Sadly, I think we're going to see a lot more evidence of this kind of practice before it's all said and done. I can't and won't tell other investors how they should treat these announcements, but I can tell you that, in aggregate, it's disappointing for those of us who so passionately evangelize technology companies and their investment potential.
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Note: At the time of this writing I, and/or funds I maintain discretionary control over, did not maintain a position (long or short) in AAPL.
options backdating shareholder interests apple aapl software woodrow investing
there is another story which is not being told. Rank and file employees with a few options are subejct to the same quiet period and trading window freezes as management. At Gartner it happened several quarters in a row, just before the window opened the price would drop then go back up after the window closed. Someone deprived employees of 10 to 15% of the prices - I was tempted to go to the SEC then. So in the current mood where investors feel taken advantage of due to option backdating, I would suggest the majority of tech employees have little control of the pricing - and probably get taken advantage of themselves
Posted by: vinnie mirchandani | June 30, 2006 at 09:00 PM
"Everyone is NOT doing it..."
Sorry, Woodrow, I vehemently disagree. Everyone IS doing it. Options backdating? Probably only with the heavy options granting companies. BUT, is there a fundamental disconnect between shareholder interests and board/management interests? ABSOLUTELY!
I would make a good odds bet that fewer than 10% of public companies have a board and management team that operate with their interests aligned with long term shareholders.
Maybe it's not options backdating. But it might be a performance payment plan that triggers full bonus if some stupid benchmark is achieved.
"The board and CEO will get a 250% success bonus if the company's operating cash flow remains above average cash flow of the Jimmy Deans booth at the vegan convention."
The disclosure requirements emerging today will unmask some of the mystery, but I think shareholder disclosure today is comparable to the details available from 1970's Kremlin sessions. Heck, public shareholder voting is as close to Iron Curtain "elections" as anything else.
Home Depot Shareholder: "We want to vote on a policy that aligns the board and management's interests more closely with our own."
Home Depot Board: "The Board has decided not to allow a vote on that topic this year. We're too busy deciding what fractional jet ownerhip plans to buy for our dog groomers to bother with that."
Posted by: trader_dave | June 30, 2006 at 07:07 AM
Good post.
I am concerned that it took an Apple to finally have blogsphere filled with outrage about backdating - but then again I should not be.
Here are a few reasons I have heard why the common person does not care about options backdating.
http://blog.vangal.com/2006/06/28/why-the-general-public-does-not-care-much-about-backdating.aspx
Posted by: Mukund Mohan | June 30, 2006 at 01:43 AM