Apple and backdating: the scandal unravels

I have, of course, long decried the vastly overblown journalism (and some academic writing) about backdating. My latest and longest summary of my position is at the Harvard Corporate Governance blog.

A couple of weeks ago I noted the hypocrisy emerging about backdating in connection with the disclosures at Apple:

Just to summarize the emerging blackletter law: It's ok to commit “fraud” (which is what we are repeatedly told backdating is) if (1) you are a media darling who produces fancy products that everybody loves; (2) you can get Al Gore to sign off (I guess this particular truth isn't too inconvenient); and (3) you can get somebody else in your company to do the dirty work.

There's also an anecdote here about actual effect of backdating on companies: Apple’s stock sank 5% after it looked like Job's job might be on the line, but then rose the same amount when the board committee made it clear he wasn’t going to be fired. Does this mean that the market doesn’t care about the fraud, but just about the governance turmoil the media frenzy wreaks on companies?

Seems to me that this story gives the backdating zealots some splainin to do, as Desi would say.

My point was: if backdating is harmful fraud, then Jobs is as guilty as the rest. But of course I've never believed that was the case. The combined judgment of Al Gore and the market would seem to support that.

In today's WSJ, the defense lawyers in the Brocade case, including a former federal prosecutor, write convincingly that their client was not guilty of criminal fraud (but at most books and records violations), echoing much of what I've written over the months. Among other things, they point out the obscurity of the rule they supposedly violated; that "much of what is pejoratively called "backdating" was actually undertaken in good faith" – i.e., done to hire valued employees, not enrich themselves; that "the economic value of options granted, whether to executives or to the rank-and-file, was no secret at all;" and that "a thoughtful look at the elements of securities fraud may help observers distinguish between accounting issues and criminal acts."

And last but far from least in this roundup, WSJ's lone stalwart against the mania, Holman Jenkins, writes today:

[Jobs'] case has performed a magical feat in prompting a few more voices to question whether backdating is really the crime of the century, or merely a business curiosity blown way out of proportion by poorly reasoned coverage. Here and there, in the New Yorker, at the Fortune magazine Web site, in the bloggings of law Prof. Larry Ribstein and journalist John Carney, the intellectual fallacies that have permeated the coverage are gradually poked away. Asks Business Week: "Is the world ready to see one of its greatest innovators sacrificed at the altar of the good-governance gods -- especially when it's not clear how [Mr. Jobs] was enriched or his shareholders damaged?"

Backdating is not a business scandal.  It is a scandal of credulous (or worse) business journalism.  It is a story about how journalists have been willing to whip the public into seething resentment against corporate malefactors, while paying little attention to the actual real world consequences and implications of the practice it was reporting.  Backdating may not have been totally innocuous (I never said it was), but that doesn't exonerate the journalists from telling both sides.  Apple has brought us at least a little closer to the light at the end of this depressing tunnel. 

Comments

[Francis G.X. Pileggi]

Congratulations on your mention in the WSJ today.