Over the last few years, many high-tech firms got in trouble for the timing of the exercise price on their stock options. These kerfuffles always get settled, but the question is at what cost: do the execs pay big fines, and are they forced to resign as corporate officers.
Three firms in the mobile phone industry have or are facing this problem.
At Apple, last summer Steve Jobs dodged any sanctions and got to keep his job as CEO (at least for another 6 months) . Instead, Apple made its former general counsel take the fall.
On the other hand, Broadcom first paid $12 million to settle charges against the corporation, and then its two founders got charged, Co-founder and once CEO Henry Samueli (who AFAIK is the only entrepreneur to endow two engineering schools) is still fighting to avoid prison time after a judge rejected a plea bargain that avoided jail time.
Now, Canadian and US securities regulators are threatening officers of Research in Motion — including co-CEOs Jim Balsillie and Mike Lazaridis — over backdated options terms that later forced a $250m earning charge. Although Balsillie surrendered his position as chairman, both CEOs are believed to be fighting to keep their right to remain a corporate officer, in the face of a rumored $100 million fine. Given the pace of leaks, it sounds like a resolution is coming in the next few weeks.
What I find remarkable is that despite the publicity that the SEC gets for such cases, life goes on — both while they are pending and after they are settled. Employees still work for the companies, consumers still buy the products, investors still buy the stocks. This is in great contrast to Enron or Arthur Andersen, whose white collar transgressions killed the company.
In fact, there is even a bit of a backlash against the charges. Broadcom’s hometown paper referred to Samueli as a “philanthropist” (a 100+ year old term that refers to giving the money away now rather than how it was made in the past).
In RIM’s home town last week, business leaders were sympathetic to RIM and its executives in their fight with regulators:
At the luncheon, the Ontario Securities Commission was as much the target of criticism for seeking fines that many felt were out of proportion to the offence.As the WSJ notes, the temptation to backdate is an artifact of 1993 Congressional sanctions against high salaries:
Others questioned the timing of such a large penalty, when Canada is facing huge challenges - a financial meltdown and the recent bankruptcy protection filing of technology icon Nortel Networks Inc.
"We need strong regulation but it's an odd time to suddenly get righteous," said Randall Howard, a veteran software entrepreneur who runs a technology investment company.
"We need to find ways to create champions," he said. In going after RIM, often cited as Nortel's successor as the key Canadian technology champion, "It's an odd choice."
"I'm absolutely opposed to what the OSC has proposed here. I think it is grandstanding of the highest magnitude and opportunistic given the Hockin report has just come out and all of a sudden the OSC wants to be seen as a regulatory tiger that has teeth. It's no coincidence whatsoever," said [Al Foerster, a lecturer of accounting at Wilfrid Laurier University.]
"All they've done is found individuals with the greatest pockets," he added. "If I were Balsillie or Lazaridis, I would fight this all the way given the OSC's track record with respect to litigation."
And one of the problems with options is that they give executives every incentive to capitalize all company profits back into the stock price--thus contributing to their own pay--rather than paying out dividends to shareholders. As SEC Chairman Chris Cox has noted, the 1993 law deserves "pride of place in the museum of unintended consequences."