Saturday, January 13, 2007

When Securities Laws Hurt Shareholders

When a company is owned and managed by one individual, there are no conflicts of interest. If that individual uses corporate funds to pay for personal travel, or wastes money on other kinds of perquisites, he is only robbing from himself.

However, the ownership of the typical modern public corporation is greatly dispersed. There is also a separation of ownership and control. This is why we have securities laws and a Securities and Exchange Commission. The purpose is to protect shareholders.

So what should happen to Steve Jobs, Apple's CEO, now that he has become entangled in the stock options backdating scandal plaguing corporate America? It turns out that backdating is far more common than anyone could have imagined back when the story first broke in early 2006. Now the SEC is overloaded with cases under investigation.

Should Steve Jobs be forced out of Apple? If he is, you can bet Apple's share price will sink. How does that protect shareholders? Even if Jobs resigns voluntarily, the stock will sell-off sharply. Shareholders will lose.

We've seen many examples of wealthy corporate executives trying to add a few more bucks to their pockets, but it is difficult to imagine someone as wealthy and as revered as Jobs doing the same. Perhaps the laws regulating options are too convoluted and difficult to understand. Perhaps it is too easy for even well-intentioned executives to violate these laws without fully realizing it.

On the other hand, suppose Jobs knew exactly what he was doing. Suppose he also realized that what he was doing was wrong. If laws are supposed to apply to everyone equally, should Jobs be forced out if he knowingly violated the law?

It's easier to answer that question in the affirmative if you don't own any shares of Apple. I don't. But you can bet I would oppose any attempts to get rid of Jobs if I did. There are few present-day CEOs who are more closely tied to the success of their companies than he is. Firing Jobs would be a disaster for Apple's shareholders.

There are no easy anwers to this dilemma. In my opinion, the board of directors must choose the lesser of two evils. They can call for tighter controls at the company. They can demand that all options in question be returned. But they should also make sure Jobs remains as CEO.