First let me say I'm a big fan of Apple's products. I've been with Apple nearly from the start... My first computer was a //c and I've had seven Macs since, and several other Apple products.
That said, there are some issues about Apple that should concern investors. They are a solid performing company... there is no question about that. However, there is some evidence of practices which skirt the very edge of ethics... even if they are not illegal.
This should be of immediate concern to investors for reasons outside of SEC litigation.
The backdating or repricing of options, while not illegal, for example, provides executives with theoretically limitless opportunities for compensation regardless of corporate performance. When companies use this as a means to guarantee money to executives, particularly if there isn't a separate compensation steering committee independent of other voting board members, this creates a conflict of interest that should be obvious.
What is less obvious is the manipulative effect this has on earnings, because a significant chunk of compensation is not being counted as a payroll expenditure and it creates no incentive for actually improving earnings. In fact, it does the opposite if management uses retained earnings to repurchase shares... which makes executives very rich without necessarily improving the business or its overall book value.
Additionally, the presence of board members from closely related businesses while not illegal is certainly dubious. It does ride the edge of, if nothing else, a bridge across the information gap that most investors are not privy to for regulatory reasons. Google and Apple, or even Schmidt and Jobs alone, may be able to conspire (I'm not using this word in the pejorative) to make stock acquisitions or sales related to economic activity only they are aware of as controllers of a significant segment of technology.
Why should this be of concern to investors? Because good, sustainable businesses grow their business organically... by creating tangible demand for tangible products and services, as opposed to engaging in esoteric compensation, financing or investment to manipulate earnings per share, particularly to their own benefit more so than that of the business itself.
The fact that Apple does well financially doesn't change the ethics or lack thereof in some of their management practices. Steve Jobs has been noted as saying that some of the repricing/backdating was done because he did not feel he was fairly compensated for what he's done for Apple. While this may be true, it's an affront to the principles of corporate governance that the board would allow this instead of having a bona-fide negotiation of performance related bonuses. It is a good thing, on the one hand, that Jobs' pay is entirely performance based... but a) he shouldn't be allowed to manipulate the pay AT ALL with backdating in order for performance-based pay to actually mean something, and b) it ought to have gone through the proper channels because it otherwise sets a bad precedent that less competent executives may abuse. How much money does Steve need, exactly? If he really believes investing in the worth of the company, the future of the company, then why isn't 99% of his money tied into holding AAPL shares, like Warren Buffett whose wealth rises or falls with that of all the other shareholders of Berkshire Hathaway?
Lastly, the repricing of options while effective at retaining executives has not been found in managerial case studies to actually increase firm performance. This should be of tremendous concern to investors... Consider that AAPL, one of the most overhyped stocks in America, has been trading in recent months at many times the actual intrinsic value of the company's assets and cash flows. What would be the effect of continuing down the options path? The company's stock may do well for a time, and then executives and board members in the know can cash out at an irrationally high price well before some future activity known only to them leaves everyone else holding the bag while the stock slingshots back down to realistic price levels relative to its actual value (about $30 per share for AAPL).
That said, there are some issues about Apple that should concern investors. They are a solid performing company... there is no question about that. However, there is some evidence of practices which skirt the very edge of ethics... even if they are not illegal.
This should be of immediate concern to investors for reasons outside of SEC litigation.
The backdating or repricing of options, while not illegal, for example, provides executives with theoretically limitless opportunities for compensation regardless of corporate performance. When companies use this as a means to guarantee money to executives, particularly if there isn't a separate compensation steering committee independent of other voting board members, this creates a conflict of interest that should be obvious.
What is less obvious is the manipulative effect this has on earnings, because a significant chunk of compensation is not being counted as a payroll expenditure and it creates no incentive for actually improving earnings. In fact, it does the opposite if management uses retained earnings to repurchase shares... which makes executives very rich without necessarily improving the business or its overall book value.
Additionally, the presence of board members from closely related businesses while not illegal is certainly dubious. It does ride the edge of, if nothing else, a bridge across the information gap that most investors are not privy to for regulatory reasons. Google and Apple, or even Schmidt and Jobs alone, may be able to conspire (I'm not using this word in the pejorative) to make stock acquisitions or sales related to economic activity only they are aware of as controllers of a significant segment of technology.
Why should this be of concern to investors? Because good, sustainable businesses grow their business organically... by creating tangible demand for tangible products and services, as opposed to engaging in esoteric compensation, financing or investment to manipulate earnings per share, particularly to their own benefit more so than that of the business itself.
The fact that Apple does well financially doesn't change the ethics or lack thereof in some of their management practices. Steve Jobs has been noted as saying that some of the repricing/backdating was done because he did not feel he was fairly compensated for what he's done for Apple. While this may be true, it's an affront to the principles of corporate governance that the board would allow this instead of having a bona-fide negotiation of performance related bonuses. It is a good thing, on the one hand, that Jobs' pay is entirely performance based... but a) he shouldn't be allowed to manipulate the pay AT ALL with backdating in order for performance-based pay to actually mean something, and b) it ought to have gone through the proper channels because it otherwise sets a bad precedent that less competent executives may abuse. How much money does Steve need, exactly? If he really believes investing in the worth of the company, the future of the company, then why isn't 99% of his money tied into holding AAPL shares, like Warren Buffett whose wealth rises or falls with that of all the other shareholders of Berkshire Hathaway?
Lastly, the repricing of options while effective at retaining executives has not been found in managerial case studies to actually increase firm performance. This should be of tremendous concern to investors... Consider that AAPL, one of the most overhyped stocks in America, has been trading in recent months at many times the actual intrinsic value of the company's assets and cash flows. What would be the effect of continuing down the options path? The company's stock may do well for a time, and then executives and board members in the know can cash out at an irrationally high price well before some future activity known only to them leaves everyone else holding the bag while the stock slingshots back down to realistic price levels relative to its actual value (about $30 per share for AAPL).
