San Jose Mercury News, May 11, 2007 article

Apple stock owners give CEO Jobs a slicing

REFORM PROPOSALS GET STRONG SUPPORT

Article Launched: 05/11/2007 01:33:43 AM PDT

Apple had a chance Thursday at its annual shareholder meeting to quell the recent furor over its options backdating. But if what happened at the meeting and the reaction of some investors are any indication, the discord hasn't gone away.

At the meeting in Cupertino Thursday, Apple shareholders asked pointed questions about the company's backdating controversy, drawing Chief Executive Steve Jobs into sometimes-testy exchanges. Fueling more criticism, Jobs refused to allow Apple's board members to answer investor questions, saying the directors were attending as "guests."

And, in a symbolic rebuke to management, shareholders appeared to have voted in unusually large numbers for four investor proposals that sought to rein in executive pay at the corporation, including one that asked the board to bar stock options backdating in the future.

"Options backdating is a cancer eating away at the company," charged Con Hitchcock, a representative of Amalgamated Bank, while arguing at the meeting for the labor-backed institution's proposal on backdating.

Frustrated shareholders had limited opportunity to confront Apple's full, seven-member board. Two of the directors, Al Gore and Jerome York, who investigated Apple's backdating, did not attend because, as Jobs put it, attending shareholder meetings "is not the most important thing they do."

Noa Oren, who represented the International Brotherhood of Teamsters, attempted to ask William Campbell, Apple's co-lead director and the head of its compensation committee, about Jobs' pay. But the Apple CEO refused to allow Campbell to answer.

`Poor judgment'

"I thought that was outrageous," Oren said.

Shareholder meetings typically are investors' once-a-year chance to interact with directors - their elected representatives. Such interactions have gained importance following the corporate scandals earlier this decade.

"It is appalling that he would think that he had a right to interpose himself between shareholders and the board," said Nell Minow, editor of the Corporate Library, a business research and watchdog organization based in Portland, Maine. "That showed very poor judgment on his part," added Minow, who owns Apple shares and voted for the shareholder proposals, but did not attend the meeting.

Minow also found it disturing that board members allowed Jobs to bar them from answering questions.

"It's bad enough that Jobs said that," she said. "`What's really appalling is that none of the directors objected to him saying that. Where were their spines?"

Jobs defends board

Apple has acknowledged it regularly backdated stock options in the late 1990s and earlier this decade. Its board has drawn fire not only for allowing the practice, but for what some investors and analysts see as a shoddy, compromised internal investigation into the matter. That investigation found that Jobs received a large backdated grant, was aware of backdating at the company and picked favorable dates in some cases. But it found that Jobs didn't commit wrongdoing. The Securities and Exchange Commission later cleared the company of wrongdoing.

Apple directors Bill Campbell, chairman of Intuit; Arthur Levinson, CEO of Genentech; and Eric Schmidt, CEO of Google, who all attended the meeting, were unavailable for comment afterward and did not return calls later.

At the meeting, however, Jobs defended the board from backdating and criticism on executive pay, saying Apple's directors "do an awfully good job."

"I think we have a great board," he said.

But even before the meeting, shareholders and analysts were questioning how well the board was doing its job. Influential research firms Glass Lewis and Institutional Shareholder Services both recommended that shareholders vote in favor of the executive pay resolutions and withhold their votes for the re-election of most of Apple's board.

Such criticism came even though Apple's stock is up 50 percent over the past year, its revenue and profits are soaring and its computers are gaining market share.

Ban on backdating

Shareholders had proposed six non-binding proposals, two of which, related to environmental concerns, were withdrawn at the meeting. The four remaining proposals, although defeated, apparently garnered widespread support among Apple investors. According to a preliminary tally reported by Amalgamated Bank, about 41 percent of shareholder votes were in favor of the proposal to bar backdating. Another 41 percent voted in favor of allowing shareholders to have an advisory vote every year on executive pay at the company. Some 38 percent of shareholder votes were in favor of both forcing Apple's executives to hold on to a large portion of their shares and tying executive pay to the company's performance.

Amalgamated's Hitchcock said those vote totals came from Apple's investor relations representative. Apple's investor relations department did not return repeated calls seeking confirmation.

Under pressure

Company spokesman Steve Dowling said he couldn't confirm the vote totals, but said he had "no reason to dispute them."

All of Apple's board was re-elected, according to Apple, although it did not report vote totals.

But the fact that the resolutions drew such high support is "very unusual" and could pressure Apple's board to make changes, governance experts say. Typically, such proposals draw such high support only at companies whose stocks and performance have been poor for a number of years, they said.

"It's clear ... there's a disconnect between shareholders and Apple's board," said Scott Adams, a representative of the American Federation of State, County and Municipal Employees union, which made the proposal that Apple executives hold on to at least 75 percent of their shares in the company.

To be sure, not everyone came to assail Jobs. In fact, when two shareholders announced that, in response to Jobs' release of an environmental report last week they were withdrawing two separate environmental proposals, the audience cheered. It cheered again when another shareholder rose to praise Jobs for keeping the company on track despite the backdating investigation and the company's recent roll-out of computers based on Intel processors.

AFL-CIO representative Brandon Reese, who asked the first question, pressed Jobs to give back some of his restricted shares, which Reese noted were awarded to Jobs in exchange for trading in a large options grant that was backdated.

In response, Jobs said his backdated grant was "approved" by Apple's board in August 2001, but that he didn't get his shares until October, when Apple's stock was about 50 cents a share higher - which would have made the options worth less.

"I didn't ask the company to reimburse me," he said.

What Jobs neglected to say was that his grant was given the October date through documents that were falsfied the following December, which is when the board actually approved the grant, according to Apple's own regulatory filings. Had the grant carried the December date when they were actually approved, they would have been priced even higher than they were in October.

Contact Troy Wolverton at twolverton@mercurynews.com or (408) 920-5021.