November 1, 2006

Trust Me, Jobs is Innocent; He Knows Nothing

The board at Apple is pretty sure its CEO, Steve Jobs, didn’t do anything wrong. The SEC isn’t quite so convinced. The fate of the iPod may hang in the balance, and we can’t have that, so someone needs to settle this.

I, D.F. Krause, am glad to oblige. I know Jobs is innocent because I buy his excuse. It could easily be mine.

Here is the problem: A bunch of Apple stock options were backdated to benefit the executives who received them. In a nutshell, for those who don’t understand stock options, you are given the option of buying a certain number of company shares for the price of the shares on the day you’re assigned the option. You wait to see if they go up or down. If they go up, you can buy them at the old, lower price, then turn around and sell them at the new, higher price, and you just made a bunch of money. If they go down, you decline to exercise the option, and you make nothing, but you lose nothing.

But someone at Apple backdated the stock to a time when the shares were selling even lower than what the correct date should have reflected, thereby allowing the execs to buy for less than they should have, and to make a bigger profit upon resale.

Yes, the board says, Jobs knew about some of the backdating. But no, he didn’t understand the accounting implications, so he did nothing wrong and is in the clear.

I can understand why the SEC is not buying this, because presumably the folks at the SEC understand the accounting implications of everything. That’s why you can’t put them in charge of investigations like this. It’s not fair. They know too much. If you want to do a fair investigation, you need to put CEOs like me in charge.

I’m typical. I’m supposed to understand the accounting nuances of my company, but I don’t. I look at our balance sheet, see lots of numbers, and don’t think any of them look familiar. I see descriptions and nod my head for the benefit of my employees – because I’m supposed to know what they mean – but I don’t.

Ah. Look at that depreciation. Very good.

I doubt I’m fooling my CFO, but we have an understanding. He runs the numbers. I look at the numbers. I don’t understand the numbers. He doesn’t give me a hard time for not understanding the numbers. We manage to stay in business. These are the special understandings between executives that create the bonds that last a lifetime.

But I couldn’t help but notice something on our last P&L. A new category had appeared. The category had an interesting name. The name was “I Don’t Know.”

I Don’t Know?

“The CFO told me to put that there,” said the executive vice president.

Oh. I see. Sure. Except . . . what?

“I don’t know.”

Of course. But the EVP tried to explain.

“A bunch of transactions were not categorized properly. When the CFO saw the entries, he said I didn’t do them right.”

Well then, what would be the right way to do them?

“He doesn’t know.”

Ah. Hence the new category. Apparently he is going to figure it out, and when he does, the “I Don’t Know” category will be changed, possibly to “Oh. That!” But in the meantime, something totaling minus-$35,000 is listed as I Don’t Know. That will look good to the bankers.

What does this have to do with Steve Jobs? It’s part of the secret pact of understanding shared by all CEOs. None of us understand accounting, balance sheets, P&L sheets or even expense reports. Even those among us who are former CFOs are sent to brain-cleansing camps and made to forget before we assume the corner office.

It’s for our own good. CEOs have too much to think about to obsess over the definition of categories, transactions and numbers that fry the brain and leave your head spinning. So if failing to understand the accounting implications means Jobs is innocent, you might as well shut down the investigation now. The guy didn’t know a thing. And he never will.

But I wouldn’t expect the SEC to understand that. Not without numbers-challenged CEOs like me around to explain it to them.