Steve Jobs Couldn't Care Less About You

I've got some sour news for you, Apple (Nasdaq: AAPL) shareholders. It doesn't matter how many iPods you buy, iPhone apps you download, or black mock turtlenecks you wear: Steve Jobs couldn't care less about you.

And that's why -- despite great products, a killer brand, and mouth-watering growth potential -- I would advise against owning shares of his company.

Hey Steve, the Jerk Store called There's plenty of anecdotal evidence to suggest that Jobs is a jerk. Stories of Apple's CEO throwing temper tantrums, berating his employees, taking credit for others' ideas, and even parking his Mercedes in handicapped spaces are nothing new. But Jobs' personality flaws are not legitimate reasons to avoid Apple shares. In fact, I don't even mind that Jobs is a jerk. After all, there is a long list of corporate leaders who managed to create significant shareholder value despite seriously deficient personalities -- from John Rockefeller to Henry Ford to Microsoft's (Nasdaq: MSFT) Steve Ballmer.

Rather, I mind that the Apple CEO has demonstrated a pattern of decidedly un-shareholder friendly behavior over the years, and with his company's stock trading for $200 per share, that's a risk that I'd rather not incur. Here are three prime examples of why I think Jobs' decisions have been detrimental to his shareholders:

1. All about Steve In early 2000, along with a fancy private jet intended for his personal use (total cost to shareholders: $88 million), the Apple board gave Jobs an options grant allowing him to purchase 40 million (split-adjusted) shares at $21.80 a piece. According to Bloomberg, "the strike price of that grant was equal to the lowest closing price of Apple stock in the 56- and 30-calendar day periods preceding the grant and in the 30- 56- and 90-day periods following the grant."

In case you're tempted to chalk that convenient strike price up to chance, remember that during Jobs' stint as CEO of Pixar (now a part of Walt Disney (NYSE: DIS)), key executives received options grants priced at the stock's yearly low in 1997, 1998, 2000, and 2003. A Merrill Lynch analyst placed the odds of that happening purely by coincidence at one in 112 million.

I don't begrudge Jobs receiving high compensation. He has created a lot of value for Apple shareholders over the years, and deserves to be compensated accordingly. But I would prefer that compensation to be commensurate with the value that Jobs creates, preferably in the form of restricted stock units awarded if Apple achieves predetermined performance-based criteria. Backdating stock options enriches executives independently of their performance -- since the bar is set so low, and at the expense of shareholders -- since the company ultimately foots the difference.

Of course, alignment with his shareholders' interests has historically not been much of a concern for Jobs. After Apple's stock plummeted during the dot-com crash, Jobs went back to the board and demanded another options grant, giving him the right to purchase 15 million (split-adjusted) shares at the new low price of $9.15 a piece. Apple shareholders did not enjoy such a luxury when the value of their holdings declined.

According to the SEC, Apple went to extraordinary lengths efforts to disguise the details of these options grants (including allegedly creating bogus paperwork and minutes of a nonexistent board meeting). Although Jobs has pleaded ignorance to the accounting implications, former Apple CFO Fred Anderson -- who the SEC forced to repay $3.5 million of "ill-gotten gains" due to his involvement in the options scandal -- insists that Jobs was deeply involved in the decision-making process and had been alerted to the accounting ramifications of his actions.

2. Too much of a good thing Apple has a rock-solid balance sheet, with a $23.5 billion cash hoard at its disposal and no debt. In and of itself, this is a very good thing. However, Jobs has been content to park that cash in short-term investments earning a paltry 1.7% return. That's peanuts.

Smart managers will keep a small amount of excess cash on hand to cushion against the impact of a possible business downturn or fund an opportunistic acquisition. But Apple can easily cover its R&D expenses and off-balance sheet purchase commitments with its free cash flow, and $23.5 billion is enough money to buy a competitor or two, the Washington Redskins, and a medium-sized Central American country.

As partial owners of the company, Apple's shareholders have a proportional claim on that cash hoard. If Jobs does not have a legitimate operational need to maintain such a significant cash balance, he should follow the lead of tech titans like Intel (Nasdaq: INTC) or IBM (NYSE: IBM) and pay his shareholders a dividend, or mirror Cisco (Nasdaq: CSCO) and use some of Apple's copious free cash flow to repurchase shares.

3. Unhealthy disclosure policy Unfortunately, no discussion of Jobs is complete without a reference to his health issues. According to a Fortune article, although Jobs was diagnosed with pancreatic cancer in October 2003, he put off surgery for nine months while he explored a number of alternative approaches. During that time span, he did not disclose his condition to Apple or Pixar shareholders -- in fact, he reportedly didn't even tell the Pixar board.

Rumors of Jobs' health issues resurfaced in 2008, but Jobs dismissed these concerns first as "a common bug," and later as "a hormone imbalance." In April 2009, Apple shareholders were surprised to learn that Jobs had received a liver transplant -- a condition far more serious than the company had led them to believe.

But Jobs' body is Apple's business. Apple's annual report sums it up best: "Much of the Company's future success depends on the continued availability and service of key personnel, including its CEO." This is surely a sensitive issue, but if Jobs is a material factor in Apple's future success then shareholders deserve to know his health status. By withholding this vital information, Jobs subjected his shareholders to significant risk.

Close, but no cigar Over the years, Steve Jobs has repeatedly demonstrated indifference for his shareholders' wellbeing. While his poor stewardship hasn't hurt shareholders too badly yet, I believe it's only a matter of time.

That's why -- despite a strong brand and obvious growth potential -- we passed on purchasing Apple shares at Motley Fool Million Dollar Portfolio, where we run a diversified real-money portfolio populated with the best recommendations from The Motley Fool universe. In addition to business models, competitive advantages, financial statements, and cash flow projections, we spend a lot of time evaluating a company's leadership, and thanks to Jobs, Apple didn't make the grade.

This article leaves out a lot of information that is necessary to really understand what was going on.

Let's look at the FUD claims being made against Jobs and Apple... all of which have been hashed out in previous articles used to depress the value of Apple stock:

1: Compensation being implied as being extraordinarily large or unusual:

"In early 2000, along with a fancy private jet intended for his personal use (total cost to shareholders: $88 million), the Apple board gave Jobs an options grant allowing him to purchase 40 million (split-adjusted) shares at $21.80 a piece."

In addition to the jet, which was provided to facilitate the CEO's travel to Apple's far-flung offices and plants, ALL that the Apple board gave Jobs was a piece of paper that cost the company NOTHING as compensation for approximately 4 years of hard work bringing Apple from experiencing a losing quarter to profitability since he had been brought back as acting CEO. It was a piece of paper that guaranteed Jobs' the right to purchase, from the company, stock at $21.80 per share regardless of what the current market price might be. In other words, Jobs would be able to give Apple $870,000,000 for shares (more pieces of paper that essentially cost Apple NOTHING) that he MIGHT be able to turn around and sell on the open market for more. At no time would Apple lose money. At worst, stockholders might see their equity diluted by a 4%, which would have been offset by the fact that their share's value would have been increased by the infusion of 4% more capital.

Selecting the low market price for the strike price of such stock options was common in companies at the time. The $21.80 was not an extraordinarily low strike price. The Board could have elected to give Jobs the options at any price they chose. The fact that they were "in the money" when issued was not at all unusual. In fact, Apple normally issued stock options to its employees at the lowest price of the stock in the week preceding the grant. Apple's compensation committee had presented the Jobs compensation award in August. It was voted on in the affirmative on August 29th when the price of the Stock was only $16.61 per share but because of vacations in the finance department, the paperwork was not completed until October 10th, after the close of Apple's fiscal year on the last Saturday in September. The by-laws of Apple required that such grants must be transferred in the same fiscal year as voted... thus nullifying Jobs award. Anderson, the Chief Financial Officer (CFO) of Apple, attempting to exercise the will of the board, negotiated with Jobs to issue the already voted options, but the price of Apple stock had climbed to over $22 per share. Instead of being able to use the lower strike price of $16.61, approved in August, they agreed to use the lowest price the stock had been since the start of the new fiscal year, $21.80.

The so called "cover-up:" Yes, that happened. someone in Apple's legal department noticed the fact that the by-laws were still in conflict with the stock option grant. That someone then "created" a bogus conference call board meeting on October 14th, at which the grant was supposedly re-voted the already voted options, and created a set of bogus minutes for this non-event meeting, assuming the board would rubber stamp it. This was signed off on by Apple's Chief Legal Counsel. At the December 19th scheduled BOD meeting, these bogus minutes were noticed, invalidated, and a new vote ratifying the original vote and the new strike price was passed.
Apple did not try to "cover-up," but instead reported it directly to the SEC, along with its own internal investigation when it brought the stock options problem to them six years later. Apple also fired the Chief Legal Counsel for allowing it and not simply having the board actually make the stupid conference call meeting on October 14th.

In the 13 years since returning to Apple, Steve Jobs has requested and received a salary of just $1 per year.

2: Too much cash reserves:

"Smart managers will keep a small amount of excess cash on hand to cushion against the impact of a possible business downturn or fund an opportunistic acquisition. But Apple can easily cover its R&D expenses and off-balance sheet purchase commitments with its free cash flow, and $23.5 billion is enough money to buy a competitor or two, the Washington Redskins, and a medium-sized Central American country.

"As partial owners of the company, Apple's shareholders have a proportional claim on that cash hoard. If Jobs does not have a legitimate operational need to maintain such a significant cash balance, he should follow the lead of tech titans like Intel (Nasdaq: INTC) or IBM (NYSE: IBM) and pay his shareholders a dividend, or mirror Cisco (Nasdaq: CSCO) and use some of Apple's copious free cash flow to repurchase shares."

The amount of ready reserves a company keeps is a strategic decision to be made by the Board of Directors. In this instance, Apple has apparently spent approximately $6 billion on something in the past quarter since the previous quarter's cash reserves were approximately $28.5 billion and Apple has added at least $1 billion more in new profits.

Attempting to get a greater than 1.7% return on large amounts of money in today's economy usually requires both risk and commitment of those funds for long periods, making them non-liquid. Apple's ability to "seize the moment" and strike at the right moment is enhanced by having a large, liquid war chest of funds.

Re-purchasing outstanding stock requires offering more than the market price of the stock to make it worthwhile. I fail to see what positional or competitive advantage Apple would gain to do so. I also don't see any advantage to stockholders for Apple to buy back its own shares.

Determining such policy is an entire Board function, and not solely at the whim of the CEO. If the stockholders are unhappy about Apple's choices of what to do with their cash holdings, they are free to bring the issue to the annual Stockholders meeting for a vote, vote the officers out and replace them with others that will issue dividends or buy back stock.

3: Job's Health.

"But Jobs' body is Apple's business. Apple's annual report sums it up best: "Much of the Company's future success depends on the continued availability and service of key personnel, including its CEO." This is surely a sensitive issue, but if Jobs is a material factor in Apple's future success then shareholders deserve to know his health status. By withholding this vital information, Jobs subjected his shareholders to significant risk."

HIPAA

Any CEO could die at any moment. The risk is inherent in the investment.

Apple has demonstrated that during Jobs' recent absence that it could operate well without him.

All of the above has been hashed out before. The market has already accounted for all of it in the current stock price. Bringing it up again to rehash is merely a means of artificially suppressing the current stock for people who have already taken a short position. We've seen this repeatedly in the Apple financial press. That makes it FUD.

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