ALL IS FORGIVEN

RIM’s options boondoggle reveals a double standard

COLIN CAMPBELL March 26 2007

ALL IS FORGIVEN

RIM’s options boondoggle reveals a double standard

COLIN CAMPBELL March 26 2007

ALLIS FORGIVEN

RIM’s options boondoggle reveals a double standard

BY <dc:creator>COLIN CAMPBELL</dc:creator> • Executives at Research in Motion Ltd. must have let out a long, collective sigh of relief last week. The Waterloo, Ont.-based maker of the BlackBerry released the results of an internal investigation into stock option grants to top executives and directors, including co-CEOs Jim Balsillie and Mike Lazaridis. The damning report concluded that “in many instances” hindsight was used to cherry-pick dates at which to peg options, thereby manipulating their value. This and other accounting lapses resulted in a US$250-million restatement of earnings back to 1996.

But fallout from RIM’s troubles was minimal. Heads didn’t roll—they were only shuffled around. Balsillie stepped down as chairman but remained co-CEO; Dennis Kavelman quit as chief financial officer to become chief operating officer; and two board members resigned. The CEOs paid back improper grants, plus $10 million, and the value of the stock fell less than one per cent on the day of the announcement. While there is still the matter of a shareholder lawsuit and ongoing regulatory investigations, in the realm of public opinion the issue of backdated option grants— something that has cost dozens of U.S. executives their jobs—has been only a minor speed bump on RIM’s highway to greatness.

To shareholder activists and governance experts, response to RIM’s case underscores a troubling double standard. If a company is successful and has a charismatic CEO, even egregious accounting and ethical lapses are often forgivable. Investors are treating it as nothing more than an “unwelcome irritation,” says Neil Brisley, a professor at the Richard Ivey School of Business at the University of Western Ontario.

“Double standard? You’re damned straight,” says Herbert Denton, president of Providence Capital Inc, in New York, and a well-known critic of executive excesses. Denton calls the muted reaction to the RIM investigation an “eyewash.” “It’s not against the law, it’s just against the principles of fair play and ethical behaviour,” he says of backdating option grants. “If you’re the head of a public corporation you can’t do bad things, get caught, and expect that everything is cool.”

Last year, the chief executive of the U.S. construction company KB Home, Bruce Karatz, resigned after a probe found he backdated his own options to the tune of about US$13 million. The company’s chief legal officer, Gary Ray, was fired. In another case, backdating cost William McGuire, CEO of UnitedHealth Group Inc., his job.

But others have been able to skate by pretty much unscathed. Apple Computer, where chief executive Steve Jobs has been implicated in the backdating of options, is a prime example. Last October, an internal investigation concluded Jobs was aware backdating took place “in a few instances” but that he didn’t personally benefit. He apologized, and the matter faded from the headlines. “Jobs is seen by investors as someone who has magic of almost messianic proportions,” says Paul Lapides, director of the Corporate Governance Centre at Kennesaw State University, near Atlanta, Ga. “There’s a hope and maybe a prayer that when it’s all said and done everything will work out great for Steve Jobs.”

Last week, Balsillie was unavailable for comment, but on the day of the announcement he chalked up the mistakes to a company that was growing fast. RIM’s investigation found no “intentional misconduct.” Yet it’s difficult to believe executives didn’t know backdating was wrong, says Lapides.

The open question is whether regulators will be as forgiving as investors. The SEC is still investigating 140 companies, including RIM. The Ontario Securities Commission is also investigating, though it’s anyone’s guess what sanctions, if any, will be forthcoming. The overwhelming response so far seems to imply that nobody—investors and regulators alike—is very interested in making waves. M