Although Steve’s “Second Coming” (to use biographer Alan Deutschman’s words) is regarded as one of the most spectacular success stories in the history of business, recent years have not been all that rosy for the iCEO.
The backdating scandal
Backdating is an illegal accounting process consisting of picking a date in the past, when a stock's value was lower, to assign the exercise price of options. It basically involves faking documentation and lying to investors. Although backdating is unlawful, it was common practice in Silicon Valley for a long time — until a 2006 Wall Street Journal article exposed it, denouncing a number of highly-regarded public companies. Apple was not cited by the Journal, but it decided to hire a special legal committee to do an in-house investigation on its own situation. These lawyers unveiled they had discovered “irregularities” involving more than 6,000 grants in the 1997-2001 timeframe.
The complete story was revealed later, after the SEC investigation. Steve Jobs was actually directly involved with two illegal procedures related to backdating.
The first happened in October 2000. The global state of the tech industry was disastrous, because of the burst of the dot-com bubble. Several companies were trying to sway talented executives away from their competitors, and Apple was a popular target. Steve decided to give some of his top executives a substantial team grant to serve as golden handcuffs. But Apple’s legal counsel failed to deliver the grant on the date that had been agreed upon — which was problematic since the stock had gone up in the meantime. As a remedy, the options were backdated from their actual delivery date of Feb. 7 to Jan. 17 — with Steve’s agreement.
The second irregularity involved Jobs himself. From 1997 on, he had refused to get more than $1 in annual salary from Apple. His official claim, especially when he first arrived as interim CEO, was that he was there “to help” and not for the money. The $1 was there only so his family could be on the company’s health benefits plan. But, in January 2000, after it was clear Apple had resurrected during his tenure, and after he had announced he was becoming full-time CEO, the board agreed to compensate him. First, by buying him a private Gulfstream V jet, with taxes — which amounted to $88 million. Second, by giving him a 40 million options mega-grant, i.e. approximately 6% of the company.
But when it was time for these options to vest, the dot-com bubble had burst, and Apple’s stock price was worth only half what it was the year before. Steve came to the board asking for new options:
Everybody likes to be recognized by their peers, and the closest that I’ve got, or any CEO has, is their Board of Directors. [...] I spent a lot of time trying to take care of people at Apple and to, you know, surprise and delight them with what a career at Apple could be — could mean to them and their families. And I felt that the board wasn’t really doing the same with me. [...] So I was hurt, I suppose would be the most accurate word, and, you know, the board had given me some options, but they were all underwater [...] and here I had been working, you know, I don’t know, four years, five years of my life and not seeing my family very much and stuff, and I just felt like there is nobody looking out there for me here, you know. [...] So I wanted them to do something, and so we talked about it.
I thought I was doing a pretty good job. [...] I’d wished they had come to me and said, “Steve, we’ve got this new grant for you,” without me having to suggest anything or be involved in anything or negotiate anything. That would have been much better from the company’s point of view because it would have made me feel better at that time.
Steve Jobs’ deposition in front of the SEC, March 2008
The directors agreed to give him a new batch of 15 million options in August 2001. However, Steve only agreed on the condition they would replace his 2000 40-million-option grant, having suffered from the public criticism he had faced the year before. This turned out to be impossible because of accounting complications —which dragged the negotiations until December 2001. The price of Apple stock had gone up again, so Apple’s legal counsel Nancy Heinen arranged for fake paperwork to date the options back a month, corresponding to $20 million more for Steve’s pockets. However, he never cashed in those options, and actually traded them for 10 million restricted shares in March 2003. As of early 2008, those shares were worth $1.2 billion pretax, compared to the $5.8 billion pretax of the 2003 grant — Steve did a bad deal for a change.
After several weeks of reviewing those facts, the SEC announced in April 2007 that they would file charges against Apple’s former legal counsel Nancy Heinen — for the backdating of the two grants of options mentioned above — and its former CFO Fred Anderson, for negligence over one grant. Anderson settled the charge by paying a $3.6 million fine, but used the occasion to publicly denounce the commission’s exoneration of Steve Jobs: the CEO was aware of the backdating, since he picked up retroactive dates himself. However, the SEC did not react, and did not personally sue Steve. They also did not sue Apple itself, citing the company's "swift, extensive, and extraordinary cooperation," including its "prompt self-reporting, an independent internal investigation, the sharing of the results of that investigation with the government, and the implementation of new controls designed to prevent the recurrence of fraudulent conduct."
The case was closed in August 2008, when Nancy Heinen agreed to pay $2.2 million to the SEC — including the reimbursement of her illegal gains on the backdated options, and a fine. The commission had cleared Steve Jobs, confirming Apple’s own statement that, although he "was aware of or recommended the selection of some favorable grant dates," it didn't amount to misconduct, because he "was unaware of the accounting implications." However the case tarnished his image and caused debates about the future of the company when he would be gone — since at some point it was feared he could have been thrown out of the company by the government.
However the most serious troubles Steve had to face in recent years were not legal ones, but medical ones: in October 2003, while performing a routine abdominal scan, doctors discovered a tumor growing in his pancreas. Usually a pancreatic cancer is quick to kill you — but not in Steve’s case. He was suffering from an islet cell neuroendocrine tumor, one that can be removed by surgery and usually leave the patient with some ten more years on earth, or more.
But Steve Jobs was no ordinary patient. True to the Eastern mysticism of his youth and his strange yet deep beliefs about medicine and food, he stubbornly refused to have the surgery, sticking to a special diet that he thought would cure him from his cancer. This lasted for nine long months, while his family and Apple’s top people got increasingly concerned about him. However, observing that his situation was not improving, he reluctantly agreed to have the surgery in August 2004, at the Stanford Medical Center. It was only then that the news were made public, with Steve himself writing a letter to Apple employees from his hospital bed. He took one month off and came back as CEO in September, assuring everyone he was “cured.” This first event was felt as a shock by the Apple community worldwide, but it was even more shocking to the company’s shareholders, who argued that they should have been aware of the CEO’s diagnosis early on, given his importance to the company. Most lawyers did agree that such move wasn’t mandatory though, since Jobs had a right to protect his privacy.
About a year ago I was diagnosed with cancer. I had a scan at 7:30 in the morning, and it clearly showed a tumor on my pancreas. I didn't even know what a pancreas was. The doctors told me this was almost certainly a type of cancer that is incurable, and that I should expect to live no longer than three to six months. My doctor advised me to go home and get my affairs in order, which is doctor's code for prepare to die. It means to try to tell your kids everything you thought you'd have the next 10 years to tell them in just a few months. It means to make sure everything is buttoned up so that it will be as easy as possible for your family. It means to say your goodbyes.
I lived with that diagnosis all day. Later that evening I had a biopsy, where they stuck an endoscope down my throat, through my stomach and into my intestines, put a needle into my pancreas and got a few cells from the tumor. I was sedated, but my wife, who was there, told me that when they viewed the cells under a microscope the doctors started crying because it turned out to be a very rare form of pancreatic cancer that is curable with surgery. I had the surgery and I'm fine now.
Steve Jobs’ Stanford Commencement Speech, 12 Jun 2005
Of course, as you noticed, Steve didn’t mention his nine-month refusal to have surgery and his special diet techniques.
The case seemed closed for a while, before it surprisingly resurfaced some three years later, in 2008. First came rumors following Steve’s public appearances at Macworld in January, but especially at WWDC in June 2008. He obviously had lost weight in a substantial and even frightening way during those six months. Many blogs and dedicated websites speculated his cancer had come back. Because of increasing pressure from journalists, Apple’s spokeswoman Katie Cotton had to issue a public statement after the WWDC keynote, confessing Steve was suffering from “a common bug.” Considering Steve’s gaunt appearance, many people found it hard to believe. They didn’t feel more relieved when, the following month, CFO Peter Oppenheimer declared at the company’s earnings conference call that: “Steve’s health [was] a private matter.” As if to make things worse, press agency Bloomberg accidentally published Jobs’ obituary in late August 2008. It is common practice in the media to keep such obituaries ready in case of emergency — but the publication obviously added concern to the issue of Steve’s health.
Steve himself reacted to the news in his September 9 Music Event, using a famous quotation from Mark Twain:
He reiterated in his October 14 event Media Event, when he told journalists his blood pressure was 110/70: “and that’s all we’re gonna talk about Steve’s health today”. Although most laughed at the joke, hardly any of them failed to notice that, in addition to his still alarmingly frail look, he unusually shared the stage with several executives — most notably Apple’s #2 Tim Cook and Senior VP of Design Jony Ive, keeping only the introduction of the new laptops for himself.
Unfortunately, those growing concerns eventually proved justified. On December 16, Apple made a shocking announcement:
Apple today announced that this year is the last year the company will exhibit at Macworld Expo. Philip Schiller, Apple’s senior vice president of Worldwide Product Marketing, will deliver the opening keynote for this year’s Macworld Conference & Expo, and it will be Apple’s last keynote at the show.
Although the demise of Macworld seemed inevitable to many, as the company did progressively scale back from its trade shows one after the other, the real shock was that it wouldn’t be Steve, but head of marketing Phil Schiller, that would appear on stage for the last Macworld keynote in history. There was no doubt that the CEO, who hadn’t missed a single Macworld keynote since his return (except Apple Expo 2004, one month after he had his cancer surgery), was simply not in good enough health to go on stage and face Apple’s fans (including your fellow webmaster).
Because of the stream of reactions that the statement caused, Steve once again made a personal announcement on Apple’s website on January 5, 2009, the day before Macworld. He explained his medical situation in those terms:
As many of you know, I have been losing weight throughout 2008. The reason has been a mystery to me and my doctors. A few weeks ago, I decided that getting to the root cause of this and reversing it needed to become my #1 priority. Fortunately, after further testing, my doctors think they have found the cause—a hormone imbalance that has been “robbing” me of the proteins my body needs to be healthy. Sophisticated blood tests have confirmed this diagnosis.
Steve said he would remain CEO during his recovery. He contradicted himself some nine days later, in an email to all Apple employees that was made public:
During the past week I have learned that my health-related issues are more complex than I originally thought. In order to take myself out of the limelight and focus on my health, and to allow everyone at Apple to focus on delivering extraordinary products, I have decided to take a medical leave of absence until the end of June.
The CEO would continue to oversee key strategic orientations, while he left most of the day-to-day tasks to his second-in-command, COO Tim Cook, as he had already done in 2004. As a result, the company and the whole Apple community learned how to live without Steve Jobs for half of 2009. This was a historic moment, reminding everybody of the simple truth that Steve was not eternal.
It would be later revealed that Steve underwent a liver transplant in April 2009. It actually is not uncommon for his type of pancreatic tumor to metastasize in other organs, including the liver. According to Philip Elmer-DeWitt, author of the Apple 2.0 blog at CNNmoney.com, Steve’s “lost his gall-bladder, part of his stomach, part of his pancreas, the upper end of his small intestine and now has someone else’s liver, which probably means he’ll be on immunosuppressant drugs for the rest of his life.” “That can’t be fun,” he added. The transplant took place at the Methodist University Hospital in Memphis, Tennessee, one of the nation’s leading center for such surgery. The hospital officially disclosed that Jobs “received a liver transplant because he was the patient with the highest MELD score (Model for End-Stage Liver Disease) of his blood type and, therefore, the sickest patient on the waiting list at the time a donor organ became available.”
The transplant worked, and Steve went back to Apple in late June 2009, as planned. It wasn’t long after that that the Wall Street Journal ran a story about Steve “being back at Apple and focusing on [the] new tablet”, with employees complaining they “had to readjust” to their boss’s demanding habits. Good old Steve was definitely alive and well. He eventually proved it at the September 9 2009 Music Event, when he was welcome on stage by a standing ovation from Apple employees and several hundreds of journalists — before unveiling exciting new iPods, as he had done in the previous four years.