JURIST Contributing Editor Nancy Rapoport of the University of Houston Law Center says that recent revelations about stock option backdating at Apple Computer suggest that it may be time for corporate board members even in the most highly-respected companies to make some needed New Year's resolutions to protect their enterprises, their reputations, and their investors…

Last week we learned that Apple Computer, too, had a piece of the backdating-of-stock-options pie and that it may have ginned up a fake board meeting to demonstrate authorization of stock options to Steve Jobs. According to news reports, Jobs knew about some of the backdating activities, although he didn’t benefit financially from the options.

Let’s review: Enron, WorldCom, Tyco, etc., scandals hit the news about six years ago. Thanks to Erik Lie of Iowa , we now know about the backdating of options problem, some of which was happening while the other 2001 news was breaking. We have Sarbanes-Oxley and the related rules, and the SEC is trying to get a handle on all of the issues with executive compensation measurements. I can’t resist poking fun at the model of clarity to get to the new rule: the SEC Website PDF Redirect Page says that:

Final Rule Release 33-8732 (issued August 11, 2006) was replaced by Amended Final Rule Release 33-8732A (issued August 29, 2006), which reflects revision of Release No. 33-8732 to conform with the publication of two releases in the Federal Register — Release No. 33-8732A and Release No. 33-8735. Release 33-8732A reflects the addition of cross references to proposing release No. 33-8735.

No wonder people have a hard time parsing government-ese, right?

So what gives? How difficult is it, really, to walk the straight and narrow in terms of corporate governance? I’m not talking about trying new types of financing or creating new markets, although there are all sorts of legal risks inherent with being a first-mover in an area. I’m talking about basic officer and director behavior.

I don’t have any first-hand experience serving on a corporate board yet, although I’d actually like to see what it’s like to serve on one. I wonder how ideas like backdating options, getting information by pretexting, or falsifying minutes of board meetings that never took place were presented to the various people who had to approve the ideas. Maybe I’m missing the nuances here. But in the spirit of making some New Year’s resolutions, here are my top five nominees for Corporate Board New Year’s Resolutions:

1. I will think twice before I endorse any action that involves “misstating,” “misrepresenting,” “falsifying,” or other descriptions that are kinder, gentler versions of “lying.”
2. If I am still tempted to endorse any action that involves lying, I will ask myself why the company needs to hide or change information, and I will spend time trying to fix the underlying problem legally.
3. If I cannot fix the underlying problem, I will do everything in my power to tell the truth about the problem.
4. I will link pay to performance after thinking long and hard about appropriate performance indicators for my company, and I will look for multiple types of performance indicators to ensure that the company’s long-term and short-term needs are taken into account. I will also conduct spot-checks at reasonable intervals to make sure that I am measuring the correct performance indicators.
5. I will remind myself and my colleagues that the level of CEO compensation is not an indicator of the company’s performance and that the arms race towards excessively high executive compensation is not a winnable race. At the point when money becomes just a way of keeping score, compensation is probably too high.

(That last resolution alone is probably sufficient to keep me off corporate boards.)

What saddens me about Apple Computer’s news is that there are many good companies out there — public and private — with solid, dedicated management and boards. These companies now suffer from being lumped together with companies that have been cheating in blatant ways. Investors are likely to conclude that they will never be able to tell the good from the bad, because the bad ones may never get caught.

Apple continues to be an innovator in design and technology, and there are numerous other companies caught in the options backdating problem that are also good companies. But good companies won’t stay good if the market loses all confidence in the character of those at the top. After all, one bad Apple spoils the whole barrel.

Nancy B. Rapoport is a professor of law and the former dean of the University of Houston Law Center. In July 2007, she will become the Gordon & Silver, Ltd. Professor of Law at the William S. Boyd School of Law, University of Nevada, Las Vegas.

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