The kiss up culture of Apple and why it matters

Last night a few people sent me information about the emerging Apple's stock option problem. I'm not exactly surprised when I read articles like "Apple finds more evidence of options irregularities." For those of you dropping by for the first time, I spent nearly twenty years at Apple with my last job being director of federal sales.  I got to see the best of Apple as a corporate culture which as it turns out were the early years and the worst which in spite of the great financial results were the years after Steve Jobs came back. Sometimes tough times build a stronger and better culture than overwhelming success.

Now if you like the current Apple products and you are satisfied with the support from Apple, don't let this article worry you. If you're an Apple investor, which I'm not, or if you're an Apple employee which Apple has made certain that I'm not, consider it a cautionary tale that lends some additional credence to the current investigation.  My comments might also give you a look inside the culture that has allowed this to happen.

Anyone who has worked at Apple, if they are honest and can detach themselves from the situation knows that Apple has accorded their vice presidents a special status to do pretty much what they please as long as they tell Steve what he wants to hear and the numbers don't look especially bleak.

You have to understand that the numbers I'm talking about are not necessarily sales numbers.  They are more often than not expense numbers.  In spite of all the billions in the bank, Apple is in essence internally a very cheap company.  Managers are often measured more on money they don't spend than on the successes they might have with money they have spent.

A really good example of this is back when Apple needed Active Directory support in OS X.  Everyone agreed that it was needed except perhaps one high profile VP who thought it was already there, but that's another story.  No one would fund this hugely important project (position) because Apple was practicing zero sum budgeting.  Zero sum means basically that if you want to do something else, you have to stop doing something that you are already doing.  As strange as it may seem, I let a very talented field system engineer who was already trying to help on the project devote almost all of his time to project.  To make a long story short, when it was clear after several months that this was going to be successful, a position got created, and he went on to do development full time.  The needed software got into the product, and for the most part it was paid for by field sales and not the development team which was able to brag that they stayed within their budget and delivered more for less.

At this time Apple was as usual adding to their billions in the bank. In presentations that I did with other directors to Apple's senior VPs, they were bragging about how little money they were spending and were seemingly unworried with Apple's tanking market share.

Now it is fine for the company's executives to be frugal with resources.  However, the frugality didn't extend to compensation for themselves or the cronies with whom they had managed to surround themselves.

So what has this to do with the current options problem?  Actually it has a lot to do with what happened because of the deference that VPs are given in Apple culture.  I worked under a number of VPs from hell, but one particularly bad one was in my opinion doing some illegal things with compensation.  I went to the VP of HR who told me "that Apple VPs have a right to make mistakes and not be called to account."

Now the behavior I had reported was serious in my mind.  He had hired a bunch of young guys and was paying them twice as much as much older much more capable females were doing in what I believed to be essentially the same job.  He had also created a compensation plan for my team which was without a doubt the most unfair compensation plan that I had ever seen.  The quotas bore no relationship to reality and to top it off, he picked a couple of people he liked and jury rigged the system so that they would be paid more than others.

The most amazing thing is that not only did Apple HR do nothing to rein him in, but they pro-actively tried to spin his actions into something that could be swept under the carpet.  In fact the only way that Apple got rid of this VP was he just stopped coming to meetings and moved to Florida.  One of his parting shots was to harangue other Apple managers in a conference call about how he had bought a Dell laptop for one his relatives because it was better than a Powerbook.

I once had a telephone conversation with a VP heading Apple sales.  He pompously told me that since he was a very busy and important man, he would hire anyone one he wanted.  His implication was that he didn't have to pay any attention to the rules, Apple's or the law.  He finally left of his own accord also, but not before exercising millions upon millions of dollars of options.

Then there is the case of the VP who was brought in to clean all the "slackers"  out of Apple sales. Those slackers were the people who knew the product intimately and through tireless work had managed to keep Apple in consideration at many enterprise accounts in spite of the company continually shooting off its own toes.

The VP came from a software company and immediately brought in a whole cohort of his cronies.  None of them understood selling hardware, much less Macs or how to sell a platform decision.  They spent a year or more trying to figure it out, but the one thing that can be absolutely guaranteed is that these guys, some of whom have already left the company, went away millionaires in spite of their lack of contribution to sales results.

This VP is the same one who shared with another employee in late Q3 2004 that Apple was holding back some sales so that the next quarter would look better.  The employee shared the information with me.  Since I was a director, I was very concerned about what I considered illegal behavior.  I reported it to the company, and in about six weeks I was gone from the company in spite of my nearly twenty years of service.  It certainly wasn't the only lapse in ethical and legal behavior that I reported, but it might have been the straw that broke the camels back since I was the one shown the door quickly.

Some tech companies have used options very broadly. That's not the case with Apple.  From sometime in 2002 onwards, Apple made the decision to almost exclusively use options to reward people that were Director and above.  That policy may have changed since I left, but I know while I was there in 2002-2004 options were almost exclusively used to reward the cronies of the VPs in power.  Very few went to the sales force.  In that environment what's a little back dating among friends?

In fact one year we were told there were no options available because all had been given to Steve Jobs.  Another year, after my team had done a tremendous job growing Apple's business over the past two years, one of which was the year Steve got all the options, the reigning VP made the decision to give all the options to other members of his team.  Of course we never knew which ones, but it was suspected that it was the same over paid inside sales team that he had created.

Fundamentally the reason that all this can go on at Apple is the Apple culture of nothing matters so much as keeping Steve happy.  I can remember sitting in De Anza in a guest office next to one of our VPs. It was one of my many trips to Cupertino.  He came back from a meeting absolutely thrilled that Steve had been so engrossed in his latest project that he had asked no hard questions. He had been particularly worried about ones which would have shown that high end Mac sales were not healthy.  The VP was pleased that Steve accepted the rosy scenario without question.

The VPs job was secure and his bank account was full.  I guess it doesn't get much better than that if you're an Apple VP.

Now I don't know that Apple's behavior is any worse than the other companies that have been mentioned with option problems.  I just know that I wouldn't bet my investment money on a company whose core is so rotten.

Things may be totally different over on Apple's product development side.  I don't know.  I wasn't there.  Yet I have to believe that in the long run, this culture isn't healthy for Apple.  I continue to hear stories from people still in Apple sales that "it's okay if the VP approved it" is still alive and well.

I'm cynical enough to believe that Apple actually awarded stock options to people whom they had no intention of letting exercise all their options.  They had already made the decision to show those people the door.  In that way they buy themselves out of situations with promises that they never intend to keep.  If you think that is devious, you don't Apple HR.  They once went to check on one of my employees in a hospital.  The visit was ostensibly to to check on the employee's health. Actually it was to campaign for a decision that would keep in place the unfair compensation system of one of those VPs from hell.  The employee called me immediately from her hospital bed to express wonder at the visit.

Now does this matter if you love the products?  Probably not unless Steve disappears, and we have to depend on a bunch of yes men to get out our next generation of products.

As I said I wasn't surprised about the announcement especially about the need to restate earnings.  I just hope they use someone to recount the numbers besides the gang that can't count, Apple's own finance team.  The running joke inside Apple is that the world as Apple knows it would come to an end if three numbers that are supposed to match actually matched.  Folks would be shocked to see how much of Apple is run on spreadsheets but that's another story.

It's nice to see at least the tip of the iceberg being checked.  The Apple corporate culture may never change but at least this is a warning shot across the bow that might do some good.

On another note if you haven't visited "The Secret Diary of Steve Jobs," you are missing lots of laughs.  Even Steve could probably use a few right now.

Comments

[coelomic]

This is absolutely unbeleivable. Thank you for giving us this valuable insight into the everyday workings at Apple. I love the company and its products, and I must admit that I have secretly enjoyed the fact that SJ is a character. I have always suspected that in a company that rests a lot of their decisions on the whim and fancy of one man, cronyism is bound to exist and you have revealed it like no other. This probably exists to a small extent in all teams but to see a company like Apple that genuinely has a great product and a market for it squander away their future is painful. I suspect that this behaviour is a reflection of the mercurial behaviour of SJ himself. I sincerely hope this investigation leads to a serious change in behaviour of the company as a whole or it seems doomed, once SJ exits.

[ibookfast]

I'm so Apple obsessed I should be paid, I really appreciate your eye opening read. I'm sorry you had such a f-ed ending with them. The zeitgeist in our country is so messed up, full of fear, greed and violence. I was hoping that Apple was an exception. Please Steve be the man I think you are, one with integrity. A man more concerned with actually making the world a better place, a man who puts people on par with profits. I am aware he has a very low threshold for dealing with frustration, and he acts like his s__t don't stink, but despite his personality faults he is making digital interactions a joy. No one's perfect, I can deal with a prick, just not a greedy, hypocritical scoundrel. Steve please clean house, and hire back the author of this blog; Applepeels. Keep up the excellent former insider's look at Apple.

[Charles]

Sorry if I'm being obtuse here, but could you please explain to me what is illegal about holding back sales to book them in another quarter? This is known as "sandbagging" and I've never heard of a company that did NOT do this. It seems like a minor quibble since it does not affect sales in the long term, no sales are gained or lost overall.

But overall, I accept your point. This is something I've spent years to teach at the companies where I worked. The lesson is, if you create incentive programs, people will spend their time trying to look good on paper, instead of improving real performance. You are "incentivising incentives" rather than incentivising improvements in REAL performance.

[Paul]

Thanks for the anecdotes and the insight. As an AAPL shareholder, it is disconcerting to find out that such options shenanigans occurred at all. I hope the negative attention this is bringing upon Apple has caused Steve to wake up. It would be nice if this experience results in a top-down culture change at Apple because nothing pisses me off more than to hear about executive wankers massaging the system to their own solely selfish benefit. And the only way such a change can happen is if it comes from Steve himself.

Maybe it's too much to hope for, but I would love to see Jobs go around personally to every single exec and make them justify their options, as it appears it has been happening as a result of shady collusions with HR. And fire their asses if need be for putting themselves and their cronies above the welfare of the company.

Again, maybe too much to hope for.

[John M]

Chilling to think that stuff like this goes on. But that said, far from unbelievable. Success tends to go straight to corporate heads as it were. Maybe Apple could do with a second pole of power, a finance specialist to balance Steve. Of course, given the Sculley experience he would never countenance that though. Or would he if this current case gets out of hand?

[Withheld for obvious reasons]

I'm not a VP at Apple, and I'm not a director - certainly not one with 20 years experience. I do, however, work closely with VPs on a very high-profile product.

From my experience, you paint a far worse picture than the reality of my working life, and I think someone ought to point out that there are two sides to every story.

I have stock in the company, and not just options, but stock bought with my own hard-earned cash. So far it's done well, and I hope it continues to do so. Certainly the expectation is that Apple are about to "hit it bigtime". Perhaps that's the source of some of your angst.

From my perspective, the company appears to be run well, and legally too. It jars somewhat with your casual assertion of constant illegality, that Apple called the SEC about their financial irregularities, not the other way around.

[Marc]

There's an interesting (and damning) article about options back-dating at:
http://news.morningstar.com/article/article.asp?id=165289

Morningstar gives Apple a stewardship grade of C (from A to F) or "fair."

[Deja Vu]

I just learned about this blog and it has been an interesting yet also unsurprising read. I worked for a place which had similar traits (favoritism, ethically challenged managers, lack of communication to protect information, setting up unfavored employees to fail, etc) and left after a decade and a half of that BS. So this kind of corporate culture and politics isn't unique to Apple but I suppose the companies "star status" makes such things a lot bigger especially when there are so many egos at play.

A lot of what you wrote from the operational/business/sales perspective also makes sense on the development side as well. I've been a participant of both CQF (in the past) and currently with AppleSeed (since 2000) and "low budget" wreaks to the point where it is pretty obvious that those managing it are doing it on a tightrope. I'm surprised they haven't cut out Fedex'ing beta CD-R/DVD-R's for larger projects like major OS X releases since that must add up during the entire testing cycle. And some of this relates internally to Apple's various development teams and why Mac OS X sometimes comes across as a hodgepodge when it comes to the entire user experience.

Those who are screaming for Apple to "Fix the F-ing Finder" are probably in for a long wait (i.e. those annoyances will more than likely remain in Leopard) because some of those annoying things don't seem to be high priority (I have a number of outstanding follow-up ID's dating back to the Jaguar seed which I'll probably re-file in Leopard if they haven't been addressed once the testing is started) and the team doing the Finder probably has their plate full programming/debugging the bells and whistles that Jobs thinks is important.

As a tester, I always submitted plenty of detailed feedback and examples to improve the user experience and lot of these have still yet to be considered since at least the Puma (10.1) seed. After the Panther seed cycle, I gave up since it was becoming a waste of time; I just concentrated on filing bug reports for Tiger. Longtime testers know how frustrating it is though because the software could be magnitudes better if certain teams within a development project didn't have to deal with limited resources (ties into your "internally cheap company" blurb). And this couldn't be more true of the entire Mac OS X (including Server) project since it is the software which defines the platform. You see plenty of good feedback on various Mac forums but little do many of those folks know how aggravating it has been to get anywhere through feedback channels closer to the development team.

Also, if you talk to the people in Apple's Enterprise sales force, you will probably hear similar stories of how they have their hands tied behind their back. From an IT end user perspective, I would NEVER recommend an end-to-end Apple solution (even though I like the products) for something mission critical as Apple's enterprise support and maintenance contracts leave much to be desired (to the point of being unacceptable) when compared to what IBM, HP, or Sun offers. Plus some of us who got on the OS X bandwagon early in 1999 to help evangelize the new direction got burned with the old Rhapsody based Mac OS X Server (version 1.0-1.2) in having no migration strategy to Cheetah Server (i.e. re-paying the full amount and only a bare minimum migration of user account information).

Anyway, like many who've have to deal with Apple at a level beyond just being a devout user, the story seems to be the same; love the products but have a strong disdain for the corporation.

[Stephen]

Allow me to demonstrate my financial acumen and share it with you, gentle reader. Now this forthcoming advice may seem to be a little obvious, but it is certainly right on the money, so to speak.

"Buy Low, Sell High"

Now, in order to do this, let's take a walk back in time to around 2001, where Apple stock was around $14-$18. In 2001-2003 time frame, what was incredibly frustrating about the stock option fiasco is that Apple employees, who believed in the product, and believed in the company, KNEW that the stock would eventually rise, based upon four major growth factors for Apple.

1. OS X
2. Better hardware, to include servers & storage
3. iPod
4. Apple Retail Stores

No major trade secrets given away there, or at the time, but Apple employees were incredibly eager to get options at the time, given the low price of Apple's, and I'm not even talking about back dating here, just a chance to get some shares at a decent strike price.

So, when we pressed Apple's senior management for more options for the sales force and engineers who were going "mano y mano" with Dell, MS, IBM, and HP in the market every day, we were told that no options were available to anyone below the Director level. Additionally, what had to happen was all the senior executives who had been holding onto their millions of options in shares, hadn't exercised any of them yet (they were waiting for the price to rise). Apple's executives would either have to exercise some of their options, or Apple's Board would have to go back to the shareholders and ask them to grant more shares.

If you want a sadly entertaining exercise, go back to late 2003 to late 2005, and look at historical insider transactions for Tevenian, Cook, Heinen, Rubenstein, Schiller, Johnson, Serlet, among others. I'm not saying they don't deserve success, but they had hundreds of thousands of shares, and we just wanted the rank and file employees to get a few thousand or so.

Nothing has changed since you left. Compensation plans are still written to reward managers as opposed to individual contributors, while the field sales teams are the ones actually driving the sales and keeping Apple relevant with our customers. Also, stock options appear to only be for managers. You are better off without Apple in your life.

[Mike]

Sad and unfortunately true in a too many places at corporate. HR is notorious for being rotten. Plenty of fine, brilliant and well respected programmers have passed Apple over because of the HR department. The mentality there is that "It's a privilege to work at Apple" and they don't care who you are. Sure, Apple is a great company to work at if you're a programmer, but they seriously need an attitude adjustment if they want the industry's best and brightest. While I've heard this from a number of friends who've dealt with Apple HR, I know they were trying to clean up their act. One such friend, after being strung along by Apple HR for about a year, ended up going to MS and making buckets of money instead. He truely is a brilliant mind and it's Apple's loss. Apple is like a role model (as close as a company can become) and this type of mentality is not healthy for anyone involved.

[Neil]

Thanks for the insights, From my limited experience, I would say this behaviour is typical of large (american?) companies, the only difference being that the for the older ones, who have been through similar embarassment before, the prime directive is to avoid any kind of "compliance issues". Now burned, Apple will do this going forward. I don't care for the shareholder bitching and lawsuits much though, maybe those are the shareholders with the short positions.

[ocracokewaves]

First off my apologies for taking so long to post the comments. There was thunderstorm near the hotel where I was staying last night, and Internet connectivity did not return until after lunch eastern time today (Saturday) so I was unable to check comments for twenty hours.

Second to answer a couple of questions-

The first "Sorry if I'm being obtuse here, but could you please explain to me what is illegal about holding back sales to book them in another quarter?"

My understanding, and I do not pretend to be a lawyer, is that if you are manipulating sales figures in order to change the quarterly results in a public held company, you're violating the law. HR at least pretended to take the allegation I made very seriously, though it was clear to me that they weren't really going to do anything more that ask someone who would obviously say that they didn't say it. Apple HR is not in the mode of solving problems. I know someone who has an unbelievable story of Apple HR foot dragging that has gone on for years. There was a Director in the Education Divison who was widely rumored to have said that "women can't sell." In spite of complaints he stayed until he got tired of Apple.

As to the comment "From my perspective, the company appears to be run well, and legally too. It jars somewhat with your casual assertion of constant illegality, that Apple called the SEC about their financial irregularities, not the other way around."

I didn't assert "constant illegality" but there were plenty of questionable actions. My comment would be that Apple knew they had no choice in reporting because this was becoming a serious issue. No one has accused Apple of being dumb. It would be much better to call the SEC than wait for them to call you.

You might want to ask yourself why Apple's head legal person recently left Apple?

As to your comment that the company appears to be "well run," well the options backdating situation proves that is not the case.

However, not every Vice President at Apple is a bad egg, I knew some very good ones, but to deny that there were and still are some very bad ones is to deny the experiences of far more people than just me.

There are plenty of people to back up what I have said. Of course most people are pretty afraid of saying anything negative about Apple.

I certainly hope Apple takes this seriously. I don't expect any real change. I would be happy to be proven wrong, but until there is some house cleaning, they're just sweeping things under the carpet.

Thanks for the Secret Diary of Steve Jobs link. I had just enough time to read the whole thing before it disappeared today. Hilarious. Hope it hasn't been cancelled forever and is able to return - maybe after WWDC.

"Withheld for obvious reasons" has had far to much koolaid and has too few years at Apple to be accurate in his assessment.

The writers source of angst is because he was screwed over by Apple, even though he continued to exceed his goals year after year and gave most of his adult life to the company.

Hopefully Apple does not treat all of their employees this way, but based on what I am hearing it is really hard to say.

[Lynda Botez]

Secret Diary of Steve Jobs moved here:

http://fakesteve.blogspot.com/

[Jerome Alexander]

Bravo! Some great comments about corporate culture. Read more about the subject in "160 Degrees of Deviation: The Case for the Corporate Cynic." A quick read.

[Mike]

I'm a big proponent of Apple but after reading that I can say that the corporate greed that VP's at Apple exhibit are rotten. They seem to be missing a few chromosomes. I believe that they think they are very important people because they have been divested with so much power and money but really at the end of the day they are no different from anyone else. I'm a charterred accountant and I have met many people like that but I'm really surprised that they work for Apple.
Steve Jobs what kind of culture are you growing?