Updated: The BlackBerry maker says it will restate its 2006 earnings. Balsillie will remain co-CEO.
Research In Motion Chairman and co-CEO Jim Balsillie will step down as chairman of the Canadian maker of the popular BlackBerry device. The resignation comes in the wake of reports that the company misstated $250 million in stock options. Balsillie will stay on as co-CEO of RIM. According to a statement released by the company today, RIM will restate its 2006 earnings by $250 million. The error came to light following an accounting review.
A new chairman has not been named. RIM Chief Financial Officer Dennis Kavelman is being moved to a new position as chief operating officer for administration and operations, and two board members, Kendall Cork and Doug Wright, have also resigned. The RIM board is undergoing reorganization and increasing its size from seven to nine members, according to the statement.
In the statement, the company said the roles of chairman and CEO are being separated to comply with "current best practices in corporate governance." The accounting review was initiated as a result of a requirement to meet the guidelines of the Ontario Securities Commission, as well as the Securities and Exchange Commission in the United States. While RIM is based in Waterloo, Ontario, its stock is also traded in the United States.
"Speaking on behalf of the Board and the senior management of RIM, we are treating this issue very seriously and have already made significant progress in rectifying this matter. We are also committed to evolving our processes to be consistent with our philosophy of achieving excellence throughout RIMs operations," said Balsillie and President and Co-CEO Mike Lazaridis in a prepared joint statement included in the release.
RIM did not say who would be appointed to serve as CFO. However, the company did say a new internal audit department will be created within RIM. The audit review found no intentional wrongdoing on the part of Balsillie.
However, observers dont think this is a particularly significant event in regards to either Balsillie or RIM. In fact, it may have been a good move on RIMs part.
"In the U.S. weve tried to separate the chairman and CEO as a way of creating independence," said Professor H. David Sherman of Northeastern University in Boston. "This is following that. My own reading is that they found this glitch, and its not a big problem in my view," he said. Sherman said that there have been a lot of restatements lately, but he described the RIM situation as marginal.
"This is a great example of what we see in the world. A large part of this restatement is a difference between U.S. and Canadian GAAP," Sherman said.
He noted that theres always a question of why the auditors missed this initially, but added that if regulators had more flexibility, the situation at RIM probably wouldnt even require a restatement.
"They found the problem, theyre going to fix the problem, it doesnt change cash flow, it does change earnings slightly," he said. "A lot was misunderstanding between U.S. and Canadian GAAP."
Sherman said that this was "a great example of a restatement that has marginal impact." He said that this is actually a positive move by RIM. "In reality, this is a wonderful thing. They found the problem, its not a real problem, and assuming they found all of the problems, shareholders can be aware of it, and theyre boosting their financial credibility rather than being tainted," Sherman said.
Sherman noted that whats most important is that this whole situation will have little impact on RIM.
"Theres little research that any governance change makes much difference. Theres some evidence that with companies that have independent boards its actually helpful. It might improve things," he said.
Sherman did note that RIMs actions are part of a trend. "This is how the general corporate governance model is moving," he said.
"I think its impressive that he [Balsillie] had two of the lead executives pony up almost $10 million to cover the cost of the additional audit and study in addition to giving back their gains," Sherman said.
Analyst Craig Mathias agreed. "This was completely self-directed. Heres a company that explained the whole matter," Mathias, principal of Farpoint Group, said.
"Its an accounting issue. No one did anything wrong in the sense that they set out to cause harm am or break the law. Thats not the case," Mathias said.
Mathias said that Balsillies acceptance of accountability in the stock options issue is refreshing. "You tend to see cover-ups. This is the opposite," he said.
However, not everyone agrees. "Given that he is the guy that has the MBA," said Gartner Principal Analyst Todd Kort, referring to Balsillie, "he should have known better than to have approved this back dating of options. This was pretty much standard industry practice, and people were getting away with it thinking they would never get caught."
"It was their way of sweetening the deal for people coming into the company," Kort said. However, Kort noted that the event is unlikely to have a material impact on RIM.
"$250 million dollars is not a big deal, and I think that this is reflected in the fact that their stock price has held pretty steady," Kort said. "I cant imagine that this, even if it did get twice as bad, that it will materially affect RIM and their customers,"
"From an IT perspective, theres not a lot going on here," Mathias said.
However, both Sherman and Craig Mathias noted that conflicts and confusion between GAAPs in the U.S. and elsewhere are sure to cause problems in the future.
"This stuff is not easy," Mathias noted, "its put together by bureaucrats and accountants."
"Its worth noting that theres a conflict between two GAAP systems," Sherman said. "Were already close, and people supposedly know both systems well. Imagine what its like in Europe and Japan where companies are adopting new GAAP systems. How much larger these issues will be."
"This is an interesting example of how a relatively finite GAAP issue can lead to this kind of restatement," Sherman said. Mathias agreed. "An international accord would help," Mathias said.
Editors Note: This story was updated to include comments from analysts.
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