It is not whether someday Apple shareholders will wish they had a more robust corporate governance regime. It is only a matter of when this will occur, and at what price.
There is a widely held consensus, made all the more vivid as the company’s stock pushes past $300 a share, that Apple Inc. is an amazing success story whose vision has transformed the way we hear and communicate with much of the world. We share that view. But we also have long held on these pages that Apple remains an under-governed and poorly directed company that needlessly places continued success at risk.
We were the first to spotlight the absence of women on its cozy six-member board (it has one now) and the fact that its chairmanship, which is informally held by Steve Jobs, has never been properly documented. The board meets infrequently and there is no reasonable way such a small number of directors could properly discharge their duties serving on Apple’s various committees, especially on top of the other outside roles most board members have. Three of Apple’s five outside directors serve as either chairman or CEO of other companies and sit on additional boards as well. Steve Jobs remains synonymous with Apple and a key to its success. Despite much ballyhoo about having others who could fill his shoes when he took his medical leave a few years ago, this is widely viewed as wishful thinking. The board has done little to show that an active succession plan is in place.
This style of corporate governance may be suited to a fledgling business located in a garage. But when it comes to one of the most highly valued companies by shareholder capital ($278 billion by today’s count) in North America, a higher standard is surely advised.
Why is Apple reluctant to adopt the corporate governance reforms enacted by so many companies? One reason may be that it has the same mindset about the company’s own vulnerabilities that it applies to its computers. Antivirus software, it is widely asserted by Apple aficionados, is for all those other millions of computers operating on the Windows system. Few viruses ever affect Macs, so they say. That’s more than a bit of wishful thinking, too, as there are dozens of other ways in which Mac computers can be compromised, as anyone who has had an encounter with malware or phishing exercises will attest. More likely, though, it’s probably just plain old hubris — the imposter of triumphant success that has seen the demise of great leaders and mighty institutions for thousands of years. There is little that is permanent about success, except the universal principle that success is never permanent.
It is not whether someday Apple shareholders will wish they had a more robust corporate governance regime, led by a larger and more engaged group of independent directors. It is only a matter of when this will occur, and at what price. Behemoths that did not take corporate governance, among other matters, seriously, have been struck down to pitiful shells before. Some, like General Motors, rise again — but never to their previous dominance. Others, like Enron, WorldCom and Penn Central Railway, vanish altogether.
It should not take the prospect of a Titanic disaster to realize that with every surge upward to yet more dizzying heights in its stock, Apple’s investors have also begun to move into some very perilous waters.
It would be foolish to conclude that Apple’s glowing status today is due in part to its anomalous boardroom style, or that there will never be a time when its directors will need to be fully engaged to deal with a real crisis. They are ill-prepared for that eventuality.
The Wall Street Journal had an unusual piece on Apple’s corporate governance the other day. We use the term “unusual” because there has not been much mainstream analysis of the board structure of the company that has been on such a winning streak. That needs to change. The Journal’s article was prompted by the death of Jerome York, an independent director who served on Apple’s board and headed its audit committee. What was previously a tiny board is now down to a mere six members, including CEO Steve Jobs. No company anywhere near Apple’s market cap has such a bizarre board regime, or so few directors who spend less time in the boardroom. We raised some of these issues in 2006.
In 2009, the board met on only four occasions, as did most of its committees. That is two or three times less often than at most other major companies. You might have seen that kind of leisurely approach to corporate governance in the 1950s. It’s not what you expect for one of the world’s most valued companies in the 21st century.
Then there is the strange case of who chairs the board. We assume Steve Jobs fills that role, too, but the function is not listed among his duties or job description in proxy filings. Apple is the only company we have encountered in more than 30 years of studying corporate governance that keeps shareholders in the dark about who actually chairs the board. Best corporate governance practices have long called for separation of the posts of CEO and board chairman, with the latter slot being filled by an independent director. This is an important principle in any listed company but it is even more critical in a case like Apple’s where so much investor focus and corporate power is centered on Mr. Jobs. While Mr. Jobs is widely viewed as being pivotal to the company, the board has a duty to mitigate that exposure by at least providing some couterweight among independent directors. It also needs to show investors that Apple’s directors are not entirely mesmerized by Mr. Jobs and can think independently about the best long-term interests of the company.
Perhaps the board thinks it is making up for this weakness by having two co-lead directors. But this only deepens the mystery of Apple’s governance. We have likened the role of lead director before to that of the first runner-up in the Miss America pageant. It really doesn’t have much clout alongside a CEO who is also chairman of the board, especially since both Andrea Jung (chairman and CEO of Avon Products) and Dr. Arthur D. Levinson (chairman of Genentech) also have substantial governance obligations with major corporations and public institutions. Having two lead directors is ridiculous. You might as well appoint every one of the five independent directors co-leads and be done with it.
The stock option deal enjoyed by Apple’s non-employee directors is also troubling. They should not be on the same track as management. Nor should their stakes be such that they might be perceived to have an interest in holding back bad news or be unwilling to take on management because it will affect their bank accounts. Compensation for Apple’s five independent directors in 2009 ranged from $436,372 for Albert Gore Jr. to $1,004,224 for Mr. York. Most major boards realize that director stock options are a no-no.
It would be foolish to conclude that Apple’s glowing status today is due in part to its anomalous boardroom style, or that there will never be a time when its directors will need to be fully engaged to deal with a real crisis. How would the board act on such an occasion? The stock options backdating fiasco Apple faced some years ago and, later, the confused and conflicting blunders about Steve Jobs’s health problems were two large red flags that signaled major changes were needed in Apple’s boardroom. Unfortunately, its directors appear to be waiting for anther disaster before they climb out of their 1950s sleeping car and into the 21st century.
It is one thing for Apple’s shareholders to be afflicted by the illusion of invincibility that surrounds the company at this uniquely successful but arguably impermanent point in its history. It is quite another for its directors themselves to succumb to that vice.
Investors need to be concerned when directors seem more like a chorus of cheerleaders than a boardroom of independent guardians.
The eyes of investors, which, heretofore, have been focused almost entirely on Apple CEO Steve Jobs, are now turning to the company’s directors. It is a long overdue scrutiny. Two years ago, in the wake of Apple’s stock option backdating scandal, we expressed concerns about the structure of its board, which at the time was a seven-man operation.
Since raising the point -and we were the first to do so- Apple has added one woman to the board. But it remains a small and rather weak example of modern corporate governance practices. It met only five times in 2008, a period when many companies were facing the likelihood of recessionary consumer pressures. Official records do not even properly name the officer who chairs the board. We all know that was Steve, but why the problem formally disclosing that fact?
The board seems to have taken little notice of the need for succession planning, even though the company’s founder and CEO has a record of serious health problems. The reason seems obvious: Steve did not want that process to move forward. All its appearances and statements suggest that the culture of Apple’s board is one of unswerving deference to Steve Jobs. Look at its January 5th press release concerning Steve’s first disclosure about his health and the wording seems more consistent with the actions of a chorus of cheerleaders than a boardroom of independent guardians. It’s pretty obvious that the board failed to do any due diligence before issuing this statement. Shareholders may well have been made more vulnerable to precisely the kind of sudden loss of value that happened yesterday as a result. (more…)
Harvard’s Lucian Bebchuk, who is doing some of the most interesting research on executive compensation in decades (and was nominated in the Finlay On Governance 2006 Annual Year End Awards as one of the people we would like to hear more from in 2007) had an interesting op-ed piece in last weekend’s Wall Street Journal concerning Apple’s stock options probe. For those without a subscription to the Journal, Professor Bebchuk posted the piece on the university’s corporate governance blog. It very much accords with some of the views expressed here on the subject recently, which are collected together at this site.
As Professor Bebchuk observes:
Steve Jobs’s great accomplishments have well earned him a place in the pantheon of high-tech leaders and visionaries. And Apple’s senior management has undoubtedly done very well for shareholders during the past several years. All of this, however, clearly does not compel the conclusion that Apple’s governance has performed adequately with respect to option grants. And the company’s report falls far short of providing a basis for accepting such a conclusion.
I posted the following comments on the piece:
I, too, am of the view that the company’s independent directors took an overly narrow approach to their mandate. They should have probed further into what was done, why it was done and the implications for the company’s reputation and culture. It is not enough to say that CEO Steve Jobs did not make unlawful or improper gains from options manipulation. Improprieties occurred on his watch. He permitted or encouraged backdating in his capacity as the most senior executive of the organization. He is the one who sets the moral tone for the rest of the company.
I am unaware in either the pre or post Enron era where it was acceptable that there could be the slightest doubt in the word or integrity of the company’s CEO. Concerns must, therefore, also focus on specifically how Jobs assisted in the backdating, what his precise role was and whether he misled investors as to the disclosures that were made at the time and have subsequently been proven false to the tune of $84 million.
The report also asserts that Mr. Jobs was unaware of the “accounting” implications involved. He has been CEO of the company for a considerable period and is widely reputed to be a “hands-on” manager. A Ken Lay type excuse that Mr. Jobs was not aware of what was happening around him or did not understand even the ethical implications of what he was doing, and was not bright enough even to seek counsel about any uncertainty, not only is not plausible, but even if it were would still raise serious questions about the standards of competency in the company’s top management.
Inasmuch as CEOs have been recently fired for making false statements on their resumes and have had their bonuses reduced because of plagiarism, it appears that Apple’s board has not adequately considered the full implications, including far-reaching ethical implications, of what has occurred. What failures in governance oversight, along with the size and functioning of the board, that may have contributed to the fiasco, and what needs to be done to address these shortcomings, also appear to have escaped the board’s gaze.
It’s clear from the actions of all the players involved that there should be more fallout from Apple’s revelations. The failure of the board to probe deeper and give Jobs a pass for this kind of conduct is bad enough. I have already talked with a number of CEOs and directors who are astonished at the board’s obvious and ill-advised attempts to sweep Jobs’ role under the carpet. But the failure of the SEC and the media to prevent that from occurring carries profound implications for the governance and leadership of corporate America and the confidence of the investors who rely upon it.
There is a growing consensus from a number of thoughtful and highly respected sources –many of whom I suspect, like me, are enthusiastic owners of Ipods and Macs, and perhaps even Apple shares– that the board’s investigation fell considerably short of the standards expected in voluntary reviews and that there may well be more fallout from both what was revealed –and what was not.
The New York Times’ Floyd Norris makes some typically insightful comments on the Apple Computer stock options scandal on his blog. Finlay ON Governance has been on this story itself, along with The Centre for Corporate & Public Governance.
It’s unfortunate that the Times requires a paid subscription to view it because this is the kind of thoughtful perspective from which all members of the investing public and interested observers can benefit. Here is an excerpt from his posting today.
It will be interesting to see if the Securities and Exchange Commission agrees that there is no problem if a chief executive was aware that favorable grant dates were selected but did not “appreciate the accounting implications.” And we are asked to believe that when options given to him were ostensibly approved at a board meeting that never happened, he did not know what had gone on, although he was a member of the board.
I responded to the post with the following comments, which can also be viewed at Mr. Norris’s blog:
Another conclusion might be that Apple has not taken corporate governance seriously. It has a tiny board of only seven directors, one of whom is CEO Steve Jobs. Many of them, including Jobs, sit on the boards of several other prominent corporations, thus requiring substantial attention away from Apple. Rather puzzling is the fact that no director or officer of the company appears to hold the title of board chair. I have never encountered this anomaly in any other publicly traded company in some 30 years in and around North American boardrooms. It seems to suggest a lack of proper board organization. No wonder they don’t know when they meet.
As to the matter of stock options, the fact that they appear to be such a driving force in the company, and on the board itself, might account for some of the current problems. Outside directors participate in a stock option plan in which they are eligible to exercise hundreds of thousands of options. It will be recalled that IBM’s board recently eliminated the practice of issuing stock options to directors, thereby winning considerable approval among corporate governance experts for the move. It is disturbing that the board committee admitted that its CEO was complicit in the manipulation of dates in respect of options but does not appear to regard that as a serious breach in the ethical leadership of the company. Nor does it suggest any further steps it plans to take to ensure a culture of integrity and accountability in the company.
A final point on Apple’s board: no woman sits among its directors. There is really no excuse for such a gender gap in corporate governance these days, and when it occurs, it suggests a company that lacks an adequate understanding of the times in which it lives and the expectations that confront major publicly traded companies. There is a serious disconnect between Apple’s technology prowess and its governance performance. It has been costly. And that, perhaps, is the most significant conclusion to come out of Apple’s options mess.
Looking over what has been disclosed by Apple’s board about its investigation –the company should have released the full report to the public in order to avoid further confusion– I am of the view that the company’s independent directors took an overly narrow approach to their mandate. They should have probed further into what was done, why it was done and the implications for the company’s reputation and culture. It is not enough to say that CEO Steve Jobs did not make unlawful or improper gains from options manipulation. Improprieties occurred on his watch. He permitted or encouraged backdating according to the report. Concerns must, therefore, also focus on exactly to what extent Jobs might have assisted in the backdating and whether he misled investors as to the disclosures that were made and have subsequently been proven false to the tune of $84 million.
The report also asserts that Mr. Jobs was unaware of the “accounting” implications involved. He has been CEO of the company for a considerable period and is widely reputed to be a “hands-on” manager. A Ken Lay type excuse that Mr. Jobs was not aware of what was happening around him or did not understand even the ethical implications of what he was doing, and was not bright enough even to seek counsel about any uncertainty, not only is not plausible, but even if it were would still raise serious questions about the standards of competency in the company’s top management.
Inasmuch as CEOs have been fired for making false statements on their resumes and have had their bonuses reduced because of plagiarism, it appears that Apple’s board has not adequately considered the full implications, including far-reaching ethical implications, of what has occurred. What failures in governance oversight, along with the size and functioning of the board, that may have contributed to the fiasco, and what needs to be done to address these shortcomings, also appear to have escaped the board’s gaze.
It’s pretty clear from the actions of all the players involved that there will be more fallout from Apple’s revelations.
Today’s on-line version of Germany’s popular Focus magazine contains excerpts of a media interview with The Centre for Corporate & Public Governance on the Apple Computer options manipulation story. There will be a follow-up in the next print edition. I will be commenting further on today’s statements by Apple’s board, which The Centre called for yesterday, over the next few days.
Perhaps the next time a scandal erupts, it could choose a less hectic time than the Christmas – New Year’s period.
