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Control Freak Apple Fights Shareholder Proposals It Made Necessary

Apple (AAPL), always a secretive company, said that it will recommend against institutional investor proposals to require a written CEO succession plan and to institute majority voting for director elections. The decision predictably fits how the company has operated, but the choice seems poor.

Apple is certainly a financially successful company. But businesses often have the seeds of their own future problems, and Apple is no exception. The board's inclination to urge shareholders to reject the requests is the very reason the company needs them.

Apple's reluctance

Apple makes some reasonable points on why the directors don't want a written CEO succession plan:
  • Competitors would have access to the strategically critical information, because it would be publicly available.
  • Competitors might try to recruit executives on the CEO track.
  • Apple executives who weren't potential CEO successors might leave the company.
But even these don't outweigh the unusual conditions at Apple. Not even two years ago, Jobs got a liver transplant, although for months the company had said that he suffered from a "hormonal imbalance" and "nutritional problem."

That was a clear case of outright deception. The board didn't want anyone -- including shareholders -- to know what was happening because so many see Jobs as irreplaceable. His status has an impact on stock value. However, as a publicly-held company, Apple has an obligation to disclose material facts, which includes surgery for the CEO, as Warren Buffett has argued:

Who's next?

The Central Laborers' Pension Fund, which submitted the proposal, argued that experts see CEO succession planning as the board's biggest responsibility and an important factor in keeping a company strong. That doesn't mean that a board is supposed to publicly document its succession plans. And yet, when a company will lie to shareholders about the CEO as Apple has done, accessible documentation is the only way to know that the board is undertaking its responsibility, no matter what its protestations.

And that raises the issue of majority election for directors, sought by the California Public Employees' Retirement System (CalPERS). The powerful activist pension fund argues as follows:

The Company's current rules allow a director nominee to be elected with as little as his or her own affirmative vote because "withheld" votes have no effect. This makes it impossible to defeat director nominees who run unopposed. We propose a majority voting standard that allows a management nominee's reelection bid to be defeated by shareowners who hold a majority of shares that are voted at the election meeting and that also constitute a majority of the quorum required for the meeting.
According to CalPERS, 69 percent of the S&P 500 have adopted majority voting for directors. Apple argues that the impact would be different in California:
Under California's statutory majority vote requirement, however, election of a director requires not only the affirmative vote of a majority of the shares represented and voting at the meeting, but also the affirmative vote of more than half of the shares required for a quorum for the meeting, which equals just over 25% of the outstanding shares.
Apple claims the laws create a risk that "directors who enjoy overwhelming shareholder support may fail to be elected because an insufficient number of shareholders voted in the election, and that CalPERS -- a savvy and sophisticated institutional investor -- doesn't take this into account.

Dropping directors

Even with Apple's current superior financial performance, there are reasons that shareholders might want to consider alternate directors. For example, shareholders might not want the CEO of major competitor Google (GOOG) on the board as long as Eric Schmidt was. Also, it is often helpful for directors to have a similar background as important customer groups. As Apple has become a global consumer electronics firm, you might expect some diversity in the boardroom. You would be disappointed.

Out of 7 directors, six are white men, the youngest of whom is Jobs, at 56. The seventh member, Andrea Jung, is a Chinese-American woman. So, only one woman, no one with a Latino background, and, as importantly, no one from another country -- there's a way to keep a constrained perspective.

No matter what rationales it offers, Apple sounds as though it simply doesn't want to cede any control, whether in who serves as directors or in showing the board's work in succession planning.


Image: morgueFile user clarita, site standard license.
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