Why Apple Shouldn't Vote for Gore


By Alex Salkever In The Global-Investor Book of Investing Rules (Financial Times Prentice Hall), shareholder activist and gadfly money manager Robert Monks, with tongue planted firmly in cheek, coined a new rule for investors: Short the stock of any company employing a former Tennessee senator on its board. After all, Albert Gore Sr. sat on the board of oil giant Occidental Petroleum (OXY) during a period of corporate misdeeds back in the 1960s. Former Senate Majority Leader Howard Baker of the Volunteer State was on the board of Waste Management (WMI), another troubled outfit. Construction concern Stone & Young had on its board ex-Tennessee Senator Fred Thompson. It declared bankruptcy soon after his tenure.

Now comes 2000 Democratic Presidential nominee Albert Gore Jr., another former Tennessee senator, who has accepted nomination to Apple Computer's (AAPL) board of directors. If past is prologue, Apple shareholders better keep their eyes open and their ears peeled.

UNSETTLING MESSAGE. Don't get me wrong. Monks' Investing Theorem is a random observation meant in jest. Gore is a savvy politician with a keen interest in technology and culture. He popularized the term "information superhighway" and even took to poking fun at himself for hinting during the early stages of his 2000 Presidential campaign that he was instrumental in the Internet's creation. As smart as he might be, however, he doesn't belong on Apple's board. Sure, he can open doors in Washington -- often cited as a big reason for board appointments. But he could do that as a special counsel to Apple.

I think the larger truth that Monks was getting at is that politicians generally make lousy board members. Investors invariably view such appointments as, well, political, and not necessarily in their best interests. Shareholder activist Nell Minow, editor of The Corporate Library, points out an additional problem with politicans: The worlds of politics and business, while they're intertwined, are quite different. And in business, politicians "don't know what they don't know," says Minow.

With its stock price down over the past two years, the last thing Apple shareholders want or need is a celebrity director with zero business experience, aside from the business of fund-raising and politicking. Gore might make a wonderful contribution to Apple in some other capacity. But Jobs & Co. should think long and hard about the message it sends to shareholders with this appointment.

FRIENDS OF STEVE. This isn't the first time that Apple's board moves has raised watchdogs' ire. In BusinessWeek's annual assessment of corporate boards last September, Apple came up wanting (see BW, 10/7/03, "The Best & Worst Boards"). Gore's appointment underscores that Steve Jobs doesn't really take the idea of a board of directors very seriously.

Apple declined to comment for this story, pointing instead to press releases outlining Gore's extensive r?um?? and interest in educational issues, which it believes will complement its lead in the classroom. Corporate-governance experts take a dimmer view. "If you don't know the difference between a 10K and 10Q in your sleep, you shouldn't be on the board of a public company. I'm sure Al Gore is thinking he's going to be doing what he likes to do and thinking about big policy issues. But the job of a board member is to set the CEO's compensation," says Minow. Gore did not respond to several attempts to contact him through his office in Tennessee.

For investors concerned about board independence, a look at Apple's current directors isn't encouraging. There's Bill Campbell, chairman and former CEO of successful financial-software concern Intuit (INTU). But Campbell is a former Apple exec and a friend of Steve, so he's hardly an impartial outsider. Also on the board is Millard "Mickey" Drexler, another CEO pal. Jerry York, president and chief exec of tech retailer and wholesaler Micro Warehouse, has a solid reputation and still earns good marks even though his outfit derives 3% of its annual revenues from sales of Apple products. Arthur Levinson is the science wiz and CEO of biotech outfit Genentech (DNA), which is a large Apple corporate customer. Finally, there's Jobs and now Gore.

TOO MUCH INFLUENCE??Such a friendly board perhaps explains why Jobs has managed to skirt many of the requirements more aggressive boards make of CEOs of public companies. For example, Jobs doesn't have a publicly posted employment contract. Such filings have become a standard fixture of corporate life, laying out key performance benchmarks and legal definitions of the relationship between company and senior executive.

Over the past two years, Apple has declined to make clear the process by which Jobs is compensated. The board has put in place no clear triggers for his performance bonuses, something that's considered necessary in board-CEO relationships. Which may explain, in part, why Jobs got a $90 million jet in 2002, while his shareholders watched Apple stock sink from $23.46 to $14.55, a 38% decline.

According to Paul Hodgson, a researcher at The Corporate Library, this raises the question of whether Jobs is exerting undue influence over compensation policies. That violates a sacred principle in corporate governance: Executive-pay decisions should be made by directors shielded from meddling by top execs. Says Hodgson: "It sounds like an idea they cooked up among themselves, with Jobs in there telling them what he wanted."

"PRIVATE CLUB." Some of Apple's other past practices don't pass muster with the post-Enron reforms in the Sarbanes-Oxley Act approved last year. For example, Apple awarded an apparently interest-free $1.5 million loan in 2001 to incoming retail chief Ronald Johnson to buy a house, according to the 2002 proxy statement. Today, Section 402(a) of the Sarbanes-Oxley Act proscribes such loans to executives.

The loan to Johnson was quite legal in 2001. But even then corporate-governance experts say it was considered a bad practice. Overall, Minow says, Apple still doesn't measure up to other corporations in its compliance with Sarbanes-Oxley. "This company," she notes, "is almost like a private club."

Now, Apple's board has a new celebrity member. "Mr. Gore has been in politics his whole life. Celebrity directors appear to be more for the entertainment of the other folks on the board," says Charles Elson, a corporate-governance expert and law professor at the University of Delaware. But Elson adds: "You want on a board a good monitor -- someone who's familiar with business practices. You have to ask yourself what this new candidate brings to the table." No wonder two large shareholders, the International Brotherhood of Operating Engineers and the International Brotherhood of Electrical Workers, filed in tandem in March, 2002, a motion that would force Apple to create a more independent board.

RISKY SCHEME. I'm not suggesting that Jobs is a bad CEO. He gets high marks for turning around Apple time and time again, and he also is doing well in the light of tech's current and broad malaise. But Apple is a public company, and even corporate legends must be accountable to their shareholders. Should Apple's fortunes fail to turn up with the rest of the market when a recovery comes, corporate governance could become a very major issue as big shareholders agitate for accountability.

In a worst-case scenario, institutional shareholders might well abandon Jobs if Apple's shares don't climb with the rest of the market and Jobs & Co. continue to ignore requests that it reform its corporate-governance practices. According to Thomson Financial First Call, 60.4% of Apple's stock is in the hands of institutional shareholders.

Apple is now looking for a seventh board member. Minow suggests that Jobs pick a high-profile shareholder-rights candidate such as Ralph Whitworth. Apple would do well to listen to her and others who have long clamored for reform. In the days before Enron's collapse, good corporate governance was important. Post-Enron, it's essential. The price to pay for a board blow-up -- even a perennially weak board -- is far higher. Apple should consider the risks as it reconfigures its board. Salkever is Technology editor. Follow the Byte of the Apple column, only on BusinessWeek Online


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