Apple's Board: Still Room for Schmidt?

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Google had no comment, while Apple offered no direct comment on the suggestion that a conflict of interest might arise, but referred to adulatory statements the company made about Schmidt when he was elected.

Still, the potential rivalry between the iPhone and Google-backed companies and applications could put Schmidt in a difficult spot. While on Apple's board, he already recuses himself from discussions that pertain to the iPhone, according to published reports. But exactly how effective a director of Apple can he be if he's not allowed to know proprietary information that pertains to the product that brings in as much as one-third of Apple revenue?

Split Fiduciary Responsibility

The recusals could leave Schmidt and the board in an ethical conundrum, corporate governance experts say. "You could imagine, as a practical matter, being able to wall him off from iPhone-related discussions," says Ron Gilson, a professor of business and law who teaches at Stanford and Columbia universities. "But then it becomes a judgement call about a director who's excluded from so much of what the board is doing and talking about." Other directors would amass a body of information he may need to make informed decisions in other, associated areas, Gilson says. "At some point the ability to actually segregate him from this information will become very difficult," he says.

Nell Minow, editor of The Corporate Library, an independent research firm that grades corporate boards, is more succinct. "It's like going to the doctor and asking him to check everything but your heart," she says. "In technology every part of the company has a bearing on every other part of the company."

Corporate directors, she says, have two duties under the law: The duty of care, and the fiduciary duty. The duty of care requires that they do their homework and show up for board meetings informed about what's going on. But the fiduciary responsibility requires them to make decisions that are in the best interest of shareholders. Like no one else on Apple's board—even those others with ties to Google—Schmidt will have a split fiduciary responsibility. "That's not sustainable," Minow says.

Especially not if Android and Xohm are successful. If they fizzle or otherwise fail to become an important part of Google's business, Schmidt and Apple's board can probably afford to sidestep the issue. If the new ventures thrive, then Apple's board may soon need to consider whether it's appropriate for Schmidt to remain.

Hesseldahl is a senior writer for BusinessWeek.com and his Byte of the Apple column, covering all things Apple, appears biweekly at www.businessweek.com/technology.