Corporate Governance A Case study on Apple Inc
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The PC manufacturer and the operating system markets are the main revenues sources of Apple Inc. The gross profit margin of Apple has been increasing over the years; in 2009 (Q4) rose by nearly 2%.
Main competitive advantages of Apple are its leadership in innovation, the brand equity and a clear target market. Apple contributes a part of its revenue for the R&D of its products. Apple's R&D expenditure in 2008 increased by 42% from those in 2007, while HP dropped its expenditure in R&D in 2008 in order to control cost (Scribd, 2009). Apple users are considered to be more tech savvy than the PC users due to Apple's sleek and sophisticated design of its products.
Apple is pressured by the low pricing strategy from its competitors. For example, Dell, with its legendary direct sale model, eliminates wholesale and retail dealers that add unnecessary cost. Also considering the low price offerings from many new entrants, Apple decided to introduce its first low end computer called 'Mac Mini' in 2005 (BBC, 2005).
Apple entered the digital music market in 2001 by launching its first MP3 player (iPod) together with its online store (iTunes) that enables users to legally download music from the web.
Apple's share of the worldwide MP3 player market is approximately 70%, which has remained stable throughout the years (Wired, 2008). However, the yearly growth of players sold has declined from 131% in 2005 to -8% in 2009 (4Q). This trend indicates that the market is entering the saturation stage, which obliges Apple to constantly invest in innovation to propose new products. The threat of substitute products is very high and the demand of standalone players is decreasing. These elements reduce the attractiveness of the sector.
The online music stores sector is highly attractive because of its healthy growth rates and the weak threats of substitutes. Music companies' digital revenues increased by 25% in 2008 to US$ 3.7 billion. Moreover, 20% of recorded music sales are made online, which results in a 15% growth rate in 2007. The iTunes platform is the biggest online store and at the beginning of 2009 reached six billions of sold downloads, and it also became the largest music retailer in the US (IFPI, 2009). This massive growth of iTunes and of the whole digital music business forced the recorded music industry to reinvent itself, and new competitors entered the market. For instance, in 2007 Amazon.com launched its download service. However, only 10% of the customers that downloaded tracks on Amazon.com have previously bought music through iTunes (IFPI, 2009). This proves that the strong brand of the company and the fast time to market of iTunes are large barriers to entry.
2. Evaluation of the effectiveness of major governance practices
2.1 Board of Directors
Apple has a unitary board, comprising of one executive and other non-executive director. The company has policies and guidelines for the selection of its Board members, that includes each of them to be highly qualified with strong leadership skills and significant amount of work experience.
Apple has rules on number of public boards its board members can be part of. According to that the CEO, is only allowed to be a part of two public boards in addition to Apple.Inc, and the Chairman of the Audit and Finance Committee is only allowed to serve four other boards. However these rules are not being followed by them as they are involved with many other companies (Business Week, 2009). This raises concerns as two of the most important Apple board members may not be able to give enough attention to Apple's crucial matters.
The independence of a Board of Directors is a core principle of good governance, but Apple's Board has shown some weaknesses. The presence of two Google's directors (Mr. Schmid and Mr. Levinson) on Apple's Board in the recent past has brought up issues in terms of interest of conflicts. In May 2009 the Federal Trade Commission started to investigate for violating the Clayton Antitrust Act, which forbids any person of being a director of two or more competing companies (Helft, 2009). But recently Mr. Schmid resigned from Apple's board and also Levinson left that of Google (Reuters, 2009). These are measures that improve Apple's corporate governance framework.
2.2 Board Committees
2.2.1 Audit & Finance Committee
It is an independent committee under the NASDAQ audit committee structure and membership requirements. Considering the educational background and the work experience, all members are well qualified for the duties and responsibilities required (Business Week, 2009). Jerome B. York has previously been the chairman of the Audit Committee of Tyco International and Dana Holding Corporation (Business Week, 2009).
The Committee undertakes reviewing of financial information provided to the shareholders, appointing of independent auditor, reviewing performance of independent auditors and internal audit department, evaluation of Company's accounting policies and its system of internal controls, and reviewing significant financial transactions.
After the financial meltdown of Enron, the Company adopted an auditor independence policy that banned its auditors from performing any non financial consulting services. This policy mandates the audit, non-audit services and related budget to be approved by the Audit Committee in advance. Also auditor engagements for non-audit services cannot enter without the approval of the Audit Committee (Redman, 2002).
KPMG acted as the external auditor for Apple from 2002 to February 2009. Recently at the Securities and Exchange Commission, Apple appointed Ernst & Young to be its new external auditor. Apple announced that it had no disputes with KPMG, but it was due to the new policy adopted by the board of reviewing its auditor every five years (Singh, 2009).
Thus, Apple has a very powerful Audit & Finance Committee which tends towards good corporate governance.
2.2.2 Nominating & Corporate Governance Committee
The co-lead directors are Andrea Jung and Arthur D. Levinson, Ph.D (Business Week, 2009). Members of the Committee are appointed by the board. Each member is "independent" in accordance with applicable law, including the rules and regulations of the Securities and Exchange Commission and the rules of the NASDAQ Stock Market.
The committee makes sure that each and every board member is well qualified and experienced to be on the board and run the corporation. It involves in the selection of the new board members and also gives the new members training and ideas about the board. It also involves into succession planning.
2.3 Executive remuneration schemes
The Compensation Committee of Apple Inc structures the remuneration schemes for the executive directors. It consists of only independent directors and arranges meetings to modify the compensation plans of the executive officers based on their performances. The evaluation of the CEO's performance is done in his absence. Remuneration schemes have been developed by companies to ensure that directors are being paid enough for the high level of expertise given to businesses. In January 2000, Steve Jobs had been awarded an airplane worth $43.5 million in recognition of his performance since he had taken over as CEO of Apple Inc (Kanellos, 2001).
Director compensation by Apple Inc has been increasing every year; the total compensation for 2008 was $711,434 (Forbes.com LLC, 2009).
Apple Inc has awarded "share options" to the executive directors based on their performance to align their long term interest with the company and the shareholders. Awarding share options has been a common norm of the corporate industry. Due to various corporate scandals, in many cases share options did not generally favour the longevity of the company. It showed that the mangers focused on short term goals and gave more propriety to share prices than cash flow statements, due to the fact that they could sell their shares in the near future.
The backdating of share options scandal at Apple Inc had become a high profile news from 2002-2008. In the scandal the CEO, Steve Jobs, along with other employees of the company were accused of knowingly backdating the share option to chosen dates. The case was cleared in September 2008 when the company had to pay a fine of $14million (Oliver, 2008).
After the recent annual shareholder meeting Apple Inc has accepted the "say on pay" system. In this system the shareholders get to express an opinion on the pay of the executive directors in the annual shareholder meetings (Skillings, 2009). This would help to set fair executive salaries from a shareholder's point of view and would hence help balancing power between the company's managers and shareholders.
2.4 Apple and its shareholders
Apple Inc has been established as a private limited company, and is therefore owned by its shareholders. The shareholder(s) with the major shareholding come to power and take important decisions within the company. Shareholders take an active part in nominating and electing the board of directors. The company organizes annual shareholder meetings in which all the company's executive managers take part to address the shareholders on the current situation of the company and address any queries of the shareholders. It helps to create transparency and enhance the bond between the corporate managers and the shareholders. About 72% of the shares of the company are owned by Institutional and mutual fund ownership (Yahoo! Inc, 2009). As major financial support of the company comes from strong institutes and mutual fund organization, it gives a solid rigidity and creditability of the Apple Inc funds. A lot of shares of the organisation are also owned by various executive managers and board of directors. Such managerial and shareholder roles shared by the managers and directors ensures high focus to achieve the long term goals of the company, which eventually helps the shareholders to benefit from the company's success.
In annual meetings, the shareholders actively take part. One of the major parts of the meeting is the re-electing of the board of directors nominated by the nominating committee and the shareholders. Major issues discussed in the Apple's recent annual meeting were:
Shareholders get "say on pay" on the salary of the executive directors. Approved after shareholders regularly appealed the board members of the company to give more insight on the compensation schemes for the directors (Skillings, 2009).
Succession plans of the company in regards to Steve Jobs (McLean, 2009).
Shareholders' feeling of being kept in the dark by not being given complete information on Steve Jobs medical condition (McLean, 2009).
The shareholders have raised many issues over the years. Apart from a few problems the company, under the supervision of Steve Jobs, has been performing supremely at the stock market. Confidence of the shareholders in Steve Jobs can be seen by him being re-elected every year by the shareholders.
2.5 Apple and its Stakeholders
Apple's relationship with its stakeholders is one of incredible importance as it should be with any well-run corporation. Managers in Apple - or any corporation for that matter - tend to be able to ensure that their interests are catered for, since they are the ones with the ability to directly influence corporate policy and company direction. The major check on this power is the Board of Directors led by Bill Campbell which has already been detailed.
As far as the company's relationship with its employees goes a Vault survey found that Apple employees were predominantly happy with the company aside from some qualms about low compensation and promotion difficulties (AppleInsider, 2009). The investors in Apple are a section of stakeholders which have received a lot of press coverage in the past year in regards to their proposal about having a say, or more specifically vote, on executive remuneration (Siliconbeat, 2009). Controversially, this proposal was initially shot down after it had passed the year before with a smaller percentage of votes in favour of it. Finally, Apple customers are pretty well known for their brand-fanaticism and it is of no surprise that Apple is tied for first place in the customer rating polls. Apple's relationship with local communities, civil society, and the natural environment etc. will be examined under the umbrella of its Corporate Social Responsibility policy.
3. Company Policy in Terms of CSR
In the context of globalization, Apple too has moved towards the popular practice of outsourcing some of its labour-intensive operations abroad, in this case China. According to Frost & Burnett (2007), attention to the electronics sector first shifted in 2006, when it was revealed that Apple's Chinese manufacturer Foxconn was not conforming to its Supplier Code of Conduct.
Generally speaking, Apple can be criticized for having a so called "reactive approach" to CSR. Apple has come under scrutiny by Greenpeace and environmental group As You Sow for use of toxic chemicals and lack of recycling facilities for old computers respectively. Now, however, Burrows & Hesseldahl (2009) claim that Apple is launching its most aggressive campaign yet, to counter its green critics. Indeed, Apple is setting a new standard by including product use and manufacturing into the calculation of its carbon emissions. This is contrary to direct competitors Dell and HP who, according to Burrows & Hesseldahl (2009), say including such factors would increase their carbon emissions several fold.
However as Burrows & Hesseldahl (2009) note, Apple CEO Steve Jobs' approach is different to what NGO's might expect of him, he feels the results are more important than the promises made in goal setting.
One big issue of the company in terms of governance is the influence and the power of Steve Jobs on the stakeholders. He is considered to be the main reason for the success achieved by Apple in the last decade, but he also created a one-man company that is completely formed around his personality and inspiration. Many shareholders are firmly convinced that the success of Apple is due to the presence of Steve Jobs at the head of the company. The decline of 10% of the share price after the announcement of his health problems proves this. His personification of the company can become a strong limit in terms of future developments and sustainability. It is highly recommended that the company propose a concrete succession plan for the company's longevity.
Within the board the company's decisions seem to be overpowered by views of the CEO Steve Jobs. Since the start of Steve Job's reign the management structure of the company has changed to a more CEO centred structure because most of the directors on the board were CEOs in their primary company. Due to this format, more power has been centred in the hands of Steve Jobs. It would be recommended that this power concentration be broken by adding more directors to the boards who are not a CEO in their primary occupation. Currently, the opportunity is available for Apple to begin this transformation after the resignation of Eric Schmidt.
Accepting the "say on pay" format with regards to the compensation of the board of directors would help to create transparency and shareholder satisfaction since they would not feel that the directors are being overpaid. But its benefits have still to be experienced and its importance has to be better understood. Nonetheless, the common consensus is that this would help strengthen the corporate governance of the company in the long run.
It is also important for Apple's executives not to rest on their laurels in terms of dealing with stakeholders. While the company certainly enjoys a large amount of popularity among its fanatic customer-base they must not ignore the other stakeholders in the company, especially with regards to its employees since these are the same employees that keep Apple on the cutting edge of technology and directly enable it to enjoy its popularity with customers. Lastly, we believe that Apple must develop an explicit, marketable CSR policy which they currently do not have. In doing this, Apple will encourage transparency and foster a multiple bottom-line company philosophy since, as a group, we believe the single bottom-line approach to be unsustainable. This is best embodied by the recent historical bubble collapses due to the relentless, single-minded pursuit of a bottom-line, pure monetary profit.