The Battle for Independence

The week before last, Apple (Nasdaq: AAPL  ) showed respect for the passing of longtime board member Jerome York by offering an homage on its home page (and risking some product sales that day). Such a gesture is a mark of a great company. However, while Apple has many marks of greatness, it isn't perfect.

With York's passing, Apple's board now has one less independent director, and shareholders should wonder whether it could afford the loss. And of course, anyone who's read much about Apple's Steve Jobs may come to the logical conclusion that a strong board's absolutely necessary to deal with such a strong-willed CEO.

In these days of weak and ineffectual corporate boards in America, this is not only a loss for Apple, but arguably a loss of the type of individual many corporate boards sorely need: independent outsiders who exhibit independence of thought.

A bit of a bad Apple?
According to The Wall Street Journal, Jerome York, a former Chrysler and IBM (NYSE: IBM  ) executive who headed up Apple's audit committee and chimed in on corporate-governance matters, had major misgivings about the way Jobs handled his health disclosures in 2009.

York described himself as "disgusted" by the length of time Jobs' health issues were concealed, and he almost resigned from Apple's board when he realized how serious Jobs' illness really was. York didn't resign, apparently wanting to avoid the inevitable uproar, but the fact that he questioned the way Apple handled the matter -- which, arguably, was very shareholder-unfriendly -- shows the right spirit in a board member. It's good to see someone who will push back against management decisions when it's prudent.

Although Apple has traditionally had a star-studded cast of directors -- former Vice President Al Gore serves on its board, as does J. Crew's (NYSE: JCG  ) Mickey Drexler, and former directors include Google's (Nasdaq: GOOG  ) Eric Schmidt -- its board falls short in some ways. Including Jobs, who also serves as chairman, it has only six members, making it one of the smallest boards among Fortune 500 companies. That means its directors are stretched thin, having to fulfill many functions.

Independent board members are seen as important in a strong corporate-governance policy, since they are more likely than insiders to push back against management. (The roles of CEO and chairman should be separated, with an outsider in the chairman role as well.)

That's weak
Weak and ineffectual boards are no new thing. Dysfunction in corporate America has fed directly into some of our worst moments in recent history. For example, before the financial meltdown, Lehman Brothers, Citigroup (NYSE: C  ) , Countrywide Financial, Merrill Lynch, and Bank of America (NYSE: BAC  ) all had chief executive officers who also served as chairman. Could more robust boards, with independent chairmen, have helped head off such catastrophes? It's not a crazy notion.

When the Obama administration stepped in after the Big Three automaker bailout and pressured GM's Rick Wagoner to step down after years of underperformance, here was a salient question: What the heck was the GM board doing over the years that it should even have had to come to that?

And check it out: The very same Jerome York at one point served on GM's board, only to resign with the following comment: "I have not found an environment in the board room that is very receptive to probing much beyond the materials" supplied by management. Shareholders should have taken note.

After GM's bankruptcy and restructuring, it finally started making many commonsense financial moves that York had suggested years before.

Corporate boards become too complacent or ineffective for a variety of reasons. Sometimes it's simply that board members are aging, their tenure is too long, or these folks are too consumed with their own day jobs to concentrate on their board duties.

Some elements are more nefarious, though. Corporate-governance experts often point to interlocking directors as a huge problem in America's boardrooms. When chief executive officers serve on one another's compensation committees, for example, there is a big incentive to "get along." Apparently, a lot of backs yearn to be mutually scratched in corporate America, to the ultimate detriment of shareholders.

Independent in more ways than one
Boards of directors are supposed to advocate for shareholder interests, not cozy up with management teams. Many people may find friction unpleasant, but it's necessary. Complacency and the sense that nobody's minding the store are culprits in too many disasters.

Shareholders sorely need more independent directors who are willing to do the right thing and stand up to corporate managements on shareholders' behalf. Here's hoping for more "blunt critics" to stand up for what's right.

Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on corporate governance.  

Apple is a Motley Fool Stock Advisor recommendation. Google is a Motley Fool Rule Breakers selection. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax owns no shares of any of the companies mentioned. The Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (22)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 31, 2010, at 3:46 PM, militauro wrote:

    Well written, very well written.

  • Report this Comment On April 01, 2010, at 4:26 AM, BalaamsAss wrote:

    Sorry to be picky, but it's fewer not less as:

    "With York's passing, Apple's board now has one less independent director"

    'Directors' is a countable noun.

  • Report this Comment On April 01, 2010, at 1:54 PM, cordwood wrote:

    York was a free think'n director,there are others.So,who are the others? Is there a rating organization for them?

    The short bios in proxies don't convey enough to distinguish the good from the slackers.

    I served on a board and was troubled by the inhabitants that would ALWAYS vote w/ the CEO...."brown noses" ,nothing more .

  • Report this Comment On April 07, 2010, at 4:05 PM, skypilot2005 wrote:

    Great article.

    “Boards of directors are supposed to advocate for shareholder interests, not cozy up with management teams.”

    Directors cozying up with management teams are why we have excessive executive compensation at most companies. I call it-legalized larceny. The executives are stealing from shareholder equity. The boards are accessories.

  • Report this Comment On April 13, 2010, at 12:13 PM, TMFLomax wrote:

    Thanks for the feedback, all. Cordwood, it would be great to be able to figure out which directors are the ones that push back and offer constructive criticism, but we are not flies on the wall, unfortunately. I guess we all have to keep our ears to the ground, when some of these things might show up in the media; Fool.com and the CAPS community are good places to share such information we might run across. (Like I said in the article, Jerome York's parting words when he resigned from GM's board were telling!)

    Nell Minow of The Corporate Library was kind enough to offer some advice for individual investors to get a general sense of the directors on their companies' boards, and offered up the following: investors should look for how much stock the directors have and whether they are selling their shares; whether directors attend at least 75% of the meetings and whether they show up in the "related transactions" section of the proxy. The SEC now has increased requirements about the qualifications of the directors, so check those out. Be wary of directors who have served too long (more than three directors with over 10 years of tenure is correlated with an increased investment risk) or pay too much.

  • Report this Comment On April 13, 2010, at 12:13 PM, TMFLomax wrote:

    /

Add your comment.

DocumentId: 1140786, ~/Articles/ArticleHandler.aspx, 4/24/2014 1:25:58 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement