In this edition of "Corporate Responsibility Spotlight," let's take a look at Apple (Nasdaq: AAPL ) . Apple has zoomed to the top of the tech world in 2012, growing over 50% so far this year. While such runaway growth might be expected from a small cap, this is obviously no small-cap upstart company. Apple puts the mega in megacap, with a market cap greater than $650 billion. But does it deserve a place in your socially responsible investment portfolio? Let's take a look and see if Apple's corporate responsibility matches its spectacular financial performance.
The main problem with analyzing Apple's environmental impact is not too little information, but too much. Numerous companies and websites have taken on the task of evaluating different tech companies and consumer electronics for environmental performance, and Apple has received more and more attention as it has grown. Environmental organization Greenpeace has frequently campaigned against Apple, requesting elimination of non-recyclable hardware components, the removal of toxins from iPhone hardware, and a comprehensive take-back plan to prevent Apple products from ending up as waste. Greenpeace also began a protest in 2003 against Apple's use of toxic PVC plastics and brominated flame retardants, or BFRs, in their products. Apple eliminated these chemicals in 2008, becoming the first laptop maker to do so.
Before 2008, Apple was an easy target for environmental organizations, many of whom squarely knocked Apple to their "do not buy" list. Since the company's rise, increased visibility and pressure have led the company to pay more attention to the health consequences and environmental sustainability of its products. On the company's environmental page, Apple gives a detailed breakdown of its carbon footprint, and discusses how it is taking steps to reduce each component. It is worth noting that Apple includes consumer use in the company's carbon footprint, taking full accountability when many other companies might not include this essential component. To minimize the 30% of emissions that come from product use, Apple has increased its products' efficiency to the point where all of its electronics produce no more CO2 in an hour of use than a 13-watt compact fluorescent lightbulb.
Apple also has a comprehensive recycling program that provides gift cards to customers who return Apple electronics and other mobile phones that still qualify for reuse to the company. Greenpeace praised Apple for exceeding its 70% global recycling goal in 2010 and expanding the program internationally. In the 2011 Greenpeace Guide to Greener Electronics, Apple places fourth out of 15 electronics makers, behind competitors Hewlett-Packard (NYSE: HPQ ) , Dell (Nasdaq: DELL ) , and Nokia (NYSE: NOK ) . Both HP and Dell received poor marks for their products' environmental performance, a category Apple excelled at. These competitors surpassed Apple in energy criteria by allowing external verification of emissions, setting greenhouse gas reduction targets, and taking a strong advocacy position on emissions reductions. I believe that the products' environmental performance is more important than any of these categories, but it's up to you to decide what you value most. For more detailed information about Apple and its competitors, be sure to read Greenpeace's guide.
One recent storyline is Apple's decision to remove its products from the EPEAT registration on June 29. The Electronic Product Environmental Assessment Tool is a government-backed registration of environmentally friendly products, although its standards are somewhat outdated, as are its products -- it does not register smartphones or tablets yet. While Apple did not specify why it pulled its products, Apple's new MacBook Pro would likely not have made the cut because it could not be fully disassembled, an EPEAT recycling requirement. However, Apple responded to consumer outrage, including a San Francisco boycott of Apple products, by resuming its participation in EPEAT on July 13. While Apple's initial willingness to remove its products from the environmental registry is disappointing, the company showed that it will cater to consumers' environmental priorities, a hopeful sign moving forward.
Here is where Apple may disappoint socially responsible investors. Apple has come under fire over the last few years as details emerged surrounding the workplace environment at Apple's Chinese suppliers. An article in The New York Times publicized unsatisfactory worker conditions, which included grueling 24-hour shifts, overcrowded dorms, exposure to toxic chemicals, and horrific explosions. Foxconn Technology Group operates many of the plants in question in Chengdu, China. Apple has audited many of its suppliers and found violations of its Supplier Code of Conduct, but requesting its suppliers improve working conditions is not as powerful as changing suppliers to ones with more humane conditions. Part of the problem is that Apple has no legal liability for what happens in Chinese factories owned by separate manufacturers. This is a clear case of Apple having to decide between what is legally correct and what is morally correct. Also, this represents one of those unfortunate situations where the socially responsible action is not what is best for business, as minimizing costs through cheap labor has led Apple to achieve such spectacular margins and profitability on its products. iSuppli even estimates that the cost of labor to produce the iPhone is only $8!
As consumers learn the reality behind the manufacturing of their iPhone, many activist groups and consumers have called for a boycott of Apple products. In response, some pundits claim a boycott is ridiculous and that while the working conditions in these factories are harsh and unfortunate, they're determined by the local economic situation rather than by Apple or Apple consumers. One other argument against a boycott is that the problem is industrywide. Many of Apple's competitors, including Dell, HP, and IBM (NYSE: IBM ) , face the same challenges, although Apple's industry-leading position earns it the brunt of the criticism.
While Apple has not specifically addressed the Foxconn controversy, even after CEO Tim Cook visited the contentious manufacturing plant, it has expanded its commitment to supplier responsibility. As the media focuses on Apple's supply chain, the company has responded by ramping up its auditing and monitoring processes, hiring the nonprofit Fair Labor Association to audit working conditions at Foxconn. According to Apple's Supplier Responsibility page, in July 2012, 97% of supplier worker weeks were compliant with Apple's 60-hour maximum work week, up from around 85% in January. Also, Apple conducted 229 supplier audits in 2011, an 80% increase from 2010 totals.
Domestically, Apple, along with many other tech companies, has been criticized for its lack of workplace diversity. The company's refusal to release statistics on its employee composition makes this hard to prove, if not more suspicious. Apple does have a Supplier Diversity Program, established in 1993, that helps develop minority-, women-, and veteran-owned businesses that support Apple's production process.
Also, the presence of conflict minerals, or minerals mined in areas plagued by warfare or human rights violations, in Apple's electronics has some activists avoiding their products. This is an industrywide problem, as almost all consumer tech producers have some exposure to the Democratic Republic of the Congo and other war-torn areas of central Africa through their tin, gold, tantalum, and tungsten supply chains. Nudged by a hidden clause in the Dodd-Frank Wall Street Reform Act requiring disclosure of conflict minerals in consumer goods, Apple fully traced its supply chains for conflict minerals, a step that other electronics companies have balked at for its complexity. Furthermore, Apple has stepped up efforts to complete smelter audits to ensure metals have been procured from conflict-free sources, although the process is ongoing. While conflict minerals have brought negative attention to Apple, the company is ahead of its peers in remediating its supply chains.
Arthur D. Levinson, the former chairman and CEO of Genentech, chairs Apple's board of directors, while CEO Tim Cook, who recently took over after Steve Jobs, holds the same power as the other board members. This separation of CEO and chairman of the board is a sign of positive corporate governance, because a board can better evaluate the CEO's performance if the CEO is not in charge of the board. Two more signs of responsible governance are restricting employees' trading in Apple stock and disclosure of political contributions. Apple prevents all employees from engaging in transactions involving derivatives of Apple stock, and prohibits directors and officers from selling Apple stock short. This policy prevents corporate managers from having any interest besides helping the company grow. The company fully discloses all political contributions on its website annually, and never contributes to individual candidates. This policy prevents shareholders from questioning whether their money is being funneled toward political campaigns, a problem that can scare away potential investors.
One red flag is that new CEO Tim Cook made $378 million in 2011 (over 99% in stock awards), making him the highest-paid CEO in corporate America last year. This bloated package likely is a one-time deal, meant to give Cook a large stake in the company and incentive to succeed before his salary falls back to more modest levels.
In its treatment of domestic employees, Apple has traditionally received high marks. Yet only a year ago, retail employee Cory Moll began an optimistic campaign to build an Apple Retail Workers Union to increase compensation and provide protection from unfair discharge, beginning with his Apple store in San Francisco. While the movement has been slow to grow, Apple has included a mandatory Union Awareness Training program to educate store managers on how unions change the workplace and how to deal with them, which some critics see as an early attempt to squash Moll's crusade. Perhaps in response to this union, Apple recently raised pay by as much as 25% for retail workers.
Apple's 2012 proxy statement reveals that the board of directors opposed several shareholder resolutions. These opposed motions would require directors to reveal their investments to show possible conflicts of interest, grant shareholders greater power in determining director pay, mandate further disclosure of political contributions (including previously unrevealed gifts to trade associations and other tax-exempt organizations), and adopt a majority voting standard for director elections. From a corporate governance standpoint, all of these measures would enhance Apple's corporate responsibility. Yet the board of directors opposed all of them, as several of these resolutions would take power away from the board's hands.
Apple certainly has its fair share of human rights controversies, which could prove to be major liabilities for its sparkling corporate reputation and the public's perception of its products. However, the two major issues, Chinese labor conditions and products containing conflict minerals, are industrywide problems. And as the industry's top dog, Apple receives much of the media attention surrounding these issues, so it is important to look at what steps Apple is taking relative to its peers. Microsoft and Intel have also announced a commitment to tracing conflict minerals through their supply chain, although Microsoft is many steps behind Apple in this process. Microsoft also depends heavily on Chinese manufacturing plants, one of which was in the news in January after workers threatened mass suicide in a pay dispute. And who was the plant operated by? Foxconn, of course. So, many of Apple's problems are not unique -- and it has been quick to respond to problems as they arise (or once they become publicized).
Apple does have some question marks in terms of corporate governance as well. While the separation of chairman and CEO is a good first step, the company's opposition to shareholder resolutions shows it is not fully committed to all aspects of positive corporate governance. Also, Apple's image may change as the Apple Retail Workers' Union evolves, so this is a story worth watching.
So, how is Apple doing financially? You could find enough opinions to make your head spin. However, by continuing to expand and refresh its product line with a smaller iPad, iPhone 5, and possible Apple TV, Apple looks poised to continue its growth. After it stumbled from its disappointing Q2 earnings, these new products could lead to an explosive third quarter and surging stock price. It is truly remarkable for a company with a market cap of more than $600 billion to grow revenue at its current clip and earnings per share at a rate of 80%. What is even more exciting is that it looks cheap, with a P/E around 16. Nobody really knows how to interpret a stock sensation like Apple, but its future looks promising once you get past the sticker price.
Whether Apple fits the bill for a socially responsible investment is slightly more contentious. For me, environmental and governance issues hold greater importance than industrywide social issues that are not specific to Apple. Compared to its competitors, Apple is ahead of the pack on many of these issues and has demonstrated its ability to respond to problems as they arise. I have been interested in buying Apple stock for a while, but have yet to pull the trigger due to Apple's social problems. What do you think? Does Apple qualify as a socially responsible investment?
To learn more about socially responsible investing, check out any of the articles in this series:
- Socially Responsible Investments: A Fool's Guide
- Socially Responsible Investments: How Do They Stack Up?
- How to Become a Socially Responsible Investor
- Corporate Responsibility Spotlight: AT&T
- Corporate Responsibility Spotlight: Whole Foods Market
Apple is the most influential company in technology and has delivered market-smashing returns for those lucky enough to have invested in it. And with the upcoming release of the iPhone 5, the stakes have never been higher. If you'd like to learn more about the opportunities and risks this socially responsible stock faces, read our premium research report on Apple. You'll also get continuing updates and guidance on the company whenever news breaks. Click here now to learn more.