Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOGL) (NASDAQ:GOOG)are two companies that need no introduction. Both companies are the constant topic of new product rumors and, more recently, Apple has been in the sights of activist investor Carl Ichan. A comparison of these two tech giants' corporate governance policies can further help Foolish investors in their investment decision-making process.
More specifically, we will look at the board of directors. The board of directors is in charge of monitoring the CEO, setting and monitoring strategy, and ensuring shareholder interests are best served. Most investors may not be paying enough attention to the higher-ups in the board room, but these are the people elected to oversee shareholder's investments. Would it not be wise to know who is in charge?
First up: Apple
Apple's bylaws state the board will have a majority of independent directors who serve on no more than four other public boards. There are annual elections for each director, which is good from a shareholder's standpoint. This allows shareholders the opportunity to get rid of the whole board at once if they so choose instead of a few directors at a time.
Directors do not have a term limit. As Apple states it likes directors to gain increased insight into company operations -- though it will kick a director off the board when he or she turns 75. All directors are required to own stock with a value of five times their base salary and the the CEO has to own stock at ten times base salary. Nowhere to be found is anything mentioning if board members are able to hire independent consultants or outside counsel. If this is the case, then this reflects negatively on the ability of the board to perform at the behest of shareholders.
Apple's board has eight members, who are all independent except for the CEO, Tim Cook. The roles of chairman and CEO are separated, which is a plus for shareholders. The average age of the eight board members is more than 63 years old. All are older men, except for one woman, Andrea Jung, who is 55, and the second youngest member behind Tim Cook, who is 53.
Apple's products appeal to a younger generation at large, yet the youngest director is the CEO. One director, William Campbell, is 73, so he only has a couple of years left before he gets the automatic boot when he turns 75. Apple could benefit from some younger blood on it's board.
A more diverse board could potentially bring a broader range of ideas to the table. The chairman, Arthur Levinson, serves as CEO or director for nine other companies. Only one of them is a public company, but one should still wonder if his full and best attention is being paid to Apple and the shareholders he has been elected to serve.
Four members of the board have served in a range of 11 to 17 years, which includes the chairman and Mr. Campbell. Service of this length means there may be minimal new thought being brought to the table. Directors serving for great lengths of time may be complacent and side with executive decisions, and may not challenge company strategy.
Apple's board could use some shaking up. Luckily, shareholders can nominate new directors at the annual meeting each year.
Next up: Google
Google's bylaws require at least two-thirds of directors to be independent, and to serve on not more than four other public boards. Similar to Apple, Google has annual elections with no term limit. Google requires the CEO and chairman to own $14 million in stock, while all other directors must own $750,000 in stock.
Google explicitly states that directors are able to hire external consultants and outside council without management approval. This allows directors to obtain guidance in areas in which they need expertise, or to help provide solutions to problems that arise with management. Google's certificate of incorporation states that the chairman may not be an employee of the company, or have been an employee within the past three years without having two-thirds approval from the board of directors. In 2011, the ex-CEO, Eric Schmidt, got unanimous approval to be the new chairman of the board. Why even have the policy in place if directors can just override it?
There are a number of issues related to the directors on Google's board. If one chooses to invest in Google, he or she basically agrees to the long-term vision of a three-person dictatorship comprised of the co-founder Larry Page, co-founder Sergey Brin, and chairman of the board Eric Schmidt. The trio's collective voting power is a cumulative 61.2%. Investors are merely along for the ride. Google's ten person board is comprised of seven men and three women. It may not be an even split between men and women representation, but Google's board is more diverse than Apple's in this regard.
Mr. Page is the current CEO, and also was CEO from 1998 to 2001. Mr. Brin served as chairman in the past. Mr. Schmidt has been chairman during two other time periods, and was CEO from 2001 to 2011.
Director John Doerr is a partner at a buyout firm in which Google Ventures has invested $28.5 million. This implies there may be some bias involved making Mr. Doerr not count as an independent director when using stricter standards. If using those stricter standards, Google's 10-person board is only 60% independent.
Google's board is highly connected to Stanford University in some way or another. The two co-founders graduated with masters degrees in computer science from Stanford. Lead independent director John Hennessey is the current president of Stanford, and served as the chair of the computer science department when Messrs. Page and Brin were earning their masters degrees.
Ram Shiram has been on Google's board since 1998, and serves on the board of trustees for Stanford University. Google makes donations for philanthropic reasons and scholarships, and the two co-founders share in some the of the royalty revenue for patents developed by students at Stanford. Google's latest DEF 14A filing states Messrs. Shiram and Hennessey have no material interest in the stated Stanford transactions; but it would be wise to draw one's own conclusions about Google's relationship with Stanford.
Putting it all together
Neither Google's nor Apple's boards are without flaws, but that's not to say there are only negatives. Google and Apple both have a separate role for the CEO and chairman, and require directors to own multiples of their salary in stock value.
Apple's board is lacking diversity with it's high average age, and lack of female directors. Some Apple and Google director's tenure can be seen as too long. Google's board has some relationships that should raise eyebrows, including Mr Doerr's with Google Ventures, and the connections with Stanford University.
Apple and Google are two of the most influential companies of today. There could be room for a significant increase in performance related to company strategy if some of these issues related to the board of directors were looked into. As we can recall, board members are in-charge of establishing the long-term strategy of the company and are supposed to serve shareholders as best they can. Investors should not overlook who is acting as their fiduciary as this will no doubt impact their investments. Just because a company may be seen as performing well, whether by stock price or new product sales, does not mean it is performing at full potential or there is not room for improvement.
Zach Friesner has no position in any stocks mentioned. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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