I'm sure that Genentech chief executive Arthur Levinson thought he was being helpful when he responded to investor concerns about CEO Steve Jobs' health raised at yesterday's annual meeting of Apple (NASDAQ:AAPL) shareholders.
Or maybe not. "We believe we have met all disclosure obligations," Dow Jones reports Levinson as telling shareholders. "Nothing has changed. Succession planning is something this board takes up regularly. You can assume we will do that responsibly."
You'd think so. Levinson has been seated on Apple's board since 2000 and, today, is co-lead director. I absolutely do expect Levinson and his peers to do the right thing.
The right thing
Here, that means disclosing a succession plan as soon as possible. Trouble is, Apple may not have one.
At least that's what investors believe. Rewind to January with me. Within two trading days of Jobs disclosing a six-month medical leave, Bloomberg reported that the Securities and Exchange Commission was investigating whether Apple had violated rules in how it disclosed Job's condition, and the stock fell to a new 52-week low, $78.20 a share.
If ever there was an argument for a succession plan, that's it. But there's also the practical reality that technology products take years and hundreds of millions in research and development to create. Apple's R&D budget has consumed more than $1.17 billion over the last 12 months. Shouldn't Jobs be working in tandem with an eventual successor in spending those dollars?
The pressure to compete is immense. Not only does the iEmpire face Microsoft (NASDAQ:MSFT) in operating systems and entertainment and Hewlett-Packard (NYSE:HPQ) in PCs, but also Research In Motion in smartphones. It can't be easy managing an organization with so varied a list of peers and products.
A history of successful successors
Corporate history is filled with stories of CEOs who handpicked their successors out in the open, before they left, with excellent results.
Jack Welch named Jeff Immelt his successor at General Electric (NYSE:GE) in November of 2000, a year before his retirement. Not only was Immelt given time to transition out of his gig as CEO of GE Medical Systems and into the top job, but the other candidates, Bob Nardelli and Jim McNerney, were freed to pursue other management jobs. Today, Nardelli leads Chrysler, and McNerney leads Boeing (NYSE:BA). Immelt is still a fixture at GE.
Lou Gerstner announced in January of 2002 that he would step aside for current IBM (NYSE:IBM) chief Sam Palmisano in March of that year. But the transition had been underway for at least 18 months; Palmisano was named Big Blue's president and chief operating officer in July of 2000.
Some will point to Warren Buffett's reluctance to publicly name a successor in defense of Jobs and Apple and their recalcitrant stance when it comes to disclosure. Fair? Maybe. I do think there's a difference, though.
Berkshire Hathaway's (NYSE:BRK-B) competitive advantage is cooked into the brains of Buffett, Munger, and the investing team at Berkshire. That could change materially with a change in personnel. Thus, revealing a successor too early is, in a way, giving away competitive information.
Now, what if Apple were to name Tim Cook or star product designer Jonathan Ive as Jobs' successor tomorrow? Would that reveal anything competitively about Apple? I doubt it.
On the other hand, there are two huge advantages to naming a successor as soon as possible. First, it would settle investor uncertainty. We hope for the best when it comes to Jobs, but we also don't really know if he'll be back in five months, as planned. That makes it very difficult to assign a meaningful risk premium to the stock, obscuring its true value.
Second, a plan would allow Jobs and his successor to work closely together. Shouldn't that be the goal? Apple is loaded with talent, but Steve's management of that talent is a key reason that Apple's yielded the results we've enjoyed over the past 12 years. Codifying the process would help any successor to evaluate and make changes as needed while also preserving proven practices.
I believe Mr. Levinson when he says that he and the board are pursuing responsible succession planning regularly. Thank you for that, Mr. Levinson. Just remember when you're done that disclosure isn't a right.
It's a responsibility.
