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.
