It would be foolish to conclude that Apple’s glowing status today is due in part to its anomalous boardroom style, or that there will never be a time when its directors will need to be fully engaged to deal with a real crisis. They are ill-prepared for that eventuality.
The Wall Street Journal had an unusual piece on Apple’s corporate governance the other day. We use the term “unusual” because there has not been much mainstream analysis of the board structure of the company that has been on such a winning streak. That needs to change. The Journal’s article was prompted by the death of Jerome York, an independent director who served on Apple’s board and headed its audit committee. What was previously a tiny board is now down to a mere six members, including CEO Steve Jobs. No company anywhere near Apple’s market cap has such a bizarre board regime, or so few directors who spend less time in the boardroom. We raised some of these issues in 2006.
In 2009, the board met on only four occasions, as did most of its committees. That is two or three times less often than at most other major companies. You might have seen that kind of leisurely approach to corporate governance in the 1950s. It’s not what you expect for one of the world’s most valued companies in the 21st century.
Then there is the strange case of who chairs the board. We assume Steve Jobs fills that role, too, but the function is not listed among his duties or job description in proxy filings. Apple is the only company we have encountered in more than 30 years of studying corporate governance that keeps shareholders in the dark about who actually chairs the board. Best corporate governance practices have long called for separation of the posts of CEO and board chairman, with the latter slot being filled by an independent director. This is an important principle in any listed company but it is even more critical in a case like Apple’s where so much investor focus and corporate power is centered on Mr. Jobs. While Mr. Jobs is widely viewed as being pivotal to the company, the board has a duty to mitigate that exposure by at least providing some couterweight among independent directors. It also needs to show investors that Apple’s directors are not entirely mesmerized by Mr. Jobs and can think independently about the best long-term interests of the company.
Perhaps the board thinks it is making up for this weakness by having two co-lead directors. But this only deepens the mystery of Apple’s governance. We have likened the role of lead director before to that of the first runner-up in the Miss America pageant. It really doesn’t have much clout alongside a CEO who is also chairman of the board, especially since both Andrea Jung (chairman and CEO of Avon Products) and Dr. Arthur D. Levinson (chairman of Genentech) also have substantial governance obligations with major corporations and public institutions. Having two lead directors is ridiculous. You might as well appoint every one of the five independent directors co-leads and be done with it.
The stock option deal enjoyed by Apple’s non-employee directors is also troubling. They should not be on the same track as management. Nor should their stakes be such that they might be perceived to have an interest in holding back bad news or be unwilling to take on management because it will affect their bank accounts. Compensation for Apple’s five independent directors in 2009 ranged from $436,372 for Albert Gore Jr. to $1,004,224 for Mr. York. Most major boards realize that director stock options are a no-no.
It would be foolish to conclude that Apple’s glowing status today is due in part to its anomalous boardroom style, or that there will never be a time when its directors will need to be fully engaged to deal with a real crisis. How would the board act on such an occasion? The stock options backdating fiasco Apple faced some years ago and, later, the confused and conflicting blunders about Steve Jobs’s health problems were two large red flags that signaled major changes were needed in Apple’s boardroom. Unfortunately, its directors appear to be waiting for anther disaster before they climb out of their 1950s sleeping car and into the 21st century.
It is one thing for Apple’s shareholders to be afflicted by the illusion of invincibility that surrounds the company at this uniquely successful but arguably impermanent point in its history. It is quite another for its directors themselves to succumb to that vice.
The day health care reform and universal coverage moved from a noble dream to the law of the land.
Every few decades, America takes a momentous turn in reaffirming what it stands for and how it treats its citizens. This happened with the enactment of Social Security in the 1930s and with Medicare and the civil rights legislation of the 1960s. At 11:57 am EDT today, history will record that another milestone was reached with the signing into law of the Affordable Health Care for America Act by President Barack Obama.
As they rallied to support those landmark moments in the past, each generation of leaders and legislators faced doubts and objections. But they overcame them because they believed they were engaged in an historic act of faith that would make the world better for their children and grandchildren. Those who stood in their places over the past months in the White House and in the Democratic aisles of Congress were driven by a similar sense of mission and faith. This was their contribution to creating a more perfect union, where the first word in that magisterial phrase from the Declaration of Independence, “life, liberty and the pursuit of happiness,” now takes on new hope for millions. For many legislators, this law will be the hallmark of their careers; everything else will be epilogue. It is this day they will long remember and frequently recount to their children and grandchildren, as King Harry’s bruised but happy band did on each St. Crispin’s day.
Making health care affordable and accessible for all Americans is likely the most costly enterprise ever embarked upon in the nation’s history — except for the costliness of doing nothing. It would likely have needed Democratic control of both Houses of Congress, and the White House, for such a plan to have become law, as with previous groundbreaking social legislation under FDR and Lyndon Johnson. That alignment of political planets does not happen often in America and it may not again for some time, given an increasingly acerbic public mood. Mr. Obama and his party’s leadership in Congress rightly seized upon a perhaps short-lived window of opportunity, which may in some ways account for an occasionally clumsy process and content in the bill that was not exactly exemplary. But these imperfections, and those that may arise in the future, should not detract meaningfully from the importance of what has eluded so many presidents and politicians of both parties over a century of efforts. Nor should it dampen the joy of the moment when health care reform and universal coverage moved from a noble dream to the law of the land.
Lawmakers of this era, including President Obama, may accomplish many things in the years to come. But few will compare with that symbolized by this day, when, like the giants who preceded them, they ventured upon the bolder path in America’s ever upward moving journey, and gave to the future the promise of a brighter tomorrow.
The court-appointed Examiner chose to continue the same lackadaisical approach to directorial performance and accountability in his search for answers as the directors themselves evidenced in their drowsy drift toward disaster.
A little noted statement in the report of the court-appointed Examiner in the Lehman Brothers bankruptcy reveals the extent of the deference displayed to the company’s former directors.
The Examiner admits in his report that he provided witnesses “advance notice” of the topics he intended to cover and that he allowed them to make use of notes and written statements before the interviews in order to “refresh recollection.” No doubt these were prepared with the assistance of legal counsel, whom the Examiner confirms represented interviewees in the “vast majority” of cases. Significantly, the Examiner chose not to conduct his examinations under oath, and, if that’s not astonishing enough, no transcripts were ever recorded. The Examiner preferred an “informal” approach over the formal depositions available to him.
This is how the largest bankruptcy in history conducted its search for information and how Lehman’s directors, who presided over the downfall, were allowed to take part in what amounted to a quest for the truth with all the rigor and intensity of a marshmallow roast – – without the fire.
We have long maintained that directors are among the most pampered class in the business world, accorded by society, the media, investors and the courts a level of deference and respect that has few parallels. Time and again, it is this approach that has permitted directors to take shelter in the harbor of the disengaged and uninformed, giving rise to the appearance of men and women who, having been lauded in press reports and company statements just days or hours before as experienced and exceptionally accomplished, suddenly adopt the demeanor of amiable dunces in their hapless efforts to explain what happened and why. This is what occurred in Enron’s collapse and before the fall of the Penn Central Railroad. The spectacle of Hollinger’s confused directors at Conrad Black’s criminal fraud trial in 2007, where board members appeared challenged even in reading important documents, will also be recalled among astute boardroom watchers.
As we noted well before the company’s demise, and repeated here, Lehman’s feeble approach to corporate governance was well established by its board and the structure and membership it adopted. It was, in our view, a significant and inevitable contributor to that downfall. It is an outrage that the Examiner chose to continue the same lackadaisical approach to directorial performance and accountability in his search for answers as the directors themselves evidenced in their drowsy drift toward disaster.
Once again, an inept board escapes culpability through a Houdini-like contrivance called the business judgment rule, one of the most anti-shareholder and destructive of legal principles ever to emerge in modern times.
Lehman Brothers made a brief return in the news today, just long enough to fall into another abyss of folly and misjudgment that will leave its former shareholders and the investing public shaking their disbelieving heads. The appearance of the once-fabled but now bankrupt firm comes in the form of a report by the court-appointed examiner. As The New York Times notes today:
The directors of Lehman did not breach their fiduciary duties in overseeing the firm as it acquired toxic mortgage assets that eventually sank the firm, a court-appointed examiner wrote in a lengthy report published Thursday.
The report, by Anton R. Valukas of the law firm Jenner & Block, found that while Lehman’s directors should have exercised greater caution, they did not cross the line into “gross negligence.” He instead writes: “Lehman was more the consequence than the cause of a deteriorating economic climate.”
Here’s what Mr. Valukas wrote on the Lehman board’s conduct:
The examiner concludes that the conduct of Lehman’s officers, while subject to question in retrospect, falls within the business judgment rule and does not give rise to colorable claims. The examiner concludes that Lehman’s directors did not breach their duty to monitor Lehman’s risks.
We rather strongly disagree. As we pointed out months before the collapse of the company, Lehman Brothers was a poster child for how not to run a board. On the Lehman boardroom stage there was but one speaking part, that of CEO Richard Fuld. He also served as board chairman, as well as chairman of the powerful two-man executive committee. The only other member was 81-year-old John D. Macomber. The executive committee met 16 times in 2007, more often than the board itself or any other committee. Lehman’s finance and risk committee was headed by 80-year-old Henry Kaufman. It met on only two occasions during 2007 — the very time that Lehman’s destructive risk, debt and CDO time bomb was ticking away.
Five of Lehman’s directors were over 70. Most were hand-picked by Mr. Fuld. Many had no previous connection at all with Wall Street. The 83-year-old actress Dina Merrill was a member of Lehman’s board and its compensation committee for 18 years until 2007. And we know that Mr. Fuld was compensated exceedingly well, to the tune of some $354 million between 2002 and 2007 alone. Somehow it seems poetically symbolic for the kind of board Lehman was that Ms. Merrill (about whose acting career we were early young fans) should have appeared on What’s My Line? and starred in such movies as A Nice Little Bank that Should Be Robbed and, a perennial favourite of many corporate directors, Catch Me if You Can (original 1959 version).
You can read more about Lehman’s antiquated and dysfunctional board here.
Once again, an inept board escapes culpability through a Houdini-like contrivance called the business judgment rule. In our view, this doctrine has been shown time and again to be one of the most anti-shareholder and destructive of legal principles ever to emerge in modern times. Talk about the need to stand up for capitalism. There is no greater form of boardroom socialism than the business judgment rule. Time and again, those who otherwise claim to have the intelligence and experience to govern giant corporations, and are paid handsomely for the privilege, suddenly appear to have been deaf, dumb and blind in the face of the disaster that was approaching. They say they should not be held to account. They claim they didn’t know what was really happening. They stress that they tried their best. Sorry things didn’t work out. Could they have a note from the court now so the besieged directors could go home early?
Lehman’s directors even managed to get away with this spiel at a time when the world was reeling from the unraveling of credit markets, when subprime mortgages and derivatives were sending off toxic alarms everywhere and when generally accepted standards of sound governance strongly signalled that the Lehman board was a train wreck just waiting to happen.
Fortunately, the judgment rule has few parallels that protect other professionals in a similar fashion, or society would be in an even more frantic state than it is today. Unsurprisingly, this rule takes its origins from a time when the courts felt it only proper to defer to men of means and that nothing too arduous should be permitted to interfere with their avocational diversions.
Under this doctrine, you have to wonder, if Clarabell the Clown and the Marx Brothers had been kibitzing about while serving on the board of Lehman Brothers in the years before its collapse, would the examiner’s report have been any different?
On second thought, you don’t have to wonder. You have your answer.
The recent flap involving the White House chief of staff is another sign that President Obama needs a Paul Volcker of the bipartisan world – – someone whose stature will command instant respect, who can act as a trusted counselor to the President. It may be one of his last chances to avoid an even more costly episode of unintended acceleration into political disaster.
There is a universal law of organizations, especially political organizations, which some of us who have counseled them over the years have come to observe. When the trusted advisor begins to attract the kind of press that puts the boss in a bad light, someone has a problem. And it’s usually not the boss –unless he lets it. The latest in a growing list of issues involving White House chief of staff Rahm Emanuel came to light in a column by Washington Post political reporter Dana Milbank, who made the point that “Obama’s first year fell apart in large part because he didn’t follow his chief of staff’s advice on crucial matters.”
Since it is Mr. Emanuel who was supposed to be giving the advice, not many besides he would know whether it was taken or not. In any event, this is not something that is going to assist a White House that is more and more looking like a victim of unintended acceleration into disaster, along with a Democratic Party that seems unable to steer away from calamity. As both the real and symbolic head of the Democratic Party, Mr. Obama needs to think about the picture that is emerging: The Senate loss in Massachusetts. The Governor’s scandal in Albany. The demise of Ways and Means chairman Charles Rangel (D-15th NY). The forced resignation of first-term representative Eric Massa (D-29th NY). A slow motion train wreck involving health care reform also features prominently on the list. Cap and trade seems almost buried and gone. The President’s approval ratings have plunged. The popularity of his party is foretelling of a November blowout. Apart from spending trillions in bailout packages to deal with problems that were not of Mr. Obama’s making, there is pitifully little to show on the domestic side for the first year of his term. On the foreign file, certain presidential trips, like the one to China, seem not to have been worth the cost of the fuel. Of course, not every problem can be laid at the door of the Oval Office. But issues, especially the ones that deal with tricky concepts of ethics and competency like those noted above, can quickly morph in the minds of voters, leaving the occupant of the White House often tarred with the blame. This is especially true during a time of increasing anti-incumbency attitudes and mounting populist sentiment.
As White House chief of staff, a post which many contend is something akin to the role of an unelected prime minister, Mr. Emanuel is not exactly a remote bystander in all of this. Our own views on the subject of his performance and probable early exit were set out late last year. One gets the impression that the growing litany of failures and setbacks is prompting some rewriting of history or at least an unbecoming distancing from the decisions themselves. The fact remains that no chief of staff in any administration worthy of respect would be caught with these kinds of comments connected to him. He has not denied the thrust of Mr. Milbank’s column. It’s another red flag that should not be ignored by a president who has already missed some important ones over the past year.
A positive step for Mr. Obama at this point would be to re-think the merits of the Chicago school he brought with him into the White House. When other presidents have been faced with a loss of momentum, they have called upon respected senior adults to help with turning things around. David Gergen comes to mind in that role for President Clinton. Howard Baker was brought in to bring direction to the Reagan White House after the messy arms-for-hostages debacle. Mr. Obama could use his own version of such a trusted advisor in the West Wing now.
What is needed is a Paul Volcker of the bipartisan political world — someone whose stature will command instant respect inside and outside the White House. The purpose would not be to replace Mr. Emanuel, but it would be the kind of person who could take over that function if it became necessary. With a little luck, he or she even might have developed an ability to restrain their predilection for profanities, bone-headed comments and flights of ego, all of which are becoming too closely tied to the staff of the Obama White House.
Coming into office, Mr. Obama wisely made much of his desire not to become tied to pre-scripted viewpoints or inside-the-beltway thinking. He understood that advice from outside was an important tool for testing the accuracy of the political compass and maintaining a healthy perspective. More of that thinking, both from Mr. Obama and from those who advise him, is needed now if an even more costly episode of unintended acceleration into political disaster is to be avoided.
The President has plenty of challenges and problems hitting him from outside. He does not need them coming from the office next door.
