CalPERS warns that Apple tempts downfall

One of the world’s most innovative and progressive companies, Apple, is the target of lobbying by CalPERS, demonstrating that dropping mandatory majority voting in director elections from the final version of the Dodd-Frank Act, hasn’t deterred shareowners from taking the matter into their own hands.

CalPERS recent battle with Apple Inc. over the introduction of a majority voting standard in all uncontested elections is part of a larger blast of shareowner activism in which the pension fund approached 58 companies which form the bulk of their investment portfolio, asking them to voluntarily adopt a majority vote rule.

Out of the 58 companies, 22 have so far adopted or committed to adopting a majority vote rule and disclosed publicly while a further six companies have done so privately. CalPERS lobbying has support from the wider corporate governance network, with  The International Corporate Governance Network (ICGN) is in support of majority voting, with its executive director, Carl Rosén, saying it’s of upmost importance for investors.

CalPERS’ proposal to Apple urges company adoption of a majority vote threshold where there is only one candidate for a board seat and the resignation of any candidate or incumbent who fails to win an affirmative vote of most shares represented.

The pension fund’s senior portfolio manager for corporate governance, Anne Simpson (pictured), warns the company responsible for the i-generation of technology not to be blinded by success, and to listen to its shareowners.

“Apple should not be seduced by success,” she says. “Good governance is a market fundamental. We’re asking for an election, not a coronation of the board.”

Sponsored Content

CalPERS claims Apple’s current plurality vote rule gives no voice to shareowners who oppose a candidate, since directors can be elected by a single “for” vote.

“The current rules are not Apple standard, they evoke the election standards of a banana republic – an election where you can be voted in without a majority lacks legitimacy,” says Simpson.

The pension fund’s support statement to Apple’s board of directors argued a majority voting standard would provide shareowners with a meaningful role in uncontested director elections, which is in sharp contrast to Apple’s current voting system “that effectively disenfranchises shareowners when directors run unopposed”.

CalPERS goes on to outline how under Apple’s current plurality standard, a director nominee can be elected with “as little as his or her own affirmative vote because ‘withheld’ votes have no effect”. According to CalPERS, this makes it impossible to defeat director nominees who run unopposed.

According to Nasdaq at December 31 last  year, CalPERS held about 2.2 million shares of the  921 million Apple Inc shares outstanding, but about 70 per cent of the stock is owned by institutions.

Three major proxy advisory services – Egan-Jones Proxy Services; Glass, Lewis & Co. LLC; and ISS Proxy Advisory Services – are backing CalPERS’ proposal.

But despite this support for CalPERS proposal, Apple’s board of directors has recommended shareowners vote against it at this year’s annual shareowner meeting (held on February 23), claiming “it is not in the best interest of the company and its shareholders, both for reasons of law and governance policy”.

Apple’s board claims dissatisfied shareowners can have their say in a multitude of ways, ranging from correspondence with the board to recall elections and alternative candidate nominations. They also assert that CalPERS did not take into account the “unusual mechanics of California law” which could lead to the failure of directors to be nominated even with no indication of any shareowner disapproval. Apple says it could therefore “lose its directors simply because too few shareholders cast their votes”.

CalPERS dismissed Apple’s concerns, saying the company would just need to engage more with its shareowners.

“Apple also posit that California law would require the board to accept the will of the majority – so that if all directors were rejected they would face a crisis,” says Simpson. “But the board would simply need to engage with its shareowners. Management would continue to run the company and the board would be reformed the next day – but would still have to face the electorate in due course – an essential discipline and one which would focus minds very well.”

CalPERS shouldn’t feel alone in this case, with the Apple board also recommending a vote against the proposal by the Central Laborers’ Pension Fund to amend the company’s corporate governance guidelines to adopt and disclose a written CEO succession planning policy.

“Capitalism relies upon two principles – transparency and accountability. The proposal on succession planning addresses the first and ours addresses the second,” Simpson says.

“Our economic system requires that those in power are held to account; the shareowners are the providers of that capital – the directors are their stewards. The mandate to the board of directors is the single most important decision capital providers can make. This is why governance matters.”

This proposal, announced last August, should come as no surprise considering the impact of the poor health of Steve Jobs – the current CEO and co-founder of Apple – and the subsequent time away from the job has had on Apple’s stock prices. While Apple announced Jobs’ leave on a public holiday, when Nasdaq and the New York Stock Exchange were closed,  Apple stocks on the European exchanges fell about 8-10 per cent.

The Central Laborers’ Pension Fund’s proposal asked for the following specifics to be adopted:

–          the board of directions will review the plan annually;

–          the board will develop criteria for the CEO position which will reflect the company’s business strategy and will use a formal assessment process to evaluate candidates; the board will identify and develop internal candidates;

–          the board will begin non-emergency CEO succession planning at least three years before an expected transition and will maintain an emergency succession plan that is reviewed annually;

–          and the board will annually produce a report on its succession plan to shareholders.

Apple’s board of directors recommended a vote against the proposal for a number of reasons, asserting Apple already fulfils several of the requests proposed, saying Apple’s corporate governance guidelines already required the board and CEO to conduct an annual review of succession planning for senior management, including the CEO. The board further says adopting the proposal would give Apple’s competitors an unfair advantage as it would publicise Apple’s confidential objectives and plans.

“Giving competitors access to this information is not in the best interest of the company or its shareholders,” says the board of director’s statement in opposition to the proposal.

The board also claims the proposal would undermine the company efforts to recruit and retain executives and it attempts to micro-manage and constrain the actions of the board.

Furthermore, the board also recognises that a highly talented and experienced management team, not just the CEO, is critical to Apple’s success – a sentiment that perhaps is not shared with investors.

At time of publication, Apple Inc.’s annual meeting of shareholders was underway.

Leave a Comment

Sort content by

Quality factor explained by profitability: Robert Novy-Marx

Among academic classifications, and the subsequent implementation of factor investing, “quality” is one of the newer areas of investigation. Robert Novy-Marx, the Lori and Alan S. Zekelman Professor of Finance at the University of Rochester, is leading the charge on the academic justification of quality as a factor, although he has a “jaded scepticism” about

How to allocate assets to combat climate risk

  Mercer’s extensive climate change report, launched today, gives investors a practical framework for monitoring and managing climate risk, shifting the discussion from philosophical agreement to practical investment implementation.   In Investing in a time of climate change Mercer outlines extensive dynamic investment modelling that analyses changes in the return expectations of assets between 2015

Behind Norway’s coal divestment

The Norwegian Parliament’s finance committee recommendations to direct the Government Pension Fund Global to divest from companies that generate more than 30 per cent of their output or revenue from coal-related activities, is the evolution of a climate-related investment strategy that dates back to 2010. Amanda White explores the raft of tools the fund uses

CalPERS gives its managers ESG ultimatum

In what promises to be a transformational moment for ESG integration and investment manager accountability, CalPERS will require all of its managers to identify and articulate ESG in their investment processes. CalPERS staff led by Anne Simpson, senior portfolio manager and director of global governance, presented the ESG manager expectations, and draft sustainable investment guidelines,

Sourcing liquidity in fragmented markets

As equity trading becomes more fragmented, and more trading is done outside exchanges, it is prudent to assess whether alternative liquidity pools contribute to well-functioning markets. Norges Bank Investment Management has done the work for you, analysing the contributions, structures and functions of trading venues with limited pre-trade transparency. One of the benefits of liquidity

Factors the same in credit and equities

Robeco will launch the world’s first multi-factor credit fund, after academic research by its quantitative research team reveals that size, low-risk, value and momentum factors have economically meaningful and statistically significant risk-adjusted returns in the corporate bond market. David Blitz, co-head of quantitative strategies at Robeco in Rotterdam, tells Amanda White why an active approach makes

Previous