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

Infrastructure – fewer fees, please

Public pension funds make up almost a quarter of the world’s 100 largest institutional investors in infrastructure and, while still favouring unlisted funds, they are increasingly investing directly and pushing back on management fees, research reveals. The research by global alternatives research firm, Preqin, shows a record number of funds on the road seeking a

Pensionomics,
a money-go-round

As debate rages in the US about the generous retirement benefits and high cost of state and local defined benefit (DB) schemes, new research sheds light on the role these funds play in stimulating the economy and creating jobs. Pensionomics 2012: Measuring the Economic Impact of DB Pension Expenditures looks at the effect of DB

Total cost shakedown at CalPERS

Up to 8.9 basis points will be slashed from the total cost of managing the CalPERS’ investment portfolio in the next three years, under a new investment resource strategy which could also see internal administration costs increase by $6.5 million next year, and internal staff accountable for internal versus external management allocations. The internal investment

ESG almost an afterthought

Only 26 of 4300 companies surveyed by Governance Metrics International (GMI) have a specific clause that measures executive compensation against a sustainability metric, and institutional investors play a pivotal role in transforming this behaviour. Kimberly Gladman, director of research and risk analytics at the governance research company GMI, says investors should set the expectations that

Broader engagement at UNPRI

The United Nations Principles of Responsible Investment (UNPRI) will expand its focus beyond the micro focus of ESG implementation for its signatories to include thought-leadership research and public and policy debate, writes Amanda White. James Gifford, executive director at UNPRI, said the new strategy came out of its board meeting last week in Australia and

Are hedge fund investors getting what they paid for?

Alternative hedge fund beta allows investors to access the returns generated by hedge funds without the pressures of finding alpha, says Fama family professor of finance at the University of Chicago Booth School of Business, Tobias Moskowitz. Moskowitz says there are three components to hedge fund returns: unique alpha, traditional market beta, and “something else”,

Previous