Apple's Board: New Blood Needed
In the latest public flare-up, Google (GOOG) Chief Executive Eric Schmidt resigned his seat as an Apple director on Aug. 3 following a dustup between the companies over distribution of Google software on Apple's hit iPhone. The same day, the Federal Trade Commission said it plans to continue an inquiry it launched in May into the interlocking board relationship between the two companies. While the FTC commended Apple for Schmidt's resignation, Genentech Chairman Arthur Levinson still sits on both companies' boards, a possible violation of federal antitrust rules.
Apple's board has also been criticized for its handling of disclosures about CEO Steve Jobs' health and failing to quickly take decisive steps to clear up a controversy about stock-option pricing several years ago.
Beside Jobs, the board's glittery directors include former Vice-President Al Gore, Intuit Chairman Bill Campbell, Avon CEO Andrea Jung, and J. Crew Group (JCG) CEO Millard Drexler.
Now recruiters and other Apple observers say the company may need new blood in its boardroom to tap into fresh thinking and establish a clearer line of succession should Jobs need to leave permanently. Apple declined to comment.
Cook Can Stand Up to Jobs Apple's next move could be to elevate Chief Operating Officer Tim Cook to the board of directors. Cook is Apple's second-in-command behind Jobs and has twice stepped up to run day-to-day operations when Jobs was on sick leave. His most recent stint was during Jobs' six-month break during the first half of this year, when Jobs underwent a liver transplant.
Adding Cook to Apple's board would telegraph to the outside world that he is Jobs' chosen successor, says Stephen Mader, vice-chairman and managing director for board services at executive recruiter Korn/Ferry International (KFY). "If Cook joins the board, it's tantamount to announcing that he'll be Steve's ultimate successor if and when the time for that comes," Mader says.
Cook, one of a handful of senior Apple executives who work very closely with Jobs on major strategic matters, has been described by people familiar with the company's operations as one of the few who can stand up to Jobs when necessary. Bringing Cook onto the board would also fill a slot for an internal director that has been open since former Chief Financial Officer Fred Anderson resigned from the board in 2006.
Mader also suggests Apple add a director connected with an Internet company such as Facebook. "Apple has lots of very successful, single-minded CEOs on its board, and it's covered there. I'd suggest someone who's at a company that's on top of how 17-year-olds and 23-year-olds are thinking," he says. "Those things have a lot of important implications for Apple."
Adding a Facebook Exec Would Be Good Schmidt might have provided such counsel in the future. And Google could have benefited from having Apple in its corner as Microsoft (MSFT) and Yahoo! (YHOO) team up to challenge its dominance in Web search, says John Coffee, a Columbia University law professor who specializes in corporate governance and securities law. "Apple could be a potential ally," he says.
But Google and Apple inhabit very different worlds than they did when Schmidt joined Apple's board three years ago. Apple hadn't yet released the iPhone, and Google hadn't released its Android operating system for smartphones or revealed plans for Chrome OS, a computer operating system it announced in July.
Now that the companies are in closer competition, Schmidt needed to recuse himself from Apple board meetings, the company said in its statement. Analysts questioned how long Schmidt could remain on the board. "If [Schmidt] were to recuse himself from all iPhone-related discussions, there wouldn't be much for him to say," says Charles Wolf, an analyst at Needham & Co..
The FTC's Investigation Will Continue Schmidt's resignation could help ease government inquiries into the relationship between Apple and Google. Just hours after Apple's announcement, the Federal Trade Commission said it will continue to investigate the board relationship between the companies.
On July 31 the Federal Communications Commission sent letters to Apple, Google, and AT&T (T) seeking information on Apple's rejection of a Google-made application for the iPhone. The software would have connected iPhone users to Google Voice, a Web-based calling system that offers free text messages, voice mail, and long-distance phone calls.
Whoever joins Apple's board next could help improve on its reputation for being a rubber stamp for Jobs' wishes, whether in its handling of Jobs' role in improper backdating of stock options in 2006 or on its handling of the disclosure of his health issues. Indeed, one source familiar with Apple's board meetings says there's surprisingly little deliberation of major strategic issues. Rather, much of the agenda consists of Jobs giving demonstrations of the companies' newest products, says the source, who adds that Jobs brooks little dissent on key strategic questions. "Steve is a control freak," this person says.
At one point earlier this decade, a director wanted to consider the idea that Apple license its Mac OS software to other PC vendors. "Steve said no," and that was it, this person says.
Apple dodged an increasingly clear conflict of interest by Schmidt's resignation. Now it needs to make sure the board avoids other missteps in the future.