Apple Tax Grilling Becomes Cook’s Latest Testing Crisis

May 21 (Bloomberg) -- Apple CEO Tim Cook defended his company’s use of offshore tax shelters before U.S. senators who castigated the most-valuable technology company for avoiding $9 billion and more in payments. Peter Cook reports on Bloomberg Television's "Money Moves." (Source: Bloomberg)

Tim Cook’s tenure at the helm of Apple Inc. (AAPL) has been a crash course in crisis management.

In almost two years since Cook became chief executive officer, Apple has lurched from one reputation-threatening public-relations predicament to the next -- from criticism of its labor practices in China, to faulty mapping software that marred the release of the iPhone 5. Most recent case in point: Cook testified yesterday before Congress to defend Apple against allegations that it dodged $9 billion in taxes in 2012.

In two hours of testimony, Cook calmly parried questions from a Senate subcommittee, urged reform of U.S. corporate tax code and even shared a laugh with Senator John McCain about the hassles of iPhone updates. Even so, continually coping with crises threatens to divert management’s attention from building better products and reversing a share slump. The accusation that Apple shifted billions of dollars to offshore affiliates to avoid paying taxes will alienate some consumers, said Jack Ablin, chief investment officer of BMO Private Bank in Chicago.

“There is a reputation risk,” Ablin said. “Being in the news, testifying before Congress and sound bites about avoiding billions of dollars in taxes has the potential to ruffle their customers’ feathers. This issue is on the front page, not the business page.”

Photographer: Andrew Harrer/Bloomberg

Tim Cook, chief executive officer of Apple Inc., center, walks through a hallway during a break of the Senate Permanent Subcommittee on Investigations hearing in Washington, D.C., U.S., on Tuesday, May 21, 2013. Close

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Photographer: Andrew Harrer/Bloomberg

Tim Cook, chief executive officer of Apple Inc., center, walks through a hallway during a break of the Senate Permanent Subcommittee on Investigations hearing in Washington, D.C., U.S., on Tuesday, May 21, 2013.

That helps explain why Cook went to Washington, D.C., to face questioning by Senator Carl Levin of Michigan and other members of the Senate Permanent Subcommittee on Investigations, which said that Apple relied on loopholes and a web of offshore entities to avoid paying U.S. taxes.

Taxes Paid

“It’s important to tell our story -- and I’d like people to hear it from me,” Cook said in testimony. “We pay all the taxes we owe -- every single dollar.”

The remarks exemplified how Cook has handled other crises - - quickly and personally -- when they crop up for Cupertino, California-based Apple.

“They are happening in every dimension of the business, whether it’s taxes, offshore production or product design,” said Stephen Diamond, a law professor at Santa Clara University who has worked with technology companies and studies corporate governance. “He’s had to dive in personally and manage these.”

While management can shrug off perceived missteps when the going is good -- as was often the case under co-founder Steve Jobs -- Apple’s leadership has lately had to cope with a stock price that’s declined 37 percent since reaching a record on Sept. 19. The shares have fallen amid concern about slowing growth and that the company won’t quickly be able to produce a blockbuster gadget that can build on the success of the iPhone and iPad. Apple rose 0.4 percent to $441.35 at today’s close in New York.

Einhorn, China

“Investors are struggling to see what’s next, and you didn’t have that problem with Steve Jobs,” said David Walker, a technology analyst at Trillium Asset Management, which has about $1.3 billion under management, including Apple shares.

Jobs also faced crises, including the investigation of Apple by the U.S. Securities and Exchange Commission and Justice Department over backdating stock-option grants for executives. That probe and the controversy surrounding the disclosure of his health issues were more drawn out than the crises Cook is currently facing.

In 2010, Jobs cut short a family vacation in Hawaii to take the unusual step of hosting a press conference to explain connectivity issues related to the iPhone 4 antenna after the smartphone was criticized by Consumer Reports magazine.

Easy Target

Cook had been handling several unforeseen incidents even before taxes took center stage. He was forced to respond after hedge-fund manager David Einhorn sued the company as a way to pressure it to return some of its cash to shareholders. Cook issued a public apology after Chinese regulators criticized the company’s warranty policies, and he oversaw a management shakeup last year that included firing senior executives Scott Forstall, who oversaw the company’s mobile software, and retail head John Browett.

Then there was the botched introduction of the company’s mapping software -- another episode that elicited a public apology from Cook.

Apple makes for an easy target because it’s big and popular. Apple was for a time the world’s most valuable company, surpassing Exxon Mobil Corp. Apple’s iPhone and iPad are among the best-selling products in their respective categories.

Focusing on Apple can attract greater attention to an arcane issue, such as tax reform, said Santa Clara’s Diamond. Apple was singled out in Congress for practices used by many companies, he said.

Antitrust Fight

“If your nose is particularly big on an issue that they care about, your odds go up to get punched,” he said. “They got punched in the nose on this one.”

Next month, the company begins a court battle in New York with the U.S. Justice Department, which has accused the company of violating antitrust laws by colluding to raise electronic book prices.

Cook is attempting to put a fresh public face on Apple after the 2011 death of Jobs, said Regis McKenna, a marketing consultant who worked with Apple through several crises in the past.

“The company has put its mark on so many social and economic aspects of life,” said McKenna. “It’s a huge, huge job. I think he’s the right person for the moment.”

Cook will probably have the opportunity to play that role again, said Daniel Diermeier, professor at Kellogg School of Management at Northwestern University.

“Apple is such an iconic brand that they are more exposed,” said Diermeier, who has studied reputation management. “This is part of the repertoire that a CEO has to deal with, and if you have a more high-profile position then there is more of that.”

To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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