Apple and Gap: How Cozy Is Too Cozy?

It's one of the big no-no's of the corporate governance crowd: interlocking board memberships, in which directors from two companies sit on each other's boards. Why? Governance advocates worry that it can lead to cozy relationships in which directors look out more for each others' interests than those of shareholders. "Best practice is not to have cross-board memberships," says Nell Minow, editor of the Corporate Library, a governance Web site. "There's kind of a closed loop."

CLOSE RELATIONSHIP? That's why some experts are bothered by what's been going on between Apple Computer Inc. (AAPL ) and Gap Inc. (GPS ) Back in May, 1999, Gap CEO Millard S. "Mickey" Drexler joined Apple's board. Four months later, Apple CEO Steven P. Jobs joined Gap's board. True, there are arguments for the appointments, given Apple's move into retailing and Gap's interest in Jobs's abilities as a consumer marketer. But given the potential for problems, governance folks argue that if Apple really needs a retail exec on its board, it should turn to someone with no company ties. "There's an obvious conflict," says Drew Hambly, senior analyst at Investor Responsibility Research Center in Washington. It creates "a `you scratch my back, I'll scratch yours' perception."

Indeed, the relationship raises questions surrounding Apple's hiring of the retail contractor Fisher Development Inc. to build Apple stores. To procure sites for its new chain, Apple hired Gap's former head of real estate, George W. Blankenship. No problem there. But to actually build stores, Gap brought in Fisher. The contractor's chairman is 69-year-old Robert Fisher, brother of current Gap chairman and founder Donald G. Fisher, age 72. Fisher Development has long had a relationship with Gap. Over the past 25 years, the San Francisco builder--one of the nation's biggest--has overseen some $3 billion in projects for Gap, and it derives more than two-thirds of its revenue from the clothing retailer, according to the trade publication Shopping Center World. Although Fisher is a respected contractor, that relationship has long been scrutinized by governance experts because of the potential conflicts inherent in choosing the chairman's brother for such significant deals.

Jobs, Drexler, and Donald Fisher all declined to comment, and Robert Fisher could not be reached. And no one is suggesting that Apple, Gap, or Fisher have done anything illegal. But for corporate governance experts, the question is how Apple shareholders can be assured that Fisher won the contract because it offered the best deal rather than because it is owned by an associate of a director. "They need to hold the business relationship to a higher standard to avoid at least the perception of a sweetheart deal," says Ted White, director of corporate governance for pension fund giant California Public Employees' Retirement System, which owns both Gap and Apple stock.

At minimum, experts say, Apple should fully disclose details of the companies' dealings in forthcoming Securities and Exchange Commission filings. But they would be better off to end the relationship altogether.

By Douglas Robson in San Mateo, Calif.

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