Secrecy vs Governance: Apple and the Steve Jobs Situation

It is hard not be sympathetic to Steve Jobs' desire for privacy as he wrestles with what could be a terminal illness. As CEO of public company, however, he, the company's board and its management are subject to rules that oversee the trade-off between access to public capital markets and the desire every entrepreneur has for operational control. It might seem cruel to demand that a very human being confront his mortality by naming a successor - or at least a plan for how to name a successor - but the rights of those who have invested their earnings, their pensions and their hopes for the future begin, at this point, to contend for primacy with those of the individual in question. This is the dilemna that Apple confronts; it wishes to respect a revered leader but it must, as a source of employment and investment, weigh that against the needs of those who are dependent on the organization. These are not easy or simple matters. Whose definition of morality may be prevalent is a question for debate, not a certainty. But in the end, the rule of law will have to prevail. How to get there without causing unnecessary damage is where the effort should be spent, not on forestalling the right to know.

Rob Cox and Robert Cyran comment on this uncomfortable situation in the New York Times:

"The mystique that Apple cloaks itself in when introducing snazzy gadgets, like the new iPad it is expected to unveil this week, has served its bottom line well. But that same opacity doesn’t translate well to corporate governance.

It took Apple’s board far too long last week to reveal that, with its visionary leader Steve Jobs on leave for health reasons, 30 percent of its shareholders wanted more information on how the company would be run if he did not return. Given Apple’s stunning success, the low profile of the pension fund that put forward the proposal and the board’s recommendation against it, that should send a powerful message.

Apple dropped into a regulatory filing late Thursday that 172 million shares were voted in favor of a proposal put forward by the Central Laborers’ Pension Fund, which has less than $1 billion in assets. The proposal called for the company to adopt and disclose an executive succession plan. With 400 million shares cast in opposition, or 70 percent of the vote, the company clearly prevailed.

But a more mainstream governance proposal from a far larger investor, Calpers, the $200 billion-plus California pension system, was passed against the recommendation of the board. And even though the Central Laborers’ effort failed, it’s still rare for nontraditional proposals from relatively unfamiliar special interests to capture so many votes. That’s particularly true when boards in good standing with their stockholders recommend against them. Apple shares have, after all, roughly doubled in each of the past five years, so shareholders should be happy.

The support for the proposal on succession suggests many investors do want the company to be more forthcoming. That might also apply to the manner in which Apple reported the voting at Wednesday’s annual meeting. At the time, it said shareholders defeated the succession-planning proposal, but it didn’t reveal the vote tallies, something that is standard procedure at many big companies like Ford Motor and Goldman Sachs.

Apple instead slipped the results into a filing with the Securities and Exchange Commission the next day. That smacks of unnecessary reluctance to keep shareholders promptly informed. Whatever happens to Mr. Jobs, the company needs to do better at separating the justified secrecy of its product introductions from its keeping shareholders in the dark.

Lessons of Leverage

The buyout of Freescale Semiconductor in 2006 never added up. The chip maker started quaking under its hulking debt almost immediately after a private equity foursome bought it for $17.6 billion. A reorganization and a rebound in sales have helped turn things around. But even if Freescale fetches the same valuation multiple in its planned initial public offering as its rival, NXP Semiconductors, its four buyers — Blackstone, Carlyle, Permira and TPG — would lose more than half their initial investment.

It never made much sense to leverage a chip company to the hilt. The booms and busts of the semiconductor business make sales and profits highly cyclical. Freescale has just endured three consecutive years of operating losses. And the high pace of innovation means companies can’t afford to skimp on R.& D. and capital expenditures during a downturn.

If the firms mistimed their buy, they at least picked a good time to sell. The Philadelphia Semiconductor Index is up more than 30 percent over the past 12 months as demand has gone up. Using an estimated $1.2 billion of I.P.O. proceeds to pay down debt also will help keep a good thing going. The face value of the company’s debt already has been trimmed by $2.1 billion since 2008. Less leverage could help Freescale refinance at lower rates and extend maturities.

Selling stock has at least one other important benefit for the current owners. It sets them up to divest if the chip sector boom should turn white hot.

It’ll be a painful step, though. NXP, another chip maker involved in a precrisis leveraged buyout, went public last August. It has a profile similar to Freescale and an enterprise value of a little over eight times last year’s earnings before interest, tax, depreciation and amortization. Put Freescale on the same multiple, and it would be worth about $9.4 billion.

Adjust for the $1 billion of cash on Freescale’s books and its $7.6 billion of debt, and it leaves, on paper, around $2.8 billion of equity for the company’s backers. That’s less than half the estimated cash they put in at the time of the buyout. Private equity investors won’t need the latest microprocessor to do the math on that one.