Economics for One

Apple’s Board is Wrong

First, some disclosures:  I’ve met Steve Jobs; we live near each other and have several friends and acquaintances in common.  Also, my wife worked at Apple for a while, and we have a number of friends who still work there.  Notwithstanding his reputation as a tough boss, the limited interactions I’ve had with Steve have all been pleasant, and he has been very gracious.  I also hold Apple stock.

Recently, we’ve learned that Steve Jobs had liver transplant surgery in Tennessee two months ago.  This has led to a public debate about whether or not Apple’s board should have revealed the extent and significance of Steve’s ongoing health issues.

On the one side are professional investors, such as Warren Buffett, who say the information is material, and therefor should have been revealed.

On the other side is Apple’s Board, supported by many members of the public, who say Steve’s health issues are a personal and private matter, and really nobody’s business.  It’s a compelling argument, and is consistent with most people’s beliefs that health matters should always be private.

But they are wrong.

The issue here is one of fiduciary duty in the face of material information.  Fiduciary duty is a concept that most people in the public are unfamiliar with.  But anyone who has served as a board member, or as a senior officer of a company (such as a CEO, CFO, etc), has had to grapple with it.

In essence, a fiduciary is supposed to put the needs of their beneficiary ahead of their own – much the way a parent often puts their child’s needs ahead of their own.  It is a unique relationship in business and in law, and the normal rules of the business world do not apply in a fiduciary relationship.

“Material information” is simply information that a typical investor would be likely to include in a decision of whether to buy or sell a company’s stock.

In this case, it’s really impossible to argue that Steve Jobs’ health is not material information.  There are many, many people who would include Steve’s health in their decision to buy or sell Apple stock.

And because he is CEO (even if on leave), he is a fiduciary.  That means he is obligated to put the needs of the shareholders ahead of his own.  There are no exceptions to that rule for health, or privacy, or anything else.

I realize this has to be a personally difficult time for Steve and his family.  So it may be difficult for him to keep a clear focus on such abstract concepts.  But that’s where Apple’s board has failed.

Apple’s board members are also fiduciaries for the shareholders.  They have monitored his progress, and have had an ongoing obligation to report his condition to the shareholders.

And they have failed spectacularly.

What’s worse, they have actually argued that they have an obligation to keep Steve’s personal health information private.  But they do not.  When they joined Apple’s board, each of them willingly took on the role of a fiduciary.  These are sophisticated business people, who understood that role (or ought to).  To argue as they have that their primary obligation is to Steve, and not the Apple shareholders, is really abhorent.

We seem to be living in a time when people are confused about the fiduciary relationship.  And yet it was that very breakdown in the fiduciary concept that caused such enormous problems at companies like Enron, Worldcom, and even HP, which resulted in the backlash of Sarbanes-Oxley.

I have admired the business decisions Apple has made over the past decade.  They have shown a great deal of vision, and have revolutionized multiple markets.  It’s been a joy to watch them grow, both as a shareholder and as a consumer.  And I wish Steve the best in his health struggles.

But I do hope that the Apple board is held accountable for this clear breach of their fundamental fiduciary duty.  Because ultimately, that will make Apple stronger, and will send a message to other boards in the marketplace that they need to respect their primary obligation to the shareholders above all others.

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