Amazon.com Widgets

Should corporations like Apple forego the benefits of board members beholden to other corporations that operate within the same industry?

At a town hall meeting shortly after introduction of Apple’s iPad tablet computer, former CEO, and Chairman, Steve Jobs reportedly said:

“[Apple] did not enter the search business. [Google] entered the phone business.  Make no mistake they want to kill the iPhone. We won’t let them. He reportedly continued to say:  “This don’t be evil mantra” [Google’s informal motto], “It’s bullshit.”[i]  

Many corporations have Directors that are on several boards or are high-level executives of other corporations or both.  For example, Paul Otellini is president and chief executive officer of Intel and currently sits on Google’s board of directors.  Dan Mead is chief executive officer of Verizon Wireless, a member of the Board of Directors and an officer of CTIA, the wireless industry trade association. Also, Mead is on the Board of ISIS, an emerging mobile commerce company. Tom Ryder a director at Amazon since 2002, was director at Virgin Mobile from 2007 to 2009.  Inevitably, these companies are sometimes in the same industry or operate within the same sphere.  As a new industry becomes particularly sought after – such as mobile telecommunication/mobile computing, or entry into this industry becomes necessary for the survival of a particular company, these same corporations can become direct competitors. This can lead to corporate fall-out between company ‘big-wigs,’ not including the larger problem of creating a board that may at some point operate outside the best interest of the corporation.    

This is exemplified by the events between the two technology giants, Apple and Google, which culminated in Mr. Jobs’ show of frustration during the aforementioned meeting. To understand the crux of Mr. Jobs’ irritation it is useful to consider some of the events leading up to this town hall meeting where his expressed frustration sent reporters and bloggers running to the nearest keyboard.

Jobs and Schmidt at MacWorld 2007 Keynote

Jobs and Schmidt at MacWorld 2007 Keynote

In January of 2007 Apple announced at their Macworld San Francisco keynote event that they “would reinvent the phone” with a single phone, the iPhone.[ii]  The company would build the hardware and software for their phone and maintain close to total control over its eco-system - the ‘bread and butter’ of any of today’s handheld computers. During its development, Apple and Google had been engaged in a very close relationship.  In fact, Eric Schmidt, Google’s chief executive officer at the time, and a member of Apple’s board of directors was present at this keynote. Steve Jobs personally introduced Dr. Schmidt to the stage saying “you can’t think about the Internet without thinking about Google; we’ve been working very closely with  [Google] to make this all happen.”[iii]  Dr. Schmidt while on stage at the event remarked on the plentiful relationships between the companies and even joked about merging the companies; quoting and lauding Mr. Jobs, he said that each company should do the best they can do every time.[iv] The companies appeared very much to be as loyal as two giant corporations could reasonably be.

In November of 2007 Google announced on its official blog “the Open Handset Alliance[v] and Android …[which are] more significant and ambitious than a single phone.[vi] They went on to say, “through the joint efforts of the members of the Open Handset Alliance, [Google hopes] Android will be the foundation for many new phones and will create an entirely new mobile experience for users, and with new applications and new capabilities we can’t imagine today. Id. This message and language clearly targeted Apple’s recently announced iPhone.   

The game had changed.  The good news was that Apple and Google had worked together to mutually beneficial ends on many projects, so both company’s had reaped the benefits of their relationship.  The bad news was that Eric Schmidt, Google’s CEO had sat on Apple’s Board as the company developed a directly competitive product.  As Apple introduced the first iPhone, Google had been presumably, privately working on its own Google Android mobile operating system.[vii]  Both companies may not have intended to compete so directly, but the competition had begun as the new frontier - the mobile telecommunication and mobile computing industry reached blue flame level.

Apple ultimately decided that having Eric Schmidt as a Director after the Android operating system announcement was not in company’s best interest.[viii]  Mr. Jobs, regarding Dr. Schmidt’s resignation from the Board said, “unfortunately, as Google enters more of Apple’s core [no pun intended?] businesses, with Android and now Chrome OS, Eric [Schmidt’s] effectiveness as an Apple Board member will be significantly diminished, since he will have to recuse himself from even larger portions of our meetings due to potential conflicts of interest.[ix]  Therefore, we have mutually decided that now is the right time for Eric to resign his position on Apple’s Board.”  Id (emphasis added).

Several questions arise from Apple and Google’s sharing of high-level individuals. For instance, had the right time for Schmidt’s resignation long passed? If the time had passed, in remaining on the Board past that time, did Eric Schmidt act in bad faith? Additionally Dr. Schmidt, did ultimately resign, so what if any repercussions should follow if his earlier actions did not comport with good faith?

It is incumbent upon directors to discharge their duties in good faith and with that degree of diligence, care and skill which ordinarily prudent men exercise under similar circumstances in like positions. Francis v. United Jersey Bank, 432 A.2d. 814, 822 (1981).  To discharge duty in good faith a director must have a rudimentary understanding of the business, has an ongoing obligation to remain informed, must generally monitor the corporations affairs/policy (attend of board meetings), maintain familiarity with the corporation’s financial status, and also has a duty to object to illegal conduct (sometimes duty to consult counsel). Id. 

Dr. Schmidt likely had been exposed to at least some of important underpinnings of Apple’s mobile operating system software, while Google worked on its own competing mobile operating system.  This can be inferred by statements made by both Steve Jobs and Schmidt at the above-mentioned keynote, stating how close the company’s relationship was presumably in large part because of Schmidt’s seat on the board.[x]

Additionally, Dr. Schmidt was a man capable of realizing or appreciating the potential conflict of interest, with regard to the operating systems (if he did not this could raise other issues about his presence on the board).  Prior to joining Google, Mr. Schmidt was the chairman and CEO of Novell and chief technology officer at Sun Microsystems, Inc. Previously, he served on the research staff at Xerox Palo Alto Research Center (PARC), Bell Laboratories and Zilog.[xi]  He holds a bachelor’s degree in electrical engineering from Princeton University as well as a master’s degree and Ph.D. in computer science from the University of California, Berkeley. Id.  He is a member of the President’s Council of Advisors on Science and Technology and the Prime Minister’s Advisory Council in the U.K. and was elected to the National Academy of Engineering in 2006. Id.

Since Dr. Schmidt could clearly understand what a mobile operating system is and likely new much about Apples iOS, the question becomes whether not resigning once he had this knowledge was acting in bad faith.  More broadly, should companies in the same realm even ever share board members because of the persistent potential that they will at some point become competitors? 

In Re Walt Disney the court stated that bad faith requires grossly negligent conduct plus more and goes on to identify 3 categories that could satisfy the more that is required: subjective bad faith (intent to do harm), lack of due care (without malevolent intent), or intentional dereliction of duty. The Court continued to say that to engage in an effort to craft a "definitive and categorical definition of the universe that would constitute bad faith" would be unwise and is unnecessary to dispose of the issues presented on [the particular] case. In Re Walt Disney Co. Derivative Litigation, 906 A.2d 27, 61 (2006). 

What articulation of bad faith may specifically fit the Apple/Google situation discussed above?  The idea that corporations anywhere in the same sphere should not have any cross Director/Executive intermingling seems too broad and it seems to interfere too much with the operation of a corporation, ousting those who perhaps know best what would be in the corporations best interest in a particular industry. Stifling a company’s options may also have implications for the consumer, depriving them of the best product or service possible by excluding a useful relationship that could have been gained from corporate cross director/executive intermingling. 

If some general definition of bad faith was possible, could this articulation work preemptively to guide corporations who’s directors are individuals who are beholden to some other corporation who may become a substantial competitor to the other corporation on whose board this individual sits? Could some articulation work to avoid possible conflicts of interest all together?  Perhaps it is best to leave such an analysis to courts that decide to accept the unwise and unnecessary challenge of the Walt Disney court and learned legal scholars.

There are numerous advantages to having directors that are knowledgeable and well connected inside the industry in which that corporation operates.  Such a knowledgeable, well-connected individual may well be a chief executive officer of some other company if she is truly at the top of her game in her respective industry.  As can be seen from the iPhone product and corporations like Apple and Google who partnered on significant parts of the iPhone’s development such as Google Maps, dynamic synergistic partnerships can be formed that benefit both companies tremendously. This is an incredible incentive to invite a potential competitor into your boardroom.

Additionally, it is difficult to foresee competition since companies change to prosper or to survive.  For example, Google started as Web-search Company, indexing web pages and monetized by advertisement revenue.  Apple started as Desktop-computer Company that made its own operating system.  Today, Google has many software products, including web-based desktop publishing software and its own operating system software.  Apple has slowly become mostly a mobile computing company (iPhone, iPad, iPod, MacBook), making all of its own core software and designing all of its own products.  Most recently, Google acquired Motorola mobile[xii], and so is poised to become a mobile computer company, likely designing hardware, and software very similar to Apple.  Where both of these companies are today was likely unfathomable just six years ago. 

Ultimately, while harm could have occurred, it is likely that more good resulted from the corporations relationship while Eric Schmidt was a member of Apple’s board. Perhaps Steve Jobs’ response to Kara Swisher’s question[xiii] of how he viewed Google after the statements he made at the town hall meeting and Eric Schmidt’s subsequent resignation, best sums up how we should view sophisticated corporations who frequently seat directors who may be future competitors, at least with regard to consumer goods.  Mr. Jobs said (D8, 2010):

“What I love about the consumer market is that I always hated about the enterprise market, is that we come up with a product, we try to tell everybody about it and every person votes for themselves.  They go “yes” or “no” and if enough of them say “yes” we get to come to work tomorrow. That's how it works.  It’s really simple.  As where the enterprise market its not so simple. The people that use the products don’t decide for themselves, and the people that make those decisions sometimes are confused.  So we love just making the best products in the world for people and having them tell us by how they vote with their wallets whether we are on track or not. 

. . . Just because we are competing with someone doesn't mean we have to be rude.”[xiv]

These statements, with which I very much agree, support the idea of a free market. Corporations are complex entities and often have directors who are quite sophisticated. Companies should be given broad latitude to seat on their board whoever they see fit, so long as the underlying decision is in the corporation’s/shareholder’s best interest.  Huge multinational technology companies and other corporations will likely know best when the disadvantages of having individuals who are beholden to some other corporation in the same sphere, outweigh the advantages. Perhaps Dr. Schmidt did resign at the right time, because Apple thought it was the right time.

 

[originally written Oct. 2011] 


[i] <http://www.wired.com/epicenter/2010/01/googles-dont-be-evil-mantra-is-bullshit-adobe-is-lazy-apples-steve-jobs>. Although Wired Magazine reported that these were in fact the words of Mr. Jobs according to their unnamed source, notable Apple Inc. Insider John Gruber, on his blog, Daringfireball.net cautioned to “take [the exact reported words from Wired] with a grain of salt.” Gruber said, one reader emailed him to say that while the gist is right, the Wired transcript is clearly paraphrased: “He actually said ‘teams at Google want to kill us.’ He never said it in a way that made it sound like the whole company did. Mostly just the Android team.” Gruber also said another little birdie in attendance [told him], “The quote was actually, ‘Don’t be evil is a load of crap.’” <http://daringfireball.net/linked/2010/01/31/jobs-town-all>

[ii] <http://itunes.apple.com/us/podcast/apple-keynotes/id275834665 (keynote 1/9/07)>.

[iii] <http://itunes.apple.com/us/podcast/apple-keynotes/id275834665 at 1:16>.

[iv] <http://itunes.apple.com/us/podcast/apple-keynotes/id275834665 at 1:18>.

[v] The Open Handset Alliance is a group of 84 technology and mobile companies who have come together to accelerate innovation in mobile and offer consumers a richer, less expensive, and better mobile experience. Together we have developed Android™, the first complete, open, and free mobile platform. We are committed to commercially deploy handsets and services using the Android Platform.  <http://www.openhandsetalliance.com/oha_faq.html. Apple is not a member of the OHA>.

[vi] <http://googleblog.blogspot.com/2007/11/wheres-my-gphone.html>. (emphasis added).

[vii] In what could be a key move in its nascent wireless strategy, Google has quietly acquired startup Android Inc., BusinessWeek Online has learned. The 22-month-old startup, based in Palo Alto, Calif., brings to Google a wealth of talent, including co-founder Andy Rubin, who previously started mobile-device maker Danger Inc.  Android has operated under a cloak of secrecy, so little is known about its work. Rubin & Co. have sparingly described the outfit as making software for mobile phones, providing little more detail than that. One source familiar with the company says Android had at one point been working on a software operating system for cell phones.  <http://www.businessweek.com/technology/content/aug2005/tc20050817_0949_tc024.htm>

[viii] In August of 2009, on their website Apple announced that Dr. Eric Schmidt, chief executive officer of Google, is resigning from Apple’s Board of Directors, a position he has held since August 2006. <http://www.apple.com/pr/library/2009/08/03Dr-Eric-Schmidt-Resigns-from-Apples-Board-of-Directors.html>.

[ix] <http://www.apple.com/pr/library/2009/08/03Dr-Eric-Schmidt-Resigns-from-Apples-Board-of-Directors.html>.

[x] <http://itunes.apple.com/us/podcast/apple-keynotes/id275834665 (keynote 1/9/07 at 1:17) >. 

[xi] <http://www.google.com/intl/en/about/corporate/company/execs.html#eric>. 

[xii] Google said on its investor relations, the acquisition of Motorola Mobility, a dedicated Android partner, will enable Google to supercharge the Android ecosystem and will enhance competition in mobile computing. Motorola Mobility will remain a licensee of Android and Android will remain open. Google will run Motorola Mobility as a separate business.  Larry Page, CEO of Google, said, “Motorola Mobility’s total commitment to Android has created a natural fit for our two companies. Together, we will create amazing user experiences that supercharge the entire Android ecosystem for the benefit of consumers, partners and developers. I look forward to welcoming Motorolans to our family of Googlers.” <http://investor.google.com/releases/2011/0815.html>

[xiii] <http://allthingsd.com/20111005/steve-jobs-appearances-at-d-the-full-sessions/?refcat=conferences>.

[xiv] <http://allthingsd.com/20111005/steve-jobs-appearances-at-d-the-full-sessions/?refcat=conferences at 28:50>

 

The Writer

New York