Tim Cook has got a lot of favorable press for confronting an investor group at the last Apple (NASDAQ:AAPL) stockholder meeting and telling them that he does not check the "bloody IRR" when he has to do the "right thing." In fact, he went further and suggested that any investor that does not believe in Apple's social mission should sell Apple stock. Since everyone else seems to have been selling Apple stock ever since Cook became CEO, I guess adding one more group to the mix will not make much of a difference. At the risk of sounding like a moral reprobate, I take issue with both what Cook said at the meeting, and how he said it.
The Incident at the Annual Meeting
The incredible success that Apple had in the first decade of this century is the stuff of legend, converting Steve Jobs into a cultural icon and changing the landscape of the market. Filling Job's shoes was always going to be a difficult task, but it was made doubly so by Apple's size (in market cap terms) and increased competition. The fall from grace was quick and painful, as Apple went from a company that could do no wrong to one that could do nothing right.
Tim Cook was, in some ways, in a no-win situation, catering to investing groups with wildly different visions of what the company should do, a development that I found troubling in April 2012 and one that eventually led to the tension that you see today. In the last year or so, you have seen at least two activist investors make noises at Apple. The first was David Einhorn, who argued that the market was undervaluing Apple's cash balance and cash generating capacity and that the way to unlock this was to issue preferred stock. While I disagreed with Mr. Einhorn on his recommendation, I agreed with his theme that the company would have to find ways to unlock the value as a cash cow. In the last few months, Carl Icahn has been active at the company, arguing that stock buybacks were the key to pushing up the stock price, a sales pitch that he abandoned just a few weeks ago, but only because the company had bought into his prescription.
It is interesting that Tim Cook's caustic response was to neither of these "big" activist investors but to a rather obscure investor group called the National Center for Public Policy Research (NCPPR). While this group describes itself as a conservative think tank, it does not own much stock in the company (at least not enough to make the list of top stockholders) and it pushed a shareholder proposal to "disclose the costs of its sustainability programs and to be more transparent about its participation in "certain trade associations and business organizations promoting the amorphous concept of environmental sustainability." While this resolution seemed to get under Cook's skin, note two things about it. First, all it required was disclosure of the costs and not a cessation of any worth programs that Apple was promoting to improve the environment. Second, the proposal was rejected by Apple shareholders, with only 3% voting in favor.
In the question and answer session that followed, Tim Cook was asked two questions by the NCPPR representative. The first of the two questions was whether these "green actions" that the company had adopted were good for the bottom line and the second was whether the company would commit to only taking actions that were good for that bottom line. Cook, according to press reports, was visibly angry and is reported to have said that "there are many things Apple does because they are right and just, and that a return on investment (ROI) was not the primary consideration on such issues" and he reportedly followed up by also saying that "when we work on making our devices accessible by the blind," he said, "I don't consider the bloody ROI."
Why Tim Cook is missing the point
Well, Mr. Cook, I am an Apple stockholder, I am not a member of the NCPPR, I am supportive of good environmental policies and find your response to be troubling, because it reveals a mindset that I would not want in the CEO of a company that I own stock in, for four reasons:
- Social responsibility comes with a price tag: I know that corporate social responsibility (CSR) is a big deal in classrooms, board rooms and executive offices today. In fact, given how many pages companies devote in annual reports to showing us how socially responsible they have been, I am surprised that they actually have the time or the resources to run businesses. Assuming that this is not just empty talk (and I have a sneaking suspicion that it often is), it is important that they recognize that this social responsibility goes with costs (which may lower profits at least in the near term). At the same time, these costs have to come out of profits, which means that they have to be reasonable (given the profits) and that the companies that are most profitable are the ones that can afford to be most socially responsible. The reason that Apple can afford to spend money on environmental causes is precisely because it has earned a "bloody high ROI" on its iMacs, iPhones and iPads.
- If you choose to be socially responsible, as a publicly traded company, you have to be transparent: If you accept the proposition that being socially responsible has costs, and you are a publicly traded company, you have an obligation to be open about those costs. Hiding behind the cloak of virtuosity or "access for the blind," as Tim Cook is, is an act of cowardice. In fact, I am curious as to why Time Cook refused to tell investors how much Apple spends on being environmentally conscious. Is it because they spend too much or is it because they spend too little (but talk about it a lot)?
- If you are transparent, and you truly respect your stockholders, you have to give them a say: CEOs seem to believe the worst about their stockholders, i.e., that they are craven, short term and amoral people who would never assent to socially responsible actions, because it costs them money. Otherwise, what is lost by being transparent about the costs of social responsibility and giving Apple shareholders a say in whether they are okay with Apple being environmentally friendly and the costs associated with that mission? After all, it is their money that is being spent, not Tim Cook's, and it is the height of arrogance for him to assume that he owns the moral high ground here.
- If you give stockholders a say in CSR spreading, and they tell you no, you have to listen: It is true that there will be cases where shareholders decide not to go along with top management and will vote to curtail or eliminate costs associated with being socially responsible. Given the history of corporate governance, I will argue that it will happen very infrequently, and if it does, it will be at companies where the managers are not trusted on doing a good job. For instance, if I were an HP (NYSE:HPQ) stockholder, I would definitely not take the word of HP's management on environmental consciousness. Given the company's perverse track record on acquisitions in the last few years, any spending they do to stop global warming will probably blow a bigger hole in the ozone layer. At Apple, stockholders clearly were not especially troubled by the presence or magnitude of these costs and 97% of them voted against the resolution.
In summary, I want publicly traded companies to be socially responsible, but not at the expense of becoming basket cases, to bear costs being good corporate citizens, while being transparent about these costs, to trust their stockholders by giving them a say on whether they are okay with that mission, while taking no for an answer. I don't want sanctimonious CEOs to define social responsibility for me, to be generous with my money and then refuse to let me know how much they have spent (let alone give me a say).
What should Tim Cook have said?
So, what should Tim Cook have done in response to the questions from the NCPPR reps? First, he should have responded with respect. After all, he is an employee, albeit a very highly paid and elevated one, and these are the owners of the business that he works at. Second, he should have conceded that Apple spends money doing the right thing and being socially responsible; in fact, if he had the facts on hand, he should have mentioned how much of the cost of an iPhone or iPad goes to it being environmental consciousness. Perhaps the reason he did not do so is that it may be just pennies, not dollars. Third, he should have zeroed in on the definition of the bottom line and argued that the bottom line, as he sees it, is to make Apple a more valuable company, not necessarily one that earns the highest profits this year. I think he could have and should have made the point that being socially responsible will make the company more valuable by making its products more attractive to consumers and its profits higher over time.
Of course, to make this argument, the lazy rationale for CSR, i.e., that being a virtuous company is its own reward, has to be replaced with a more rigorous foundation, where CSR is connected to the drivers of value: cash flows, growth and risk. I personally believe that if we want companies to be socially responsible, we need to stop treating this as a morality play and make it in their economic best interests to be socially responsible. For that to happen, of course, we, as investors and consumers, have to put our money behind our mouths and actually be willing to pay higher prices for products for socially responsible businesses and pay more for their shares. In fact, I would be glad to help Apple with building this valuation model and I would do it on a pro bono basis, and treat it as my contribution to a green cause this year.
As an Apple investor, this is what this incident tells me about Tim Cook
I may be overreacting to this incident. Who knows? Perhaps, Tim Cook was having a bad day or there is a history here with the NCPPR representative that I do not know about. However, I am troubled by the reaction because it reveals three troubling things about what Tim Cook thinks about Apple's mission and its stockholders.
- The first is Tim Cook's response to the "bottom line" question from the stockholder group, where he reacted with his "bloody ROI" comment. If Cook believes that the ROI, which is a near-term accounting earnings-focused number, is the bottom line for Apple, that may explain the absence of any "major" new products since very few innovations generate high near-term earnings. Value is driven by cash flows over time, not earnings in the near term, and it is definitely not maximized by maximizing ROI.
- The second is his suggestion that stockholders who are unhappy with Apple's social mission, at least as defined by Tim Cook, should feel free to sell their stock. It is never a good idea for an employee to suggest that an unhappy owner of a business sell the business, since the owner is on much more solid ground suggesting that an employee who does not like the owner find another job.
- Third, there is a hint of a Messiah complex in Tim Cook's answer, a mix of hubris and elitism that he not only knows what's best for society and how Apple can deliver that benefit, but that he can do so, without letting Apple stockholders be privy to the details.
As a parting thought, Mr. Cook should realize that while he may have fought off Mr. Einhorn and neutralized Mr. Icahn, there are Apple stockholders who care about the "bloody stock price" and they will only get more restive over time, no matter how green, virtuous and socially responsible Apple may be perceived to be as a company. If Mr. Cook feels that he cannot reconcile his green mission with delivering higher value for stockholders, he should give up the pay package that he got from Apple last year and become head of Greenpeace instead.
Disclosure: Long AAPL.