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Activists Take Aim at Apple

Shareholders look for a voice in compensation and options timing.

At its annual shareholder meeting Thursday, Apple (AAPL) - Get Apple Inc. (AAPL) Report will square off against disaffected shareholders clamoring for a voice in setting executive compensation -- and hoping to prevent another options-backdating scandal.

Three labor unions holding Apple stock in pension funds have put proposals on the company's ballot that would require options to be priced on the day they are granted; give shareholders a nonbinding vote on executive compensation; and tie executive bonuses to the company's stock performance.

In order to pass, each proposal must be voted on by a majority of shareholders and receive 50% of those votes. The AFL-CIO, International Teamsters and Amalgamated Bank LongView Funds submitted the proposals.

Ironically, the assault on Apple's governance practices comes when shareholders are enjoying all-time highs, sparked by continued strong sales of the iPod digital music player, expanded market share of the Mac computer line, and the anxious anticipation of the iPhone. Apple shares closed Wednesday at $106.88.

Apple is one of many companies facing a flurry of proposals this year to improve governance standards and make executives and board members more accountable for corporate performance and compensation.

As of March 30, there were 127 proposals to revamp executive compensation policies, including 40 to link pay to performance, 45 to give shareholders an "advisory vote" on compensation and six to reform option-grant practices, according to advisory firm Institutional Shareholder Services.

Activist shareholders enjoyed a milestone victory in March when a majority of

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investors voted for a proposal to create a tighter link between performance and the compensation of its popular chief executive, Mark Hurd.

Similar proposals have garnered support from companies that advise shareholders. Securities laws don't provide a mechanism for shareholders to "provide ongoing feedback" to boards regarding the compensation plans they approve for executives, according to a report from shareholder advisory firm Egan-Jones.

Shareholders can only withhold their votes, which is "a blunt and insufficient instrument for registering dissatisfaction" with compensation plans and practices, the report concluded.

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On its ballot, Apple and its board, which includes former Vice President Al Gore and

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CEO Eric Schmidt, said the proposals are unnecessary and will hurt its ability to "attract and retain" top executive talent.

Apple's ballot also points out that its compensation committee is composed of independent directors. Board members are considered independent when they are not employees of the company and have no financial or personal ties to the executives whose compensation they oversee.

Companies in Apple's position have argued that labor unions interfere in compensation matters to gain leverage when negotiating employment contracts.

But this view overlooks the fiduciary responsibility of union pension funds to manage their members' retirement savings, says Rob Kellogg, research and policy director at Institutional Shareholder Services. This duty, he says, means taking an active interest in governance matters.

Both ISS and Egan-Jones recommended voting in favor of compensation and options proposals on Apple's proxy.

The proposal to set guidelines for granting options is particularly thorny in light of Apple's simmering scandal. An internal review found that discrepancies between reported dates and actual dates on options granted between 1997 and 2001 understated past expenses by $105 million.

Apple's former chief legal counsel is under investigation. Its former chief financial officer settled civil charges with the SEC and has implicated CEO Steve Jobs as complicit in the financial misrepresentation of expenses.

Apple rejects the need for option-granting guidelines because in 2003 it began giving senior executives grants for restricted stock rather than common stock. The company says restricted stock grants can't be manipulated because they don't have a strike price like options.

Amalgamated counters that the protections are necessary because the company may in the future choose to begin granting options for common stock again. "Compensation fads come and go, and restricted stock is the flavor of the day," said Con Hitchcock, Amalgamated's outside counsel.

Amalgamated withdrew similar proposals from the ballots of six other companies after their management agreed to adopt policies to prevent future backdating occurrences. Talks with Apple's management, said Hitchcock, "did not make as much progress."