Shareholders Rejoice! But Should They?
Thursday of this week will be an unusual day for the world of tech. Both Apple and Google will each hold their annual shareholders meetings within ten miles and a few hours of each other. Tech's top two names will speak directly to their shareholders, yet the meetings may have decidedly different tones.
Lets' begin with Apple: shares are now trading at an all-time high, thanks to the ongoing robust sales of iPod, iTunes and judging by its last earnings report, the Mac as well -- not to mention the upcoming release of the iPhone, due on store shelves in late June. Apple stock has been on the move, almost non-stop for the past three years and this company shows no signs of slowing down.
"We're recommending the stock as a strong buy for several easy-to-understand and compelling reasons: strong fundamentals. The company is gaining share in the core desktop and laptop area. IPods continue to track very well, and as a result, iTunes continues to generate revenue growth and profitability, and there is a significant product pipeline that is coming forward over the next couple of months," S&P's Scott Kessler tells us.
But Apple is not without its issues. The carefully crafted PR image suffered a body blow with the ongoing stock options backdating scandal that threw the company's C-suite into chaos. A recent settlement with the SEC by former CFO Fred Anderson, and pending charges against former General Counsel Nancy Heinen, may have largely put the issue to rest. Yet how Apple addressed it still may be a bitter taste in some shareholders' mouths.
The proxy advisory watchdog group Institutional Shareholder Services has sent out a note to Apple investors asking them to withhold their votes for Apple's board of directors, including all members of Apple's compensation committee that was at the center of the options investigation. They include Millard Drexler, William Campbell, Al Gore, Arthur Levinson, Jerome York and Eric Schmidt.
The recommendation won't cost any of these members their jobs, since the company uses the "single winner" approach to board election. But any significant "no-vote" could send a powerful signal to Apple's management that shareholders are disappointed in the decisions that were made.
"Once again, Apple is displaying a pattern of poor pay practice and disregard for shareholders' input on compensation issues at the company," the ISS report says. "The Apple board's handling of the entire options imbroglio does not inspire investor confidence."
The report continues, "While the SEC has decided not to bring any enforcement action against Apple in view of the company's 'swift, extensive and extraordinary cooperation in the Commission's investigation,' shareholders were not provided with the same level of transparent and complete disclosure of its findings and remedial actions. Instead, secretiveness and a lack of candor surround the case at Apple.
"Strong financial performance does not excuse such shortcomings regarding the oversight of grant timing. CEO Steve Jobs has been instrumental in creating significant shareholder value; however, a cult-like devotion to any CEO can be a huge downside risk to shareholders. The entire board, including Steve Jobs, needs to ensure that even superstar CEOs do not rule the empire."
Says S&P's Kessler, "I don't think there's any question that there were mistakes made and people have been punished for them. However, I would comment that almost all these actions have occurred in the past and I'm not talking just a few months ago, or a few years ago. In some cases, we're talking about a number of years ago."
The past is the past, and the higher these shares climb, the blurrier that past gets.
Apple's meeting goes from 10 a.m PT to 11 a.m. PT, and then we'll get in the truck, jump on to HWY 85 North to the Shoreline Blvd. exit, and reset our position outside Google's Mountain View, Calif. headquarters.
This was once quite the high-flyer, but over the past year, Google shares haven't done much of anything. So you might expect a fair amount of frustration as the company continues to shell out big bucks for major, yet very controversial deals like YouTube ($1.6 billion and fraught with copyright litigation) and DoubleClick (a deal that some say could encourage a US Department of Justice anti-trust investigation.) These could be serious, long-term issues that affect the company and its ability to grow.
But as frustrated and concerned as Google investors are, lest we not forgot, it really doesn't matter because of the Class A and Class B shareowner structure at the company, which has founders Sergey Brin (28.6 million shares or 35.6% of the company), Larry Page (29.1 million shares or 36.2% of the company) and CEO Eric Schmidt (10.7 million shares or 13.3% of the company) in firm control of the company. With their Class B shares, the three executives control 66.2% of the vote. Shareholders have no voice. Period.
Of course, shareholders knew this going in, just as investors in Liberty Media and Dow Jones knew that they were merely riding management's coattails and would reap all the rewards of a job well done without being able to influence decisions along the way.
That makes the Google shareholder meeting a little less newsy. Sure, there are some interesting proposals in front of the board: one comes from the Comptroller of New York, the trustee of the New York City Employees Retirement System, the Teachers' Retirement System, the Police Pension Fund and the Board of Education Retirement System, which collectively own 486,617 shares of (yawn!) Class A shares.
New York City wants Google to adopt a Freedom of Speech and anti-censorship measure, and to send the clear message to countries in which the company does business that Google will not cave to their authoritarian regimes. New York wants Google to step up its fight for freedom and do whatever it can, legally, to resist demands for censorship.
Neat ideas, but there's no way Google will adopt anything like that if it puts its budding political and financial relationships in China at risk. Still, the proposal shines a light on one of the more sensitive topics swirling around the company these days.
There are other concerns as well. Citigroup's Mark Mahaney tells me, "This company is adding employees at a very steady, very high rate: almost 1,500 new employees a quarter. A question that shareholders and investors will have is, 'Are you sure that you're able to maintain the same level of quality of hiring and will you be able to get the same returns on each of those employees that you've been able to from prior employees?"
Good question. He also wants to know: "It's one of the most widely held, no it is THE most widely held stock in the internet space. The stock has essentially been flat. You could have bought the stock at this price a year ago. So, is frustration settling in? No. But at some point people will be looking for out-performance in these shares."
And this: "The issue facing investors is that they know that Google, despite their strong growth in its core business, is investing aggressively in new business. The open question that investors are facing is, 'I want to buy Google now, but do I need to buy it now or why don't I wait for some of these investments to play out, or pan out."
All good points, but like Apple, it comes down to stock performance. "It's kind of tough to be too frustrated with Google from a shareholder perspective," says S&P's Kessler. "The stock came public in August of 2004 at $85 a share. And here we stand three-and-a-half-years later and the stock is nearly $400 higher. I think shareholders have been handsomely rewarded if they have in fact owned the stock for the last year or so."
Not quite. You're doing great if you got in at, or soon after, the IPO. But in this what-have-you-done-for-me-lately kinda world, Apple's got the edge and Google's got a "not much" hovering over its head.
It'll be interesting to hear from a variety of shareholders on Thursday and we'll feature coverage throughout the day. If you invest in either, or both, drop me a note and let me know what you're thinking. Maybe I'll use your comments here or on the air.
Questions? Comments? TechCheck@cnbc.com