Sunday, March 2, 2014

If Tim Cook does not care about the "bloody ROI", does he care about the "bloody stock price"?

Tim Cook has got a lot of favorable press for confronting an investor group at the last Apple 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 promotion 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, am not a member of the NCPPR, 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:
  1. 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 actually 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. 
  2.  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)?
  3. 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.
  4. 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 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 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 over reacting 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. 
  1. 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.
  2. 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. 
  3. 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.

61 comments:

Harry said...

You're off the mark on this one professor. Your post comes off as a tone argument. Stop trying to psychoanalyze Tim Cook and look at the actions he's taken.

You've admitted that Apple's CSR policies can enhance shareholder value over the long-term. They don't need to be more transparent about it because: 1) shareholders almost unanimously voted against it 2) it is extremely difficult to report on CSRs impact on the brand and overall shareholder value (and would probably be a waste of resources to try).

Apple is an undervalued company and he has engaged with other activist investors on their thoughts about buying back stock and has been constructive on that front. This maximizes shareholder value.

On the most important measure, creating shareholder value, Tim Cook is delivering. That should be your only concern as an Apple investor. If your only gripe is how he treated an investor, I have to wonder how you invested in Apple while Steve Jobs was CEO.

Basically what I'm saying is to get over the personality, and focus on whether he's delivering shareholder value.

Aswath Damodaran said...

Harry,
I know that he is trying and I give him credit for yjsy, but it is also true that whatever he is trying is not working, for whatever reason (not all of them in his control). But on this issue, I know that it is easy to take sides on this issue based on what you think about climate control and the stockholder group in question, but what exactly is the justification you can offer for not being transparent about your CSR actions/costs and then defending them in front of your stockholders?

Harry said...

What exactly are you referring to when you say "whatever he is trying is not working"?

As for your question I think the answer is that it's probably an immaterial amount. I don't think Apple should disclose more than they need to (their financial reporting is more transparent than most companies anyway), especially for things that aren't critical in order to analyze the performance of the business.

Harry said...

I'd also add that Apple is already extremely transparent about their sustainability efforts. You can read all about it here:

https://www.apple.com/environment/

The amount is likely immaterial and there's no need for them to disclose it. My actual opinion is that it enhances shareholder value in indirect and not easily identifiable ways.

Aswath Damodaran said...

Harry,
Look at the stock price when he became CEO and what it is today. I have owned Apple stock for the last year and I don't see any gain in the stock, and it gets worse if you adjust for market performance. So, where is the value being created showing up?
On the transparency and CSR is good for Apple issue, I agree with you more than I disagree. In fact, if Cook had said exactly that in response to the question, we would not be having this discussion and I would not have posted on it.

Harry said...

I know how the stock has performed, I'm an investor as well. Really I have to say I'm surprised to see this line of reasoning from you. Aren't you a value investor? Surely you aren't trying to equate the short-term movement in price to value?

Aswath Damodaran said...

Harry,
So, let's take price out of the equation. What value enhancing action has Apple taken other over the last three years? Buybacks don't enhance value. At best, they are designed to push price towards value. To increase value, you have to create new products or make old products more profitable. Apple has over the last two years become branded as a smart phone/tablet company, for better or worse, and the markets for both products are becoming more competitive and less profitable. Perhaps, you can pinpoint one action that is value enhancing during this period. The only one (and it is a small one) was the debt issue last year, and the value increment came from the tax benefits of debt.

Surya Mishra said...

I think the value increment point is only covered initially in your snide remarks on Mr. Cook.

The bigger point which I thought is being missed in the din of the arguments over "personality" is the responsibility of a CEO towards the shareholders, activist or not. Mr. Cook hasn't behaved responsibly towards them in particular. It's easy to say, sell Apple stocks but difficult to reason it out (though it might be the obviously correct route). I won't go into the debate of CSR and transparency good or bad, because all seem to agree on that.

The CEO's job then, is to take that difficult route to satisfy the shareholders.

Harry said...

Innovation is incremental and they've been trucking along on that front since introducing the iPhone and iPad. Apple has captured a larger share of the over $400 segment for smart phones. They have one competitor than can go toe to toe in that space, Samsung, and they're faltering.

http://www.nytimes.com/2014/01/07/business/international/samsung-forecasts-a-greater-earnings-decline-than-expected-for-end-of-2013.html?_r=0

They've signed new carrier deals including China Mobile. The 5c and 5s have outpaced their predecessors in the mid and high end according to Tim Cook, which translated to a record number of iPhones sold this last quarter (as well as record iPads).

Apple's core businesses continues to be fundamentally sound. The only thing that has changed is the price of the stock has deviated from its intrinsic value.

If you are one of those people that think only new product categories count as innovation, good news, because they're on the way. Apple isn't operating on the media's or investors' timetables, if they were I'd probably sell the stock.

I think you're off the mark on the strength of Apple's position in smartphones and tablets. The increased competition and smaller profits are happening in price segments that Apple doesn't compete in. It's a race to the bottom for everyone but Apple (it is not unlike what has happened in the PC market) and won't be sustainable for them in the long-run.

Nick said...

I also think you're off the mark. Frankly, I think it's naive to think that passive minority shareholders are "owners" in any meangful way or that Tim Cook is their employee. Tim Cook is an employee of Apple and control of Apple rests with the CEO and board. It's certainly constructive to frame investing in terms of ownership, but it's also a fiction, and a better analogy is a minority partner.

As a second point, I completely disagree that it is Tim Cook's responsibility to listen to the shareholders. He owes defference to the board only, with whom he shares control. I think you can always make the case that he should be more respectful, but their only recourse really is to sell the stock, because they are not owners

Ashwin Kumar said...

Tim Cook basically said "I will do whatever I want with your money". I think that's just plain wrong even if it is for right reasons. End of the day the minority stakeholders can't do anything, but would it hurt to bring some transparency and show some respect to the stakeholders !

Anonymous said...

That's absolutely not what he said.

vincenzopavarotti said...

Prof, I really don't think you can make the statement that "whatever he is trying is not working" on the basis of 18 months of share price performance.

I'm hoping that given a bit of thought you agree and I don't have to go in to why this cannot categorically be the case?

By the way, I too am an Apple shareholder and am disappointed with the share price performance.

Anonymous said...

Apropos Nick,

I think your point about minority shareholders not having their say and Tim Cook not being shareholders' representative is misplaced.

First of all, do all minority shareholders wish to make gains in the price movements of Apple shares?

I do not have the money that bigger, institutional investors have, but do I want to be a part of Apple as a company? Absolutely Yes.

While I may not be a marginal investor for Apple sake, I would still be a shareholder and thus the Board's job is to take care of shareholders' interests.

Also, pardon my ignorance here, but is the CEO not responsible to the Board (and ultimately to the Shareholders) and not the other way around? So,while it may seem fashionable to make statements like the one the author alluded to above, it suggest arrogance ingrained within.

I agree with your your point of the minority shareholders recourse being to sell the stock, if they feel like they are not being heard.

But I sense a siege mentality from Tim Cook,with pressure from all sides mounting and no real value additions in product offerings in the last couple years.

Keeping aside the minority shareholders perspective, while Tim Cook can afford to say such things given that Apple is the company it is right now, it would be interesting to see if he has similar observations when the lack of value creation at Apple finally catches up. Till then, the minority shareholders should 'sell their stock', as you point out.

VIKRAM said...

Interesting post professor.

My worry is, next time what if Mr.cook does this with apple's customers by saying "if you don't like apple products, then bloody don't buy "

Anonymous said...

So many ridiculous (but oft-expressed) comments here, but I'll limit myself to rebutting just the main ones.

No Tim Cook doesn't have to give shareholders ("owners") a say in micromanaging the company, other than his statutory obligations. More so minor shareholders. Even more so, minuscule shareholders like the writer of this blog. THAT would be a horrendous waste of time. Do you have any idea how many shareholders like you there are out there. Is he expected to listen to all your opinions and give them consideration?

Contemplate these 2 questions. What exactly do
you know about running Apple that he and his team might might not have considered? My guess, nothing. What exactly does he know that you might have not considered? My guess, a great deal, given you have no knowledge of the internal workings of the business.

When your bus driver is stuck in traffic, do you tell him that he really should have taken another route, or that the bus company should change its schedule? Would you like to poll the passengers as to what route to take, and where to stop? Don't you think there may be another ten dozen considerations preventing the bus driver taking that other route. Not least of which laws, marketing, regulations, competition, infrastructure, timetables, other passengers, the plan of the city in 5, 10, 20 years' time. Does the bus driver have to respond to your nagging and enter into discussion about company route policy. No he doesn't. Yes passengers are punters not shareholders but they are still "paying his salary". Does that give them a say into the route. No it doesn't. Like it or lump it.

Finally, no, Tim Cook has no obligation to give you a detailed breakdown of how he spends his ecobudget and how large it is. You can't have it both ways. Either he is getting the best bang for his buck by talking up his ecocredentials but maybe spending a smaller figure than some other organisations. That is good for shareholders primarily interested in ROI. Or he's really putting his money where his mouth is and has a long-term (maybe 20-year) view of what is important to the brand, perhaps in terms of demographic shifts in brand allegiances and future legislation. Either way, if it was good for the company he would be completely transparent. If it would only cost the company more in terms of responding to every self proclaimed eco-auditor (some wanting to spend more, some wanting to spend less) out there, in order to mitigate damage to the brand from negative publicity then he should be against transparency, and that will benefit the shareholder.

It's a public company not a public service, and goodness we barely have cameras in courtrooms, so why on earth should Apple "let us in" on their business.

As he says, it's hard enough keeping one step ahead of the competition - no need to make it easier for them. Apple is a knowledge business, give the knowledge away and you destroy the business.

Anonymous said...

My reply:

So many ridiculous (but oft-expressed) comments here, but I'll limit myself to rebutting just the main ones.

No Tim Cook doesn't have to give shareholders ("owners") a say in micromanaging the company, other than his statutory obligations. More so minor shareholders. Even more so, minuscule shareholders like the writer of this blog. THAT would be a horrendous waste of time. Do you have any idea how many shareholders like you there are out there. Is he expected to listen to all your opinions and give them consideration?

[[While the general day to day management is not supposed to be dictated by what a 'miniscule' shareholder' wants, surely making a remark that seems to defy general logic (and not just a miniscule investor's) must cause discomfort to 'big' investors as well.]]

Contemplate these 2 questions. What exactly do
you know about running Apple that he and his team might might not have considered? My guess, nothing. What exactly does he know that you might have not considered? My guess, a great deal, given you have no knowledge of the internal workings of the business.

[[By that logic, there should be no analysis of any company, because Insider know best]]

When your bus driver is stuck in traffic, do you tell him that he really should have taken another route, or that the bus company should change its schedule? Would you like to poll the passengers as to what route to take, and where to stop? Don't you think there may be another ten dozen considerations preventing the bus driver taking that other route. Not least of which laws, marketing, regulations, competition, infrastructure, timetables, other passengers, the plan of the city in 5, 10, 20 years' time. Does the bus driver have to respond to your nagging and enter into discussion about company route policy. No he doesn't. Yes passengers are punters not shareholders but they are still "paying his salary". Does that give them a say into the route. No it doesn't. Like it or lump it.

[[I think you're over-simplifying. A CEO is not a one-man show, or should not be. Unlike your bus-driver, who really does not have to be a transportation visionary,the CEO should be held accountable for a 'general sense' of where the Firm is going]]


Finally, no, Tim Cook has no obligation to give you a detailed breakdown of how he spends his ecobudget and how large it is. You can't have it both ways. Either he is getting the best bang for his buck by talking up his ecocredentials but maybe spending a smaller figure than some other organisations. That is good for shareholders primarily interested in ROI. Or he's really putting his money where his mouth is and has a long-term (maybe 20-year) view of what is important to the brand, perhaps in terms of demographic shifts in brand allegiances and future legislation. Either way, if it was good for the company he would be completely transparent. If it would only cost the company more in terms of responding to every self proclaimed eco-auditor (some wanting to spend more, some wanting to spend less) out there, in order to mitigate damage to the brand from negative publicity then he should be against transparency, and that will benefit the shareholder.

[[I thought you said earlier that the CEO was not supposed to have a vision??]]

It's a public company not a public service, and goodness we barely have cameras in courtrooms, so why on earth should Apple "let us in" on their business.

[[I think there can be a middle ground, which are what good corporate governance practices provide]]

As he says, it's hard enough keeping one step ahead of the competition - no need to make it easier for them. Apple is a knowledge business, give the knowledge away and you destroy the business.

Anonymous said...

You guys are something else.

Shareholders are the owners - the only difference is how mch they own. Cook is an employee. That's nt even debatable.

The market is smarter than many value investors think (that's why most can't beat tge market when adjusting for risk and liquidity). There's a plethora of research showing how the market usually reacts to long term changes (that's why the market rewards R&D, for instance). A falling stock price is at least a red flag.

The stock price felt incredibly when compared to the market. And it wasn't an irrational crazy fall either - one can easily see how the bloody ROI and, more importantly, the growth prospects have been squashed under Cook's management. One can easily take one of the prof's old valuation spreadsheets on Apple and try to justify it valuing 800B or a trillion - that will demand some extreme assumptions to say the least.

Jobs was brilliant in many ways, but didn't instill a particular culture for the long term at Apple. Cook seems to be concerned with everything but improving the value. Anything Apple has attempted in the last few years seems to be a bunch of shots in the dark, with no differentiator or competitive advantage at all.

If you had 700M in AAPL a while ago, sold it all and invested in the S&P, you'd have about 1000M now. If you kept it at Apple, not so much.

Back of the napkin, since Cook took charge, AAPL investors need about a 50% upside just to keep up with the market. One may talk about hidden value all they want - once a few years have passed and you're 50% plus behind the market, in a risky company, that's not value investing - that's just a mistake.

Anonymous said...

Should AAPL have more than one focus? I don't think so.

If Apple focuses on increasing shareholder value, they will have a clear mostly measurable goal and will contribute to mankind's wealth.

If Apple wants to be socially conscious they should do like Buffett and donate the money to someone who knows what they're doing (i.e. Gates Foundation).

A non-specialist who spends just a little bit of time thinking about helping the world and has multiple goals (Cook) clearly is not effective. While Gates saves a life with a thousand dollars or less (and has saved about 20 million already), Cook spends millions/billions trying to make specific products from a specific company aimed to wealthy consumers a little more socially conscious.

Economically, this is akin to Cook basically killing African children (donates to Gates or the Malaria Foundation could save them - Cook seems to prefer they die in horrible pain as long as rich blind kids in Norway or Canada can use Apple products a little better).

jennifer Warnes said...

wow! all of you supporting tim cook now because the prof said the right thing. But if Carl Ichan ask for a bigger piece of dividend, everybody is happy. Double standards - because we are minority shareholders.! In larger terms, nobody has ever cared for minorities ever.

Tim Cook needs to treat every shareholder with respect or it is time to go!!!

Sunil said...

While I am a big fan of your work, your post on Tim Cook was clearly your "not-so-profound" thought for the month. Your post makes you come across as an academic who has never built or managed a business, and one who like to hear the sound of his own virtuousness. Why do I say this;
1. Apple's environmental efforts have not been at the cost of profits as their P&L attests to. They are in the business of making good products and profits, and that is what Mr.Coook and his team are focused on doing, not saving the ozone layer. With this priority, environmental consciousness may be a culture and a mindset at Apple that guides actions but not the objective in itself. Mr. Cook was therefore clearly stating the fact that he does not daily look at financial cost-benefit of being environmentally conscious, they just do what they do and also make a lot of money, so it is clearly not hurting the shareholder.
2. He is using the word ROI generically as in "some sort of financial analysis", rather than in the technical sense of ROI. If you spent more time in boardrooms around the world than in the semantic cloisters of academia, you would be surprised to see howmany corporrate chiefs use ROI so casually.
3. Lastly if you think that Mr.Cook's comments reflect that he does not care about his investors or stock price, this is a pretty big leap. Every evidence suggests that the mild mannered Mr. Cook is also smart enough to understand that innovation is what drives value and he is focused on that. If you ever ran a business you would realise that innovation is hard and unpredictable.

Prof, you clearly have a lot of time on your hand, so perhaps you should take the time you would like to invest in pro bono work and work on a shopfloor or a sales organisation to learn bow business works and finally to a bar so you can chill out a little.

Anonymous said...

"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."

The fact that you have to point this out just shows how 'professional' management (as compared to owner management) has become all powerful in relation to the shareholder. Partly, its because ownership is largely in the hands of moronic investment managers who are too scared (or stupid?) to start exercise their shareholder powers. Its a green light for professional management to a) pay themselves whatever they want .. [at board meeting] "you go ahead & make up my pay and I'll make up yours" b) empire building through badly thought out M&A c) short termism with everything that comes with it, namely lack of investment while ramping stock prices through buybacks (or empty talk).

Anand Raj

Mark said...

Outstanding rational piece. I admire Tim Cook, but he's confusing his controversial policy preferences (Warmism, Gay Fascism) with his employment contract. Such confusion throws doubt on his strategic instincts.

rickraphael said...

Dr. Damodaran:
Taken in the context of your 1/31/14 article, Market Mayhem: Lessons for Apple, you are making cogent points. Apple does need to be financially transparent but we must also recognize the need for secrecy at the company. Apple is swimming in a competitive shark pool. Saying it is a socially responsible company is good for business. Telling the customer how much that added cost brings to an iPhone when the customer may not agree with the political consequences of the policy may not be so good for business. Perhaps this is a “national security” issue for Cook. Again, you may be right in principal to say Apple can’t have it both ways, i.e., if it’s a selling point for the products the company perhaps should tell the shareholders how much is coming out of the bottom line. On the other hand, perhaps it’s a fractional part of a penny, in which case, what’s the point for him?

Jobs never had any hesitancy about telling shareholders to take a hike. His scorn for the stock market and AAPL investors was legendary. I’d say that Cook is simply pursuing long standing company policy. And if he was wrong at the shareholder’s meeting, I think Al Gore will take him to task for it.

I value Tim Cook for his managerial skills; for his sales skills and public presentation abilities, not so much. He is the CEO and for better or worse, our options are to have these online dialogues that are not going to change anything or sell the stock.

Or perhaps he'll you up on your offer. It’s a wonderful idea!

Anonymous said...

I didn't read Tim Cook's response as dismissive of owners' opinions in general, but a reaction to NCPPR using an investment in Apple to make a high profile political point that would get picked up in the media. Does NCPPR have any genuine interest in Apple's long term financial results?

If an Apple investor had asked a sincere question about whether its green initiatives were a drag on its financial results they might have still gotten stonewalled, but I suspect the response would have been more measured and polite.

Aswath Damodaran said...

Sunil,
You suggest that I spend some time in a business to understand what Mr. Cook's motivation is in this issue. I think you really mean that I should spend time in a corporate environment to understand how CEOs think and that is a very different setting.

Let's make this simple. Let's assume you own a restaurant and you hire me as your manager. My favorite cause is feeding the homeless and I decide to set aside a third of your restaurant to accomplish this objective. When you ask me how much this is costing, I refuse to tell you and I also tell you that when it comes to feeding the homeless, the bloody profits don't matter. Be honest. Would you keep me on as your manager?
You will probably argue that it is different being a shareholder at a publicly traded company. Why? Because I own a small piece of the company? If so, don't you think that this is a fundamental problem in corporate governance?

On your first point, which is that Apple is gaining value from being environmentally conscious. Don't I make exactly the same point? My issue with Cook is two fold: not telling me how much you spend is not an option and if you are rigorous, you need to work through the benefits of being green and be able to convince me of its efficacy. I think it can be done, but you have to trust your stockholders to make the right judgments.

Finally, you would be surprised at how many CEOs make decisions based on ROI. How else do you explain the popularity of measures like Economic Value Added (EVA), which is just a glorified ROI measure?

Harry said...

Professor,

The analogy is weak because the amount spent is not anywhere near a third. The amount is immaterial.

Your criticism of Tim Cook over this issue is patently absurd. And it's all because of a group with a political agenda that has no interest in the long-term performance of the company or shareholder value.

Harry said...

You've also failed to articulate how Tim Cook has failed to deliver shareholder value, when all of his actions prove the opposite.

Dan S. said...

Cook should have just stuck with the script in the proxy statement when responding to the question at the meeting. After all, 97% of shareholders felt it was adequate enough to agree with when it came to voting.

Clearly, he became angry at this particular questioner and made some foolish remarks, which made him appear flippiant about shareholder value, and ordinarily, I would be appalled at a CEO having such an attitude.

However, in this particular case, you have to consider the motivation of the 'shareholders' bringing up the motion. After reading the proxy and press release this organization (NCPPR) released in the wake of this meeting, it's pretty clear that it bought a token amount of stock to make a political point, using Apple as its foil. The intent seems to be purely to try to embarass a company for a business practice with which they disagree politically (and also has Al Gore as a board member).

Cook appears to have concluded, correctly in my view, that the NCPPR does not have a bona fide interest as a shareholder, but was, rather, willing to pay the relatively low price of admission, purchasing a few shares of stock, to make a political statement. I don't think it's irrational for a CEO to not want such shareholders, and thus I understand Cook's attitude toward them. I do not believe it is an idictment on his corporate stewardship. That should be judged in more substantive matters, and not the political sideshow of this particular situation.

Obviously the NCPPR's scheme worked to a degree, evidenced by it getting a mention in the latest news cycle as well as our discussing it here today.

Max said...

This post reminded of Milton Friedman's famous "The Social Responsibility of Business is to Increase its Profits" article. Similar themes.

My reaction to Cook is quite different: I thought it was calculated PR. There's no downside to insulting some busybody shareholders. He used it as an opportunity to burnish Apple's image.

Anonymous said...

Some guys who have commented here do not seem to understand the meaning of business, roles and responsibilities of its managers and the board, and corporate governance. They have also demonstrated lack of knowledge about the ownership of business and owners' rights.

They have implied that a private business started by an individual owner is quite different from a publicly owned business on the one hand, and on the other hand they consider that both are the same when it comes to spending money.

They fail to understand that while an individual can do anything from his/her own purse, it is immoral and unethical to do so from someone else's money, especially without their knowledge.

They have also not understood what is CSR, and long-term goals of a profit-seeking business.

More importantly, they have not understood how a manager of a publicly traded company should behave.

Sadly, they have also not used the right words while writing based on their thoughts. Good behavior is the first virtue to be acquired.

Ignoring this crowd is the best thing to do, I guess.

Khambatta said...

Mr Damodaran, such issues are likely controversial, specially since they are attached with a company that is seen as an icon in itself. Probably you decided to write on this even having known that, so kudos to you, Mr Damodaran.

I think many people are missing the key points you are trying to make and getting into the semantics of it. Some of them are unnecessarily disrespectful for what is just a disagreement of opinion.

I am a low-risk value investor in India and believe that management attitude towards minority shareholders and transparency with shareholders adds (or detracts) a lot to the long-term value of any company.

It gives me no joy to know that some companies whether in US or India try to hide behind the veil of secrecy citing competition. Hopefully, other companies are more shareholder friendly, and this kind of management attitude is not representative.

Khambatta said...
This comment has been removed by the author.
Apprentice of Agamas said...

Khambatta, would you mind contacting me (or give me a means to contact you) ? I'd love to mull over ideas of value investing in Indian stocks using a synthesis of several approaches of all of the folks you mention in your profile plus others (our very own Prof, Klarman and Penman)

Anonymous said...

Professor Damodaran,

I find your thoughts here the crux of the issue:

"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."

Given Mr. Cook's response I assume he was unprepared for the question and unfortunately chose to give a flippant response to the question. I'm sure Mr. Cook has since been briefed on the pertinent information and will be able to deliver a well crafted response in the future.

I do agree that more disclosure is better, but I think that their PR team would like some time to properly frame the argument to get the best brand value out of it. Since spending a pittance (I find more likely than it costing a material amount) on social responsibility might alienate some customers who strongly value that component of the product. Giving good spin to the magnitude of their social responsibility rather than the dollar figures is probably the message they will craft. They also want to be able to have a good story and figures to tell the shareholders that their socially responsible investments are good for profits in the long run.

Also on your comments here:

"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."

I absolutely agree. Some companies will simply not get much benefit from socially responsible investments, those that do not should return that money to the shareholders and let them donate money to causes if they so choose. Companies with strong brands and those particularly in the luxury segment which have both large margins and where customer loyalty is important for future revenue should definitely be able to monazite their socially responsible investments. Companies like Patagonia have practically built their brand around their social responsibility.

Stephanie M. Davis said...

Dr. Damadoran: would like 10 minutes of interview time for a podcast on this story from your point of view. Thanks

Hemanth Manda said...

I see a lot of debate on Apple's recent performance and how well Tim Cook has been delivering since he inherited the job from Steve. I crunched the return on invested capital and marginal pre-tax ROC using an earlier example from Prof. Damodharan ( see my following blog post for results : http://bit.ly/Nx2GTY)... Numbers don't lie and they don't look good. Unless Apple has been working on a stellar product, it is not going to get any better.

Anonymous said...

Ranjit

Just a quick what IF ? actually two

1- A hypothetical scenario since APPLE its a publicly traded co & most of them are not considering Individual share holder as owner let me empower others.

What if the Top Institutional holder who collectively hold 20% of apple (Vanguard Group,State Street Corporation,FMR, LLC BlackRock Institutional Trust Company,Invesco Ltd.Northern Trust Corporation)

shows up & say "We care about the bloody ROI." ? & as the Owner/Investor we care about making returns & If you don't care about the ROI we will fire you ? or we will dump the stock ? (Remember 20%)

what will Tim Cook answer in that case?

2> Second scenario suppose you are the owner of a small start up which is trying to survive In the competitive market..& some of your manager say to you "I don't consider the bloody ROI."

What will you say in that case?

Bob McGill said...

If Tim Cook keeps dumbing down Apples stock price it could become a target for activist investors. They would dethrone the "King" and replace him with a CEO with a long term vision for Apple.

PENNY STOCK INVESTMENTS said...

Apple has seen its best day.

Anonymous said...

professor, on a tangential point to you talking about working in a 'business', would you ever consider working in a fund in a full or even part time capacity?

in your lectures you've spoken about investing personally, would you ever consider using your skill commercially?

Anand Raj

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CI said...

Many of the comments are missing the Professor's point - which is, management has a duty to maximize shareholder value. Tim Cook's response was that CSR is an important and noble mission. But what does that mean for shareholders? The estimations of the benefits of CSR to Apple will be very soft at best, but it is the CEO's job to communicate that (i.e., CSR burnishes our brand or makes Apple more appealing to a profitable sector of socially-conscious consumers, ergo higher profits).

Note that I am not judging Tim Cook's track record as CEO; time will settle that argument. I am solely focusing on how he responded to the CSR question. And on that point, the Professor is fundamentally correct - Tim Cook failed to articulate how Apple's dedication to CSR is promoting shareholder value.

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Apple is in great shape now, but runs a serious risk of becoming a value trap.
value trap: any enterprise that accumulates cash and assets without making significant investments or returning it to its owners

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Peter said...

As only one commenter has pointed out, what was really obnoxious about the question is that the shareholders had no interest at all in Apple or its financial decisions or even corporate social responsibility programs more generally. They were using a high profile setting to get attention for a political point.

Cook's real mistake was responding to them at all. He should have said "that's obviously a political question" and moved on. Or asked them some basic facts about Apple to establish clearly that they were not interested in the business.

By getting angry and responding in terms of CSR, he opened himself up to the Professor's criticism and gave the questioners exactly what they wanted - media attention.

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Saurav Jalan said...

Dear Prof.,

I think that Mr. Cook shouldn't worry about the virtues of running a company and preach aggressive piety to the shareholders of Apple. A CEO should be rational and humble about his judgement and shouldn't believe that running a company like Apple qualifies him to be the wisest person on the planet.

It's not that every shareholder wants to make money to fritter it away on things which are not so important for the society. There are many shareholders who do a lot of charity in their personal capacity and are more happy and satisfied about doing charity in the field of their choice.

It makes more sense to rationally discuss about the social concerns of the business with shareholders and analyze its cost and benefits before taking any decision.

Who knows some shareholder might come up with a form of charity which would have a much greater impact on the society as compared to what Mr. Cook has thought about. In ancient Indian civilization the powerful kings never use to take any important decision without consulting the learned scholars who has the integrity, knowledge and wisdom to explain what would be in the best interest of all.



vincenzopavarotti said...

Thinking about it some more, this article really bothers me in that it displays a fundamental belief that profit should be the primary, or perhaps even sole, objective for a corporation.

Perhaps unsurprising for a corporate finance professor, but it is extremely questionable to me that humanity is better off where people and capital are mobilised with this intent.

I applaud Tim Cook's strong leadership - as someone that holds Apple stock as a substantial portion of my portfolio. Sure, I would like to make money out of my position, but not by acting against the greater good of humanity (and I am not a multi-millionaire).

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Anonymous said...

"actually be willing to pay higher prices for products for socially responsible businesses and pay more for their shares."

A cynic might say, professor, that you've blown your own argument out of the water with that statement.

I think the cost of environmental friendliness is more difficult to pinpoint than you might hope for. I have done work on Health & Safety, but my time has not been specifically costed as such. That makes accounting for the money that my company spends on "social costs" somewhat inaccurate.

Take waste disposal, for example. Presumably, if you wanted to know how much "socially responsible" waste disposal cost, you'd have to be careful to keep tabs on the incremental costs of "socially responsible" waste disposal, and "normal" waste disposal. As it turns out, my company deals with hazardous substances, for which legislation exists regarding its disposal, so in my particular case "socially responsible" disposal is not really an option. It's mandated by law.

My broader point is this, though: is it a particularly effective use of managment's time to gather all this information separately, or would it be better, as I'm implying, that management "just gets on with it" and acts in the most appropriate way that it feels?

It's management's job to manage. Otherwise, you're really just second-guessing outsiders, and there's a risk of micro-managment.

Let's not forget that one thing that Jobs is noted for is to clear away the mental clutter, and focus on the task in hand.

M

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Eddie said...

I totally agree with everything Harry said. I am a shareholder with 24% of my net worth in Apple. Tim Cook brought value by: #1 market cap, #1 brand, and longer lines every year. Tim Cook's comment got 97% of investors, customers, and employees to love Apple even more. That increases loyalty and a sense of purpose, because Apple is not a company that focuses on the bloody ROI. Apple is a company that focuses on making the best product (which includes social responsibility), and by doing so, people will buy the products, and eventually everything else follows, including the stock price.

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Anonymous said...

" 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. "

One of the most idiotics sentences I've ever read, and written so matter-of-factly without an ounce of humility of irony.

Apple has decimated all of its previous sales, revenue, and profit records since Tim has been CEO- far surpassing any performance under Jobs. As for stock price, when Tim became CEO is was around $350- today, it is $600- almost DOUBLE what it was. So, what exactly are you bitching and moaning about? Tim was making a very obvious point- that once in a while, for a company as rich as Apple, not ever fucking decision needs to be made based on ROI. Especially when it comes to social, environmental, and humanitarian causes. Most of us got that. It's ludicrous to believe Cook does not care about Apple's financial health or stock price- obviously, he does. His point that if a company is pulling in billions and billions a quarter, it can afford to pursue some causes it believes in, without having to answer and apologize for every penny spent. In most cases, even if you're a cynical bastard like yourself, these causes also tend to create positive PR, and have longtem positive effects for the company- even if the Ibenefits are not instantaneous. Cook's point was that Apple can be ultra-profitable, and responsible at the same time. It's making enough money, without needing to apologize to people like you. Apparently, you don't get it, and never will.

Your entire article was mind-numbing, and I think the stupidity of the statement I quoted, and the fact that it is based in nothing resembling a fact (apart from your own hysterics) speaks for itself. Cook has proven himself thousands of times over. More can be said about people like you, with tall poppy syndrome.