Corporate Governance and Finance - Essay Example

?Corporate Governance and Finance Table of Content Overview 3 Company Background 4 Company History 5 Company’s Strategic Direction 5 Company’s Corporate Social Responsibility 6 Comparative Analysis of Company’s position in view of Economic Change (Fiscal Year 2011 vs. 2010) 7 Company Stock Performance 8 Evaluation of Company Share price over the last 8 months 9 Composition of Shareholders and their Performance 13 The Industry Experience of the Company CEO 14 Evaluation of Company’s Position in terms of US Market Practice 15 Assessment of Company’s Corporate Governance and its Effectiveness 16 Conclusion 17 References 19 Appendices 23 Overview This paper is intended to study the performance of Apple Inc. with the last 8 months and relate its performance to the effectiveness of its corporate governance. Various researches have revealed that superior corporate governance is greatly correlated with improved operating performance as well as market valuation (Klapper & Love, 2002; Gompers, P., et al, 2001). This is because companies with enhanced corporate governance would provide their shareholders with stronger rights, resulting in better performance and market value (Shleifer & Wolfenson, 2002; Shleifer& Vishny, 1997). In order to conduct the study in a methodical way, the paper first focuses on the background and history of Apple Inc., following which the paper discusses the strategic direction and corporate social responsibility of Apple. Subsequently, the financial position of the Company is assessed in view of the economic changes. For a more detailed understanding of Apple’s performance, the share price movements of the company during the last 8 months are examined. The corporate governance norms of an exchange listed company are largely influence by its institutional ownership (Li et al, 2006). Hence, the paper would further accentuate on the composition of Apple’s Shareholders and their performance. Furthermore, the qualification and industry experience of the Chief Executive Officer (CEO) of Apple Inc. is conferred. The paper then evaluates Apple’s compliance to the US market practice. Conclusively, the paper discusses the corporate governance practices of Apple Inc. and attempts to relate it to its performance in the Stock Exchange. Company Background Apple Inc. was instituted in the year 1977 and is headquartered in California, United States of America. The company along with its subsidiaries designs, produces, and sells mobile communication devices, personal computers, media devices, and handy digital music players among others. Apple Inc. also sells a range of associated services, software, networking solutions, peripherals, digital content and other forms of applications. Apple Inc. caters to a broad array of clients, ranging from individual consumers, to small and mid-sized enterprises and education, corporate and government customers (Apple Inc. (a), 2012). The products as well as services offered by Apple Inc. comprise of iPhone, Mac, iPod, iPad, Apple TV, in addition to a collection of specialized and consumer software applications. Apple Inc. also provides the iOS, iCloud, and Mac OS X operating structure, in addition to an assortment of accessory, service as well as support offerings. Apple Inc. also vends and distributes digital content as well as applications by means of the App Store, iTunes Store, Mac App Store and iBookstore. The Company markets its products throughout the globe via its stores, both online as well as retail in addition to direct sales force. Apple Inc. also sells via wholesalers, intermediary cellular network carriers, retailers, as well as value-added resellers. Furthermore, Apple Inc. also markets a range of third-party iPhone, Mac, iPad, and iPod attuned products, such as application software, printers, speakers, headphones, storage devices, as well as many other accompaniments and peripherals, via its retail and online stores (Apple Inc.(a), 2012). Company History Apple was founded by Steve Jobs and Steve Wozniak in the year 1976. Originally, the duo intended to build an uncomplicated micro-computer board that could be marketed to small organizations. Nevertheless, the two of them in due course went on to assemble a microcomputer kit known as Apple I (Allan, 2001). In the year 1977, Apple was integrated as “Apple Computer Inc”. The company came up with one of its initial commercially successful personal computers, known as Apple II, during 1977 (Elliot, J., & Simon, W.L., 2011). The Apple II was different from the offerings of the other rival companies owing to the incorporation of color graphics as well as an open architecture. The Apple II was acknowledged for its simplicity of use, attributes, and expandability. This facilitated Apple in its expansion into a profitable, successful and honored company. In the1984, Apple came up with the highly appreciated Macintosh, which offered superior graphics potential and an innovative Graphical User Interface. Subsequent to the triumph of Apple II and the introduction of Macintosh, Apple launched its Initial Public Offer (IPO) in the year 1984 (Elliot, J., & Simon, W.L., 2011). Company’s Strategic Direction Apple Inc. offers some of the most excellent personal computing, mobile communication as well as portable digital music experience to individual consumers, professionals, enterprises, government agencies, and corporate by means of its modern software, hardware, peripherals, services, and other Internet applications. Apple’s business strategy leverages its exceptional capacity to devise and build up its personal operating system, application software, hardware, and services to endow its customers with latest products and solutions with advanced easy-of-use, flawless combination, and pioneering industrial design. The management of Apple Inc. believes that incessant outlay in research and development activities is crucial for the development and improvement of inventive products as well as technologies. Over and above developing its personal computers as well as related solutions, Apple Inc. carries on to make the most of the union of the digital consumer electronics, personal computer, as well as mobile communications. The Company has been successful in doing so by developing and refining innovative offerings, such as the iPhone, iPod, iTunes Store, as well as Apple TV (Apple Inc., 2011) Apple’s strategy also comprises of extending its distribution network to efficiently get in touch with greater number of its targeted customers and endow them with a premium sales as well as post-sales support experience (Apple Inc., 2011). Company’s Corporate Social Responsibility Apple Inc. does not issue any Corporate Social Responsibility (CSR) report, instead all the information are reported through their annual reports and reports on their Suppliers’ as well as their Company’s Code of Conduct. However, the Company religiously complies with its CSR standards. The company recognizes its liability to ascertain proper working conditions in its supplier factories (Apple Inc. (b), 2011). An assessment of Apple’s Supplier Responsibility Report divulges that the organization is taking measures to prevent unethical practices amid its suppliers. Some of the unethical practices against which Apple had taken action include u employment of juvenile labor at some of their facilities, hazardous working settings at two facilities, fabrication of audit resources at four facilities, as well as corruption at one facility (Apple Inc. (b), 2011; Forbes, 2011). It’s understandable that these negligent a\and unethical practices had to be prevented. Nevertheless, doing what is required in this field cannot be termed as CSR activities that should have been practiced by the company (Forbes, 2011). Apple Inc seems to be inclined in the development of a fresh vision for the company, one that comprises of CSR. Subsequent to his appointment, Tim Cook, the CEO of Apple declared that Apple would take up a fresh corporate charity matching plan, by means of a model akin to those of other large organizations. The model reflects a dollar for dollar equivalent for workforce aid of up to $10,000 per annum (IMD, 2011). Comparative Analysis of Company’s position in view of Economic Change (Fiscal Year 2011 vs. 2010) The total net revenue of Apple Inc. in 2011 was $108,249 million, which was a 66% increase as against that of 2010. The company achieved the highest percentage increase in net sales (174%) in the Asia Pacific region. The earnings per share of Apple for the year 2011 was $28.05, while it was only $15.41in 2010. This increase in EPS was due to the 85 % rise in the net income of Apple in the year 2011 as compared to that of 2010, which more than compensated for the increase in Apple’s weighted average outstanding shares during 2011 (Apple Inc, 2011) The figure below illustrates the revenue generated by Apple Inc. from 2009 to 2011, in terms of its four important product offerings. Figure 1: Total Revenue of Apple by Product Line (Source: Macworld, 2011) Company Stock Performance The graph below illustrates the evaluation of the five year total shareholder return of Apple as against the S&P 500 Composite Index, the Dow Jones U.S. Technology Index and the S&P Computer Hardware Index (Apple Inc, 2011). Figure 2: Comparison of 5 Year Cumulative Total Return (Source: Apple Inc, 2011) In the figure, it has been assumed that in September 2006, $100 was invested in each of the index including Apple (Apple Inc, 2011). It can be observed from the graph that the total shareholder returns of Apple Inc. had been consistently higher that of the other Indexes considered. This implies that Apple Inc. had taken good care of the interests of their shareholders, which is an indication that the corporate governance of the company is quite strong. Evaluation of Company Share price over the last 8 months This section of the paper focuses on the share price movements of Apple Inc. for the last 8 months (from August 25, 2011 to April 25, 2012). (Refer Appendix) The figure below graphically represents the fluctuations of the adjusted values of Apple’s share price variations during the aforementioned time period. Figure 3: Apple’s Share Price Movement (Source: Refer Appendix) The percentage variations of Apple’s Stock price have been illustrated in the following figure: Figure 4: Percentage Share Price Movement of Apple Inc. (Source: Refer Appendix) It can be inferred from Figure 3 and Figure 4 that, the value of Apple’s shares have increased visibly since the beginning of this year. The percentage variations of the share price have also remained in the positive side during this year, excepting a minor decline in the prices during the last three weeks. Apple Inc. is listed in the NASDAQ Stock Exchange as NASDAQ: AAPL (Apple Inc.(c), 2012). The price movements of Apple’s Stock against the NASDAQ reveal that the value of the Company’s stock is much higher than that of NASDAQ’s cumulative value. (Source: Yahoo Finance (a), 2012). Figure5: Price Movement of Apple Inc. against NASDAQ The primary rival companies of Apple Inc. include Hewlett-Packard Company (HPC), Dell Inc (Dell) and Microsoft Corporation (MSFT) (Glass Lewis & Co., 2012). The following figure illustrates the indexed stock price movement Apple Inc against, Peer Average (comprising of HPC, Dell and MSFT) and the Wilshire 5000. (Source: Glass Lewis & Co., 2012). Figure 6: Indexed Stock Price Movement of Apple Inc against Peer Average and Wilshire 5000. Consequent to the assessment of the share price movement of Apple Inc. during the last 8 months and the comparison of Apple’s stock price fluctuations with that of its peers as well as with indexes like NASDAQ and Wilshire 5000, it can be inferred that Apple’s stocks have been performing well with respect to the overall market. This implies that the Company has been protecting the interests of its shareholders by providing them with augmented shareholders’ return. This further indicates that the Company has efficient Corporate Governance practices. Composition of Shareholders and their Performance Apple Inc. has around 932.37 million shares outstanding (Apple Inc. (d), 2012). Of this, only 0.64% is held by insiders while 70.20% of the shares are held by the institutions. The rest of the shares are held by common investors (Yahoo Finance (b), 2012). The high percentage of institutional ownership in Apple reveals that these institutional investors have a strong influence on the corporate governance of the company. The effectiveness of corporate governance affects the quality of disclosures, thereby influencing the decisions taken by investors and other stakeholders (Larcker et al., 2007). Evidence suggests that with a change in institutional ownership, the corporate governance and performance of the Company gets influenced (Davis & Thompson, 1994). An increase in institutional ownership has a strong influence on the corporate governance and performance of the organization (Baysinger & Hoskisson, 1990). The top five institutional owners of Apple Inc. are Fidelity Management & Research Co (5.39% ownership), The Vanguard Group, Inc. (3.99% ownership), BlackRock Fund Advisors (3.82% ownership), State Street Global Advisors (3.69% ownership) and T. Rowe Price Associates, Inc. (2.52% ownership) (Glass Lewis & Co., 2012). (Refer Appendix) The Industry Experience of the Company CEO Tim Cook was named as the Chief Executive Officer of Apple Inc. in August 2011 and serves on the Company’s Board of Directors. Prior to that, he was the Chief Operating Officer of Apple and was accountable for the sales and operational activities of the company across the globe. Tim Cook was also the Chief of the Company’s Macintosh division and played a major role in the continuous improvement of strategic reseller as well as supplier associations, ascertaining agility in reaction to an increasingly challenging marketplace (Apple Inc. (e), 2012). Apple Inc awarded Tim Cook around $378 million in total compensation, together with 1,000,000 restricted stock units which have a value of approximately $376 million, taking into consideration his promotion as well as his long-term retention, the Company. The Company had started that this elevated compensation is justified owing to Tim. Cook’s experience with Apple, as well as his leadership for the period of Steve Jobs’s preceding leaves of absence. The Management of Apple Inc. considers the retention of Tim Cook as CEO as vital to their organization’s success and efficient leadership transition (Glass Lewis & Co., 2012). Before joining Apple, Tim Cook was associated with Compaq as the Vice President of Corporate Materials for and was accountable for getting hold of and administrating Compaq’s entire product inventory. Prior to that, Tim Cook worked at Intelligent Electronics as the Chief Operating Officer of their Reseller Division. Previous to his work at Intelligent Electronics, Tim Cook was associated with IBM for about 12 years in their Personal Computer business segment (Apple Inc. (e), 2012). Evaluation of Company’s Position in terms of US Market Practice The firms that are listed on a stick exchange of the United States have to abide by the pertinent stock exchange listing regulations. According to the NASDAQ as well as the New York Stock Exchange, the board of directors of every listed company should consist of a large number of independent directors. The companies are required to firm an audit committee consisting of at least three independent directors. It is mandatory to have the supervision of independent directors on matters related to the compensation levels of executives and the nomination of directors (Glass Lewis & Co., 2012). A careful assessment of the constitution of the Board of Directors and other imperative Committees of Apple Inc. reveals that the Company meets the standard requirements of the stock exchanges (Apple Inc. (f), 2011). Assessment of Company’s Corporate Governance and its Effectiveness Corporate governance and compliance to its prescribed practices has always been a subject of discussion in the corporate environment. Adherence to corporate governance practice helps a corporate organization to rationalize risks as well as maximize its business performance at the same time. In the present day aggressive business environment that calls for a firm regulatory setting, compliance to corporate governance norms help organizations to sustain in the long run (Samontaray, 2010). Corporate Governance forms the outline for building long-term trust and confidence between organizations and their respective stakeholders. The corporate governance practices resolve the clash of interest issue between the company and its stakeholders. It helps in doing so by rationalizing and controlling a company’s risks, restricting accountability of the senior management by circumspectly carrying out the decision making process, ascertaining authenticity of annual accounting reports, in addition to offering the extent of confidence that is required for apt functioning of a business (Samontaray, 2010; Hoitash et al., 2009). The subject of corporate governance is associated with the jobs and accountabilities of a business organization’s Board of Directors in handling the business and their associations with the organization’s shareholders as well as other stakeholder. Characteristically, in any corporate organization the full time executive directors possess extensive powers with reference to the dealings and matters of the organization they are paid to manage in support of the shareholders. Nevertheless, the executive directors might not always bear the interests of the shareholders in their mind while carrying out their executive responsibilities. Consequently, this had resulted in endeavors to make the directors more liable for their strategies and actions. The non compliance with the corporate governance principles has broadly impacted the performance of the organizations. Apple Inc. at present upholds rules concerning director conflicts of interest, which affirm that directors must hold on to the organization's Business Conduct Policy and that all directors should take rational steps to keep away from clashes of interest with the organization. Apple Inc.’s rules concerning director conflicts of interest describe a conflict of interest as an "activity that is inconsistent with or opposed to the [Company's] best interests, or that gives the appearance of impropriety or divided loyalty." (Apple Inc., 2009). The directors of Apple Inc. offer general guidance and perspective on importance issues related to the organization to the Board of Directors and the other executive directors. The executive officers as well as the directors of the Board are supposed to seek the assistance of the Chief Executive Officer on particular matters prior to raising them at the board meetings. The boards of directors are accountable for making certain that the organization presents a fair representation of its operational activities as well as financial performance to its stakeholders. The board had to ensure that the required internal control structures of the organization are executed aptly and examined frequently and rigorously. In this context, the executive directors of Apple Inc. are primarily responsible for conducting a fair and true audit of its financial activities as well as performance (Apple Inc. (g), 2012; Apple Inc. (f), 2012). Conclusion Conclusively, it can be stated that Apple Inc. practices strong corporate governance principles and hence the company has not faced any major instances of conflict of interest. The comprehensive assessment of the corporate governance as well as the code of conduct of Apple Inc. revealed that the Company abides by strict guidelines and always attempts to protect the interests of its stakeholders. 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