Corporate Governance Case on Apple

Topics: Board of directors, Stock, Corporate governance Pages: 9 (2735 words) Published: July 12, 2010
The case company analysed in this report is Apple Inc. I will start by identifying the company profile, which is beneficiary for the remainder of the report. The overall framework of the report will follow an agency approach. I find this approach very feasible in a corporate governance context. Per definition corporate governance is “the control and direction of companies by ownership, boards, incentives, company law, and other mechanisms” (Thomsen, 2008). So, if proper control and direction is not applied in the company it leads to agency problems. I will identify and discuss the different agency issues (type 1,2 or 3) by evaluating and analyzing Apple’s capital structure, board structure, executive compensation scheme, and ownership concentration. My conclusive remarks will include a very brief summary of the governance issues and recommendation suggestion for Apple to better align management and shareholder interests. Apple Inc. – Company profile and financial performance

Apple Inc. (Apple) is a US company that designs and manufactures consumer electronics and computer software. With its highly innovative and fancy designed products and an EPS of 10.27 it takes the role as market leader in its industry. Apple has a strong financial profile. From 2005 to 2009 EBITDA has evolved from USD 1,829,000 (000’s) to USD 8,361,000 (000’s), an increase of 357 percent over the period. Worth noticing is the positive financial development from 2008 to 2009 – during the financial crisis. An increase of 23.9 percent in EBITDA, indicates strong consumer preferences for Apple products even during economic downturns. Relative to main competitors Apple’s share price has outperformed significantly over the past 5 years, with nearly 600 percent return over the period. Research In Motion (RIMM) is performing second best with a 5-year return of almost 250 percent (See exhibit 1). An overall assessment of Apple’s financial health and performance indicates that the company has very low risk following its almost invisible debt/equity ration and high market capitalization. It has very high growth rates, partly because the company is a market leader, and because zero dividends are paid out, making it possible to reinvest most of retained earnings. Finally, Apple benefits from very high profitability. Its EBIT margin is double the industry average, its ROE is triple the industry average (See exhibit 2). These are very attractive conditions for Apple shareholders. Since the firm is mainly equity financed the associated risk is very low. In a high growth company this condition is very rare. Usually growth is associated with high reinvestment and high leverage, thus also high risk. So, I assume shareholders are satisfied with the current executive team. Apple follows the typical US market-based governance structure. The board works as a one-tier system, where the CEO is a director in the board. The legal system applied in the US is common law, which recognizes a high degree of shareholder rights (Thomsen, 2008). By law, this forces public-listed US firms to act solely in the interest of shareholders (owners). Capital structure and payout policy

Given Apple’s superior financial performance, follows large annual cash flows. In 2009, Apple had a free cash flow (FCF) of around 9 billion dollars ( This excessive amount of cash can create agency problems between managers and shareholders (type 1), since managers might act in their own interest and take on projects that trigger performance-based managerial compensation. In economic terms, managers might invest in projects that generate large short-term returns but with a negative long-term NPV. Jensen’s Free Cash Flow Hypothesis (Jensen, 1986) suggests better utilization of excessive amounts of cash by engaging in debt and paying out dividend. From its debt the firm is forced to pay out cash in form of interest payments. Ideally this should make managers more efficient and...

References: Brealey, Myers and Allen (2008). Principles of Corporate Finance. McGraw Hill, 9th edition
Hendrikse, G
Fama, F. & Jensen, M. (1983). Separation of ownership and control. Journal of Law and Economics 26, 301-325.
Gugler, K. & Yurtoglu, B. (2002). Corporate governance and dividend pay-out policy in Germany. European Economic Review 47. Pp. 731-758.
Hansen, M., Ibarra, H. & Peyer, U. (2010). The Best-Performing CEOs in the World. Harvard Business Review. Feb. 2010.
Hansmann, H. (1996). The Ownership of Enterprise. Harvard University Press, Cambridge Mass.
Hermalin, B. & Weisbach, M. (1997). Endogenously chosen boards of directors and their monitoring of the CEO. American Economic Review, forthcoming.
Higgs, D. (2003). Review of the role and effectiveness of non-executive directors. Department for Business, Enterprise and Regulatory Reform.
Jensen, M. (1986). Agency costs of free cash flow, corporate finance and takeovers. American Economic Review 76, 323-339.
Myers, S. (2001). Capital Structure. The Journal of Economic Perspectives 15 (2). Pp. 81-102.
Sponholtz, C
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • corporate governance Essay
  • Corporate Governance RBS Essay
  • Corporate Governance in the Hershey Company Essay
  • Essay about Effective corporate governance
  • Corporate Governance Essay
  • Corporate Governance Essay
  • Corporate Governance Essay
  • corporate governance Essay

Become a StudyMode Member

Sign Up - It's Free