Saturday, June 20, 2009

Governance Issue at Apple

Recently, Apple has provided a very good example of why CEO succession planning is so important. According to the WSJ, Steve Jobs recently underwent a liver transplant. We all knew he was sick, and he's been away on leave for a little while. Apparently his #2, COO Tim Cook, has been running the day-to-day business in Jobs' absence, and now it appears he's being groomed to replace Jobs. This is a very good idea, and it's lucky that Jobs got a second chance to do this before exiting Apple completely.

In any corporation, but especially in one as large and innovative as Apple, well-done CEO succession is vital. Leadership is everything in a business where extraordinary vision is required simply to stay with the competition. Because there wasn't an heir apparent at Apple, when Jobs got sick, shareholders were rightly perturbed that his health was being kept a close secret. Frankly, the fact that they could keep a liver transplant secret for so long amazes me. Shareholders need to be sure that their company will transition into capable hands in the event of a CEO's sudden departure, as well as in the event of a planned departure. It's just as important as the Presidential line of succession, at least to the firm's shareholders.

Now, here's the really interesting part. As some very intelligent Kelley School of Business professors (I'm not biased) found in this paper, inside directorship (placing top executives on the board) is a very common and useful funnel for selecting a firm's next CEO. Accordingly, the WSJ article says that Cook is likely to be placed on Apple's board. So, it's pretty clear that he's the next in line. However, thanks to Sarbanes-Oxley, inside directorships have been limited, and now the average number of non-CEO executive board members in the Fortune 500 is less than 1. This makes it much more difficult to groom a capable successor. Thanks again, government.

Hopefully Apple will be able to navigate through Jobs' eventual exit. They seem to be taking the appropriate actions to ensure that now, albeit a little late.

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