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CalPERS to Apple: Shape up

The California pension fund manager will put the spotlight on Apple when it meets with its board of directors April 1.

Shareholder organization and pension fund manager CalPERS will put the spotlight on Apple Computer (AAPL), when it meets with its board of directors April 1 to ask for a plan of action.

Apple, which has been hit with losses and declining marketshare as it heads for another major restructuring, is one of the top ten underperformers in the California Public Employees' Retirement System ranking released last month. Apple's shareholders have received lower returns on their investment in comparison to the S&P Computer Index since 1993.

CalPERS named Apple to the target list because of the company's downward spiral in the marketplace as buyers continue to abandon the Macintosh platform. The designation comes as Apple is losing marketshare to clone makers. (See related story)

In addition to the company's poor stock performance, CalPERS has concerns about Apple's board of directors. Pacheco said some members don't have enough of a personal stake in the company. Therefore, the organization questions what incentive these members have to turn around the ailing computer maker.

"We question if Apple's directors have the time and dedication to turn around Apple when they sit on other boards," said Pacheco. "Three board members don't even own stock."

According to CalPERS, two or more of Apple's directors are stretched thin, sitting on four or more boards. In February, the organization voted against Apple's board of directors at its shareholders' meeting.

"As shareholders--and owners of this company--we believe that dedication of all of Apple's directors and personal incentives are critical to recovery," said Kayla Gillan, general counsel for CalPERS, in a statement.

Executive compensation is another area of concern. According to the company's proxy statement, CEO Gilbert Amelio, who joined Apple in February 1996, received a base salary of $655,061 in fiscal 1996 and a bonus of $2,334,000, bringing his total cash compensation to $2.99 million.

"It is natural for companies to grow and downsize, but when that is happening and they are paying excessive compensation, that is not a great value to shareholders when assets are being used that way," added Pacheco.

CalPERS is the nation's largest public pension fund. The system provides retirement and health benefits to more than 1 million active and retired public employees and their families. CalPERS reported last month that it owns 709,565 shares of Apple.

The system, which manages $108 billion, annually releases its influential top ten list of corporate America's financial underperformers based on ratings from such market gauges as the Standard & Poor's 500 Index.

CalPERS isn't the only one wondering how Apple can afford generous compensation packages. "Apple should win the Nobel Prize for executive compensation plans," said Graef Crystal, a San Diego executive compensation expert in an earlier interview. "Apple is one of the worst abusers of executive compensation."

For 1996, Apple had a compensation plan that would give senior executives bonuses based on Apple's financial performance.

In the first three quarters, Apple reported a cumulative loss of $841 million. At the midyear mark, Apple's compensation committee replaced the original bonus plan with a new plan that made the bonuses to senior management based solely on whether Apple reported a profit in the fiscal fourth quarter. The company did.

Much of that profit, however, came from a one-time gain from inventory adjustment and a smaller need to dip into reserves set aside to cover severance costs of employees laid off by the company. Without it, Apple would have reported a modest loss or would have simply broken even, one analyst estimated.

The distinction of making the CalPERS list, while a dubious one on its face, might eventually be good news for these failing companies. A recent study conducted by Wilshire Associates showed that CalPERS's efforts at targeting underperformers has paid off.

The 62 companies that were targeted by CalPERS from 1987 to 1995 outperformed the S&P 500 Index by 33 percent for five years following the organization's actions.

CalPERS named Apple to the target list because of the company's downward spiral in the marketplace as buyers continue to abandon the Macintosh platform in greater numbers. Apple's shareholders have received lower returns on their investment in comparison to the S&P Computer Index since 1993.

According to market researcher Dataquest, Apple's worldwide market share slipped to 5.2 percent in 1996 from 7.9 percent in 1995.

"We have influenced [companies] by just putting them on this [underperformers] list," said CalPERS's Pacheco. "They will move quicker to turn around. Even though some companies are reluctant to meet with shareholders, we are longtime investors with over a million members."