04 Sep PUBLIC PENSION CORNER #55: Apple, Tim Cook, and the Friedman Doctrine
NEWS:
I. SEC to Undo Shareholder Proposal Rule
Late last week, the Securities and Exchange Commission (SEC) submitted a notice that intends to eliminate Rule 14a-8, the heart of the shareholder proposal process, and amend Rule 14a-4:
In a regulatory notice, opens new tab dated Friday, the SEC said it would consider changes to the rule known as 14a-8. It establishes requirements for shareholder proposals in public companies’ annual proxy statements including minimum ownership.
Via e-mail, a spokesman for SEC Chairman Paul Atkins said he has “highlighted concerns that the SEC’s Rule 14a-8 on shareholder proposals exceeds the Commission’s authority and infringes upon state laws. To that end, the Commission is expected to consider a proposal to rescind the rule and return the role of regulating shareholder proposals to the states.”
Investor resolutions focused on topics like carbon emissions and executive roles have been the focal point of many corporate annual meetings, though support for them has fallen in recent years.
II. ISS Files Suit Against Oklahoma
Institutional Shareholder Services, the largest proxy advisory company in the world, has filed suit to block the implementation of a new Oklahoma law that would force proxy advisors to explain their recommendations:
The lawsuit comes as the Oklahoma State Pension Commission is halfway through its own analysis of thousands of shareholder votes on behalf of the state’s seven retirement systems. State Treasurer Todd Russ directed that effort.
Institutional Shareholder Services Inc. filed its lawsuit over House Bill 4429 last month. It wants a federal judge to issue a preliminary injunction before the law takes effect Nov. 1.
ISS said the law infringes on its free speech rights and imposes additional compliance costs on advice to clients such as pension systems and other institutional investors.
COMMENTARY
By Stephen R. Soukup, President and Publisher, The Political Forum
“Apple, Tim Cook, and the Friedman Doctrine”
One of my chief complaints about what has come to be called the “Friedman Doctrine” is that it’s based on a mischaracterization of what Milton Friedman actually said. Whether that mischaracterization is intentional or inadvertent depends largely on whether one uses the phrase “Friedman Doctrine” descriptively or pejoratively.
In short, the doctrine, as it’s usually presented, is that a fiduciary has the responsibility to “make as much money as possible” for his beneficiaries. This is an abridgment of a phrase Friedman wrote in his famous essay in the September 13, 1970 edition of the New York Times Magazine: a corporate executive’s “responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible….”
Those who disagree with Friedman and therefore view his doctrine negatively usually decry it as pure, cold-hearted profit maximization that takes nothing else into account and is ugly and brutal. Those who agree with Friedman, by contrast, tend to think that profit maximization is the whole point and that suggesting otherwise is social engineering that risks undermining the entire free-enterprise system.
In both cases, the point of Friedman’s statement is misconstrued, largely because the end of the statement is ignored. What Friedman actually wrote was that a manager’s “responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.” (emphasis added)
What Friedman does here is add two distinct qualifiers. The first is legal and thus, mostly perfunctory: don’t break the law to make money. The second, however, is moral/ethical and, as a result, changes the entire complexion of the statement, not to mention an honest reading of the Friedman Doctrine. A true fiduciary cannot chase profits or returns while disregarding the moral and ethical customs of the society in which he operates, even if doing so is legal. More to the point, under the Friedman Doctrine, a true fiduciary cannot substitute his own beliefs about morals and ethics for the customs of society, and he cannot ignore those parts of the customs he finds personally inconvenient. As always, a fiduciary’s responsibility is not to himself but to his clients or beneficiaries.
Anyway, I’ve been thinking a great deal about Friedman, his Doctrine, and its proper interpretation this week, as I’ve read the encomia for the now-former CEO of Apple, Tim Cook. Cook, you see, took over a company in crisis, one that was losing its founder and creative visionary. Instead of folding, however, Cook stepped admirably into Steve Jobs’ enormous shoes and did wonderful and amazing things for Apple, its shareholders, and ultimately, the world. As Reuben Gregg Brewer of the Motley Fool put it just yesterday: “When Tim Cook took over Apple in 2011, it had a market cap of around $350 billion. That’s a very big company, but its market cap is $4.7 trillion today. Very clearly, investors benefited greatly under Cook’s tenure.”
To be sure, Cook built Apple into a giant. And as he did so, he did, indeed, do very well by his company’s shareholders. Nevertheless, it is more than fair to speculate about the faithfulness of Cook’s behavior as the agent of Apple’s shareholders.
At the risk of being overly shameless, I would suggest that the best place to get the full story on Cook’s questionable tenure as the CEO of Apple is in the chapter dedicated to the company in The Dictatorship of Woke Capital, which is titled “The World’s Biggest Corporation: Rotten to the Core?” Essentially, the case against Cook boils down to two principal charges, both of which are derived from Friedman.
The first charge is that Cook violated the ethical-custom qualifier of the Friedman Doctrine, most significantly by engaging with and enabling the Chinese Communist Party in its totalitarian domination of its people.
Friedman’s “ethical custom” was never intended to be jurisdiction-shopped. He meant the ethical norms of the society in which the corporation operated. For an American reader in 1970, that meant the prevailing Western standards around fraud, deception, fair dealing, and so on. It did not mean whatever rules the local authoritarian government happened to enforce. Cook’s own activism on LGBTQ matters, racial justice, and immigration constituted a clear appeal to American ethical norms. Moreover, he was always clear that Apple’s brand is built on exactly that appeal. The real inconsistency here isn’t simply that Cook was woke at home and fast asleep in China. It’s that he treated ethical custom as a genuine constraint when it cost Apple nothing (or helped) in the U.S., even as he treated it as irrelevant the moment those same principles (free expression, protecting dissidents, rejecting forced-labor supply chains) threatened the bottom line in China. That’s not respecting different ethical standards for different societies. It’s applying a single standard selectively, based purely on commercial cost, and dressing it up as deference to local law.
And that’s exactly what Tim Cook did. As I put it in the book:
In the end, most of what happens with Apple cannot be distinguished from what happens with and at the instruction of the Communist Party of China. The CCP needs Apple desperately….At the same time, though, Apple needs China pretty desperately as well. Not only is China Apple’s largest manufacturer, but it is also Apple’s second-largest market. Apple’s rise to become the biggest and most valuable company in the world was fueled in large part by its growth in China.
The CCP, of course, knows this and knows that Apple can’t afford to make it unhappy or upset its leaders. Just since 2017, Apple has, at the request of the CCP: removed the New York Times app from the Chinese App Store; removed Skype from the Chinese App Store; removed more than 400 VPN (Virtual Private Network) apps from the App Store; moved all of the user data for its Chinese iCloud users to a server owned by a Chinese company (in accordance with a new Chinese law); and, most ominously, removed the Quartz news app that was covering the Hong Kong protests and blocked an app used by those protesters to organize.
The second charge against Cook is that he violated the foundation of the Friedman Doctrine itself, using shareholder resources to pursue his personal political predilections. That’s a serious violation of his duties. Again, from the book:
Apple is one of the ESG movement’s darlings. At the end of 2019, Apple was the single largest position BlackRock held. Moreover, it was one of the top five companies held by all actively managed ESG equity portfolios.5 Cook and Apple have repeatedly filed amicus briefs with the U.S. Supreme Court advocating on behalf of DACA (Deferred Action for Childhood Arrivals) legislation.6 After the George Floyd protests, Cook announced that he would use $100 million of shareholder funds to pursue the “unfinished work of racial justice and equality” by establishing “Apple’s Racial Equity and Justice Initiative.”
Most significantly, Cook and Apple have been among the most aggressive companies in advocating for a “carbon-free” future. Indeed, nearly a decade ago, Apple pledged to be carbon-neutral and, moreover, to get all of its energy from renewable sources.
Again, to be clear, in some ways, Cook’s hands were tied, and he did the best he could, given that. After all, where else would he have ramped up Apple’s manufacturing the way he did? No country other than China could have made that possible. Additionally, building out the Chinese market for Apple products undoubtedly increased the company’s profits and the price of its shares. But that didn’t mean that he had to kowtow to the CCP when they made demands of him that he knew were wrong. It also didn’t mean that he had to act one way at home and another way abroad, wasting shareholder funds on his political fixations.
Whatever else one thinks of Tim Cook and his tenure at Apple, it is inarguable that his record is one of violating the Friedman Doctrine: one way at home, and a different way abroad.
