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San Jose Mercury News, September 19, 2007 article


San Jose Mercury News


Top funds joined Apple dissenters




By Troy Wolverton
Mercury News
San Jose Mercury News


Article Launched:09/19/2007 01:40:46 AM PDT



When Apple held its annual meeting in May, activist investors made a lot of noise about the company's backdating scandal and the job Apple directors were doing.


It turns out that these generally small but vocal shareholders weren't alone in their concerns. Many of the leading mutual fund investors in Apple - including household names such as Vanguard and Oppenheimer - sided with the activists, recent regulatory filings reveal.


"It's pretty clear that you had a much broader rebellion than Apple would like the investing public to believe," said Patrick McGurn, special counsel at the corporate governance unit of RiskMetrics, a financial research firm that advises investors how to vote in corporate elections.


An Apple representative was not available for comment.


Of the 50 mutual funds with the largest stakes in Apple, at least 38 voted against Apple's management on at least one issue. And at least 18 of those decided not to vote for two or more of the company's directors up for re-election.


Vanguard, for instance, withheld its votes from Apple directors Bill Campbell, Art Levinson and Jerry York, who make up the company's audit committee, which oversees the company's financial statements. One of the upshots of Apple's backdating investigation was that it was forced to restate and lower its past earnings by $84 million.


Vanguard is the fourth-largest institutional investor in Apple, holding some 23.9 million shares at the end of June, according to FactSet Research's LionShares site.


Like many mutual fund companies, Vanguard does not comment on particular shareholder votes. The company's voting guidelines state that Vanguard will vote against members of particular board committees when the actions of that committee are "inconsistent with (Vanguard's) other guidelines."


Last year, Apple revealed that it had backdated about 6,400 options grants from 1997 to 2002. The board said it found no wrongdoing by current management, but said its investigation had raised "serious concerns" about two former executives, whom it did not identify.


Earlier last year, Apple said former Chief Financial Officer Fred Anderson had resigned from the board, and that Nancy Heinen, the company's longtime general counsel, had quit her job.


The Securities and Exchange Commission this year charged Heinen and Anderson with violating securities-fraud laws for their involvement in backdating at the company in 2001. Anderson simultaneously filed a settlement with the SEC that requires him to pay $3.5 million in fines and penalties, but not to admit liability. Heinen is fighting the charges.


Other institutional investors went further than Vanguard. Funds managed by T. Rowe Price, Oppenheimer and Transamerica, for instance, declined to vote for the re-election of any Apple director except Chief Executive Steve Jobs.


Representatives for Oppenheimer and Transamerica declined to comment on their company's Apple votes. Representatives for T. Rowe Price were not available.


The funds' votes, which they revealed late last month, follow Apple's own disclosure in August that nearly half of the shares voted at its annual meeting were cast in favor of a shareholder proposal that would essentially bar the company from backdating stock options. Apple also revealed that more than a third of shares voted were withheld from directors Campbell, Levinson and York.


Mutual funds typically vote with management, especially when the company, like Apple, has seen its share price do so well. But they have become increasingly willing to challenge corporate managers.


Jobs has apologized for his role in the scandal and promised not to let the issue recur.


To be sure, not all mutual fund managers were up in arms. At least three of the top 50 mutual funds sided with management. (Voting records for some funds were not immediately available.)


Even among those investors that took stronger stands, outrage at Apple's board could fade with time, particularly if the company's stock price continues to boom. Apple shares are up 66 percent for the year and 31 percent just since the shareholder meeting.


But Apple shouldn't expect the issues to just fade away, said Nell Minow, editor of the Corporate Library, a research and watchdog group.


"If the shareholders feel that the board isn't getting the message, they will continue delivering the message more and more forcefully until the board does," Minow said.



Copyright 2007 San Jose Mercury News




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