Apple's Board: Still Room for Schmidt?

Google has been incredibly supportive of Apple's flagship computer, the Mac, and has developed a lot of software for Apple's music-playing iPhone, notably a tool that lets users watch video from Google's YouTube site. Why wouldn't Apple, an innovative creator of hardware and software for Web-enabled computers, music players and cell phones, want Schmidt's informed viewpoint on the Internet and its evolution?

Google is also increasingly becoming a would-be Apple competitor, making Schmidt's membership on Apple's board awkward, if not ultimately untenable. Concerns over a potential conflict of interest have surfaced in the tech blogosphere in the past, but the potential for rivalry takes on added urgency as Apple prepares to launch the next version of its iPhone while Google partners ready cell phones that run Google's operating system.

Android Arriving

Google will also soon become a big backer of a company that could go mano a mano with Apple's U.S. iPhone partner in providing mobile Web access. Google is set to provide US$500 million in funding for a joint venture between Sprint Nextel (NYSE: S) and Clearwire that will provide wireless Internet access at speeds faster than those available over the network run by AT&T (NYSE: T) , the only authorized U.S. iPhone carrier.

The overlap has been years in the making. Last June, a little less than a year after Schmidt joined Apple's board, Apple introduced its iPhone. The second iteration of the iPhone will be marketed even more widely and likely appeal to a larger global customer base. By the end of March, Apple had sold 5.4 million iPhones. Piper Jaffray analyst Gene Munster predicts that by the end of 2009, Apple will have sold 45 million, almost nine times as many.

Google made clear its intentions to be a player in the wireless industry long before it backed the Sprint-Clearwire venture. In 2005, Google acquired Android, a software maker that is now the heart of its efforts to build an operating system for wireless phones, also known as Android.

Many Recusals

Assuming Munster's aggressive predictions for the success of the iPhone pan out, then the iPhone may account for as much as $18 billion in booked revenue in the 2009 calendar year, or roughly one-third of $57 billion in booked revenue he expects for the year.

Google won't be selling phones, per se. Instead, its Android project will spawn software for phones that will be made by such manufacturers as Motorola (NYSE: MOT) , HTC and Samsung . It's less easy to predict exactly how successful these phones will be, but they're hitting the market just as demand for multifunction wireless devices, so-called smartphones, takes off. Market research firm iSuppli pegged the worldwide market for smartphones, a category that includes iPhones, Research In Motion (Nasdaq: RIMM) BlackBerrys, Microsoft's (Nasdaq: MSFT) Windows Mobile devices, and Palm (Nasdaq: PALM) Treos -- at 136 million units at the end of 2007. It's expected to surge to 229 million by the end of 2009, making it the fastest-growing segment of the wireless hardware market.

Google had no comment, while Apple offered no direct comment on the suggestion that a conflict of interest might arise, but referred to adulatory statements the company made about Schmidt when he was elected.

Still, the potential rivalry between the iPhone and Google-backed companies and applications could put Schmidt in a difficult spot. While on Apple's board, he already recuses himself from discussions that pertain to the iPhone, according to published reports. However, exactly how effective a director of Apple can he be if he's not allowed to know proprietary information that pertains to the product that brings in as much as one-third of Apple revenue?

Split Fiduciary Responsibility

The recusals could leave Schmidt and the board in an ethical conundrum, corporate governance experts say. "You could imagine, as a practical matter, being able to wall him off from iPhone-related discussions," says Ron Gilson, a professor of business and law who teaches at Stanford and Columbia universities. "But then it becomes a judgment call about a director who's excluded from so much of what the board is doing and talking about." Other directors would amass a body of information he may need to make informed decisions in other, associated areas, Gilson says. "At some point the ability to actually segregate him from this information will become very difficult," he says.

Nell Minow, editor of The Corporate Library, an independent research firm that grades corporate boards, is more succinct. "It's like going to the doctor and asking him to check everything but your heart," she says. "In technology every part of the company has a bearing on every other part of the company."

Corporate directors, she says, have two duties under the law: The duty of care, and the fiduciary duty. The duty of care requires that they do their homework and show up for board meetings informed about what's going on. However, the fiduciary responsibility requires them to make decisions that are in the best interest of shareholders. Like no one else on Apple's board -- even those others with ties to Google -- Schmidt will have a split fiduciary responsibility. "That's not sustainable," Minow says.

Especially not if Android and the Sprint-Clearwire venture are successful. If they fizzle or otherwise fail to become an important part of Google's business, Schmidt and Apple's board can probably afford to sidestep the issue. If the new ventures thrive, then Apple's board may soon need to consider whether it's appropriate for Schmidt to remain.