Corporate Governance at IBM and Google IBM and Google are two of the most successful firms in the history of business. the demise of Bell Laboratories following the breakup of AT&T, IBM has had the worid leading corporate research labs. Five IBM scientists have won Nobel Prizes in physics Since compared with 12 from Bell Labs), and every year since at least 1992 IBM employees have been granted more patents than employees at any other h importantly, some technology analysts consider IBM's research more fundamental yet more practical, and its patents more valuable, than those of most competitors Google was founded in 1998 by two Stanford computer science graduate students, Larry Page and Sergey Brin, at the start of the Internet boom. Google quickly became the world's dominant search engine and gained widespread fame for its corporate culture. Google offered employees free healthy lunches and dinners, and snack tables were spread throughout the firm's offices. Google buildings included space tor bicycles, pets, pool and foosball tables, volleyball courts, and gyms. The firm offered employees free massages, meditation classes, and yoga sessions. Employees were encouraged to spend 20% of their time at work on projects of their choice, which to innovative developments and motivated employees led IBM Back in 1890, the U.S. Census Bureau estimated it would need 10 years to compile the information obtained in the 1890 census 2 The Census Bureau sponsored a test for an improved way to process that data. In response, Henry Hollerith invented a three-part system that included (I) a keypunch machine with an alpha-numeric keyboard used to punch holes into a card; (2) the Hollerith code, which associated various hole sequences with the 10 Arabic numerals and the 26 letters of the English alphabet; and (3) a machine that read the punched cards and tabulated the results. His machines were used to complete the census in three months. Mr. Hollerith then founded the Tabulating Machine Company in 1896. For that work, Mr. Hollerith received a patent in 1889 and a Columbia University PhD in 1890. In 1911, his firm merged with two others to form the Computing-Tabulating-Recording Company which changed its name to International Business Machines Company in 1924 con- In both 1992 and 1993, IBM reported operating losses of about $9 billion (Exhibit 1). There were calls for IBM to sell unprofitable business units, and there was even concern that IBM might be forced into bankruptcy. In 1993, IBM hired Louis V. Gerstner, Jr., who dramatically changed IBM's operations and focus.4 Within a year, he returned IBM to 1. "IFI patent intelligence analysis of 2008's top U.S-patent recipients suggests America may be losing dominance, Wolters Kluwer Health. http://www.ificlaims.com/IFIPatents010909.ht 2. Information for this section from IBM Archives: Valuable Resources on IBM's History tp://www-03.ibm.com/ibm/history 3. See Columbia University history, http://www.columbia.edu/acis/history/hollerith.html. Also see IBM story, http://www-03.ibm.com/ibm/h 10909.htm. com/ibm/history/documents/pdu/1885-1969.pdt. Discusses Changing the Culture lartha, Gerstner: Changing Culture at IBM-Lou Gerstner at IBM. Harvard Business School. Archive. http://hbswk.hbs.edu/archive/3209.html. profitability and soon transformed IBM from primarily a computer manufacturer into a firm that provided information technology (IT) services throughout the world. In the mid- 1990s, data processing became so complex that many large organizations outsourced their entire IT departments. IBM was one of the few firms in the world large enough and skilled enough to manage those projects. T hat work was highly profitable, but by the late s IBM's service operations faced severe competition, first from large Indian IT firms such as Infosys Technologies and Wipro Limited and then from Hewlett Packard. For at least the past 40 years IBM has been one of the world's most respected com- panies. However, because it faced various competitive challenges from Microsoft, ian IT firms, and Hewlett Packard, IBM was forced to take actions to reduce costs and many of those actions were widely criticized (see below). In July 2003, IBM in- vited all 319,000 of its employees throughout the world to engage in an open "values jam on its global intranet. Tens of thousands of employees offered comments about the company over a three-day period. That discussion produced IBM's current corpo- rate value statement (Exhibit 2).5 According to that value statement, employees were brutally honest, and some of what they wrote was painful for management to read. Exhibit 2 states that IBM's stock price must increase by 10% before IBM's 300 most senior executives benefit from their employee stock options. In addition, the executives must first invest their own funds in IBM stock before they can buy stock under IBM's executive stock option plan. The corporate values statement mentions that this require- ment is unique in the computer industry and possibly in all of U.S. business. Although IBM's value statement is more restrictive than most values statements for U.S. compa- nies, IBM has received criticism for some of its actions during the past 10 years. Pension dispute Like most large companies founded prior to the 1990s, IBM included a defined ben- efit pension plan for all employees as part of its compensation package.6 IBM termi- nated its defined benefit pension plan in 1999 and transferred all employees to a cash balance pension plan. Employees filed a class action lawsuit against IBM claiming the plan discriminated against older workers. In 2003, a lower court ruled that IBM's revised pension plan did discriminate against older employees. IBM appealed the case, but to limit its maximum exposure it agreed to pay plaintiffs $320 million. If IBM lost on appeal, it agreed to pay an additional $1.4 billion (i.e., plaintiffs agreed to a 1.4 billion additional payment as a cap). In 2007, IBM won its appeal, although th $320 million payment was not returned because of the contractual agreement. Overtime dispute Under the U.S. Department of Labor's Fair Labor Standards Act, employees in the United States are classified as either exempt or nonexempt employees. Exempt em- ployees are professional or managerial employees who are exempt from the mini- mum wage laws and from the requirement to be paid at least one and one-half times S. IBM, Our Values at Work on Being an IBMer. http//www.i 6. A defined benefit plan pays employees a fixed monthly pension based on years worked, average earnings over the last few years of ment losses, IBM must contribute additional cash to make up for the shortfall. In contrast, w fibm/va t, and retirement age. If the pension fund suffers invest ith a defined contribution plan, such as a 401k plan, an employer's only obligation is to make a specified contribution each year to each employee's retirement fund. 7. Some companies began offering a third option in the mid-1990s, called a cash balance plan. It is similar to a defined contribution plan, but the employer guarantees a specified annual 8. Taub, Stephen, "IBM pension ruling stands," January 16, 2007. CFO http://www.cfo.com/ article.cfm/854641 return on its contributions SECTION TWO GOVERNANCE AND REGULATI In July 2009 the U.S. Federal Communications Commission (FCC) announced would investigate Apple's rejection of the Google application. In response, in Octob 2009, AT&T stated it would not object to third-party VolP applications such as Skype and Google Voice.21 However, AT&T did file a complaint with the FCC against Google Voice. The FCC announced it would investigate whether Google Voice violates tele communications laws because it blocks calls to some rural areas and call services with high fees, fees that AT&T and other telephone companies must pay.2 Google Street View Google Street View is a project to eventually show street views of nearly any street in the world. For example, a user can obtain directions from one location to another using Google Maps. The directions are shown by number on the left of the resulting Web page. To the right of each direction, when available, is a camera icon. Click ing on the icon shows a photograph of a street view at that location. Below the photograph is a map with a person icon. By moving the person icon, the street view photograph moves along the street, as it would be seen by a person standing where the person icon is located.3 The street view feature can be very useful to individuals in an unfamiliar location to businesses that wish to provide directions for their customers. However, many ts complained about the invasion of privacy. In the United individuals and governmen States, Google initially removed identifiable faces of individuals at their request. In some count is illegal to show an identifiable face, which is considered an inva- sion of privacy* Switzerland filed a suit to block all Google Street Views, other coun- tries, including England, Germany, Greece, and Japan, have asked or forced Google to hide faces, building numbers, license plates, or views inside residences.25 Nexus One Google introduce the Android operating system for mobile phones in 2007. It is an open- source operating system that can be modified and upgraded by programmers through- out the world, is based on the Linux operating system, and is free. In February 2009, HTC a major Taiwanese electronics manufacturer, introduced the first mobile phones based on Android. On September 10,2009, Motorola introduced its first Android-based mobile phone, the Cliq7 Motorola introduced its second Android-based phone, the Droid, i October 2009, the first mobile phone to use Google's Android 2.0 operating system. 21. Reuters, 'AT&T allows Internet voice calls on Apple's iPhone,' October 6,2009. http//www.reuters.com/ article/technologyNews/id 22. Kang. Cecilia, FCC begins inquiry into Google Voice. The Washington Post, October 9, 2009. http//voices.washingtonpost.com/posttech/2009/10cc_begins_inquiry_into_ google.html 23. See Google Maps and Google Street View directions on Google's Web site. 24. "Google faces Street View Block" BBC News, July 4, 2008. http:/ews.bbc.co.uk/2/hi/7488524.stm 25. The Associated Press, "Swiss privacy agency top sue Google over street view.' The New York Times November 13, 2009. http://www.nytin 1007?leedType RSS&feedName-technologyNews com/2009/11/14/technologylcompanies/14google.html? 26. Culpan, Tim, 'Google Android may run Asus Netbook, Rival Microsoft, B 27. 'Motorola introduces Android phone, Bloomberg UTV, September I1, 2009.http://www.bloomber est-electronic-gadgets/31801/motorola-introduces-a On January 7, 2010, $179 with a T-Mobile contract marked "D novel Do Androids using Nexus in the more general sense of a place where th Google announced it would sell its own mobile phone, the ed by HTC, through its Web site for an unbundled price of $529, or le phone contract. That announcement drew immediate criticism for reasons. Motorola licensed the name Droid from George Lucas, who had trade- roid from his Star Wars movies. The family of Philip K. Dick planned to file suit against Google because it claimed Google had taken the name Nexus from Dicks Dream of Electric Sheep? That novel, the basis of the movie Blade Runner, featured a series of Nexus 6 model robots, In its defense, Google claimed it was ings converge.? Google also received criticism because it was competing against mobile phone manufacturers who developed the market for Android. They were now being undercut by Google, which was offering the first mobile phone to use Android 2.1, an operating system upgrade announced the same day as Nexus One, although Google's Android Web site stated that "Android 2.1 does not add significant user features...."30 The Nexus One could only be purchased through Google's Web site. The prominent ad placement, just below the search field on Google's home page, seemed to give the Nexus One a significant advantage over other Android-based mobile phones, such as Motorola's Users could buy the Nexus One for $179 bundled with T-Mobile service, but only for new T-Mobile customers, which upset existing T-Mobile customers. Finally, there were widespread complaints about customer service. Service was available only through Google online, primarily through Google-monitored user help forums. Users who called HTC or T-Mobile were directed to Google's Web site, with no option to talk to a live operator. The Nexus One was considered a potent competitor to Apples iPhone, but Apple has excellent iPhone customer service through its stores, live sup- port, online support, and through AT&T Google China On January 12, 2010, Google filed a Form 8-K with the SEC that contained the follow- ing announcement (see Exhibit 4) On January 12, 2010, Google posted on the Official Google Blog an announcement that it was the target of a cyber attack and that it will be reviewing the feasibility of its business operations in China. A copy of the blogpost is filed as Exhibit 99.1 to this Form 8-K and is incorporated herein by reference Required 1. Would IBM's value statements have caused IBM to act differently in the three 2. Are Google's actions in the situations described in the case consistent with 3. Compare and contrast the IBM and Google value statements. Do the two values 4. Should a for profit organization have a values statement? If so, what should be its situations described in the case? Explain Google's value statements? Explain. statements have different purposes? Are they appropriate for IBM and Google? purpose? 29. Raphael, FR., 'Google's Nexus One faces new woes, PC World,January 8, 2009 30. Google, Android 2.1, Release 1, January 2010. http/l/developeran