OPENING CASE STUDY: Apple: the world's most valuable company, but how ethical is it? The popularity of digital devices such as this tablet has boosted Apple's profits, but Apple's profile as a respected company is a different matter. Source Getty Images/Hoston/Tom Merton VAith a market capitalization of over $700 billion, VV Apple reached a market value in 2015 that no other company with publicly traded shares has reached The oil company, ExxonMobil, which lies in second place, has a market value of about half that of Apple. Apple's rise to this unprecedented level has taken place in a relatively short time. Its shares have risen 120-fold since 2000, which marked the start of its recent successful spell, with the launch of a series of iconic gadgets, starting with the iPod and focusing primarily on successive models of iPhone. In 2015, it also reported the largest quarterly profits of any company in history - $18 billion. Apple's shares rose by 60% in 2014. with the launch of the successful iPhone 6 Apple is ranked in first place in the annual rankings of the world's most respected companies, carried out by Barron's (www.barrons.com). This table is compiled from the views of institutional investors, and tends to reflect share performance rather than how the company is run. On the other hand, as Barron's points out, those criteria are connected. Investors surveyed by Barron's took into account four criteria: ethical business practices. sound business strategy, strong management, and revenue and profit growth (Racanelli, 2015). In the 2015 survey, they felt ethical business practices to be the most important of the four, while revenue and profit growth were the least important. When corporate wrongdoing comes to light, a company's shares tend to plunge, affecting financial performance, which for investment managers is a central concern. Investment managers are highly sensitive to the opinions and values of the investing public whom they serve. And it is likely that corporate malpractice, for example offshoring profits to avoid tax, is now attracting greater criticism. Although Apple has attracted criticis ethical grounds, its share price has remained and one of the investors surveyed by Bar summed up the reasons for Apple's Num position: its innovative products, strong financial performance (Racanelli, 2015) s remained strong trong brand and For Barron's ro along with other assessment of an issues relating to a shareholders. It wo the supply chain is one of the areas Following attempt but are these more Foxconn's, and many more th pay and living cond Barron's, 'respect includes ethical practices th other criteria. What would a multifaceted ont of an ethical company include? There are lating to a range of stakeholders, not simply olders. It would focus on human rights issues in ply chain. The use of outsourced manufacturing of the areas in which Apple has been vulnerable. wing attempted suicides in a Foxconn factory in Apple has introduced audits of supplier factories these more about public relations than genuine vement? There are hundreds of factories like n's, and many more that produce components Apple devices. The electronics Industry generally is an ambitious production targets that have on effects in terms of hours worked, equipment and living conditions. Improvements in wages and conditions in China are derived not so much from hanging the policies of brand owners as from reforms in protective legislation taking place, as China's economic development model evolves to take account of more qualitative issues. Apple has a reputation for driving tough, uncompromising deals with suppliers, which is a contributory factor in poor working conditions. It is also accused of too much secrecy. These contracts are subject to comprehensive non-disclosure clauses. the terms sometimes coming to light only later in court proceedings. Greater transparency and flexibility in supply contracts would be a step forward. However, transparency and flexibility have not been values associated with Apple, either under its former CEO Steve Jobs, or its current CEO, Tim Cook. Cook has given greater attention to shareholder interests than his predecessor, introducing dividends. However, he faced criticism because the dividend payment was funded by a huge bond issue of $17 billion, to avoid a tax bill that would have arisen on profits brought back to the US. Apple strenuously denies any wrongdoing over its offshore arrangements to channel profits away from the US tax authorities. Three Apple offshore units. facilitated by the Irish government are used to hold money without any legal tax residence at all. This highly irregular arrangement is under investigation by the EU, and was also criticized by US Senators. The Senate Permanent Subcommittee questioned Tim Cook in a highly publicized hearing in 2013. accusing Apple of searching for the 'holy grail of tax avoidance (Barker and Bradshaw, 2014). This hearing was seen as a pivotal moment when the general public became more engaged with corporate tax avoidance issues. In 2015. Apple held $101.1 billion in profits offshore, which would lead to a tax bill of $59.2 billion if the money were returned to the US Apple's employment practices are also criticized on ethical grounds. Like other technology companies Apple has a poor record on diversity as an employer. 70% of its employees are white and Asian males. Only 30% are women and 7% are black. Tim Cook has been forthright in stating that there is much to be done to improve diversity. In 2015, staff in the Apple store in Melbourne, Australia turned away a group of black students on the grounds that they might steal something' (Rushe, 2015). Tim Cook has assured the public that this behaviour is contrary to the company's values and that staff would be retrained. As in other areas of ethical practices, Apple has appeared to respond when criticized, rather than establish a strong ethical stance in the first place. Sources: Kopytoff, V. (2015) Apple: the first 5700 bilion company. Fortun 10 February: Jeffries, D. (2014) is Apple cleaning up its act on labour rights, The Guardian 5 March at www.theguardian.com Racanell, V. (2015) Apple tops Barron's list of respected companies, 27 June, at www barrons com Barker, A and Bradshaw, T120141 Apple braced for explo Brussels probe', Financial Times. 29 September, at www.it.com: Rushe. D. (2015) Tim Cook orders retraining for Apple store staff after Melbou controversy. The Guardian, 13 November, at www.theguardian.com

*************Questions for discussion What are Apple's ethical shortcomings? Is Apple's business model essentially unethical? why have ethical shortcominas not appeared to adversely affect Apple's share price? Would you purchase shares in Apple, and why?