What Did Eric Schmidt Know About Apple (And When)?

Steve Jobs is supposed to reclaim his perch as CEO of Apple next month, but no one knows for sure. Except, of course, for Apple’s board of directors, which probably does.

This brings us to the propriety of Eric Schmidt’s place at the table, as a director of both Apple and Google, which competes with Apple in many areas and may in several others before everything is said and done. Schmidt knows if Jobs is coming back as scheduled and, more importantly, if he isn’t. And if Jobs is never coming back, Schmidt would know that too, and the impact of that knowledge could put Schmidt in a very uncomfortable position for Google and its shareholders: next to his lawyers defending himself against insider trading charges, not to mention civil suits that could yield treble damages.

When Schmidt took his position on Apple’s board, he promised he would recuse himself whenever topics came up that involved areas where the two companies compete. And we’re supposed to take him at his word. But taking people at their word is very 1999, and we have a much-maligned law in place since 2002, Sarbanes-Oxley, which was enacted precisely because shareholders have discovered that they can’t, in fact, take the word of directors and company executives. The law mandates a number of independent directors as well as the presence of financial experts on the boards of audit committees.

But the law doesn’t prohibit directors from sitting on more than one board, even if the boards are directing competing companies. And in Silicon Valley, connections are the life blood of deals. Legendary venture capital firm Kleiner Perkins vaunts its “connections” in the industry to lure start-ups into its arms, promising that it can get the fledgling companies commercial deals because it has directors on so many boards.

The investigation into Schmidt and Arthur Levinson, another director sitting on the boards of both companies, may come to nothing. Giles McNamee, managing director of investment bank McNamee Lawrence & Co., says the companies hardly compete in any material way. “The areas where their businesses compete are relatively small and it’s therefore immaterial to their business. They didn’t start out competing — they evolved into those businesses, and they’re still very small portions,” he told me. “It’s just Silicon Valley noise,” he added.

That may be so — the iPhone still represents “just” $1.8 billion out of Apple’s $32 billion in total revenue, and the Android operating system is thus far still marginal compared to Google’s advertising-driven business. But the two companies are coming into closer and closer competition in several areas — for instance, Android may become used widely by netbook vendors competing with Macs. Even the appearance of a conflict of interest could land Schmidt and his company in more trouble than it’s worth. Schmidt doesn’t want to have to answer the SEC, a Congressional committee or a criminal prosecutor when they ask, “what did you know about Mr. Jobs’ health, and when did you know it?”