Disclosure of Executive Health Issues
posted by Dave Hoffman
Check out this terrific article in Fortune about Steve Jobs. As the article points out, far more than most corporate leaders, Jobs is personally identified with Apple’s brand:
Jobs is also among the most controversial figures in business. He oozes smug superiority, lacing his public comments with ridicule of Apple’s rivals, which he casts as mediocre, evil, and – worst of all – lacking taste. No CEO is more willful, or more brazen, at making his own rules, in ways both good and bad. And no CEO is more personally identified with – and controlling of – the day-to-day affairs of his business. Even now, Jobs views himself less as a mogul than as an artist, Apple’s creator-in-chief. He has listed himself as “co-inventor” on 103 separate Apple patents, everything from the user interface for the iPod to the support system for the glass staircase used in Apple’s dazzling retail stores.
That personal identification makes disclosure of an executive health issues a tricky materiality problem. When Jobs was diagnosed with cancer in 2003, the relationship between Jobs’ body and Apple’s SEC filings was front-and-center:
Jobs put the procedure [surgery] off for more than nine months, raising the thorny issue of disclosure. He told the board, and the board decided to say nothing. Palo Alto attorney Larry Sonsini, the company’s longtime outside counsel, advised the directors that the CEO’s right to privacy trumped any disclosure requirement as long as he could continue to perform his duties. A second outside lawyer agreed.So Apple conducted business as usual, disclosing nothing and letting the tiny circle of insiders who knew about the situation continue to trade Apple shares.
Had Jobs’ health gone sour, could investors have successfully claimed that Apple failed to disclose material facts? I tend to think so, and don’t think much (at all) of the balancing privacy interest. It strikes me that, no less than presidential candidates, CEOs of publicly traded firms have contracted away their right to a private medical life. That said, the authority on these issues is really Joan MacLeod Heminway, whose Personal Facts About Executive Officers: A Proposal for Tailored Disclosures to Encourage Reasonable Investor Behavior really sets up the problem nicely.
May 6, 2008 at 4:09 pm
Posted in: Securities
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Responses (7)
Shawn Levasseur - May 7, 2008 at 10:46 am
“It strikes me that, no less than presidential candidates, CEOs of publicly traded firms have contracted away their right to a private medical life.”
I’d disagree. The health of any other employee has financial consequences for a company too, and yet personal privacy trumps those concerns. Just because the employee is at the top of the power structure ought not change that. You shouldn’t have different laws for different classes of people.
Investors should assume that any CEO can drop dead, or be incapacitated, at any time. Unless the CEO has made any claims to immortality, the real question should be about what plans are in place if something happens to the CEO.
paul a'barge - May 7, 2008 at 10:54 am
You don’t think much (at all) of the balancing privacy interest.
Nice. Wait until your privacy is up for grabs.
Look, if you don’t like living in a country where the individual and his-or-her rights are really, really important, by all means move to Sweden or some other Socialist fantasy land. Really. Get out now.
It’s just that simple, isn’t it?
molon labe - May 7, 2008 at 10:59 am
Not quite. Markets work because of information availability. CEOs – especially founding CEOs in technology firms, but others as well – are NOT like other employees in their impact on publicly traded firms. Indeed, part of the rationale for very large incentive-based CEO compensation is precisely that the leadership and decisions of a given CEO can and are expected to influence the firm in significant ways.
Shannon Love - May 7, 2008 at 11:31 am
It strikes me that, no less than presidential candidates, CEOs of publicly traded firms have contracted away their right to a private medical life.
That might be a good thing to establish by legislation or contract but I think that as a matter of standing law, I think the right of privacy trumps everything else.
If not, how far down the totem pole does the loss of medical privacy go? In many high technology companies, the most critical employees are a small number of technical types. Should their medical histories be public knowledge as well? With medical cost being a major outlay, perhaps investors could claim the right to examine the medical histories of all employees in order to determine medical insurance cost.
We need to be careful about jumping to implied law. We should assume that everyone has a right to privacy and then explicitly legislate breaches in that privacy as needed.
PatHMV - May 7, 2008 at 11:41 am
I lean more towards the side of disclosure here, particularly where the executive plays such a crucial role in the company. Does anybody doubt that if Steve Jobs were to leave Apple, for health reasons or any other, that Apple’s stock price would tank, at least for a while?
Jobs felt his health was important enough to let the directors and others at the company know. That, I think, forfeits whatever privacy right he may have had. After he told them, they had insider information that there was a higher than random chance of his having to step down for health reasons. As the post notes, they could continue trading in possession of that knowledge, not shared by the rest of the market. That’s not proper.
Real privacy, fine. If Jobs wants to keep his illness from the Board and others at the business, that’s fine, he shouldn’t have to disclose it to anybody. But if he thinks it is necessary to tell the Board, it should also be necessary to tell the owners of the company, the stockholders.
khirareq - May 7, 2008 at 12:52 pm
Interesting. This could put an auditor into a situation where they had to qualify their opinion because of accounting law, but could not disclose why because of privacy law.
I love this country!
In order for this to reach a standard where it would have to be disclosed, Job’s cancer would have to have a material impact on Apple’s financial position (note: NOT the same thing as its stock price). Which means there would have to 1.)be a financial cost 2.)that you could reasonably estimate 3.)that was material to the overall financial position of Apple. Seems unlikely for a manufacturer, no matter how important that person is. Well, I say that – I can actually envision such a thing being material to, say, the Miley Cyrus empire or Mary Kate & Ashley’s clothing line, where someone’s face is actually required to sell the merchandise being produced.
Colin Kingsbury - May 7, 2008 at 2:25 pm
The central argument here seems to be that the directors have insider information on which they could make advantageous trades.
Directors already deal in tons of this type of information on a much more mundane level, e.g., quarterly earnings projections before the public announcement. Missing an estimate these days can take a 15% haircut off your stock price and that happens a hundred times more often than a CxO gets a serious illness. In that case, directors are obligated not to disclose that information, but to not trade on it to their private advantage. I don’t see how Jobs’ medical condition is crucially different.
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