The Weighty Issue at Apple

In an interesting investor relations development Monday, Apple CEO Steve Jobs announced that he is suffering from hormone imbalance, causing him to lose weight.  Now, you may ask, “Why is an announcement about someone’s weight loss important from an investor relations standpoint?”  There are a number of answers to that question, but the short one is that this is the first time Steve Jobs and Apple have taken a straightforward approach to the disclosure of his health as it may affect the company.  Of course, it may be that in light of their lack of candor in handling the issue in the past, this may be too little, too late, but that remains to be seen. 

Many companies take the approach that the health of their employees is a private matter, whether that employee is a clerk or the company CEO.  Certainly, if you take the position that all employees are interchangeable parts of the whole, and the illness or death of one will not have a material impact on the operations of the company, this would make sense.  Of course, it’s a bit less defensible if the CEO is making millions of dollars.  It seems to me that when companies grant executives huge compensation packages they are admitting that the loss or incapacitation of that employee will have a material adverse impact on the firm.  Presumably companies expect to get a return on their investment in their employees, so if the CEO is making millions of dollars, the loss of the CEO will result in the loss to the firm of at least that much, if not more, in firm earnings.  It’s even less defensible when, as is the case with Steve Jobs, the CEO is widely credited with personally turning around the company. 

Be that as it may, there is no SEC rule requiring that a company disclose or discuss the health of its CEO.   On the other hand, there is no right to privacy under the federal disclosure laws and regulations.  The SEC regularly requires company executives to disclose such personal information as compensation, perks, the purchase, sale and holdings of company stock and company dealings with family members, among other things. What investors must rely upon regarding CEO health is the general rule regarding disclosure of material events, which is to say, “Information is material if there is a substantial likelihood that a reasonable shareholder would consider it important in making an investment decision.” And “There must be a substantial likelihood that the disclosure of an omitted fact would have been viewed by the reasonable investor as having significantly altered the “total” mix of information made available.”

So let’s look at how the facts apply to the relevant rule.  Several years back, in October of 2003, Steve Jobs was diagnosed with pancreatic cancer.  The company did not disclose the illness at the time, and Mr. Jobs was one of the fortunate few that contract a curable form of pancreatic cancer.  Jobs elected not to immediately undergo surgery for the removal of the tumor, instead trying to cure the tumor through a special diet.  After nine months of staying silent, Jobs finally underwent the surgery and only then announces that he had been suffering from cancer, but now he was “cured”.  So the first investor relations question that comes up is whether Apple acted properly is staying silent for so long.  I am willing to bet that a whole slew of lawyers working for Apple, including the company’s securities law lawyer, the general counsel, outside securities law firm and possibly even special counsel for the Board of Directors, looked at this question.  And what a surprise, they came to the conclusion that the chairman wanted. 

It seems to me that it would have been difficult for Apple to maintain that the possible incapacitation of their CEO was not a material event, especially in light of the statement concerning “Factors That May Affect Future Results and Financial Condition” on page 49 of their Fiscal Year 2003 Report on Form 10K (filed in December, 2003, after Jobs had been diagnosed with cancer), which stated “Much of the future success of the Company depends on the continued service and availability of skilled personnel, including its Chief Executive Officer…”  The only way Apple could have justified not disclosing the illness at that time was the line of reasoning first set out in SEC vs. Texas Gulf Sulphur Co. that because Jobs was still waiting to see how the cancer was responding to treatment, the issue was not yet ripe for disclosure.  Conveniently, the issue then became ripe for disclosure once Jobs was “cured”.

In part because of the way the original illness was disclosed, compounded by the secrecy that surrounds everything Apple does, the issue has refused to go away.  This past summer, four years later, Steve Jobs made a speech at an Apple technical conference, introducing the Apple 3G iPhone. He appeared noticeably thinner and speculation ensued that he was having a recurrence of his cancer.  In response to questions, an Apple company spokeswoman said Jobs had been hit by a “common bug” and was now on the mend with the aid of antibiotics.  In spite of this, rumors surrounding Jobs’ health have continued to circulate throughout the remainder of 2008.  

In December 2008, Apple announced that Steve Jobs would not be making a keynote address at the annual Macworld conference in January 2009, a speech that he had customarily given in the past.  Speculation and rumors concerning the state of Jobs’ health immediately increased and the stock dropped 10%.  On January 5, 2009, Apple released a letter from Steve Jobs to the public. In the letter Jobs states:

“I have been losing weight throughout 2008.  The reason has been a mystery to me and my doctors.

…Fortunately, after further testing, my doctors think they have found the cause – a hormone imbalance that has been “robbing” me of the proteins my body needs to be healthy.

The remedy for this nutritional problem is relatively simple and straightforward and I have already begun treatment”. 

The problem here is that in making the most recent statement, Jobs seems to be contradicting the Apple spokeswoman’s “common bug” statement of last summer.  If the reason for his weight loss was a mystery to his doctors, it could not have been a common bug.  So why should investors believe Apple this time?  Further, in terms of information content, there is not a lot of substantive information for investors.  One doctor interviewed by the Wall Street Journal has been quoted as saying “To an endocrinologist, the most vague statement you can ever make is the term ‘hormone imbalance’”. 

The investor relations conclusion I draw from all of this is that early and full disclosure, as distasteful and intrusive on privacy as it may be, is better for the company in the long run in terms of establishing and maintaining credibility.  If Apple had come out soon after the initial diagnosis of cancer in Steve Jobs they could have engendered tremendous sympathy and good will.  A continuing stream of disclosures could have kept rumor and speculation to a minimum.  Yes, the stock would gyrate, but the gyrations would be based on credible information, not rumor and innuendo.  I think that if you are the highly visible CEO of a publicly traded company, your privacy takes a back seat to the information needs of investors.