Monday, July 6, 2009

A Healthy Debate

There’s an interesting column in today’s New York Times entitled “Unhealthy Fixation on Job’s Illness” by David Carr, whose column, The Media Equation, looks at business events form a media perspective. In the column he basically says that the people clamoring for more disclosure on Steve Job’s health are a bunch of blood sucking voyeurs who won’t be satisfied unless they have real time readouts on all of his vital signs. I’ve written about Apple’s lack of disclosure about Steve Jobs in the past and I’ve even created a case study out of this fact set for my class on investor relations at Rice University, so at the risk of being classified as a blood sucking voyeur, I thought I would chime in and try to bring some rationality to the subject.

First, I would agree that, under normal circumstances, the health of senior executives is a private matter that does not require disclosure. While they are paid boatloads of money as if they are the only people that count in the organization, the fact of the matter is that they are mostly interchangeable parts, people that can be substituted for without a material change to the company. However, I also believe that there are certain people who are so identified with a company’s performance in the eyes of investors that a serious threat to their health requires telling shareholders. Warren Buffet of Berkshire Hathaway is one. Bill Gates and Sam Walton, when they were CEOs during their companies go-go years, are two other examples. There may be a few others, oftentimes founders of companies, that fall within this classification.

Companies can also exacerbate the situation and put themselves in a position of having to disclose. They often put boilerplate language in their “Risks” section of their SEC filings, as Apple did, saying something along the lines of: “Much of the future success of the Company depends on the continued service and availability of skilled personnel, including its Chief Executive Officer…”. Once such a statement is in the SEC filings, it would seem to me to be hard to argue that a serious illness to the CEO is not material to investors. After all, you’ve just told them that much of your future success will be attributable to your CEO, and basic finance dictates that a firm’s stock price is the discounted value of its future cash flows and capital gains. Further, if your firm celebrates the cult of the CEO; if the CEO is the only one who ever talks to the street; if your CEO either runs a one man show or give that impression to investors, your firm may be putting itself in a similar spot.

The federal securities laws do not mandate that a company disclose the health of the CEO or any other senior executive. On the other hand, they also do not grant a right of privacy on the issue of health. It all comes down to what would be considered material in the eyes of investors. In the case of Steve Jobs, the media reaction and the stock price movement relating to announcements about his health tell us that investors consider this information material. It may not seem fair, but these things are always viewed in hindsight.

Finally, even if the initial judgment is that disclosure isn’t necessary, you still don’t have the right to mislead, and this is where Apple may be most vulnerable. Once you choose to say something, you have to be truthful and not omit anything which, under the circumstances, might otherwise make the statement misleading. And Apple has had a whole series of statements that appear to be less than completely truthful when it comes to Mr. Jobs’ health.

So, what are the lessons here for corporate practitioners? If you want to plan so that this isn’t even an issue should your CEO get sick there are several things that you can do. First, take a team approach to meeting with investors. Let the Street see that the COO and CFO are also very capable individuals who know the business and can step in quickly should the CEO get ill. This applies to both in-person meetings and quarterly earnings conference calls. Next, get your lawyers to revise the risk section of your 10 – K and 10 – Q filings and remove language about how valuable your senior executives are and what a calamity it would be if you should lose them. Lawyers like to think of these sections as insurance policies against securities law class action lawsuits, but unless you want to disclose health issues, the language may be doing more harm than good. Finally, if you do decide to say something, make sure the disclosure is accurate and complete. Remember, the Securities and Exchange Commission and your mother strongly agree on one thing: It’s wrong to tell a lie.

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