Tuesday, October 19, 2010

Maybe They Thought It Wasn’t Important

There are several scenarios that are a company's publicity and investor relations nightmare. One of them is if a senior executive is arrested for drunk driving. That’s just the situation Walgreens found itself in recently when its CFO was arrested, not once, but for the second time in a little over a year for driving under the influence of alcohol. According to press reports, Wade Miquelon, Walgreens CFO, was first arrested in September of 2009 for having a blood alcohol level that was unacceptable under Illinois law. As a result of the first arrest, Miquelon paid a hefty fine and was placed under Court supervision. In September 2010 he was again stopped and charged with driving under the influence and driving on a suspended or revoked license. At the time of his second arrest he refused to submit to a breathalyzer test, resulting in an automatic suspension of his driving license for three years.

Walgreens response to all of this has been to have a company spokesman state, “We are aware of the situation. It's a personal matter, and we don't comment on personal matters related to our employees.”

This is a perfect example of adopting a regulatory approach to investor disclosure. If you just read the regulations, there is no requirement to make a disclosure under any of the filings. The instructions for filing a Form 8-K state that a company need only file a Form 8-K if someone like the CFO either resigns or is removed, not if he has done something criminal. Regulation S-K, which governs disclosures for periodic filings and proxy statements, states that with respect to certain legal proceedings, a company must disclose events during the past five years “that are material to an evaluation of the ability or integrity of any director, person nominated to become a director or executive officer of the registrant:…

(2) Such person was convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);”

Driving under the influence of alcohol, even if it is a second arrest, would seem to fall under the exception for traffic violations, so that there is no specific requirement to file a disclosure of the event. So what one is left with is a standard materiality test, not unlike the situation when Steve Jobs of Apple was ill and the company was faced with a disclosure decision. (See my posts “The Weighty Issue at Apple", Jan. 6, 2009 and "Maybe Things Were Not So Simple and Straightforward", Jan. 15, 2009.) The legal analysis revolves around whether Mr. Miquelon, the Chief Financial Officer of the company who was specifically hired in to lead a restructuring effort called “Rewiring for Growth” was considered so key that effort that investors would deem it important to a decision to either buy or (more probably) sell the stock if he was shown to have a drinking problem. On this point, reasonable minds can differ, and when the subject of making a disclosure that might prove embarrassing to senior officers is concerned, it’s easy to see how a company might be able to get an opinion from counsel that you need not disclose.

The more interesting question is whether the company should have said something voluntarily. Clearly they have an officer, one of the most important in the company, who is either suffering from an illness or is exhibiting extremely poor judgment. According to reports in the press, if convicted for the second offence, Mr. Miquelon faces a high probability of doing some jail time, which will remove him from the company for a period of time. Additionally, I’m sure the questions crossed the minds of investors along the lines of “If Mr. Miquelon thinks so little of laws that affect him personally in the most direct way possible, what are we to think about the way he will choose to deal with the myriad laws and regulations that surround the accounting and investor disclosures he is in charge of for his company?” Yet Walgreens did not make any disclosure until the incident came to light. Wouldn’t it have been better to be proactive, acknowledge the problem and how they were addressing it?

You can’t tell me that the CEO and Board of Directors don’t think this series of incidents is not important. So it should be considered important to investors as well. Some well thought out disclosures should have been made for the benefit of the shareholders, the owners of the company.

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