When is a CEO’s Illness Material?

There was an article in yesterday’s Wall Street Journal entitled “Investors Want Right to Know” which uses the recent announcement of Steve Job’s latest medical leave of absence to advance the argument that Boards of Directors need to disclose more about the health of their chief executive officer. I’ve written about Steve Job’s illness and the lack of disclosure surrounding it on a number of occasions before (see “The Weighty Issue at Apple”, Jan. 6, 2009 and “Maybe Things Were Not So Simple and Straightforward” Jan. 15, 2009) and I stick by what I wrote then. In short, this is a sensitive area where the privacy of an individual bumps up against the disclosure of material events.

Surprisingly, in light of the numerous other items executives must disclose, 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, either. So what it boils down to, as it does in so many investor relations situations, is the materiality of the issue. If the fact that your CEO has a life threatening disease would be enough to create “a substantial likelihood that a reasonable shareholder would consider it important in making an investment decision” then you had better disclose it.

There are probably two lines of inquiry a Board needs to think about in considering disclosure; the corporate side and the health side of the issue. Factors to consider on the corporate side in making such a disclosure would include:

• How irreplaceable is the CEO perceived to be? People such as Sam Walton of Wal-Mart and Steve Jobs of Apple score highly on this test. Less visible CEOs might not be considered as important to the future of the company, particularly if there is a well publicized succession plan in place and the CEO is nearing retirement age.
• How much is the company paying the CEO compared to everyone else on the proxy compensation list? One of the most visible measures of how much the Board of Directors thinks the CEO is worth is how much they are paying him compared to the other important executives. If he’s making several multiples of the compensation of the next person on the list, then the logical assumption is that the Board views him as almost irreplaceable.
• Does the company have a risk factor in their 10-K report that talks about how unique and important their CEO is to their future? Obviously it’s difficult to argue that a life threatening illness to the CEO is not material if your risk factors say he’s very important to your future. (Apple in fact did this, but it sure doesn’t look good.)
• What is the fact situation surrounding the CEO? Does he portray himself as the sole identity of the firm or does he showcase other executives in public appearances, relations to investors, suppliers and customers?

On the health side of the equation, not to put too fine a point on it, we can all agree that the death of a CEO would be material. So the question Boards must wrestle with is how incapacitating, short of death, must an illness be before a Board has an obligation to disclose. Some commentators have been calling for more regulation by the SEC in these cases, but I think that is likely to be difficult, as hard and fast rules when dealing with health issues can prove a very slippery slope.

All of this sounds good in theory and it would work, except for one thing: Boards usually choose not to disclose a CEO’s illness. I can understand this from a couple of perspectives: the need for privacy in a very stressful situation and the Board’s sense of loyalty to the CEO. Further, when you go through the type of analysis I’ve outlined above, you can often find reasons not to disclose. So investors need to understand, and I think most do, that disclosure in these situations will be slower and more guarded than in a typical corporate situation.

As for the situation at Apple, I have very little sympathy for those who are now crying for more disclosure. If, after all the publicity surrounding Steve Job’s illness during the previous two episodes, an investor hasn’t gotten comfortable with an Apple after Steve Jobs, then they have been asleep at the switch.

Maybe We Have Things Backwards

I’ve been reading an interesting book lately. Normally I stay away from business books, particularly ones that sound like they want to solve business problems with touchy-feely quick fixes. But in this case I listened to the author get interviewed on the Harvard Business Review podcast and I was hooked. The title of the book is “The Happiness Advantage” by Shawn Achor and its basic premise is that we have things backwards when it comes to success and happiness.

If you are like me, you probably grew up thinking that if I can just be successful, then I’ll be happy. What this type of thinking leads to is a continual round of striving, only to discover that the goalposts keep getting moved. For example, you start out thinking, if I study hard and get good grades, I’ll get into a good school and then I’ll be happy. So you get into a good school and instead of being happy, you discover that now you have to study even harder so you can get the job or graduate school admission that will make you happy. Then when you land the job you think will make you happy, you discover that you need to really buckle down and start your career so that you can achieve true happiness when you get the big promotion. And so it goes, and we never really feel as if we’re happy, because there’s always more out there that we need to achieve in order to think we’re happy.

Mr. Achor turns things around and, based upon research, shows that happy people are more successful. Further, he demonstrates that you can learn to do a lot of small things in your everyday life that will increase your ability to feel positive about things, basically making happiness a habit. I’m still reading the book, so I can’t speak to everything Mr. Achor claims can be achieved, but the way I think about it is, if some of these things make you feel better about life and increase the probability of your success, why not give it a try?

In the field of investor relations, one way to look at it in this context involves the flow of information: many times IR officers are placed in a situation where analysts want more information than our companies want to provide. For example analysts may want to follow the inflation rate in your product category and your company only releases that information in its earnings release. There are two potential ways to handle the situation. One is to simply say the information is not available intraquarter (as Oddball, played by Donald Southerland in the classic movie Kelly’s Heroes says, “Negative waves, Moriarty”). Or you can choose to be helpful by pointing them to a government inflation index that closely tracks your own internal inflation that will help the analysts without divulging your number. I guarantee that the analyst will think more highly of you and your firm if you choose the latter course.

When all is said and done, a large part of investor relations is based on relationships that you build with investors over time. If those interactions that you have with investors are positive in nature, the investors are more likely to have a good impression of your firm and its prospects. And that’s a big part of the battle.

Focus on the Fundamentals

I spend a fair amount of time listening to business experts on the Harvard Ideacast and Knowledge@Wharton podcasts. I choose to listen to the podcasts as opposed to read the scholarly articles they are based upon for two reasons: First I find that authors are much more likely to speak in plain English than they are to write it. Second, I spend a fair amount of time cycling to stay fit and listening to podcasts beats hearing my playlist of oldies for the 2,000^th time (and I can hear traffic over the sound of the spoken voice whereas Bruce Springsteen tends to drown out the sound of approaching cars).

One thing I’ve noticed about business experts, whether their field is human resources, finance or management, is that they are all convinced that the insights they bring and the field they are working in are the most important and critical applications for the modern corporation. Almost every expert comes across as being convinced that if company managements would only sit up and take notice of the expert’s crucial insights, companies could solve all of their ills and rake in the profits.

And so it is with investor relations experts as well. Over the past several years as I have observed and commented upon the field of investor relations, I have seen a parade of experts inform us how our lives were going to be radically changed by the latest topic du jour, and that we had better get on the train because it was leaving the station and those that were not on board were doomed to extinction.

Let’s start with XBRL. I first wrote about this topic in January 2009, so almost two years have gone by since I confessed that I didn’t understand the revolution. Guess what? I still don’t understand what all the fuss was about. XBRL sure hasn’t changed my life, and I look at company filings and websites all the time. It may have changed the lives of some programmers that had to map all that data, but to me it just seems like another government mandate that has had little to no impact in the real world.

And how about social media? Has it totally changed your IR program yet, the way all the experts claimed it would? I think the only change social media has made to IR is to give rise to an entire set of new experts that will get you prepared for the revolution they say is coming.

The point here is not that these issues don’t have an impact – they do, albeit a minor one in the scheme of things. These relatively new technologies will grow in importance over time, just as the use of the web and email have, although each new technology brings about its own dangers (see my June 10, 2009 post “Email is Not Your Friend”). The point I am trying to make is that IR practitioners should not let the latest fad overshadow the fundamentals of what we do. And what we do is to ensure that investors have sufficient information to make reasoned investment decisions about our company’s stock. This is accomplished by making sure the information our companies disclose is clear and understandable and presents a complete picture so that investors can make an informed investment decision. Clear and understandable generally comes in two parts: how we plan to make money in the future, back-tested against what the company has accomplished in the past.

The medium of how information gets delivered, whether it is in the form of paper, telephone, fax, email, text messages or social media, is just a tool – the important part is the information itself. So as we move into a new year, let’s focus on the important stuff and make sure that we make sure the basics are covered before we start chasing the stuff at the margin.