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Weekly UpdatesRECENT FOCUS upon the level of disclosure by Apple regarding CEO Steve Jobs' health suggests consideration of the larger issue: What should be the scope of disclosure about highly personal information concerning executives (and directors), and what should be off-limits?
The touchstone is disclosure of "material" information--what a reasonable investor might consider important in making a voting or investment decision. Sophisticated securities lawyers will, however, admit that deciding what is "material" can be difficult.
Arguably, there are many data that a reasonable investor would consider important in deciding whether to buy, sell, or hold, but that, to my knowledge, are not currently disclosed by any public company and that, at no time before or since 1933, have ever been systematically disclosed.
Consider venture capitalists, who operate by their own set of (private company) rules. They generally delve deeply into the backgrounds of key people involved in a potential investee, including their marriages, kids, medical history, habits, etc.
Is it reasonable, or is it unreasonable, for the following--which most likely would be ferreted out by VCs--to be disclosed as material facts?
Physical Health: Is the CEO an alcoholic? As substance abuse expert and Temple University professor Steven Belenko notes, "Most alcoholics exhibit impaired judgment and reduced cognitive functioning, even if their visible conduct and manner do not make their alcoholism obvious; a CEO who is an alcoholic is likely not to make optimal business decisions." Because of his illness, an alcoholic CEO or director makes drinking a priority over other things (e.g., running, or overseeing the affairs of, the company). Wouldn't reasonable investors consider all this highly material?
Wouldn't reasonable investors consider important whether the CEO regularly takes powerful prescription drugs for, say, chronic back pain? In several such cases (including that of the late Chief Justice Rehnquist), the direct result was seriously impaired judgment. So, disclose? If the CEO has high serum cholesterol, then, according to conventional medical wisdom, his chances of having a heart attack are increased. Wouldn't reasonable investors consider that important; hence, shouldn't those lab test results be disclosed?
Exercise is key to forestalling disease. Wouldn't a reasonable investor consider it important to have the CEO's exercise regimen described in adequate detail? Does the CEO use a treadmill and swim, or does he rock-climb and bungee-jump? Does the CEO ski on slopes properly matched to his skill? Does he always (or sometimes, or never) wear a ski helmet? Does he ride a motorcycle? Don't these matters reveal to a reasonable investor not only information affecting the CEO's potential longevity but also his approach to risk? Aren't they, therefore, material to a buy/sell/hold decision?
Mental Health: If, say, the CEO is a borderline personality or sociopath, wouldn't a reasonable investor consider that important? Such a CEO would believe that the rules don't apply to him or her, would erupt into irrational rages, would lack empathy, and would project his or her own disturbed thought processes onto others. (Should such a person be running a public company?)
However, many believe that the "normal" or "well-adjusted" person lacks what it takes to be successful in a competitive, results-oriented world, where a driven, obsessive-compulsive mentality is an asset. The psychologically "well-adjusted" CEO may not be ideal. So, disclose diagnoses of personality disorders because such information is material (positively or negatively, as the investor chooses to evaluate it)?
Character: If the CEO cheats on his spouse, is it more likely he may cheat in other areas, too (e.g., on the financial statements)? So, disclose? Another angle: Assuming that the CEO is not as adept a two-timer as Alec Guinness, with a different woman in each port, in the film "The Captain's Paradise," the chances of discovery--followed by a messy divorce, prolonged distraction, and the inability to concentrate fully on the company's business affairs--are high. Given this foreseeable chain, shouldn't the CEO's adultery (the first link therein) be disclosed?
Our disclosure system sometimes emphasizes the trivial and banal over the significant. Disclosure of minutiae of executive compensation is mandated; that a CEO is an untreated alcoholic and adulterer who skies on black diamond slopes sans helmet is not. Which of these two sets of facts would you prefer to know? (Which of the two do you think the venture capitalist would prefer to know?)
To the critical problem of respecting medical and other personal privacy there is no good (or perhaps any) solution--unless we take the position that executives (and directors) of public companies, like politicians, cede their rights to privacy by dint of choosing to pursue such positions. Perhaps we may be approaching such a view as American business heads toward federalization.
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Hoffer Kaback is president of Gloucester Capital Corp. and has served on several boards.
The author can be contacted at hkaback@directorsandboards.com.
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