The SEC Is Too Lax on CEO Health Disclosure

Apple doesn't say much about Steve Jobs' condition in part because regulators don't require it to. It's time for the government to issue stricter, clearer guidelines, says BW's Arik Hesseldahl

By Arik Hesseldahl

Company shareholders have a right to know when an executive's life hangs in the balance. As things now stand, Securities & Exchange Commission rules are exceedingly vague about what a company should disclose about the health of a C-level official, and how soon that disclosure should be made.

Just how loose those rules are has been made plain by the way Apple (AAPL) has handled news about the health of its CEO Steve Jobs, who received a liver transplant at Methodist University Hospital Transplant Institute in Memphis.

What's odd about the news is how it was conveyed to the public. Official confirmation came June 23, in the form of a statement from the hospital. Jobs gave the facility, and the doctor who performed the surgery, his permission to release the statement. But where was Apple's board? The institute's statement followed a June 20 report in The Wall Street Journal saying Jobs received the transplant in April. Bloomberg News initially reported in January that Jobs was considering a liver transplant.

Apple and its board have been largely silent on the issue since Jan. 5, when Jobs said his doctors found a "hormone imbalance" that was causing weight loss, the treatment for which he said was "simple and straightforward." Then, on Jan. 14, Jobs said he would take a medical leave until June because he had learned, during the prior week, that his health issues were "more complex than I had originally thought." During the interim, Apple has consistently reiterated that Jobs would be back at work in June and declined to elaborate on his condition.

Adhering to the Letter of the Law

But even before the medical leave, Apple and its board have maintained that they say as much as they have to about the health of an executive who was diagnosed with pancreatic cancer in 2003, underwent surgery to treat the disease in 2004, and has shown signs of physical ailment since 2006 that have led to incessant speculation over his physical well-being. Yet, as Apple director and Genentech's then-CEO (now chairman) Arthur Levinson said during a Feb. 25 shareholder meeting, Apple is in compliance with the law when it comes to disclosure over the health of its CEO.

Therein lies the rub. Ask legal and corporate governance experts and they'll tell you that indeed Apple is adhering to the letter of the law on this. That's because in the eyes of regulators, Apple really doesn't have to say much. The closest thing to guidance the SEC does give appears on page 15 of the form for filing an 8K report, used for alerting shareholders to events that may have a material effect on the company. Listed companies have to report the retirement, resignation, firing, or other departure of principal officers, and the hiring and appointment of new ones. That's it.

It's time for the SEC to tighten and clarify the rules. I know where a lot of Apple fans stand on this matter. The company continues to produce stellar products and its shares are on a tear. Apple's profits skyrocketed to $4.8 billion in fiscal 2008 from $266 million in 2004. Sales surged to $32.5 billion from $8.3 billion in that same time frame. The stock has risen tenfold through the end of fiscal 2008 from the beginning of fiscal 2004. Shareholders have little to complain about. Then they likewise shouldn't mind more data on Jobs' condition.

SEC: Case for More Disclosure?

The SEC has a strong legal basis on which to set down strict guidelines about reporting on the health of a CEO, say a group of academics whose research is due to be published in Business Horizons, the journal of the Kelley School of Business at Indiana University. The paper was authored by Alexa Perryman, a professor of management at Texas Christian University; Frank Butler of Florida State University; and John Martin of the U.S. Air Force Academy.

The authors outline extreme cases where shareholders were given plenty and too little information on the condition of a CEO. In 1993, when Tenneco (TEN) CEO Michael Walsh was diagnosed with brain cancer, the company made an extensive and detailed disclosure. Before he died in 1994, Walsh stayed on long enough to see the company through a restructuring and to designate a successor. In 2006, Frank Lanza, the CEO of defense contractor L-3 Communications (LLL), was recovering from surgery on his esophagus, supposedly for acid reflux, when he died suddenly of esophageal cancer, a condition about which L-3 investors were ignorant.

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