Where should companies draw the line when considering what information to disclose on the private lives of their CEOs when that information could have a very real effect on the company and its shareholders?
Should health concerns of the CEO and other company leaders be considered material information? How about a change in marital status, if a looming divorce could put millions of shares in the hands of a founder's ex-spouse?
Supporters of comprehensive corporate transparency say the private lives of top executives should be an open book. Others say CEOs face plenty of scrutiny and gossip as it is and don't need to formalize those intrusions into their personal life.
Earlier this month, News Corp. went public with news that CEO Rupert Murdoch and wife Wendi Deng were divorcing. Doing so certainly made sense, given the inevitable gossip that was bound to surface. Going public was a way for the company to get ahead of the news and do its best to quash concerns that the separation might affect an ongoing, much scrutinized corporate restructuring that will split the company in two. For now, it appears that Murdoch's controlling stake in the company is in no danger.
While news of the divorce was leaked to the press, the news has not yet made its way into a filing with the Securities and Exchange Commission, however, nor does it have to under current reporting rules. Should such a formal dissemination to shareholders be either required or voluntarily made? That question is part of a much larger debate.
“Information about a CEO's personal life should be disclosed if those issues or life events could have a material impact—or be perceived to have a material impact—on their performance, or the reputation of the CEO or the company,” says Eleanor Bloxham, CEO of the Value Alliance and Corporate Governance Alliance, a board and executive educational and advisory firm, focused on corporate governance matters.
The SEC requires only minimal disclosure regarding CEOs. Among the information it mandates are age and compensation information. It does not require health-related disclosures, although detailing succession plans is urged, but not mandatory. Regulation S-K also requires companies to disclose the CEO's personal bankruptcy history and any past violations of securities laws. Companies must also detail when a principal financial officer transfers duties, even temporarily, and what boards they sit on. The SEC and other regulators have otherwise steered clear of requirements for companies to disclose other personal matters that might, arguably, rise to the often murky status of “materiality.”
Defining what is material, in this context, is no easy task. Should a CEO's pregnancy be disclosed? Is a divorce of interest to investors? What about an arrest record, trip to rehab, or personal financial meltdown? There are no such requirements that any of these matters need to be made public, and typically they aren't.
Bloxham says a CEO's life outside the office might present situations that should be disclosed “if the issue could accelerate board plans for CEO termination or succession.”
“Failure to disclose matters forthrightly and proactively damages the trust between the board and the corporation's stakeholders, so it's important the board consider not only the actual materiality of the event but the perception others will have about the potential for that issue under other circumstances to have a material impact,” she says.
“Disclosure is always better,” says Frank Butler, a professor of management at the University of Tennessee at Chattanooga and co-author of the academic paper, “When the CEO is Ill, Keeping Quiet or Going Public.” “It's really because you want to reduce uncertainty. Uncertainty is not good for the share price of an organization, and it is not good for your shareholders or employees.”
Frequently, this debate centers on demands for health-related disclosures, a discussion that reached a fever pitch when news that Apple CEO Steve Jobs was battling pancreatic cancer became public. Some investors and analysts accused the company of covering up the illness or downplaying its seriousness for as long as it could.
“Information about a CEO's personal life should be disclosed if those issues or life events could have a material impact—or be perceived to have a material impact—on their performance, or the reputation of the CEO or the company.”
Chief Executive Officer,
Value Alliance and Corporate Governance Alliance
Plenty of other CEO health issues have raised similar disclosure debates over the years. Most recently, Google co-founder Larry Page spooked investors when vocal cord paralysis led him to cancel public appearances and reduced his voice to a strained whisper during earnings calls. He eventually came forward to announce the malady and assure shareholders that his company efforts were unaffected.
In January 1993, Michael Walsh, the former CEO of Tenneco, was diagnosed with brain cancer amid a $3 billion corporate restructuring. He immediately informed directors upon news of the diagnosis and reached out to shareholders through the media. Harry Pearce, former vice chairman of General Motors, took a similar approach when he was diagnosed with leukemia in 2001. His take at the time: “There is an absolute requirement to make a full disclosure. Any investor in the company is entitled to know the health of all the members of the senior management team,” he said.
Shareholder advocates praised Warren Buffet for the openness he and Berkshire Hathaway exhibited after a colon cancer diagnosis last year. Company correspondence and filings not only gave a candid assessment of Buffet's condition, they added detail about treatments and recovery statistics.
Not every business leader shares that view. In 1980, Time Warner CEO Steve Ross demanded that a debilitating heart attack be kept secret because the news would be “bad for the company.”
Companies that choose to hide an executive illness are aided in those efforts by laws, such as the Americans With Disabilities Act, which were designed to protect employee privacy and defend against discrimination.
Butler and his co-authors make the case that public disclosure is warranted when: there is an illness or condition that immediately endangers the life of the CEO; an illness or condition requires a lengthy absence; a condition has the potential to shorten the lifespan of the CEO; or it impacts the CEO''s ability to reliably perform his or her job.
Health-related disclosures put both the SEC and companies in an awkward position, says Brian Breheny, a partner with Skadden, Arps, Slate, Meagher & Flom, and former deputy director for legal and regulatory policy at the Commission's Division of Corporation Finance.
“I suspect any rule would involve some level of materiality, because you wouldn't want to require disclosure of things like, ‘Oh, I have high blood pressure.' Any trigger would be tricky to write and enforce,” he says.
The SEC could, perhaps, require disclosure of a health issue that was viewed as materially impacting an executive officer's ability to perform his or her duties or responsibilities. “But any such provision would remain the subject of a facts and circumstances analysis, which is generally where we are today,” Breheny says. “I can't see the SEC having any interest in crafting a rule like this.”
Often it's hard to determine how much a private issue or event involving the CEO or other company leader can impact the company. “Disclosing the private matters of a senior executive can be one of the toughest decisions for a corporation,” says Tom Lin, law professor at the University of Florida's Levin College of Law.
He explains that “materiality” has been established by the U.S. Supreme Court cases, TSC Industry Inc. v. Northway Inc. and Basic Inc. v. Levinson.
The former case found that an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding to take a particular course of action, such as how to vote shares during a merger. The Basic ruling established the “fraud-on-the-market theory” and the concept that because stock prices are a function of all material information about a company, omissions and mis-statements have market-wide implications.
The following is from a 2009 rule change issued by Financial Industry Regulatory Authority on “Addressing the Origination and Circulation of Rumors.”
As originally proposed, Rule 2030 prohibited a member firm from originating or circulating a rumor that “the member knows or has reasonable grounds for believing is false or misleading or would improperly influence the market price of a security.”This formulation was based largely on the existing prohibition in FINRA Rule 6140(e). In contrast, NYSE Rule 435(5) prohibits the circulation of rumors of a sensational character “which might reasonably be expected to affect market conditions on the [NYSE].”As amended, proposed Rule 2030 applies to a rumor that a member knows or has reasonable grounds for believing is false or misleading and is likely to influence the market price of a security.
As originally proposed, Rule 2030 required a firm to report to FINRA “any circumstance which reasonably would lead the member to believe that any [rumor covered by the rule]might have been originated or circulated.” FINRA received several comments addressing the breadth and scope of the proposed reporting requirement, ranging from suggestions to reduce the scope of the requirement to suggestions that the rule not include any reporting requirement. FINRA continues to believe that the reporting of rumors will enhance FINRA's efforts to ensure the integrity of the market. However, FINRA is proposing a revised reporting requirement that would require firms to promptly report rumors that the firm learns of and knows, or has reasonable grounds for believing, were originated or circulated for the purpose of improperly influencing the market price of a security. FINRA believes that a more focused reporting requirement will increase FINRA's efficiency in dealing with reports and enhance FINRA's ability to respond rapidly and appropriately to those rumors that are most likely to affect the market and harm investors.
While the Murdoch divorce may not result in many consequences for News Corp. or its shareholders, electric car-maker Tesla was not so lucky. The 2010 divorce of CEO Elon Musk from Talulah Riley was particularly ill-timed as it came during the quiet period leading up to a $100 million initial public offering. Complicating matters was that hundreds of millions of dollars in government loans were predicated on Musk's controlling stock interest. Could his ex-wife become co-owner, diluting that interest? The company's response was an updated S-1 filing that detailed reasons why Musk didn't expect the proceedings to have a negative impact on the IPO, the government backing, or continued business operations. The S-1 also detailed a post-nuptial agreement that allowed Musk to retain ownership of all his shares.
Too Much Information?
Ann Olazábal, professor of business law at the University of Miami, challenges the assumption that a CEO's personal life should be fodder for regulatory disclosures. A company may want to disclose any number of things, but shouldn't be required by law to do so, she says.
Olazábal, who detailed her views in a paper, “Celebrity CEOs: Disclosure at the Intersection of Privacy and Securities Law,” co-authored with University of Miami professor Patricia Sánchez Abril, challenges the notion that a single executive can make or break a company's fortunes, pointing to the fact that Apple suffered no long-term stock price consequences when Tim Cook succeeded Jobs as CEO. The often salacious nature of media reports, and a voyeuristic thirst for gossip, provides little in actionable information for investors, it only encourages speculation, she says.
How about other news, such as a marital affair that could raise questions about the CEO's judgment. “The law, and justifiably so, has to stay away from these slippery slopes,” she says.
Butler, however, maintains that CEOS fall into that same social strata as celebrities, whose very job description means forgoing much of their privacy. “If this person is also responsible for managing a billion dollar organization, can their personal life truly be private when something could interfere with the potential operations?” he asks.