Executive health and mandatory disclosure

Should Apple have to disclose the full facts of Jobs’ health? Harvey Silverglate, writing in today’s WSJ, says

the notion that investors were entitled to every detail, when they knew the CEO's health history and saw his obvious weight loss, is ludicrous. That a man's desire to maintain a shred of privacy under these circumstances can justify a fraud investigation tells us much about the lack of legal precision, not to mention decency, with which federal investigators and prosecutors too often operate.

Under current law there’s probably no affirmative duty to disclose. For reviews of the law and recommendations for SEC disclosure rules on this see Joan Heminway and Allan Horwich. Corporations can’t lie or misleadingly disclose, which is now giving rise to the Apple investigation (which will probably be subject to the Apple Rule, discussed most recently here). And executives’ health could be material inside information that insiders can’t trade on even if there’s no duty to disclose.

Should the law go further? I’m sympathetic with Mr. Silverglate, though appeals to “decency” are unsatisfying as a principle for interpreting and applying the securities laws.

How about this solution: let the shareholders decide. After all, non-disclosure mainly hurts the company – the lack of information raises investor risk, and therefore the company’s cost of capital. The shareholders ought to be able to balance the extra recruiting and retention costs of a full disclosure rule (and “decency,” for what it’s worth) against traders’ needs to know all the facts. Conversely, how can a regulator possibly decide that tradeoff for all firms, executives with varying degrees of importance, and the full range of diseases known to medical science?

But once we’ve gone down the shareholder-choice road, where should we stop? Are the issues regarding executive health disclosure all that different from, say, executive pay, internal controls disclosures under SOX, or the plusses and minuses of securities fraud class actions? Here is Henry Butler and me on optional SOX in Forbes, Adam Pritchard on optional securities class actions, and a post tying all this together (watch for more forthcoming from Washington Legal Foundation).

Where would this optional stuff lead? State law?  If this sounds odd, then you go figure out one size fits all rules that cover situations like Steve Jobs.

Comments

[Fat Man]

Why don't Jobs' rights under HIPAA trump the securities laws?

[Dick Johnson]

Speaking as a non-lawyer who works in investor relations, I favor the "decency" approach even if it can't be codified. Surely, the CEO’s ability to continue managing has to be considered material to shareholders, so disclosing health problems that interrupt a CEO’s work makes sense. But the market doesn’t need medical details - only the facts of his involvement in the business. I offer some other comments on the IRCafe.com blog (http://ircafe.com/2009/01/22/is-the-ceos-health-fair-game/) - which also lists Ideoblog as a favorite in my blogroll.