Shareholder Profit Vs. CEO Privacy : Recent Cases Renew Debate Over Disclosure of an Executive’s Illness

Are public companies doing all they should to inform shareholders when grave illnesses strike key executives?

Tenneco Inc.’s disclosure this week that Chief Executive Michael H. Walsh, 50, has brain cancer--which followed by one day the death from the same disease of Reginald F. Lewis, chief executive of TLC Beatrice International--has renewed questions about whether investors’ rights to information about CEO health are adequately protected.

Securities lawyers said Thursday that, in their judgment, Houston-based Tenneco’s response appeared to be a model of swift disclosure.

Walsh revealed his condition to the board of directors and then to Wall Street analysts and reporters during a hastily convened telephone conference call Wednesday--all less than 24 hours after he received results from a brain tumor biopsy. The stock fell sharply on the news, but rebounded slightly Thursday to close at $40.375 on the New York Stock Exchange, down a total of $1.625 over two days.

Walsh’s open-door policy contrasts sharply with the secrecy that shielded Lewis, whose condition was not made public until he lapsed into a coma the day before he died. Since TLC Beatrice is privately held, the company was not obligated to inform the public, although some of its bonds are publicly traded.

No regulations specifically address the sensitive topic of CEO illness, and many corporate chieftains consider their health a private matter. The issue is covered only by Securities and Exchange Commission and New York Stock Exchange rules that require firms to forthrightly reveal all information deemed “material.”

Such vague wording leaves lots of room for maneuvering.

Los Angeles securities attorney Henry Lesser of Irell & Manella maintains that regulators are correct in leaving the matter up to individual companies. “Regulators must be leery about micro-managing disclosure decisions,” he said. “There are any number of situations that . . . cannot be accurately assessed, such as executive health.”

Too much emphasis on what-might-happen scenarios would risk market volatility, Lesser added.

Yet incomplete disclosure may fuel rumor-mongering by analysts and journalists hungry for information. And shareholder activists contend that investors need stronger boards of directors to protect their interests in such matters.

“One of the most important obligations of outside directors is to monitor a CEO’s capacity to continue performing, and that includes his health,” said Nell Minow, president of LensInc., an institutional investor advisory group.

Nonetheless, companies often tend to minimize the seriousness of a key executive’s illness, in part because the results of treatment are hard to predict. Share prices generally remain stable at the first announcement, as investors absorb news softened by an optimistic spin.

That was the case five years ago, when MCI Communications initially kept secret for two weeks the fact that Chief Executive William G. McGowan had suffered a heart attack, then claimed that the event was not “material” because it was only a “temporary disability.” MCI stock barely budged. McGowan died last June.

Steven J. Ross, then chief executive of Time Warner, revealed that he had prostate cancer in November, 1991, two days after learning of the malignancy. At the time, Ross said he was “optimistic and maintaining my normal work schedule.” Riding a run-up in media shares that day, Time Warner stock traded up $2.25.

But illness forced Ross to stop working a few months later. Media speculation about his condition continued, however, even as Ross reportedly assured associates he would return to work. He died in December at age 65.

Last May, Pepsico Chairman D. Wayne Calloway, 57, informed shareholders at the firm’s annual meeting that he had undergone surgery for prostate cancer three weeks before.

Calloway called his surgery “a complete success.” But one skeptical shareholder nevertheless suggested, in view of Calloway’s health, that the company should create a separate office of president. The proposal was not acted on, and Pepsico shares closed down only 25 cents that day.