When Should a CEO’s Illness Be Made Public? : Policy: Saul Steinberg’s recent stroke again raises the question of what firms’ obligations are.
Financier Saul P. Steinberg became notorious a decade ago by launching hostile corporate takeovers that earned him millions of dollars. Now he’s a topic again in corporate circles--this time for actions he didn’t take.
Though Steinberg’s takeover ploys ended with the 1980s, he’s still chairman and chief executive of Reliance Group Holdings Inc., a publicly traded insurer based in New York. His family is also Reliance’s biggest investor, with a 47% stake.
Steinberg, 55, suffered a stroke in late June that left him partially paralyzed, though not incapacitated. But Reliance said nothing about it to the public for the next six weeks. It wasn’t until the cable-television channel CNBC disclosed the stroke that Reliance stepped forward last week to confirm it.
Reliance called the stroke mild and said that it was not necessary to make an immediate announcement. The company also said Steinberg, who was hospitalized for six days, then went home to recuperate, should be back in the office after Labor Day.
Still, Reliance’s initial silence revived the question of how soon companies, especially those that are publicly held, have a duty to announce major changes in the health of their top executives. Whether or not the firms speak up can have a significant, if temporary, effect on their stock prices and hence on shareholders’ investment.
Steinberg’s setback is reminiscent of a controversial 1987 case in which MCI Communications Corp. waited two weeks before announcing that its then-chairman, William G. McGowan, had suffered a heart attack. McGowan died in 1992.
In other cases, companies have been quick to disclose that their bosses are sick. In 1993, Tenneco Inc. Chairman Michael H. Walsh announced that he had brain cancer less than 24 hours after he got the results of a biopsy. He died a year later.
But the question of how soon a company should say something is a ticklish one.
A firm’s employees, suppliers and investors might want to know promptly if the CEO is ill, and institutional investors especially aren’t fond of the kind of silence Reliance used.
“The people we represent would like to know from day one” about serious executive ailments, said Alyssa Machold, spokeswoman for the Council of Institutional Investors, a trade group for public pension funds. “But we also understand this is a gray area involving personal health.”
One of those pension funds, the giant and activist California Public Employees Retirement System in Sacramento, “prefers full and prompt disclosure on issues such as serious illnesses among chief executive officers,” spokeswoman Pat Macht said.
But securities lawyers said there are several reasons companies might prefer not to say anything.
“You’re balancing tremendous privacy interests against disclosure,” said Scott Smith, a partner with the law firm Pillsbury Madison & Sutro in San Francisco. “There’s also the hazard that you will over-alarm the marketplace” if the executive recovers as expected.
Indeed, news of a top executive’s sickness is immediately felt on Wall Street, although the reaction varies with each incident. In Walsh’s case, Tenneco’s stock fell sharply after his condition was announced. But after Steven J. Ross, then co-chief executive of Time Warner Inc., revealed in November, 1991, that he had cancer but was maintaining his work schedule, Time Warner’s stock gained more than $2 a share. Ross died in 1992.
Steinberg’s setback had no apparent major effect on Reliance’s stock price or trading volume before or after Reliance confirmed that he had had a stroke.
James Fingeroth, a spokesman for Reliance, said the company’s attorneys concluded that “no public announcement was necessary, mainly because his [Steinberg’s] intellectual capacity wasn’t affected in any way, and that he was continuing to run the company on a day-to-day basis.”
What does the law say? Securities and Exchange Commission regulations do not specifically require announcements of executives’ health problems. But there are other broadly defined SEC rules governing such disclosure.
The rules say that the news must be a “material event” that significantly affects the company, and that it is information the company is legally obligated to disclose.
If that sounds oblique, it is, because the term material is open to interpretation. Also, there are times when a company is not legally required to disclose information, even when the news is material.
“Merely because something is material doesn’t give rise to an obligation to disclose it,” said Tom Newkirk, associate director of the SEC Enforcement Department in Washington. “For instance, a company can be engaged in confidential merger discussions” and legally keep that information quiet, he said.
And it appears that the SEC gives companies plenty of leeway. Newkirk said he could not recall a single case in which his agency charged a company with failing to promptly announce an executive’s illness. As for Reliance, he cited the SEC’s policy of never confirming or denying the existence of any investigation.
Some companies are slow to disclose executive illnesses because they also don’t want the markets to expect constant updates, securities lawyers said.
“You don’t want to get yourself in a position of being afraid of being sued if you don’t continue to have that stream of disclosure coming,” said Larry D. Soderquist, a lawyer and securities law professor at Vanderbilt University in Nashville, Tenn.
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Disclosing Illness
When must a company announce that its chief executive is sick? The rules are vague, and firms vary in their decisions.
Executive, company: Saul P. Steinberg, Chairman, Reliance Group Holdings Inc.
Illness: Stroke
When disclosed or confirmed: Six weeks later, in June, 1995
*
Executive, company: John F. Welch, Chairman, General Electric Co.
Illness: Heart surgery
When disclosed or confirmed: Next day, in May, 1995
*
Executive, company: Michael D. Eisner, Chairman, Walt Disney Co.
Illness: Heart surgery
When disclosed or confirmed: Same day, in July, 1994
*
Executive, company: Reginald F. Lewis, Chairman, TLC Beatrice International
Illness: Cancer
When disclosed or confirmed: No disclosure until day before he died on Jan. 19, 1993
*
Executive, company: Michael H. Walsh, Chairman, Tenneco Inc.
Illness: Cancer
When disclosed or confirmed: Day after condition diagnosed in January, 1993. Died May 6, 1994
*
Executive, company: D. Wayne Calloway, Chairman, PepsiCo Inc.
Illness: Cancer surgery
When disclosed or confirmed: Three weeks later, in April, 1992
*
Executive, company: Steven J. Ross, Chairman, Time Warner Inc.
Illness: Cancer
When disclosed or confirmed: Two days after condition diagnosed in November, 1991. Died Dec. 20, 1992
*
Executive, company: William D. McGowan, Chairman, MCI Communications Corp.
Illness: Heart attack
When disclosed or confirmed: Two weeks later, in 1987. Died June 8, 1992
The SEC’s Disclosure Rules
Companies pondering whether to disclose an executive’s illness rely on Securities and Exchange Commission rules that broadly define when such a statement is required. What’s involved:
* The issues: A company must decide if the executive’s sickness is “material,” that is, whether it significantly affects the firm’s operation, and whether the company has a legal obligation to disclose the news. The rules are open to interpretation; some material events, such as merger talks, can be kept secret.
* The pros: Prompt disclosure of an executive’s illness keeps a company’s constituents apprised and reduces a company’s liability for failing to announce the problem quickly.
* The cons: Disclosure might prematurely rattle the financial markets and could impose a duty on the company to make constant, updated pronouncements on the executive’s condition.
* The result: Some companies wait only hours, others weeks, in disclosing that an executive is sick. The SEC rarely takes enforcement action against companies for failing to promptly disclose such news.
