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View entire case with footnores and accompanying exhibits at Closer Look Series: Topics, Issues and Controversies in Corporate Governance
Jan. 24, 2011

In recent years, much attention has been paid to CEO succession planning as a risk management issue. The SEC has encouraged companies to disclose information on their succession plans so that shareholders can assess whether the company might be “adversely affected due to vacancy in leadership.” While many applaud this move, the question now is what information to include in this disclosure and how extensive should it be.

This is particularly true when it comes to companies whose CEOs are experiencing health issues.

Shareholders will value detailed disclosure on the health of the CEO because it helps them to make a reasoned assessment of whether or when a transition might occur. This information will almost certainly be relevant to the market price of the stock. At the same time, health information is a personal matter. The CEO may not wish to disclose the details of his or her condition to the public.

The sensitivity of this issue is exemplified at Apple Inc., where CEO Steve Jobs has faced numerous questions regarding his health and the impact that a sudden departure would have on the company.

In October 2003, Steve Jobs was diagnosed with pancreatic cancer. No public announcement was made, although the board of directors was notified of his condition. The specific form of cancer was rare but considered treatable, with the majority of patients who undergo surgery experiencing a survival rate of more than ten years. On July 31, 2004, Jobs entered Stanford Hospital for treatment.

The following day, Jobs sent an email to Apple employees stating that, “This weekend I underwent a successful surgery to remove a cancerous tumor from my pancreas….I will be recuperating during the month of August, and expect to return to work in September. While I’m out, I’ve asked Tim Cook [executive vice president of sales and operations] to be responsible for Apple’s day to day operations, so we shouldn’t miss a beat.” A copy of the message was distributed to the Associated Press. It was the first public disclosure of his condition. Given Jobs’ strategic and visionary role at Apple, it is perhaps not surprising that when trading resumed the next day, Apple stock fell 2.4 percent.

The issue of Jobs’ health resurfaced in June 2008, when he appeared noticeably thin at a public appearance.

A company spokeswoman responded to inquires by stating that Jobs had “a common bug. […] He’s been on antibiotics and getting better day by day and didn’t want to miss [the event]. That’s all there is to it.” When analysts asked for more information during an earnings conference call, Apple CFO Peter Oppenheimer declined to elaborate: “Steve loves Apple. He serves as the CEO at the pleasure of Apple’s board and has no plans to leave Apple. Steve’s health is a private matter.”

In January 2009, Apple released another letter from Jobs in which he explained that his recent weight loss was due to a “hormone imbalance.” According to the letter, “The remedy for this nutritional problem is relatively simple and straightforward, and I’ve already begun treatment. […] I will continue as Apple’s CEO during my recovery.” Concurrently, the board of directors issued a statement that, “[Jobs] deserves our complete and unwavering support during his recuperation. He most certainly has that from Apple and its Board.”

Ten days later, however, the company announced that Jobs would take another leave of absence. According to Jobs, “during the past week I have learned that my health-related issues are more complex than I originally thought. In order to take myself out of the limelight and focus on my health […] I have decided to take a medical leave of absence until the end of June.” No elaboration was offered. Tim Cook, then chief operating officer, would resume leadership of the company. In the two-week period surrounding these announcements, Apple stock fell 17 percent.

Jobs returned to work as scheduled six months later. Two weeks prior to his return, however, news leaked that Jobs had received a liver transplant at a Tennessee hospital the previous April. A company spokeswoman declined to comment other than to say, “Steve continues to look forward to returning at the end of June, and there’s nothing further to say.” Doctors unaffiliated with the case explained that tumors associated with the pancreatic cancer that Jobs was originally diagnosed with often metastasize in another organ, commonly the liver. The hospital where Jobs received the transplant stated that his prognosis was “excellent.”

In January 2011, Jobs took a third leave of absence. In an email to employees, he explained that he would “continue as CEO and be involved in major strategic decisions” but that Tim Cook would be responsible for “day to day operations.” Jobs would be back with the company “as soon as I can. In the meantime, my family and I would deeply appreciate respect for our privacy.” When asked for additional comment, an Apple spokeswoman replied, “We’ve said all we’re going to say.”

PUBLIC REACTION

Experts disagree on the appropriateness of Apple’s disclosure of Steve Jobs’ health. Warren Buffett, CEO of Berkshire Hathaway who himself underwent colon surgery in 2000, believed that Steve Jobs’ health was a disclosable item: “If I have any serious illness, or something coming up of an important nature such as an operation or anything like that, I think the thing to do is just tell Berkshire shareholders about it. I work for them. Some people might think I’m important to the company. Certainly Steve Jobs is important to Apple. So it’s a material fact. […] Shareholders are going to find out about it anyway so I don’t see a big privacy issue.’

Jerome York, former director of Apple, told the Wall Street Journal that the company’s concealment of Jobs’ health “disgusted” him and that he wished he had resigned over the matter.

Charles Elson, director of the Center for Corporate Governance at the University of Delaware, believed that the company’s use of public capital required full disclosure: “The public should know basically what the board knows. Transparency in this situation is very important. When privacy than you would otherwise have.”

Others, however, disagreed. Robert Crandall, former CEO of American Airlines, believed that the company had no obligation to disclose more than it already had: “I think the fact of the matter is that the precise nature of Steve Jobs’ illness is a matter for Steve and his family.”

Arthur Levitt, former SEC commissioner, thought it was “insensitive” to seek additional information beyond what the company had provided: “Jobs going on medical leave sends a message to the market. An intelligent investor should know the risks of Jobs having a relapse. For the board to opine on what the extent of the illness is right now I don’t think is really necessary.”

The law was also on the side of the company. External counsel advised Apple’s board that personal privacy trumped disclosure obligations so long as Jobs was able to continue to perform his duties. The SEC opened inquiries into the matter in 2006 and 2009, both of which were closed without action.

WHY THIS MATTERS

1. The issue of what information a company should disclose regarding the CEO’s heath continues to be a controversial subject. Companies have handled this issue differently. How extensive should this disclosure be? How should the board of directors weigh its obligations to shareholders against the protection of personal privacy?

2. The nature of Steve Jobs’ condition is extreme in its nature. Should the board disclose other, less sensitive information regarding CEO behavior that might be material to the stock price?
For example, what if the CEO is involved in a contentious divorce that distracts from day-today management of the company? What if he or she exhibits unusually high stress levels that may precipitate an early resignation? What if the CEO engages in hobbies (such as skydiving or private aviation) that carry above-average risk? Do shareholders have the right to know this information? Where should the board of directors “draw the line?”

By David F. Larcker, James Irvin Miller Professor of Accounting, Director of Stanford Graduate School of Business Corporate Governance Research Program
and
Brian Tayan, Stanford GSB casewriter and MBA ’03

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Also on Stanford Knowledgebase:

  1. Disclosure Adds Shareholder Value: Lessons from Sarbanes-Oxley’s Predecessor
  2. Sensitivity of CEO Wealth to Stock Price: A New Tool for Assessing Pay for Performance
  3. Penny Pritzker’s Latest Challenge: Helping Fix Public Schools

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