Examining Timely Disclosure of Material Information and the Privacy Concerns of Executive Officers

Abstract

On January 20, 1993, Michael Walsh, the former Chairman and CEO of Tenneco revealed to the public that he had brain cancer. This type of disclosure of health issues are arguably serious enough to affect Wall Street. Other company officials have previously made similar disclosures such as Hugh Martin, CEO of Pacific Biosciences, who in October 2010 disclosed to his employees that he had cancer of the Blood (multiple myeloma), and Harry J. Pearce, the Vice President of General Motors, who disclosed in 2001 that he had leukemia. The above public disclosures are however more the exceptions than the rule. When a CEO becomes ill, most public companies usually respond by keeping the full details of the illness a secret without violation of Securities Laws. The concern of these companies is that investors would abandon ship and that stock prices would decline if this information gets to the market. Classic examples are Apple Inc., and Sara Lee. The Securities and Exchange Commission (SEC) rules seem to be silent on such situations. The Securities Act of 1933 and the Securities and Exchange Commission Act of 1934 require companies with publicly traded securities to make fair, timely disclosures of material information to the investing public.The question therefore remains whether the health situation of an executive officer of a company is material information within the contemplation of the SEC rules that must be disclosed. If answered in the affirmative, then to what extent do executive officers have a right to privacy? If this information is not material information that is subject to disclosure, should the company in the absence of specific SEC rules, disclose facts about the illness of executives as a matter of good corporate governance. This paper will look at the position of the securities laws with regard to the duty to disclose and some of the arguments in support of material disclosure of the health of executive officers. This paper will also examine some of the opposing arguments and criticism about additional disclosures, which are mostly based on privacy-related statutes, absence of specific SEC rules for such situations, and the burden that such a requirement might place on companies. The paper will also attempt to strike a balance between the need to provide material information that may influence the investment decision of shareholders, and the need for the protection of the right to privacy of executive officers of a company.