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How Big is the Risk when the Boss is Sick?

August 1, 2008

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Full Disclosure

Due to recent speculation about a highly visible U.S. CEO, experts are beginning to weigh in on disclosure practices related to CEO illness.

"The board must determine if the CEO's health is considered material information, meaning that an investor would consider the information important in deciding whether to buy or sell the company's securities," notes Steven R. London, the partner-in-charge of the Boston office of Pepper Hamilton LLP and head of the firm's Shareholder Activism Team in a bulletin that appeared in my inbox last week. "If the information is determined to be material, then the company must disclose the news to the public or require all of its insiders to refrain from trading in the company's securities."

A June MarketWatch.com article reporting on questions of Apple CEO Steve Jobs' health made this issue abundantly clear. The article's sub-headline headlines reads, "Is Apple hoarding information like the Soviet-era Kremlin?"

It depends, according to London. "In the case of Apple Inc., one could argue that Steve Jobs is that type of dominant figure," he explains. "If his illness is likely to incapacitate him, the current status of his health is material information."

Determining materiality sounds a lot like determining risk: the board and executive team needs to balance the potential magnitude of the event with the likeliness that the event will occur. The issue also sounds like one that requires careful consideration and plenty of legal analysis.

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See Risk more holistically

On August 6th, 2008 a bfmag.com reader said:

I am saddened by the CPA/ Chartered Accountant approach to risk. They think auditing will reveal all. It helps but its too narrow. The FASB and IFAC have a way to go yet to get to grips with Risk. An example of the narrow focus of those who perform audits is the lack of risk disclosure on the housing bond issue in many US banks annual reports. The write offs have affected the world.

Disclosures in Financial Statements about Risk are so skimpy. What I like about this article is that the risk of the CEO falling ill should be measured in financial terms, impact and probability being part of the calculation. This should not be reserved only for the CEO but the risk profile of all senior or key persons in an organisation should be reviewed for risk. How many organisations even have a risk register?

Risk management is also not a one off exercise, keep at it, there is always something new to look at.