Health issues are personal, private matters — except, perhaps, when it comes to the company's question about whether to disclose executive health issues. When a top corporate leader becomes ill, it creates an ethical dilemma for the board and other corporate officers. On the one hand, it's a personal and professional courtesy not to disclose personal, health or other sensitive information about another person publicly, especially when that person is a top corporate leader. On the other, boards have to maintain vigilance over the competence of the CEO, who is the top executive. If there's any question about the CEO's health, the board may need to make decisions about who will lead the company in the CEO's absence and who will succeed the CEO if he or she can no longer perform their duties responsibly.
These questions are being revisited in light of the recent passing of Oracle's CEO, Mark Hurd. Hurd announced that he was taking a leave of absence in September 2019. He simply indicated that he needed some time off to take care of his health. A month later, the announcement came of his death. The news sparked discussions about whether companies should disclose news that a corporate leader is dealing with a health challenge or when.
When Is There a Duty to Disclose Executive Health Issues?
In simple terms, there is no law, rule or regulation that requires a CEO to disclose adverse health information for themselves or anyone else. There is one notable exception to that statement, and that is if the executive is incapacitated.
Despite demands or expectations from the media and the general public, the board has the liberty to evaluate the specific facts around the competency of the CEO, whether those facts are related to health concerns or anything else.
Securities laws mandate boards to disclose a CEO's illness or other health-related information when the information is considered "material" and there is a "duty to disclose." There is no impetus for boards to disclose health issues when a CEO is performing their duties normally and as expected. In the context of health, it isn't considered material information unless shareholders would consider it important under federal securities laws and there is some concern over the CEO's performance. An issue is also considered to be material if it would alter a shareholder's decision to buy or sell the company's stock.
As it pertains to case law, neither the courts nor the Securities and Exchange Commission (SEC) has come to the conclusion that adverse information about a CEO's health was so adverse that it needed to be disclosed as being material. In reality, corporate executives and boards have taken one of three approaches when faced with the question of disclosing high-profile health conditions. They either engage in full disclosure, partial disclosure or they simply remain silent.
Boards make a judgment call every time they make a decision to make a disclosure about a CEO's health or other sensitive matters. The definition of materiality is overly broad and overly inclusive so boards walk a fine line when making judgments about health matters, as well as about matters that pertain to sensitive business information, business conduct and other issues that could affect the company's bottom line.
Is the Partial Truth Better than the Whole Truth?
One of the reactions that companies can have to adverse news about a CEO's health is to give part of the truth. Making voluntary partial disclosures is a choice that brings associated risks with it, such as the potential for litigation. The "half-truth doctrine'" says that if the board discloses anything, they must disclose any other information so that the statement isn't misleading.
Case law on this premise hasn't been applied to a matter that's related to CEO health and well-being just yet, but the potential exists. The fact remains, if the board knows something about the illness that would affect the CEO's ability to perform, they have a duty to disclose it publicly. Shareholders have brought forth litigation about a CEO's illness or death, so it's possible that more cases could be forthcoming that would change case law.
Are Internal Disclosures Necessary?
Internal disclosures about CEO health are viewed differently than external, public disclosures. CEOs are legally required to inform their boards about any serious medical conditions they may have, so they can make appropriate, timely succession plans.
The duty to keep the board informed extends to other corporate officers. If one or more of them feels that the CEO was compromised in doing his or her duties, it would pose a clear enterprise risk to the board and the company if the CEO isn't forthcoming on their own accord.
Boards can set their own expectations for the CEO to disclose personal information to the company, either formally in writing in their bylaws or informally in direct discussions with the CEO. Companies could also make use of their Code of Ethics or CEO employment agreements to require the CEO to disclose information to the board.
If the CEO is missing work, or is noticeably sick or getting medical treatment, the board has a duty to investigate for purposes of evaluating disclosure obligations. The board, officers or other spokespersons shouldn't make any representations that are inconsistent with known facts, such as indicating that the CEO is in good health. Such a misrepresentation could violate anti-fraud protections for the CEO.
In conclusion, there is currently no law or case law that clarifies whether boards should disclose a CEO's health condition, which means they must make the best decision about how to handle it on their own.
Executive health is pretty much an exception to the question of materiality, even when it may matter to investors to some degree. Health information is viewed by courts and regulators as an issue that needs to be treated differently than typical business issues. Boards' decisions may be influenced by privacy concerns for the CEO or the company.
It's important to factor in that medical science isn't exact and it's usually impossible for boards to know all the medical facts even when they're aware that a CEO is ill. Most prognoses are uncertain at best. As a rule of thumb, unless a CEO's health is so acute that their critical duties are in jeopardy, there is no duty to make a public disclosure.
In all cases, boards must evaluate the facts to determine if they're material enough to pursue their duty to disclose. Boards may make voluntary disclosures at their discretion, being fully aware that this response comes with risks. It's crucial to avoid disclosing half-truths when making this choice. Before making this choice, it's prudent and wise to consider whether silence is the best response.