Is CEO Health Public Information?

Matthew Lynn, a Bloomberg columnist, doesn't think so. He argues in an op-ed that a chief executive's health -- no matter how important that executive is to the firm -- is personal, not public, information. Of course, he uses Apple CEO Steve Jobs as his prototypical example. I generally agree, but I think the SEC still needs to monitor important CEO health news on some level.

Lynn makes some great points:

First, a company is never dependent on one person, no matter how it may appear. Assets, brand names and a corporate culture should prove durable even when the person who created them departs. If a company relies on the health of a single person, you should sell the shares right away. Nobody is immortal, so the equity is going to collapse one day.

Quite right. But I would make this point a little differently. Some companies certainly rely more on one person than others. That does not necessarily make them worthless companies, as Lynn suggests. It does, however, make them riskier. If a company is heavily dependent on one person, that risk should be considered when determining the value of a company. That way, health problems would not have a huge effect on stock price, since there would already be what I'll call "prime-mover" risk figured in.

He also states:

Second, there are all kinds of sudden events -- a terrorist attack, a new law, an innovative competitor -- that might hurt the future of a company. Shareholders can't expect to be insulated from all such risks.


And where do you draw the line? If CEOs are made to disclose their medical records, why not reveal meetings with their therapist? Or their marriage counselor? Or personal coach? Aren't those material as well?

I agree. But I would go even further regarding an important chief executive. What if Steve Jobs was in perfect health, but got hit by a bus, struck by lightening or died in a plane crash? There are an infinite number of events that could lead to fatal consequences to chief executives other than just health problems. That's why, as I mentioned, stock price should already include prime-mover risk.

So does that mean that the SEC should completely ignore significant health issues that CEOs may face? Not exactly. Even if a moderately important, but probably replaceable, CEO -- say Jamie Dimon of JP Morgan -- were to be suddenly have a major health problem, stock price would be affected. Such news probably wouldn't affect JP Morgan as much as Jobs' poor health would affect Apple. But I would be shocked if investors didn't react negatively to Dimon suddenly having to abandon his throne at JP Morgan.

This should matter to the SEC. Insiders who have knowledge of health problems, or other issues that might affect a chief executive's ability to run a firm, could improperly use this non-public information as motivation to buy or sell securities. For example, what if Jobs' doctor, after learning the CEO had cancer, sold all his Apple shares? Insider trading? I'd say so.

As a result, this information can remain private, but insiders with that private information must be forbidden from trading the associated company's stock. Once that information is released to the general public, it should be done so according to SEC requirements regarding the release of any other material information. That's very reasonable. It also doesn't infringe on the privacy of chief executives.