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What are the rules when the CEO gets sick?

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Monday, January 01, 2007
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Worst-case scenario: A company’s CEO gets diagnosed with cancer and decides to keep the illness a secret. A few co-workers begin to notice that the CEO seems sick and isn’t working as much as she did a few months ago. Rumors begin to swirl internally and in the media. Company share prices plunge based on pure speculation.

What should this CEO have done at the moment of diagnosis? Whatever she wanted, says Mary Ann Franz, partner at Miller Nash in Portland, who, after searching for past lawsuits that may have set a precedent on the subject of CEO health disclosures, found nothing specific on the books. “While companies traded on the New York Stock Exchange and NASDAQ must disclose material information under SEC law, the health of an executive doesn’t fall into that category,” Franz explains.

Without specific legal obligations to disclose major health problems, CEOs and companies release such sensitive personal information based on need, which can include simple rumor management.

Generally, health concerns are considered private, personal issues, says Thomas Jones, a professor at the University of Washington Business School, but the delineation doesn’t always apply to executives. “Presumably, executives should have some right to privacy, but when they take those positions and are paid truly enormous amounts of money, privacy becomes secondary,” he says.

Just as mergers and holdings affect a company’s value, an executive’s health could shape the business’s performance. That reality should prompt executives to consider disclosure under certain circumstances, Jones says. “I think they should usually opt for disclosure,” he explains. “Because of the highly public nature of their positions, there are huge potential consequences that come with life-threatening health problems.”

But life threatening could mean anything from a cancerous mole to leukemia. How and when CEOs choose to release health details rests with them and, if they choose, with members of their company.

“It depends on the CEO more than anyone else,” says Franz.

Franz notes that when executives resign, they have more of a legal responsibility to disclose why they’re leaving as defined by SEC code. But that doesn’t mean resignations always reveal the truth. “Many health-related resignations are actually code for, ‘We don’t want to tell you why he’s leaving,’” she says.

But when executives stay despite real health problems, they face tough choices. In 2004, Apple CEO Steve Jobs underwent surgery to remove a cancerous tumor from his pancreas. In a pre-emptive move, Jobs sent Apple employees an e-mail from his hospital bed to announce he would be taking a month off to recover from the surgery. Most likely, Jobs, a notoriously private person, admitted to the illness to protect his company from harmful speculation that could have decreased stock values. And the announcement created an action-rather-than-reaction scenario, a common public relations strategy designed to maintain an image of power and control.

For Tripwire founder and CEO Wyatt Starnes, choosing to reveal his health conditions followed recovery from a major illness. After being diagnosed with throat cancer in 2003, Starnes took a temporary leave of absence from the Portland-based security software company while he was being treated for the disease.

Four months after he returned to work, Starnes resigned, citing health problems. A local paper reported that Starnes revealed his health problems in reaction to rumors that he was fired. “I’m wearing myself out,” he said at the time. “It’s time to go heal myself.” Starnes later founded SignaCert, a Portland computer security company. He declined to comment for this story.

During the past few years, it’s been difficult to deny the implications of serious health conditions at the executive level: Frank Lanza, a chief at L-3 Communications, died from cancer; Skip Ackerman, president and CEO of Panacos Pharmaceuticals, died of a heart attack at age 58; in 2004, McDonald’s CEO Jim Cantalupo died of a heart attack.

Issues of succession and stability have forced shareholders to become increasingly savvy when it comes to hiring CEOs. Now, many executive screening processes include full physical examinations in addition to the more standard hiring procedures.

For executives interested in making the ultimate pre-emptive strike by staying healthy,  hospitals around the country offer thorough physicals designed for executives. In Oregon, ODS Companies offered an executive evaluation program at Oregon Health & Science University, but recently canceled the program because of lack of interest.

While local executives might be taking their health into their own hands, staying healthy could mean avoiding ambiguous legal and ethical territory in the long run.

— Lucy Burningham

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