What Does a Sick C.E.O. Do to His Company?

When Steve Jobs was diagnosed with pancreatic cancer in 2003, Apple waited until after his surgery to tell the public and shareholders — yet company stock only fell 2.4 percent on the next trading day.

But Jobs’s gaunt appearance while speaking at the Worldwide Developers Conference in June and the speculation about his health that followed likely contributed to a drop in Apple’s stock shortly after his appearance.

Steve Jobs in May 2007. Photo by Joi

Jobs recently told The New York Times that his condition is more serious than a “common bug” but not life threatening — hardly enough to quiet suspicions.

Is the public overreacting or is Jobs’s health that important to Apple?

We asked Steve London, the partner in charge at the Boston office of Pepper Hamilton LLP and head of the firm’s Shareholder Activism Team, and James Post, a professor at the Boston University School of Management, how a sick C.E.O. can affect his company.

Q: How do you predict Apple’s stock price and overall image would be affected if Steve Jobs ever announced that he had another bout of cancer?

Post: The stock would definitely take a serious hit. Jobs is, in many respects, Apple’s greatest asset. Institutions may have already been pricing such bad news into the stock, but many small investors who worship Apple would likely be caught.

London: Steve Jobs is a dominant figure in Apple. The market perceives of him as a driving force in the company. If he is critically ill, you can be sure that the market price of Apple stock will decline — but by how much and for how long really depends upon Apple’s succession plan.

If the board of directors has a powerful succession plan, the market decline will be short lived. Ultimately, Apple will be judged on its results. If Apple reports period to period growth following an announcement about Steve Jobs and following his replacement, any uncertainty in the marketplace will dissipate quickly.

Q: Which is worse for a company whose C.E.O. is diagnosed with cancer: saying nothing for months while shareholders and the public speculate, or announcing it outright?

Post: For most C.E.O.’s, getting to the top is a lifetime of effort. They don’t want to surrender the power and position and may be given to overestimating their ability to conquer their illnesses. I think it has less to do with hubris than with an egotistical determination to prevail.

This refusal to surrender can be a virtue in many business contexts, but it can also be a weakness when dealing with serious health issues.

Once the diagnosis is made, it is important for a company C.E.O. or board chair to make public the announcement, the therapeutic strategy, and the outlook. Secrecy and “no comment” are the worst courses of action.

Secrecy has two effects: First, it can deceive investors, customers, employees, and business partners. This is unethical, per se, and has negative effects on the company’s reputation for integrity. Second, it encourages speculation that may be worse than the actual facts of the situation. This can lead to business losses.

London: While a cancer diagnosis for a C.E.O. is a significant health issue, a company doesn’t necessarily have to disclose it.

Speculation by the public is generally worse for a company and its stockholders than promptly announcing negative news; it usually causes unjustified and potentially dramatic swings in the stock price. Speculators can make money on those swings, but they don’t add substantial value to the long-term growth of the company.

The down swings also give the losing investors reason to think about lawsuits against the company. It is more important for the long-term value of Apple to have integrity in the market. Investors should trust that they are receiving all material information about the company on an ongoing basis.

If a company has already commented on the C.E.O.’s health condition in the past, there is likely an obligation to update the market if the C.E.O.’s condition changes. For example, Apple recently mentioned that Steve Jobs just got over a common bug. The market could easily interpret this to mean that his health is otherwise good. If he has a serious recurrence of cancer, Apple should disclose this publicly.

A C.E.O.’s health is generally not one of the specific events required to be disclosed under the securities laws.

Keep in mind that we also have a well-established but contradictory public policy that protects the privacy of our health and medical information, especially in the workplace. This is one of the reasons why the Steve Jobs situation has been debated.

Companies emphasize the importance of maintaining the confidentiality of their employees’ health and medical records. But when you have a prominent figure in a public company, the securities laws present a competing policy. If a key executive’s health condition is likely to prevent him or her from continuing to serve the company, the interests of the company’s stockholders and the investing public may prevail.

Q: Do you think C.E.O.’s overestimate the impact their health has on their companies?

Post: Many do overestimate their importance. But many more, I suspect, underestimate the toll serious health issues can take on their leadership. Modern medicine is filled with miracles, but no leaders should underestimate how much personal time, attention, and energy it will take to fight a serious illness.

The board uses its collective judgment to assess impact. Can the C.E.O. perform those duties that are essential to the position (such as judgment, analysis of information, travel, and appearance at leadership events)?

London: Most of us believe that we are irreplaceable in our organizations. But that is rarely the case.

The real question for legal compliance is the board of directors’ evaluation of the impact on the company from the potential loss of the C.E.O. It’s arguably a breach of fiduciary duty if directors fail to develop a succession plan when a C.E.O.’s health or future is questionable. When the C.E.O. is a dominant presence within the company (as is Steve Jobs in Apple), the analysis is the same but the impact of his loss is more dramatic — and it’s more difficult to identify a comparable replacement.

Q: Is there such a thing as a reverse mortality effect (where stock rises when a C.E.O. gets sick or injured)?

London: What a devastating commentary on the value of that C.E.O.! I certainly can imagine such a situation. Look at the various companies who are in a battle with dissident stockholders over management’s performance. The dissident stockholders are focused on replacing management. If the C.E.O. is unable to continue because of health problems, it’s possible that the market might react positively.