Your CEO has just been diagnosed with a potentially terminal disease: she may have six months or six years. She’s come to discuss what you should say to the financial community. Should you disclose immediately? Should you wait to see how she responds to treatment?
A CEO’s illness can be material news that will have an impact on the stock price; especially if the CEO has turned that company around or been key to its success. Take, for example, Disney’s Eisner, Microsoft’s Gates, or Berkshire Hathaway’s Buffet. Intensifying the issue: analysts rate the strength of management as the key determinant in investment decision-making.
‘Part of our job is to get into the CEO’s head,’ says one sell-side analyst, who wants to remain anonymous. The CEO of a company she follows was diagnosed with leukemia last year. ‘You take this kind of news personally, no matter how hard you try to be objective.’
Unfortunately for IROs, disclosure is even more important if a company doesn’t have a clear successor in the wings. Karl Groskaufmanis, a partner at law firm Fried Frank Harris Shriver and Jacobson, says a management team may be reluctant to disclose early for fear the share price will take a hit. ‘Ironically, that’s what makes it material news,’ he says. ‘If you’re likely to see a downtick, you should consider disclosing sooner rather than later. And insiders should not be dumping shares while the illness remains undisclosed.’
Groskaufmanis suggests IROs talk to senior managers about possible scenarios in advance. While this may be as unpleasant as talking to parents about the contents of their will, having a plan can make the difference. ‘So far there haven’t been many legal proceedings launched in such cases but it’s not unreasonable to see it happening.’
Forward planning
How can IROs prepare in advance for such bad news? According to Jack Lascar, former IRO at Tenneco, ‘The first few hours are key.’
In early 1993, Lascar was faced with the task of telling Wall Street that Tenneco’s CEO, Mike Walsh, had been diagnosed with a brain tumor. ‘The company had been through some bad times and we’d put a lot of faith in Mike. I remember thinking that this company had a black cloud hanging over it.’
Most helpful, recalls Lascar, were the CEO’s and COO’s understanding of the communications process – and the importance of being straightforward. ‘They told me we were going public with the news. I didn’t have to urge them.’
Tenneco, which held a teleconference to explain Walsh’s condition to the market, was prepared for a crisis. But some companies don’t have a clearly defined crisis plan. Many IROs cringe at the idea of having to talk about the subject with their bosses – or anyone else for that matter. One London-based IRO shied away from speaking on the record on the issue for fear of starting a rumor ball rolling. ‘Suffice to say there are plans in place in case anything untoward happens – and I think that’s vital,’ he says. ‘You need to know what you’re going to do in such a situation but that doesn’t mean having to look five years into the future all the time.’
‘Difficult as it is,’ says Vickie Weyand, IRO at Harland, ‘you need to discuss succession planning with the chief executive. When you have a young CEO who has sold investors on a new strategy, having to go outside and find another leader can really hinder operations.’
From a broader perspective, the issue of a CEO’s health is another argument for a strong board of directors. Tenneco’s board was highly involved in managing the crisis, ensuring the succession plan, and keeping Wall Street posted on the health of its leader.
Above all, IROs need to find ways to focus attention on division heads and potential successors. ‘A strong communications program will highlight the supporting cast,’ says MW McCall, author of High Flyers: Developing the Next Generation of Leaders. ‘ Their enthusiasm will help investors understand that a good strategy is immortal, even if the implementors aren’t.’
Ultimately, there is no bright line rule. When you disclose and what you disclose will be dictated by the situation. And, if all else fails, remember that it could be worse. As one sell-side analyst says: ‘Some stocks trade up on this kind of news.’
Morgan Molthrop is a director of IR at Georgeson & Co in New York
