Stop the Noiz

Is Steve Jobs' Health Essential to Apple's Future?

Frank Fox - 2009.06.30 - Tip Jar

While I can agree with all the pundits that "material facts" must be disclosed in order to avoid the wrath of the SEC, what constitutes a "material fact" is vague. There is no list of items that make up the definition of a "material fact". It is more like a common sense idea that events, choices, decisions, etc. that could affect a companies business are "material facts" and therefore important for an investor to know about.

Requirement for material facts is posted on the SEC website:

In the chaotic securities markets of the 1920s, companies often sold stocks and bonds on the basis of glittering promises of fantastic profits - without disclosing any meaningful information to investors. These conditions contributed to the disastrous Stock Market Crash of 1929. In response, the US Congress enacted the federal securities laws and created the Securities and Exchange Commission (SEC) to administer them.

If we look at some common things that Apple routinely discloses, we can see the interpretation of material facts in action. For example, Apple does disclose the number of Macs sold in each quarter, but they don't provide a fine breakdown of the details. Apple doesn't say how many of each model was sold, or if more were sold online versus retail, or who were their biggest customers, or how much profit was made on each model, etc.

Would an investor care about all the missing details? Yes, but so would a competitor.

If you release too much information in presenting the "material facts", you risk telling your competitor how your business works, and they can then target these facts to steal away your business. In other words, you have to give enough "material facts" to show that your company is making money and how they do it, but you don't want to disclose any trade secrets in the process. In other words, keeping some things secret is accepted when disclosing "material facts" to the investor.

Is the CEO's Health a Material Fact?

The question for the SEC: Is a CEO's heath part of the "material facts" needed to know if a company is operating as it says it is?

Let's take a fictitious case where the CEO is having a nervous break down. The CEO may make all kinds of poor decisions that could adversely affect the profitability of a company. Should the fact that the CEO is seeing a psychiatrist be posted for public knowledge?

The answer is, most likely, "it depends." Has the company posted associated material facts that would show the decisions made by the CEO, so investors could judge for themselves if the CEO was making poor choices? Giving the facts about the business may be enough to cover the requirement for disclosure.

Decisions have to be made on what disclosures are enough to keep investors informed while not airing too much of the company's dirty laundry.

The company also has duties to its employees, and the CEO, while important, is just another employee. The Health Insurance Portability and Accountability Act (HIPAA) was enacted in part to protect the privacy of a person's medical information. A company would be wise not to freely disclose an employee's medical information, whether that person was the CEO or janitor.

A Simple Question

Apple has to walk a fine line between disclosing material facts and disclosing medical information. In my opinion, Apple has stayed on the right side of the law if we ask a simple question: Did Steve Jobs' health problems affect the operation, profitability, or decision making of the company?

Looking at financial reports while Jobs was on medical leave, there were no drastic changes in the operation or profitability of the company. Apple has consistently beaten analysts' expectations. In regards to decision making, Apple doesn't ever say much, so effectively no outward change in decision making to influence the investor.

For the upcoming quarter, while Jobs was out, profits will probably be down some - but the economy hasn't been the greatest and we all knew that Jobs was on medical leave.

If investors were making their decision based on Steve Jobs always being there and ignored how profitable Apple has been, I would fault the investors, not Apple.

Warren Buffett's View

So why did Warren Buffett come out saying that Apple should have disclosed more about Jobs' medical condition?

"If I have any serious illness, or something coming up of an important nature, an operation or anything like that, I think the thing to do is just tell the American, the Berkshire shareholders about it. I work for 'em. Some people might think I'm important to the company. Certainly Steve Jobs is important to Apple. So it's a material fact."

This guy is smart and knows a lot about investing, but his company, Berkshire Hathaway, isn't a manufacturing company. It goes around acquiring other companies. Buffett has more than a little interest in knowing all the details about a company before Berkshire Hathaway invests in it.

To me, his statement is a little self-serving.

The Big Picture

The thing that annoys me about Buffett's comment is that he's a big fan of long-term investments; his claim that Jobs' health is a "material fact" is like him say the long-term chance for Apple remaining a good investment ends if Jobs is gone. I don't agree with him, and I think it is a very insulting thing for him to say of the leadership at Apple.

Is Jobs' health a "material fact"? In my opinion, not really, except for long-term investors, and then only if Jobs' health were in danger and the rest of the executive team were a bunch of idiots. So far neither has been shown to be true.

Apple still has a lot of growth potential, and only the most incompetent leadership would miss the opportunities.

Time for my disclosure: I am not a lawyer, never ran a corporation, nor do I work for the SEC. My opinions should not sway your investment choices. You should use your own best judgment and try to ignore the noise. LEM

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