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. 
