Karen Morris' Bio
Karen Morris is a Distinguished Professor of Business Law at Monroe Community College in Rochester, New York where she has taught for 31 years. She is also an elected town judge and the author of two textbooks - New York Cases in Business Law and Hotel, Restaurant and Travel Law. Karen also writes a treatise on New York Criminal Law and a column in Hotel Management Magazine. She recently published her favorite work - Law Made Fun Through Harry Potter's Adventures. Professor Morris is the recipient of numerous teaching awards and recently received the Humanitarian Award from her county Bar Association.
Marianne Jennings' Bio
Professor Marianne Jennings is a member of the Department of Management in the W.P. Carey School of Business at Arizona State University and is a professor of legal and ethical studies in business. At ASU she teaches graduate courses in the MBA program in business ethics and the legal environment of business. She served as director of the Joan and David Lincoln Center for Applied Ethics from 1995-1999. From 2006-2007, she served as the faculty director for the MBA Executive Program.
Professor Dan Ariely, Duke University, has released the results of his new studies on cheating.
You can view a another video of him discussing his research, but his findings include the following:
· You feel pretty comfortable taking pencils and pens from work, but taking petty cash, well, that would be a line. Inflating your expense reports is “iffy,” but if everyone in your office is doing it, you will feel fairly comfortable about inflating your expenses. In other words, if you see that others are cheating, you are more likely to cheat.
· In an experiment in involving Carnegie-Mellon students, students were paid for the number of math problems that they could complete in 5 minutes. The math problems were not difficult, but it was not possible to do them all in five minutes. In the first experiment, the students were asked to shred their sheets and then self-report their scores. The students did not know that the shredder was only taking off the edges of their answer papers and that Professor Ariely could actually check and verify their self-report. Most of them completed 4 problems, but reported 6 correct. Most students, who were being paid for the answers completed, cheated a little. However, in another version of the experiment, Professor Ariely had a student plant who raised his hand and said he had completed all 20 problems and had them all correct. He was paid for the 20 correct answers. The remaining students self-reporting figure went up significantly because the student gave them the impression that it was okay to do so.
· Another experiment had students try to recall the Ten Commandments prior to doing the exercise. Some made up commandments, none could recite them all, and some were atheists who recalled what they could. However, all of them cheated less through this simple reminder. The translation for business is to get the code of ethics in front of employees often and have them remember it before they fill out their expense reports, talk to customers, or even work on the self-evaluation portions of their own annual reviews.
· Professor Ariely was also able to conclude that if we see that “everybody is doing it,” we feel more comfortable. If you put out a buffet at a hotel with a sign over it that the food is for a particular organization (something that indicates the group is meeting at the hotel and that the food is for its members) then you can be sure that other hotel guests will step forward, but only after one person steps up to the buffet. The group, of course, is non-existent, but plenty of hotel guests do take advantage of the free buffet set up, deceptively, for a group. Doping in sports may be far less than we believe it to be, but athletes take away the perception that “everyone is doing it” and feel comfortable starting or continuing use because they will lose if they don’t.
The book is “The Honest Truth About Dishonesty,” and its insights can help companies curb cheating. In addition to reminders about ethics and the company code, Professor Ariely learned that we are better able to resist temptation when we are not tired. So, tough decisions early in the work day will be more ethical, and even filling out expense reports in the first few hours of work results in fewer reported expenses and lower amounts claimed.
1. How can companies help employees resist temptations to cheat?
2. What makes us feel comfortable about being dishonest?
Claims made by a company about its products must be truthful. Consumers rely on those statements when making purchase decisions. Misleading the public with untruthful assertions will likely give rise to lawsuits, Particularly is this so in recent times when the misrepresentation relates to health claim.
General Mills is the latest to be sued for false advertising relating to claims of healthful products. The plaintiffs, two California mothers, take issue with the company’s representations that its Nature Valley granola bars and chewy trail mix are “100% Natural.” Instead, the plaintiffs assert the foods contain highly processed ingredients.
Particularly, the plaintiffs object to two ingredients – high maltose corn syrup, a sweetener, and maltodextrin, a thickener that also provides a sweetness to food’s taste. Plaintiffs claim these are highly processed foods that do not exist in nature.
One plaintiff wants to expand the lawsuit into a class action and pursue as a remedy all the profits made by General Mills from selling the products. Another plaintiff would be satisfied if potential purchasers are made aware of the offending ingredients.
Nature Valley’s online presence emphasizes a connection with nature. The website’s title is “Enjoy nature”. It promotes the Nature Valley Grand Prix, a bicycle race through a “breathtaking course” pictured with gorgeous countryside, and a trail system of 330 miles preserved by Nature Valley. The site reads, “Help us preserve America’s National Parks; Your Dollar. Your Chance to Make A Difference.” Similar wording is included on the granola bars packaging plus this, “Energize yourself the natural way.”
Studies prove that consumers are willing to pay more for natural foods because of the association with health benefits and low impact on the environment. .
General Mills has declined comment saying it has not yet reviewed the complaint. For more information, click here.
1) If the plaintiffs are correct and the promotional materials for Nature Valley are determined to be misleading, what would be an appropriate remedy?
2) What should General Mills do in response to the lawsuit?
Patent law in the United States has always been complex, but in some areas it is nearly dysfunctional and in need of major repair.
One of the most brilliant jurists in the country, Richard Posner of the 7th Circuit Court of Appeals, served as trial judge in a patent dispute between Apple and Motorola concerning conflicting claims that affect their phones. As in other such disputes, many patents were in conflict as phones have hundreds of patents attached to them. Apple was demanding that Motorola be banned from selling phones that it claimed violated patents; Motorola demanded huge damages from Apple for alleged infringements of its patents.
Judge Posner blasted the tactics of both parties, asserting that many claims were dubious and their assertions of damages suffered were not credible. He dismissed the litigation with prejudice, meaning the firms are barred from refilling the matter.
Posner published an article in The Atlantic that explains the major problems with patent law. He hopes to encourage Congress, which writes the patent statute, to fix the mess and discourage many of the destructive practices played out by competitors via the courtroom.
Judge Posner notes that the U.S. Patent Office is swamped with highly-technical patent applications and that many patents are granted for minimal inventions, thereby compounding the problem. Judges are also ill-equipped to understand the engineering details in complex patents.
The matter is made worse by patent trolls—firms that buy up thousands of patents and then file suit against many companies contending that their products infringe on their patents. These firms earn no income from inventions; they merely litigate for a living. Because litigation is very costly, many firms settle rather than get bogged down in costly proceedings with uncertain outcomes.
Judge Posner has brought the mess to the forefront, but litigation proceeds. At the same time he threw out the Apple-Motorola dispute, another federal judge, handling a patent dispute between Apple and Samsung issued an injunction against the sale of Samsung’s Galaxy Tab 10.1 tablet computer until after the trial is over (by which time technology will have marched right past that model).
Discussion: Why does Congress seem uninterested in taking a hard look at the details of the patent law?
The Consumer Financial Protection Bureau (CFPB), the new all-encompassing federal agency that is housed within the Federal Reserve to handle all consumer credit laws and issues, has taken its first major enforcement action – against Capital One credit cards, the cards with Alec Baldwin as spokesperson and "What's in your wallet?" as its slogan.
Capital One has agreed to pay a $210-million fine and settlement for consumer payments for deceptive practices in selling “add-on products” for their credit cards. Add-ons include:
· Payment protection in case consumers lose their jobs
· Credit monitoring – which gives you access to your credit report and credit scores
The problems arose because the telephone operators signing up consumers for the Capital One credit cards used a sales pitch that made it seems as if these add-ons were mandatory in order to obtain the credit card. In some cases, the payment protection plan was sold to consumers who were not working but were on disability or retired and thus did not need protection for payments should they lose their jobs.
The CFPB investigated 33 consumer complaints about Capital One sales pitches on add-ons. There were 137 total complaints on add-ons, and Capital One had the largest percentage of those complaints. Discover Financial Services is next in line under the CFPB investigation. The CFPB’s investigation was done easily and swiftly because it could listen to the actual saes telephone conversations – those conversations that we are told are recorded for training purposes. Keeping those training resources was Capital One’s downfall because the tapes provided documentation of the deceptive sales pitches used on consumers seeking a Capital One card.
Add-ons are a critical part of credit card companies’ revenues because of the limitations the Dodd-Frank Act (and the CFPB was created under the same act) places on late fees and the escalation of interest rates. With that revenue down, credit card companies have turned to add-ons. However, the settlement indicates that the sales pitches must be forthright in terms of whether they are required for the card.
Following the announcement of the settlement, Capital One was also scheduled to release its earnings for the second quarter. The company’s earnings plunged 90%, largely due to the set-asides for this settlement.
The CFPB is showing its teeth in protecting consumers and the head of the agency indicated that more enforcement actions and penalties will be announced.
1. What is the basis for the action by the CFPB?
2. What will Capital One need to do, going forward with sales of add-ons?
Four men are accused of stealing $5.7 million from Columbia University. Jury selection has begun.
The money was allegedly taken by altering a routing code on an account payable record. The money was intended for New York Presbyterian Hospital. Instead, the foursome rerouted 58 separate payments to a company called IT & Securities Solutions, LLC (hereinafter “Securities Solutions”) which was formed by the group’s ringleader. The crime was enabled by two employees of the university’s accounts payable department.
The four are charged with Grand larceny first degree which consists of stealing in excess of $1 million. The crime carries a potential prison term of 25 years.
The investigation was done by the Major Economic Crimes Bureau of the Manhattan District Attorney’s office This department concentrates exclusively on crimes involving thefts of substantial sums of money.
The defense is that the money unexpectedly “turned up” in Securities Solutions’ bank account. Jurors were asked during voire dire, the jury selection process, what they would do if an unexpected large sum of money appeared in their accounts – keep it or tell the bank manager? Most jurors laughed.
During the voire dire jurors are informed that the judge will tell them the relevant law at the end of the trial during the judge’s charge. The jury is also informed they must accept the law as the judge will instruct them whether they agree with it or not. Some of the jurors were asked, “If the judge instructs you that [keeping money found unexpectedly in your account] would be stealing, would you be able to listen to and accept those instructions?” If a juror answered no, s/he would likely be removed for cause. This is the dismissal of a proposed juror based on that person’s inability to listen to the evidence and decide the case impartially.
One of the two Columbia employees has become an informant, providing information to the prosecutor about the criminal actions of the other three participants. In exchange, as is typical when law enforcement utilizes informants, the prosecutor has promised leniency to the informant in his own case.
Typically, Information provided by an informant is critical to the district attorney’s case, often making the difference of whether or not the prosecution has sufficient evidence to proceed to trial. Although law enforcement may find it irksome to treat a wrongdoer lightly, full prosecution of less than all the perpetrators is better than full prosecution of none. The motivation for the informant to provide information against his prior co-conspirators is a reduction in the penalty the informant faces.
Jury selection in the Columbia case is expected to take three days, and the trial is anticipated to last three weeks.
For more information click here.
1) What action might the University have taken to protect itself against the theft that allegedly occurred?
2) What is the goal of a voire dire?
3) If you were the judge, what sentence would you think appropriate for the informant in this case? Why?
The Kellogg Company used to advertise that Frosted Mini-Wheats could improve the attention of children in school by as much as 20 percent. The Federal Trade Commission objected and Kellogg agreed to stop the ads.
That administrative matter was followed by a class action suit in federal court in California against Kellogg. The company eventually agreed to refund class members between $5 and $15 each (out of a fund of $2.75 million), and to pay more than $5 million to unspecified charities that provide food to the poor. The company also agreed to pay the plaintiffs' attorneys $2 million for 944.5 hours of work on the case. The district court agreed to that settlement.
If you divide those numbers, it means the lawyers were to be paid $2,100 per hour of work on the case. Two members of the class objected to the Ninth Circuit Court of Appeals. That court remanded the settlement back to the district court for reconsideration.
The court noted that the payment to the lawyers was “extremely generous” and should be reviewed. Plaintiff suggested that $500 an hour would be plenty. The court also criticized the $5.5 million payment to uncertain charities for unclear purposes. That violates the cy pres doctrine, a notion in equity, that charitable funds should be used for proper purposes.
The appeals court stated that the settlement failed to identify the recipients of the charity. It only said that Kellogg would distribute $5.5 million “worth” of Kellogg foods to feed the poor. Which poor? How is the value determined—retail or wholesale? Such unclear charitable distributions are unacceptable, so back to court.
Discussion: Did the lawyers in the deal “sell out” the plaintiffs? How many consumers are going to track down the tiny refunds for purchases made years before?
It took federal district court judge, Sam Sparks, but a few hours to toss Lance Armstrong’s suit against the United States Anti-Doping Agency. Judge Sparks indicated that the 80-page complaint did not contain a “short and plain statement of detailed facts” as required in complaints and that the complaint was simply “a mechanical recital of boilerplate allegations” and “a lengthy and bitter polemic against the named defendants.” Judge Sparks also concluded in his order of dismissal that his court “would not indulge Armstrong’s desire for publicity and self-aggrandizement.” Mr. Armstrong’s attorney indicated that he would be refiling the suit.
Mr. Armstrong, a seven-time Tour de France winner is facing charges by the United States Anti-Doping Agency (USADA) that he used performance-enhancing drugs during his career. The USADA is the United States’ private regulatory body created to maintain integrity among U.S. Olympic athletes. The USADA has the authority to strip Olympic athletes of their titles as well as ban them from future U.S. Olympic team competition.
Mr. Armstrong has denied using such drugs. The purpose of his suit was to obtain an injunction against the USADA so that the arbitration panel of the agency could not go forward with its proposed sanctions (a lifetime ban and forfeiture of his seven titles) or a hearing if Mr. Armstrong refused to accept the sanctions. Such hearings are held before a panel of three arbitrators, one selected by the USADA, one selected by Mr. Armstrong, and the final arbitrator selected by the other two. Appeals from the decision of this arbitration panel then go to the Court of Arbitration for Sport.
When a plaintiff files a suit, there are specific requirements for the allegations in order for the suit to go forward. The Supreme Court has held that "a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Complaint requirements are covered under Rule 8 of the Federal Rules of Civil Procedure.
Mr. Armstrong’s complaint referred to the USADA in his complaint as a “kangaroo court” that would effectively deny him his due process. However, Judge Sparks concluded his order with a reminder of the required content f0r a valid complaint, content that must give the defendants enough information to know what they did and how it results in a legal remedy:
(1) the basis for the Court's jurisdiction;
(2) the legal claims asserted;
(3) tying each of the Defendants to some or all of the claims being made;
(4) the factual allegations supporting each claim;
(5) a brief statement of why such facts give rise to the claim;
(6) a statement of the relief sought; and
(7) why the claims entitle the plaintiff to relief.
In what could be called unfortunate timing, the USADA imposed lifetime bans on three of Mr. Armstrong’s former team members at about the same time as Mr. Armstrong’s case was dismissed. The three failed to respond to allegations of their use of performance-enhancing drugs and, as noted, the failure to respond is deemed an admission and the lifetime ban was imposed.
Mr. Armstrong has been given a 30-day extension to file a response to the USADA allegations.
1. What are the requirements for a valid complaint and why is certain information required in a complaint?
2. What rights does Mr. Armstrong have beyond the USADA arbitration proceedings?
Rihanna, the pop singing star, is suing her accounting firm in the wake of numerous losses and IRS audits. She claims the firm, Berdon LLP of New York City, took exorbitant commissions, misadvised her on matters, and was late in submitting tax returns. Rihanna frames the lawsuit by describing herself in the early years of her relationship with the firm as a young singer (age 16; now 24) with no knowledge or experience of financial matters and thus very reliant on her accountant/business manager.
Concerning the commissions, Rihanna alleges that, in an unusual arrangement, the accounting firm was paid based on a percentage of her gross revenues from tours Specifically, she claims the firm paid itself 23% of the gross revenues from her tours, which equaled millions of dollars, while Rihanna received only 6%.
Concerning incorrect and insufficient advise, the lawsuit asserts that the firm did not accurately track income and revenues from tours. This rendered financial planning difficult to achieve. Additionally she asserts that the firm failed to discover and pursue unpaid royalties in the millions of dollars relating to inadequate monitoring of her music by Universal Music Group which was assigned to do the tracking.
Another allegation involves the star’s purchase of a $6.9 million Beverly Hills home in 2009. While the firm allegedly advised her the house was a “good investment,” her income did not justify the purchase. Further, she ended up selling it for $2 million less than she bought it due to water damage.
Concerning taxes, not only does the suit claim the accounting firm was repeatedly late in filing returns, but also that it mishandled foreign and domestic withholding. The firm is accused of setting aside more money than was necessary, causing losses of tax benefits she might otherwise have enjoyed. Additionally, she is currently being audited for her 2008 and 2010 returns because of questions about them.
In the lawsuit Rihanna claims breach of contract, negligence (presumably malpractice), breach of fiduciary duty (a responsibility requiring great honesty and trustworthiness), and unjust enrichment (an equitable rule holding that no person should be allowed to benefit unfairly from another’s mistake or misfortune).
1) What should the accountants have done differently?
2) How might accountants manage client relationships to help avoid misunderstandings?
The Heart Attack Grill in Las Vegas serves high-calorie, fat-laden foods. The “quadruple Bypass Burger” has four half-pound beef patties, eight slices of cheese, and other goodies, and delivers 8,000 calories. “Flatliner Fires” are cooked in lard and you can enjoy a “ButterFat Shake.” The owners hope it will become a national chain.
The 2nd Avenue Deli in New York City is a well-established kosher restaurant. About the same time Heart Attack Grill opened in Vegas, the deli began to serve the “Instant Heart Attack” sandwich made of latkes (potato pancakes) stuffed with corned beef, pastrami, salami or turkey.
The culinary establishments ended up in federal court in New York. Heart Attack Grill had sent 2nd Avenue a cease-and-desist letter claiming the similar names of some sandwiches used in NY violated the Vegas restaurant’s intellectual property rights—especially its trademarks for various “Bypass” burgers.
2nd Avenue then sued, contending it had the right to sell its sandwich and could add another called “Triple Bypass.” The judge agreed with 2nd Avenue, noting that even unsophisticated consumers could tell the difference between the Manhattan deli and the Vegas theme restaurant. Among other differences is the fact that 2nd Avenue is kosher, so it serves no beef, lard or cheese. However, 2nd Avenue cannot use the name “Instant Heart Attack” should it wish to open restaurants outside of Manhattan, where it has been located for 60 years.
Discussion: Suppose Heart Attack Grill becomes a national chain and wishes to open restaurants in Manhattan. Would there be a conflict in that case?
Because of complaints filed with the Guest Worker Alliance, the Department of Labor, and the Equal Employment Opportunity Commission (EEOC), WalMart has suspended CJ’s Seafood, located in Breaux Bridge, Louisiana, as one of its suppliers. One of the plant workers, Martha Uvalle, 52, and a guest worker from Mexico in CJ’s program, explained that she earned $2 for every pound of crawfish she peeled, or about $70 to $90 a day\. However, she was working 14 hours per day, without breaks. Ms. Uvalle indicated that the owners locked the doors so that they were unable to leave until they had finished their very long shifts.
The Fair Labor Standards Act requires overtime pay for the hours above 40 hours per week that employees work. However, there are some exceptions for seasonal workers as well as for workers who receive commissions. For example, at summer resorts and in harvest seasons there are exceptions for the maximum hours provisions because the work is limited in length and is not a full-time job. Employees who work on commission likewise do not have limits on hours because the commissions are based on results, and it often takes more than a 40-hour week to get to those results. The issues in the CJ’s Seafood case no doubt will focus on whether the guest workers are seasonal workers and whether the compensation on a per-pound basis would be considered a type of effort/commission job under which the hours are not measured because of the variables on individual effort. However, the commission-based worker is also not subject to management controls in terms of time allocation, breaks, and even work schedule. All reports indicate that CJ’s controlled the workers hours, indeed demanded the longer hours. And seasonal workers are still entitled to breaks for rest and meals.
There are other allegations of worker abuse at CJ’s. including threats to beat workers with shovels and poor housing conditions as well as a lack of sufficient food and breaks for eating.
WalMart’s suspension came after students around the country along with the National Guest Worker Alliance brought the conditions to WalMart’s and the public’s attention. Although Walmart was unable to verify the conditions described in the workers’ complaints to the Alliance and two federal agencies, it was receiving public backlash from the reports and decided it was necessary to take action to protect its reputation. WalMart does have its "Standards for Suppliers" that would cover situations such as those alleged at CJ's Seafood, but 12 Walmart suppliers have had 482 federal violations.
1. Describe the basics of the Federal Labor Standards Act (FLSA) and its role in this case of alleged worker abuse.
2. Why does WalMart take responsibility for the actions of one of its suppliers?
As the map shows, the Bohai Sea is off the coast of northern China. It is shallow water and is productive for people who make their living harvesting fish and shellfish. Last year there was an oil spill from an off-shore rig that spread over a large area and killed marine life.
The oil rig is a joint venture between Conoco and CNOOC (China National Offshore Oil Corporation), a state-owned company. CNOOC owns 51% of the site; Conoco, headquartered in Houston, owns 49%.
For a while there was no admission of the leak but word of it leaked out and satellite photos showed its existence. The result was a loss of livelihood for many who rely on harvesting sea food in the area.
Conoco has contributed about $200 million to a fund to provide compensation for those injured by the spill. The fund will be administered by the Chinese government, which apparently believes the fund settles liability issues.
According to a class-action lawsuit filed in federal court in Houston on behalf of the fishermen, they have the right to sue Conoco for their losses under the Alien Tort Claims Act (ATCA). As their filing explains, they tried to sue in court in China, but did not get anywhere, so they come seeking compensation in the U.S.
The ATCA is part of the Judiciary Act of 1789. The relevant part reads: “The district courts shall have original jurisdiction of any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States.” The law was essentially dormant for 200 years until some enterprising lawyers figured out that it could be widely applied. This is one of a number of such suits brought by foreign citizens against U.S. companies for actions that happened in other nations.
Discussion: If a foreign government believes a matter has been settled, should citizens of that country have the right to pursue litigation in the U.S.?
A federal court judge has ruled that a group of female vice-presidents and senior vice presidents of the third largest advertising agency in the world can sue as a class. The woman complained of lower salaries than men (8.5% to 11.2% less), higher termination rates, and firings after maternity leaves. The defendant employer is Publicis Groupe, Based in France, it employs 45,000 people around the world and had revenue in 2011 of $7.7 billion.
A class action is a lawsuit brought by numerous plaintiffs, all of whom are “similarly situated.” In law, this means that they have all been injured from the same unlawful conduct, and the losses suffered are similar. The goals of class actions are to save each plaintiff from having to independently prove defendant’s wrongful conduct, and also to alleviate the court congestion that would be caused by many separate lawsuits.
Before a lawsuit can become a class action, a judge must approve or certify the class. Courts look for commonality, or stated differently, a common core of facts, among proposed class members before authorizing a class action. The necessary commonality can be found where a defendant engages in standardized or uniform conduct towards members of the proposed class.
Although Publicis is a huge company, the business’ policies require that compensation decisions be made centrally by the same team of administrators (which plaintiffs claim were all male). The central decision making established sufficient standardized or uniform conduct by the defendant to convince the judge to certify the class.
The decision by the judge to permit the plaintiffs to proceed as a class means that all current and former female vice-presidents and senior vice-presidents will have a chance to join the lawsuit. The more women in the class, the greater the potential damages Publicis may have to pay if found liable.
As with this case, class actions are typically started by a few plaintiffs who perceive the common characteristics among potential plaintiffs, and recognize the benefits of a class action. Advantages include: 1) reduced attorney’s fees and court costs since these are divided among all the plaintiffs; and 2) often a willingness by defendant to resolve the case in lieu of facing the risk of liability to many plaintiffs. .
Typically a few plaintiffs undertake the process of expanding their numbers to a class action. Once a judge certifies the class, the existing plaintiffs must notify all the people in the class. Notice is usually given by mail provided the identity and address of class members is known. If not, notice by publication in a newspaper or through radio or television may be authorized by the judge. Members of the class then have the choice of opting to remain part of the class, or declining and then pursue their own, individual lawsuit. Once a person chooses to be part of the class, he is bound by the decision that results from the case; he cannot thereafter bring a separate lawsuit.
In the Publicis case there are approximately 125 potential plaintiffs. The court will likely order Publicis to provide the existing plaintiffs with the last known addresses for the others.
For more information, click here.
1) Why does the law require notice to the class members?
2) If you were part of the class and received notice of the lawsuit, what would impact your decision of whether to opt in or opt out?
3) What if anything might justify different salaries for different workers at a similar level?
Google CEO and billionaire co-founder, Larry Page, missed the company’s annual shareholder meeting in June. The company has announced that he will also miss the company’s July earnings report (usually done by phone). The explanation given at the annual meeting was that Mr. Page “lost his voice,” and “can’t do any public speaking engagements for the time being.”
When you and I are ill, we can stay home and have our privacy. However, when a CEO of a publicly traded company is ill and must miss shareholder meetings and live sessions on earnings, well, the market does react. The demands for more information about Mr. Page were quick and numerous because the tech investors have gone through this type of vague health disclosure with the late Apple CEO, Steve Jobs. Mr. Jobs and Apple held information about his health condition close to the vest, and Mr. Jobs was gravely ill. Eerily, Mr. Page sent the same kind of e-mail to employees that Mr. Jobs sent out – nothing wrong here and I will continue to run the company. This time investors are demanding more.
Corporate governance experts believe that these types of health issues must be fully explained. Professor Jeffrey Sonnenfeld, a professor of management at Yale and frequent author of articles on governance, concludes, “He’s not entitled to his privacy.” Amir Erati and Joann S. Lublin, “What’s Ailing Google Chief?” Wall Street Journal, June 23-24, 2012, p. B1.
The SEC standard for disclosure on any issue related to the company is whether it would have a material adverse impact on the company. That decision on materiality differs from company to company, and particularly among board members who ultimately make the decisions on disclosures. Most boards opt for privacy, but there are risks with that policy. The first is that the share price suffers as shareholders assume the worst and sell of their shares as a way of hedging the risk. The second is that the SEC standards for materiality often differ from the traditional privacy stance companies take. As one investor noted, “It’s hard to imagine a CEO missing that much stuff and not having a serious problem.”
1. Describe what interests the company is trying to balance as it makes decisions on disclosure.
2. What is the SEC’s position likely to be on health issues given the possible market impact?
3. Did the Steve Jobs experience and nondisclosure have an impact on investors?