It is not news that the choices CEOs make can significantly impact the companies they lead. But at least according to a recent academic study, CEOs’ ability to affect their companies is not limited just to the decisions they make in their corporate posts, but also includes decisions they make in their personal lives. According to the study’s authors, CEOs’ decisions and actions in the personal lives can affect their companies’ performance. As shown below, CEOs’ personal decisions can also lead to shareholder claims against their companies.


In a December 3, 2013 post on the Harvard Law School Forum on Corporate Governance and Financial Regulation entitled “The Impact of CEO Divorce on Shareholders” (here), David Larker and Allan McCall of the Stanford University Accounting Department and Brian Tayan of the Stanford Graduate Business School examine the impact that CEO divorce can have on a corporation. The authors summarized their findings by saying that “recent events suggest that shareholders pay attention to matters involving the personal lives of CEOs and take this information into account when making investment decisions.”


(The authors’ recent blog post is abbreviated version of their more detailed October 1, 2013 paper entitled Separation Anxiety: The Effect of CEO Divorce on Shareholders, which can be found here).


The authors note that there are at least three potential ways that CEO divorce might impact a corporation and its shareholders. The first is that the property settlement associated with their divorce — in which the CEO might be forced to sell personal shares in their company – could affect a CEO’s control or influence. The share sale could “reduce the influence that he or she has over the organization and impact decisions regarding corporate strategy.”


Second, CEO divorce can affect the productivity, concentration and energy levels of the CEO. The authors cite prior research the concluded that employee divorce can affect firm productivity. In the extreme, the authors note, the distraction of divorce can lead to premature retirement. (The authors’ paper cites the example of A.G. Lafley, who stepped down early from his post as Proctor and Gamble’s CEO following his divorce filing).


Third, CEO divorce can influence a CEOs attitude toward risk. A sudden change in a CEO’s wealth can affect the executive’s risk appetite and therefore affect decision making. The authors’ research suggests that both the board of directors and shareholders need to consider the consequences to the corporation when a CEO and spouse separate. In some cases, the board might want to consider a change in CEO compensation to “restore” the CEO’s incentives so they are consistent with the original expectations and the company’s risk tolerance.


It is interesting to me that in their summarization of their findings, the authors did not limit their conclusions simply to matters pertaining to CEO divorce but rather stated more generally that shareholders should pay attention to matters “involving the personal lives of CEOs.” Indeed, recent events suggest that shareholders should be concerned not just CEO divorce but CEOs’ personal relationships as well.


A recent example where a CEO’s relationship caused problems at the executive’s company and even lead to the filing of a securities class action lawsuit arose at the IT outsourcing company iGate Corporation. On May 20, 2013, the company disclosed that its Board had terminated its CEO Phaneesh Murthy after an internal investigation revealed the CEO had a relationship with a subordinate employee in violation of company policy and the CEO’s employment contract. The company’s shares declined nearly 10 percent on this news. Then on May 22, 2013, the company further disclosed that the CEO’s termination was “for cause” and that the former CEO was not entitled to severance under his contract. The company’s shares slid further on this news.


As discussed here, on June 14, 2013, plaintiff shareholders filed a securities class action in the Northern District of California against iGate and its former CEO. The plaintiffs alleged that the defendants had failed to disclose that (i) the Company’s Chief Executive Officer and President was involved in an improper relationship with a subordinate employee in violation of iGATE’s explicit policies to the contrary; and (ii) the CEO’s improper conduct created a risk that he would be terminated from the Company, jeopardizing the Company’s future success.


Although the circumstances at iGate may seem to have their own distinct features, the departure of a CEO amid allegations of an improper relationship is not unprecedented, nor is the arrival of a shareholder lawsuit following the CEO’s departure.


For example, former H-P CEO Mark Hurd denied that he had a personal relationship with an outside publicist for the company, but (as discussed here) the board’s investigation into the publicist’s sexual harassment allegations ultimately led to Hurd’s resignation based on allegations that Hurd submitted expense report that had been falsified to obscure his relationship with the publicist. Following these events, an H-P shareholder filed a shareholders derivative lawsuit against the company’s board in the Northern District of California, alleging mismanagement and breach of fiduciary duties. (The case ultimately was dismissed, refer here). 


Of course, neither of these cases related to CEO divorce, which is the topic of the academics’ paper. But they do show how the CEO’s personal relationships generally can affect their company and can even lead to shareholder claims. The authors’ study shows how a CEO’s decisions in their personal life can affect corporate performance and investment risk. The difficulty for investors (and indeed for D&O insurance underwriters) who might want to understand this risk is that their interest in this kind of information runs directly into the CEO’s right of personal privacy.


The study’s authors have no difficulty identifying investors’ interest in knowing information about CEO’s personal lives. The authors understandably are more hesitant when it comes to describing company’s corresponding disclosure obligations in that regard. The authors note that companies do not always disclose when a CEO gets divorced, and that reports often only come out later when, for example, the CEO sells shares to satisfy the terms of the divorce settlement. In the end, the authors avoid any prescriptions about corporate disclosure obligations but simply pose the questions, “Is divorce a private matter, or should companies disclose this information to shareholders? If so, how detailed should this disclosure be?”


If the disclosure questions are awkward when it comes to CEO divorce, the questions are even trickier when it comes to issues such as CEOs’ personal relationships. Clearly, where a CEO has had a relationship (or engaged in any other behavior) that violates company policies, that is a matter that must be disclosed to investors. A CEO’s personal relationship arguably might trigger a disclosure obligation when a personal relationship has a clear and direct impact on company performance. However, beyond that, I think just about everyone would recognize that other details of CEO’s private life generally are off limits.


Just the same, the interests of investors (and of D&O underwriters) are affected by the choices that a company’s CEO makes, and that is true not just of the CEO’s corporate choices but even of their personal choices. We have all grown used to the notion that a company’s compliance environment starts with the “tone at the top.” Given the CEO’s rightful expectation to privacy, there may be no realistic way to try to underwrite the likelihood that a CEO’s personal life will lead to problems affecting corporate performance (or lead to shareholder lawsuits). However, a company’s culture, and the CEO’s role in that culture, can be underwritten.


This discussion does remind me of an earlier post I wrote years ago concerning another academic study in which the authors found an inverse correlation between the value of a CEO’s house and the future performance of their company. As discussed here, the study’s authors found a "significantly negative stock performance following the acquisition of very large homes by company CEOs," a negative trend that persists for several years after the home purchase.


All of which says to me that while in general the choices a CEO makes in their personal life often are nobody else’s business, the fact is that at least some of a CEO’s personal choices might nevertheless tell you something about the company they are running. As a minimum, as the authors of the CEO divorce study conclude, the CEO choices in their personal lives can affect corporate performance and therefore represent a form of corporate risk.