Do a CEO’s Marital Woes Belong in the Boardroom?

In today’s fast-paced digital news environment, very little is off limits, and stories can spread like wildfire. The Donald Sterling saga is just one recent example.

While interest in the actions of a company’s chief executive officer (CEO) was once confined to the boardroom, their personal lives are increasingly under scrutiny. From alleged illicit relationships to drug use to political affiliations, it’s all fair game.

Stryker Corp.’s chief executive, Stephen P. MacMillan, and Best Buy’s CEO, Brian Dunn, both left their posts after romantic relationships with employees came to light. Whether they were ousted or departed on their own accord is unclear, but the public scrutiny of their personal lives undoubtedly played a role.

Stanford University professor David F. Larcker contends that even a simple divorce can impact corporate governance. In his paper, Separation Anxiety: The Impact of CEO Divorce on Shareholders, he discusses three potential ways that divorce may impact a company and its shareholders:

It might reduce the executive’s control or influence over the organization. Larcker notes that an executive with a considerable ownership stake in a company might be required to sell or transfer a portion of this interest under the terms of a divorce decree. He argues this “can reduce the influence that he or she has over the organization and impact decisions regarding corporate strategy, asset ownership, and board composition.”

It might affect his or her productivity, concentration, and energy levels. Larcker cites a study that found 37 percent of companies report that employee divorce negatively impacts firm productivity. In the most severe cases, the distraction of divorce can lead to premature retirement, noting that among 24 CEOs who got divorced between 2009 and 2012, seven (29 percent) stepped down within two years of the settlement.

It might influence attitudes toward risk. Larcker argues that the sudden change in wealth, which often occurs during a divorce, can change a CEO’s risk aversion, and therefore affect his or her decision-making. For instance, a chief executive might become more open to high-risk investmentsin an effort to reclaim personal wealth lost in the divorce.

Overall, the study suggests that divorce should at least be on every board’s radar. While marital discord alone should not threaten the reputation of a corporation, it may still impact its operations and productivity.

If you have any questions about this post or would like to discuss your company’s corporate governance policies, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work.