Some marriages last forever. Some may only last for hours, weeks or a short few years. Some divorces are quick and quiet. Some are high profile. Think: Brad and Jen, Tiger and Elin, Ashton and Demi. Names, faces and assets differ, but just about every divorce involves drama.
Drama sells magazines. But what the heck does it have to do corporate governance? You might be surprised. Check out the post on the Harvard Law School Forum on Corporate Governance and Financial Regulation entitled “The Impact of CEO Divorce on Shareholders” in which authors David Larker and Allan McCall of the Stanford University Department of Accounting and Brian Tayan of the Stanford Graduate Business School examine the impact that a CEO’s divorce can have on a corporation. They argue that the tumultuous personal life of a CEO—the very person tasked with setting strategy and leading a corporation to better profits and shareholder returns—should be of investor concern because:
- a CEO’s divorce settlement may affect a CEO’s control or influence (e.g., CEO is forced to sell personal shares held in the company);
- a CEO’s divorce may affect a CEO’s productivity, concentration and energy levels;
- a CEO’s divorce, and resulting changes in wealth, may influence a CEO’s risk appetite and decision making.
Indeed, plaintiffs’ lawyers are taking note that, in addition to selling magazines, drama may mean fees. In May 2013, iGate Corporation disclosed that it had terminated its CEO following an internal investigation that revealed he’d been involved in an improper relationship with a subordinate employee in violation of company policy and his employment contract. iGate’s stock declined almost 10%. Two days later, the company further disclosed that the termination had been made “for cause.” The stock’s decline continued. On June 14, 2013, a securities class action suit was filed against both iGate and its former CEO in the Northern District of California. The plaintiffs alleged that the defendants had failed to disclose that iGate’s CEO was involved in an improper relationship and that the CEO’s improper conduct created a risk of termination, which, therefore, jeopardized the company’s future success.
Most people believe personal lives should be personal. Hence the word “personal.” But the reality is that often they are not. The iGate suit, which was voluntarily dismissed, suggested that corporate disclosures should have been made while the improper relationship was ongoing. Similarly, Messrs. Larker, McCall and Tayan have asked: “Is divorce a private matter, or should companies disclose this information to shareholders? If so, how detailed should this disclosure be?”
People! ’34 Act Reports are not magazines! Do we really want Reg. S-K disclosure relating to whether a CEO is happily married or not, drinks too much, is affected by seasonal mood disorder, gets cranky with too much coffee and sleepy with too little? Notwithstanding, given the above (not to mention the impact bad behavior tends to have on employee morale) boards—as a matter of good governance—need to know their CEOs on a personal level. CEOs—and their direct reports—should be encouraged to voluntarily confide in their boards if leaders are experiencing personal challenges that may adversely affect performance. Board members, tasked with setting the tone at the top, should inquire about, consider and, if deemed appropriate, address any issues that may arise not by casting a stones, aspersions, or a new risk factor but by prudently using their business judgment to protect and further the best interests of the corporation and its shareholders.