Sorry, But the CEO’s Divorce Is the Board’s Business
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The “Separation Anxiety: The Impact of CEO Divorce on Shareholders” survey, conducted by Stanford University professor David F. Larcker, a nationally recognized corporate governance expert, argues that CEO divorce can impact the corporation and its shareholders in at least three potential ways:
The first point of impact relates to the decline in influence of the CEO when forced by the divorce settlement to relinquish a substantial portion of his/her ownership position in the company. With no, or a reduced, stake in the company, the CEO may be less able to exert control over the organization and affect decision making. Shareholder reaction will depend upon their pre-existing perceptions of the effectiveness of management.
The second point of impact is with respect to CEO productivity, concentration and energy. Larcker’s survey cites studies that suggest a notable decline in corporate productivity following a CEO divorce. Indeed, in extreme circumstances, the distraction of divorce may prompt the CEO to retire prematurely. In either situation—lack of productivity or premature retirement—the organization can suffer materially.
The third—and potentially most alarming—point of impact is the potential effect of divorce on the CEO’s approach to risk. A board-driven executive compensation program and related oversight guidelines are normally intended to provide appropriate incentives for informed risk taking. The concern, as identified by Larcker’s study, is that the sudden change in wealth that often accompanies a divorce could, without careful board oversight, affect the CEO’s attitude towards risk, and thus affect his or her judgment.
Thus the conclusion is that CEO divorce can affect corporate value because of its potential impact on the CEO’s “control, productivity and economic incentives.” According to Larcker’s study, significant personal developments affecting the CEO—such as divorce—have a direct impact on the interests of shareholders (and other corporate constituents). For that reason, CEO divorce must be a matter of importance to boards. In this regard, it should be noted that these concerns with respect to CEO divorce extend across industry lines and, at least with respect to Larcker’s second and third factors, are applicable as well to large nonprofit corporations.
Read original articleTags: corporate productivity, divorce settlement, point of impact, Stanford University professor David F. Larcker
