Sex and The Boardroom
When a CEO’s intimate affairs lead to divorce, does the company have a right to intrude? Stanford Business School’s David Larcker says it’s a duty.
The #MeToo movement is only the latest invitation to open a path between the boardroom and the bedroom. While most CEOs never behave as abominably as Harvey Weinstein, the exposure to companies from any high profile scandal that ends in divorce will have repercussions far beyond the more sensational aspects of the story.
The board of directors is charged with oversight of the chief executive, including misbehavior that affects the company’s reputation. But while board directors can be very vocal about stock options backdating, they tend to be a bit prudish about extra-marital dating. That is why I turned to corporate governance guru David F.Larcker for some practical advice. He is the James Irvin Miller professor of accounting at Stanford and heads up the corporate governance practice. But unlike legions of corpgov experts who get lost in the thicket of virtue theorizing, Larcker came to corporate governance by way of engineering and information systems. Just the right kind of thinker when looking for a logical argument about divorce, boardroom style.
JC: What led you to look into CEOs and divorce?
DL: There have been examples where marital problems have led to alleged behaviors — that resulted in the dismissal of a CEO, or more broadly, as with Boeing and Hewlett Packard, CEOs were terminated because of extramarital relationships. Since nothing is more central to corporate governance than the termination of a CEO, I wanted to look into whether boards of directors had a duty to examine the personal challenges of the chief executive.
JC: Are CEOs divorce-prone?
I don’t have statistics as to whether CEOs are more prone to divorce or not, but clearly, it’s a stressful job with a requirement to be away from family a good part of the time. Looking at things from a governance angle, CEOs can accumulate great wealth in the form of company equity, and the ownership of the equity may change. All of these have consequences a board must be attuned to.
JC: What were some of the key findings of your study?
One that caught our attention was that most of the divorced CEOs were long-tenured at the company at the time of the divorce. Yet within a year or two after divorce, they were gone. There was one with a 25-year tenure who might have been ready to retire, but most had tenures of 7 to 12 years or under, when a CEO may be hitting his or her stride. So their resignations seemed precipitated by the divorce. That caused us to think boards had a responsibility to have a grasp on the married lives of their CEOs.
JC: How should a board start this tricky conversation?
Each board is different. But finding a trusted board member who is close to the CEO and who can check in from time to time on “how is your home life going?” is a start. From there, it’s up to each board and each CEO to discuss the specific risks and circumstances to arrive at a solution. The main thing is to have the talk up front rather than after a difficult situation has emerged.
JC: Do boards have an obligation to disclose details to shareholders?
There is an analogy to health-related issues, something that was given a good deal of scrutiny during Steve Jobs’ at Apple. It turns out that in our study of health disclosures by the CEO, we found instances where there was almost no disclosure and others where there was almost graphic disclosure. And the question that a board must ask itself is: What is really necessary to know? There are succession concerns, but also a real risk of creating a worse situation by probing personal matters or making them public. A board has to weigh the balance between risk management in finding out what the status is and a respect for the CEO’s personal privacy. We all struggle with that, but from a board perspective, the more you know, the more effective the board can be.
JC: You cite the case of A. G. Lafley, former and subsequently CEO of Procter & Gamble, who you believe may have opted for an early retirement in 2010 due to an ugly divorce. (Lafley returned in 2013.)
The former P&G CEO, as it was widely reported, was so affected by his divorce he was unable or unwilling to complete his tenure. The possibility that a divorce might cause an early retirement due to stress makes it a governance issue.
JC: So, let’s say the board recognizes things are not going well as with the case of Steve Wynn’s divorce. What should that board have done?
The board has to think about the impact on focus, on behavior, and on the CEO’s attitude toward risk. Let’s begin by admitting the obvious, in a divorce situation, you may not have the cognitive capacity to focus. The energy may be sapped. Then, also, there is a likelihood that the CEO may lose a large portion of his or her wealth, and, if so, the board’s CEO incentive plan may go out the courthouse window. Does the board now have to revise compensation arrangements to ensure incentives offset equity lost in the divorce? If not, then is the CEO under-incentivized? Then what of the shares now tendered to the spouse, particularly in closely held or private companies? Are they in friendly hands?
JC: When should the CEO bring the board into his or her confidence?
Divorce is an issue where the board would prefer to know earlier than later. We did a little piece on social media that was related to some people who had been talking about the affair that the CEO was having about six to nine months before it came to the realization of the board.
JC: With divorce, exactly how much detail should a board disclose?
With either a health issue or a divorce, a general disclosure should make the point that the board is informed and they are taking serious, appropriate steps, as opposed to laying out all these things in detail. I think that this can sometimes infringe on someone’s privacy as well as provide proprietary information to competitors. But like the Apple example again, which can apply to health or divorce, they had a succession plan in place with Tim Cook, and they provided enough information without giving too much.
JC: Any final advice to boards and CEOs?
The lesson is that what goes on in the personal lives of executives can matter to the company. Of course, there is a limit to how involved a board can be if the executive is not open about these matters. Boards shouldn’t need to pry or read about problems in blogs and social media. Keeping the board apprised is a big step toward everyone performing their shareholder duty. Beyond that, it seems like common sense.