The Impact of CEO Divorce on Shareholders

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday December 3, 2013 at 9:28 am
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Editor’s Note: The following post comes to us from David Larcker, Professor of Accounting at Stanford University; Allan McCall of the Department of Accounting at Stanford University; and Brian Tayan of the Corporate Governance Research Program at the Stanford Graduate School of Business.

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. In our paper, Separation Anxiety: The Impact of CEO Divorce on Shareholders, which was recently made publicly available on SSRN, we examine the impact that CEO divorce can have on a corporation.

There are at least three potential ways in which a CEO divorce might impact a corporation and its shareholders. The first is loss of control or influence. A CEO with a significant ownership stake in a company might be forced to sell or transfer a portion of this stake to satisfy the terms of a divorce settlement. This can reduce the influence that he or she has over the organization and impact decisions regarding corporate strategy, asset ownership, and board composition. Shareholder reaction to loss of control will vary, depending on the view that investors have of CEO performance and governance quality. If they view performance and governance quality favorably, they will react negatively to the news; if they view management as entrenched or a poor steward of assets, they will react positively. Shareholder reaction will also depend in part on what happens to divested shares, including whether they are transferred to the spouse, sold in a block to a third-party, or dispersed in the general market. Each of these can shape the future governance of a firm.

Second, divorce can affect the productivity, concentration, and energy levels of the CEO. According to Wheatley, Vogt, and Murrell (1991), 37 percent of companies report that employee divorce negatively impacts firm productivity. In the extreme, the distraction of divorce can lead to premature retirement. Although we are unaware of rigorous research on the relation between divorce and CEO retirement, small samples of data suggest an elevation in CEO retirement rates following divorce. Among 24 CEOs who got divorced between 2009 and 2012, seven (29 percent) stepped down within two years of the settlement.

Third, divorce can influence a CEO’s attitude toward risk, depending on how the divorce settlement is financed. In aggregate, these suggest 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 the compensation program to “restore” the CEO’s incentives so they are consistent with original expectations and in-line with the company’s risk tolerance.

The full paper is available for download here.

  1. [...] 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 [...]

    Pingback by CEOs' Personal Lives and Corporate Risk | The D&O Diary — January 30, 2014 @ 6:41 pm

 

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