Tuesday, November 5, 2013
As noted over at the Family Law Prof Blog, Stanford Graduate School of Business recently issued a report, "Separation Anxiety: The Impact of CEO Divorce on Shareholders” (pdf), in which a study considered the impact CEO divorces have on the CEO's corporation. The report indicates that recent events "suggest that shareholders should pay attention to matters involving the personal lives of CEOs and take this information into account when making investment decisions."
The study found that a CEO's divorce has the potential to impact the corporation and shareholders in three primary ways. First, is a possible reduction in influence or control if a CEO as to sell or transfer stock in the company as part of the divorce settlement. Second, divorce can negatively impact "the productivity, concentration, and energy levels of the CEO" or even result in premature retirement. Third, the sudden change in wealth because of the divorce could lead to a change in the CEO's appetite for risk, making the CEO either more risk averse or more willing to take risks.
The report argues that this matters because:
1. Divorce can impact the control, productivity, and economic incentives of an executive—and therefore corporate value. Should shareholders and boards be concerned when a CEO and spouse separate?
2. Rigorous research demonstrates a relation between the size and mix of a CEO’s equity exposure and risk taking. Should the board “make whole” the CEO in order to get incentives back to where they originally intended? Would this decision be a “cost” to shareholders because it represents supplemental pay that could have been used to fund profitable investments, or a “benefit” because it realigns incentives and risk taking?
3. Companies do not always disclose when a CEO gets divorced. Reports only come out much later when shares are sold to satisfy the terms of the settlement. Is divorce a private matter, or should companies disclose this information to shareholders? If so, how detailed should this disclosure be? (citation omitted)
While I think this is somewhat interesting, I am not sure how much it helps shareholders or boards in their consideration of CEOs or their companies. Any major life problems or events -- divorce, death of a close family member, major losses in other investments, addiction, etc. -- could (in varying degrees) have a negative impact on control, performance, and risk tolerance.
In addition, the study cites two high-profile examples: Harold Hamm and Rupert Murdoch. Both such divorces are likely to touch on all the issues the study raises. Still, for both men, their recent divorces are not their first divorces. I'd be curious to know if there is any correlation between the performance of companies with CEOs who have been divorced at least once versus those who have not.
Clearly, a major life event can have a negative impact on the CEO and the company, at least in the short term. But I can't help but wonder how much value this adds as a general matter. That is, it may matter on a case-by-case basis, but I don't think I would want to see it become some kind of Sabmematric analysis of CEO potential. It seems to me risky for a company to look at the likelihood of divorce of a CEO as a determining factor in hiring. Or for a company to encourage a CEO to stay married (or single). And I doubt it's wise to go dumping stock in a company just because the CEO has a wandering eye (or their spouse does).
Perhaps there's more to this, but it seems to me this just confirms that a divorce is an awful experience for everyone. Still, for the companies and their shareholders, just as it is for the people directly involved, divorce may be the best available option.