Stanford’s larcker on Divorce CEO Style
Jeff: What led you to study CEOs and divorce from a corporate-governance perspective? David: There have been examples where marital problems have…
Jeff: What led you to study CEOs and divorce from a corporate-governance perspective?
David: There have been examples where marital problems have led to alleged behaviors that resulted in the subsequent dismissal or retirement of a CEO, or more broadly, as with -Boeing and Hewlett–Packard, where CEOs were terminated because of extramarital relationships that may have been in violation of company policy. Since nothing is more central to corporate governance than the termination of a CEO, this study looked into the matter from an unusual perspective: that of the board of directors and their shareholder fiduciary duty in times of personal challenges for the chief executive.
Is there something inherently destabilizing about CEO marriages?
I don’t actually know 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 as part of their incentive compensation, and the result of a split in the marital estate may reduce or otherwise change the incentives in place. Finally, the CEO’s wealth is often denominated in company equity, and the ownership of the equity may change. All of these have consequences a board must be attuned to.
What were some of the key findings of your study?
One that caught our attention was that most of the divorced CEOs we looked at were long tenured 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 to be precipitated by the divorce situation. That caused us to think boards had a responsibility to have a grasp on the married lives of their CEOs and possibly other senior executives.
Do you have any advice as to how a board should delve into this tricky topic?
Each board and each case is going to be quite 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, I would think. From there, it’s up to each board and each CEO to discuss the specific risks and circumstances openly and candidly to arrive at a solution. The main thing, as always, is to have the talk up front rather than after a difficult situation has emerged, sometimes in a very public manner.
Once boards have a better understanding of the situation, do they also have the requirement to disclose the matter to shareholders?
There is an analogy to health-related issues, something that was given a good deal of scrutiny during Steve Jobs’ tenure 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 in responding to a crisis.
In your article, you cite the case of A. G. Lafley, former and current CEO of Procter & Gamble, who you believe may have opted for an early retirement in 2010 due to an ugly divorce. (Note: Lafley returned to P&G as CEO in 2013.)
It had been reported by others, and so we took it into our study for further analysis: the former P&G CEO was affected so much by his divorce that he was unable or unwilling to complete the tenure he had committed himself to. We don’t know if the reported facts are overstated, but the possibility that a divorce might have caused an early retirement due to stress makes it a governance issue.
So let’s say the board recognizes things are not going well in the CEO’s marriage. What kinds of issues should they be thinking about?
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 really focus on work. The energy may be sapped because it’s almost like a second job. 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 appropriate incentives—for instance, ramp up the equity compensation to 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 or a block of shares waiting for the highest bidder?
If a company believes the CEO’s divorce should be handled like a health issue, when should it be disclosed to shareholders?
Whether it’s a health issue or a divorce, disclosure should most likely be general and 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, I thought the board handled it well. They had a succession plan in place with Tim Cook, and they provided enough information without giving too much.
With divorce, it’s going to be hard to draw the line on materiality, meaning when it must be disclosed.
Yes, I think that’s exactly right. It’s one of a whole plethora of these kinds of things and could be related to risky behavior. Where do you draw the line? Certainly divorce is one [issue] where the board would prefer to know earlier than later if there is some relationship that may cause problems for the company. 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. It would have been helpful for the board to know about this behavior well before the situation became very public.
What committees would this go to?
I believe the nominating committee—which is often also where “ethics” and governance sit—should take the reins. Of course, when it comes to the CEO’s equity ownership, the compensation committee should be aware of potential losses of equity incentive and the result of equity ownership changes.
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, or be surprised about personal matters in the local newspaper. Keeping the board apprised is a big step toward everyone performing their shareholder duty. -Beyond that it seems like common sense to me, and I think boards and CEOs will handle the issue professionally once it’s brought up for discussion.