In a recent study (“The Consequences of Managerial Indiscretions: Sex, Lies, and Firm Value”, November 16, 2016) three respected academics have examined 325 separate instances of executive indiscretion, in order to analyse whether they led to any consistent, measurable business impact.
Their conclusions are extraordinary:
“We find that companies of accused executives experience significant wealth deterioration, reduced operating margins, and lost business partners.”
But that’s not all.
“Indiscretions are also associated with an increased probability of unrelated shareholder-initiated lawsuits, DOJ/SEC investigations, and managed earnings”, they explain.
“Further, CEOs and boards face labour market consequences, including forced turnover, pay cuts, and lower shareholder votes at re-election.”
If that sounds extreme, let us explain.
Through Regression Analysis the researchers were able to directly quantify the Business Impact of indiscrete CEO Behaviour:
- CEO Behaviour Directly Impacts Their Corporation’s Market Cap
The study found that the announcement of CEO indiscretion leads to a median decline in Market Cap of 4.06% – amounting to an average decline of $226 million for the analysed sample.
But these indiscretions are not just associated with short-term stock price damage, however.
In a separate, earlier part of the analysis, the researchers had discovered the Stock Price at companies that suffered from CEO indiscretions fell by between 11% and 14% over the subsequent 12 months.
So the impact was significant in the short-term – and even more significant over the following 12 months.
- CEO Behaviour Directly Impacts Their Company’s Business Performance:
It wasn’t just the Share Price that was hit. Overall Business Performance suffered as well.
According to the researchers:
“The firms in our indiscretion sample exhibit significantly lower operating performance than their industry- and performance-matched peers in the year of the indiscretion”
In fact, they found that CEO Indiscretion led to a decline of 5% in Operating Profit versus their peers.
This was for many reasons, but two of the most significant were these:
CEO indiscretions lead to a 2.1% lower likelihood of their Company acquiring additional major customers in the year following announcement, and:
CEO indiscretions lead to a 5.1% lower likelihood of their Company initiating a new Joint Venture in the year following announcement.
Both Clients and Business Partners were less willing to partner with the companies that suffered CEO Indiscretion.
And the reason for this was critical.
- CEO Behaviour Directly Impacts Corporate Reputation:
The Direct Costs incurred by the impact of Indiscrete Behaviour are not material, the study found.
But the Indirect Costs are substantial.
This is for one critical reason:
“For the majority of indiscretion types, reputational costs are the dominant factor”, the researchers conclude, explaining that “a significant portion of the loss in firm value is due to the reputational capital lost when an indiscretion is announced.”
Consequently, among all the distinct misbehaviours exhibited by their sample, one had a much more dramatic impact than any other.
‘Substance Abuse’ had no material effect.
‘Sexual Misadventure’ was minimal.
Even ‘Violence’ caused little impact.
But there was one misbehaviour that accounted for the greatest Business Impact by far:
In fact, CEO Dishonesty led to share performance that is 3.9% lower than any other indiscretion.
In an interview explaining their findings, one of the lead researchers – Adam Yore of the University of Missouri – concluded that:
“Our research certainly suggests shareholders and potential business partners perceive that someone who is duplicitous in his or her private life could be more willing to mislead professionally,”
His conclusion was simple:
“Personal integrity at the top matters.”
As ever – CEO clarity, consistency, honesty and integrity are the most fundamental values of all.
At Reputation, we provide personal, confidential counsel to CEOs of listed Corporations, advising them how to Position and Present themselves to their most important Stakeholders.
If you are a CEO of a listed Company, and you would like a confidential discussion about how to improve your Personal Branding and Stakeholder Engagement, please get in touch with us either via our website or by email to Connect@TheReputationPartnership.com – and we will reply to you by return, in total confidence.