How a CEO’s divorce may affect company value

BVWireIssue #141-3
June 18, 2014

A renowned corporate governance expert, David F. Larcker, claims that, far from being a private matter, a CEO’s divorce may have a negative effect on company value. How? Larcker says the CEO’s influence may decline as a result of a divorce settlement that forces him or her to give up a substantial portion of ownership in the company. Less influence may mean less ability to make decisions. Also, a divorce is a distraction and may result in the CEO’s reduced productivity.

Most critical, “the situation” may affect his or her judgment when it comes to risk, especially when the outcome results in a sudden change in wealth. Even though boards may be reluctant to intervene barring some outrageous conduct from the CEO, they cannot afford to turn a blind eye to the situation, Larcker says.

What to do about it? Have the governing boards provide counseling or monitor performance for signs of slipping? The solution will depend on the facts and circumstances of the case, Larcker suggests, and it will involve the board and general counsel. One way to go is to be proactive and provide explicit guidelines for a CEO’s personal conduct.

Find out more about the Larcker survey here.

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