Shareholders Pay the Price for Degenerate CEOs

There’s a sobering table included in an academic paper titled “The Consequences of Managerial Indiscretions: Sex, Lies and Firm Value,” co-authored in November 2016 by Adam Yore, assistant professor of finance at the University of Missouri.

The table lists 12 instances of alleged managerial indiscretions in four categories: “Sexual Misadventure,” “Substance Abuse,” “Violence,” and “Dishonesty.”

Under Sexual Misadventure, we have Mark Hurd, chairman, president and CEO of Hewlett Packard Co., who was dismissed in 2010 for allegedly harassing HP contract employees. Substance Abuse features William Parker, chairman and CEO of U.S Airways Group, Inc., who was arrested for DUI in 2007 while leaving a golf tournament hours after a failed merger bid for Delta airlines.

In the Violence category, Yore includes Patrick Naughton, executive vice president of Infoseek Corp., Disney’s partner in the internet portal in 1999, who attempted to solicit an undercover FBI agent posing as a 13-year-old girl. Finally, in the Dishonesty category, there’s the case of James Minder, chairman of the board of Smith & Wesson Holding Corp., who quit in 2004 when it was revealed he failed to disclose he had served a 15-year term in prison for armed robbery.

Yore’s paper grew out of his dissertation in 2007, and was just accepted by the Journal of Financial Economics, one of the top publications in his field. A decade after its genesis, the work of Yore and his co-authors seems more relevant than ever as executives, film stars, entrepreneurs and others continue to fall like dominoes to allegations that fit neatly into one or more of the four categories in Table 1 of “The Consequences of Managerial Indiscretions: Sex, Lies and Firm Value.”

Yore studied 219 “unique indiscretions” for the paper, whose authors note that, “As far as we know, our paper is the first to examine shareholder wealth effects surrounding ex ante signals of low integrity revealed in an executive’s personal life and how these signals impact corporate relationships in the product markets.”

In other words, Yore and his cohorts figured out what it costs to be a lecherous, drug-addled, cheating, abusive CEO. And the numbers are pretty stunning.

Yore figures there is an immediate loss of $110 million in market capitalization at the revelation of an indiscretion by a top executive. If that top executive is the CEO, the loss more than doubles to $226 million.

“The magnitude of the stock market losses suggests that investors react to more than just the monetary penalties associated with these events,” Yore and his co-authors write in the paper.

Shareholders are also worried about litigation, opportunity costs or severance costs that result from the event, as well as the clobbering the reputation of the company takes. Exhibit A is The Weinstein Co., which fired chairman Harvey Weinstein three days after the New York Times revealed his extensive history of sexual harassment settlements and allegations.

As Variety reported on Jan. 4, “The company was already struggling financially, weighed down by a series of film flops, and came under severe strain as its partners abandoned projects due to negative publicity.”

Stephen McClellan, a 32-year veteran of Wall Street, perhaps put it most succinctly in Yore’s paper, where he is quoted as saying, “I am put off by executives with a litany of ex-wives, messy public divorces, marriages to bimbos, visits to strip clubs, (or) heavy drinking.”