why the private lives of CEOs matter


Certainly, the fallout can be significant. The article notes how Domino’s shares plunged more than 20 per cent after Don Meij had to liquidate personal holdings to settle his divorce, and that Mark Hurd’s dismissal at HP following an extramarital affair led to a $US9 billion drop in the company’s market value.

Dr van Doorn writes that the private lives of CEOs warrant rigorous academic examination beyond casual observation due to “the increasing prominence of CEOs as visible figures in broader society, as well as the increasing substantive imprint of CEOs on entire organisations”.

“There is a very strong connection between the private life events [of a CEO] and [their] risk preferences, and also the [time] horizon that they operate under,” he told The Australian Financial Review in an interview.

“Some life events will make them more short-term oriented; other life events will make them more long-term oriented.”

Dr Van Doorn and two other researchers – Mariano Heyden from Monash Business School and Marko Reimer from the WHU Otto Beisheim School of Management – reviewed “the fast-emerging literature on CEO private life events” spanning 72 studies.

The research builds on upper echelons theory, which states that executives’ experiences, values and personalities greatly influence their choices, by variously exploring how significant events in the private life of a CEO affects everything from their risk tolerance and length of tenure at a firm, to their stance on social-ethical issues and the financial performance of their company.

The life events include marriage, divorce, bereavement, infidelity, childbirth, adoption, exposure to terrorism and military experience, among others.

The article cites one study that found that unmarried CEOs are “more likely to pursue more aggressive investment policies”. Another found CEO marriage “is associated with lower future stock price crash risk”.

“Generally, married CEOs are seen as beneficial for financial performance,” Dr van Doorn writes, while noting an inverse relationship with divorce.

“Unsurprisingly, most studies find that CEO divorce has a negative association with firm performance, as it may indicate that CEOs are distracted and otherwise occupied with the dealings of going through a divorce,” the article says.

In Australia, much attention has been paid to the marital separation of Magellan Financial Group co-founder Hamish Douglass.

Mr Douglass felt he had to deny suggestions he and his wife were about to dump Magellan stock after The Australian Financial Review revealed the pair had separated.

The news had invited concerns of a liquidity event at the fund manager after its shares tanked 30 per cent following the loss of its biggest institutional client.

“There’s a time when people should really stay out of people’s personal lives,” Mr Douglass previously told the Financial Review.

CEO divorce linked to short-termism

Dr van Doorn said there was evidence to suggest CEOs were more likely to focus on increasing their personal bonuses and less likely to focus on their firm’s long-term objectives after going through a divorce and paying a large settlement.

At the other end of the spectrum, CEOs who were parents or who had a military background were more likely to engage in long-term strategising.

“CEOs who are parents tend to invest more in corporate social responsibility, and military CEOs [are] seen as more trustworthy than their non-military counterparts,” Dr van Doorn said.

He said the findings of his literature review had clear implications for company directors.

“If you have a CEO who’s going through a divorce, as a board you need to be [aware] that there can be more short-term, more self-serving tendencies that need to be managed appropriately – otherwise it can harm the firm, both in the short and long term,” he said.

“So it’s about recognising that CEOs are human, and that they have tendencies that draw from their personal life and spill over into the professional domain, and to try and create ways of managing that in a smart manner.”

Dr van Doorn said most studies in the field so far had focused on the effect of single significant events on a CEO’s performance rather than the cumulative effect of multiple events throughout their lifetime.

He said his current research project would adopt a “lifespan perspective” and look at multiple events in a CEO’s life.

The research will be based on interviews with CEOs of medium-sized enterprises, as Dr van Doorn believes these leaders will provide more candid responses than the CEOs of ASX-listed companies given they are less monitored and their businesses are “perhaps less formally arranged”.

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