The "legacy" of a misbehaved CEO can beleaguer a company's reputation for an average of 4.9 years in the news, and cause an average 3.1 percent decline in shares after the news first breaks, according to a study from Stanford (Calif.) University.
The report, entitled "Scoundrels in the C-Suite," focuses on behavior that is not illegal, but merely controversial. To better understand how boards deal with misbehaved CEOs, researchers reviewed media reports between 2000 and 2015. They identified 38 times when a CEO's behavior resulted in more than 10 unique news references. These incidents included lying to stakeholders about personal matters such as a drunken driving offenses or falsified credentials; sexual affairs within the company or among consultants or contractors; questionable, but not illegal, misuse of corporate funds; and controversial or offensive public statements.
On average, these incidents made over 250 news stories each and media reports lasted nearly five years after the news first broke, the researchers found. The data also showed stocks usually fell, declining by a market-adjusted average of 3.1 percent over the three-day trading period before, during and after initial reports of the incident. However, the researchers do note stock prices occasionally jump when bad CEO behavior headlines. Eleven of the 38 incidents were associated with a positive abnormal stock return, according to the report.
Other negative effects noted by researchers include a change in marketing, the loss of a major client, a federal investigation, a lawsuit or other shareholder action, all of which occurred in 34 percent of the cases studied.
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