When the CEO gets a divorce
If the top executive’s marriage falls apart, the worst-case scenario is that it could damage the bottom line of the company, according to a new study among Danish companies from Aarhus BSS at Aarhus University. Boards and executive management teams should agree on procedures in the event that the CEO goes through a personal crisis, says professor behind the study.
It could cost a small company between 21 and 32 per cent of their operating return on assets (ROA) if their top executive suddenly faces a personal crisis like a divorce. CEOs are people too, and like all other people, they may encounter sorrows and hardships in life. This may in turn affect company earnings. Such is the result of a new research project.
According to psychological research, a divorce is one of the most stressful events we can experience in our adult lives. Up to half of all marriages in Denmark ends in divorce, so the likelihood that some of these failed marriages involve CEOs is rather high.
CEOs are human beings too, and we should not treat them as superhuman or invulnerable.
Ingo Kleindienst, professor at the Department of Management, Aarhus BSS, Aarhus University.
Divorces result in lower productivity
Employee divorce is associated with fewer working hours, decreased productivity and increased sick leave. And these adverse effects can kick in years before the legal dissolution of the marriage and persist for years afterward. This is a well-established fact in literature on the subject, but how does divorce affect top executives? And what are the ramifications in the companies that these executives are in charge of?
Professor Ingo Kleindienst from the Department of Management at Aarhus BSS, Aarhus University, decided to investigate this topic together with assistant professor Tünde Cserpes and former postdoc Kaleb Girma Abreha, both also from the Department of Management, as well as his colleagues Denis Schweizer and Juliane Proelss from Concordia University in Canada. The results have been published in the journal Academy of Management Discoveries.
"CEOs are human beings too, and we should not treat them as superhuman or invulnerable. Divorces affect people, and we wanted to find out how this impacts the companies they are in charge of," explains Ingo Kleindienst.
Small companies in high-growth industries
By using statistics from Statistics Denmark, IDA (Integrated Database for Labour Market Research) and Regnskabsstatistikken (a financial database), the researchers examined a total of 9,147 Danish companies and their CEOs over a 13-year period (2000-2012).
It turns out that two things in particular affect the severity of the consequences of failed CEO marriages: company size and industry growth rate. In addition, the consequences are more severe for companies when the CEO divorce involves children or a fierce financial conflict with the former spouse.
The results of the analyses show that small companies (10-49 employees) and companies in high-growth industries suffer most from CEO divorces. On average, these companies experience a relative decline in operating return on assets of 21 or 32 per cent respectively.
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Alone with their responsibilities
The CEOs of small companies are often single-handedly responsible for most of the strategic development as well as day-to-day operations, and according to Ingo Kleindienst, this explains the fact that small companies seem to suffer the most when a CEO is divorced from his or her spouse.
”In small companies, no one can step in or take over when a CEO is temporarily absent or distracted by private life events,” says Ingo Kleindienst.
By contrast, this is more likely to be the case as company size grows, for instance in medium-sized companies, which do not seem to exhibit adverse performance effects from a CEO divorce. The same is true for micro companies, the analyses show.
“However, this does not mean that the CEOs of these companies are not affected by their divorce. It just means that we are not able to detect any effect on firm operating performance. For micro companies, the explanation might be that CEOs simply have to keep focusing on day-to-day operations to keep their businesses running,” says Ingo Kleindienst.
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Agree on a plan
He encourages all CEOs to make an agreement with the board or otherwise plan ahead in case he or she should go through a personal crisis.
"It would certainly alleviate some of the potential negative consequences for firm operating performance if companies prepared for situations in which unexpected private life events may affect their management and thus their company finances,” says Ingo Kleindienst.
We strive to comply with Universities Denmark’s principles for good research communication. For this reason, we provide the following information as a supplement to this article:
Population-level data of CEOs in Denmark over the 2000-2012.
CEO data are obtained via the Integrated Database for Labor Market Research (IDA) provided by Statistics Denmark.
Firm-level data are obtained via Regnskabsstatistikken.
Difference-in-difference research design with matched samples.
|Ekstern finansiering||The research was supported by the Aarhus University Research Foundation (grant no: AUFF-E-2015-FLS-8-60) and the Jacques Ménard- BMO Centre for Capital Markets at Concordia University.|
|Conflicts of interest||None|
|Link to the scientific article||https://journals.aom.org/doi/10.5465/amd.2020.0031|
|Contact information|| |
Professor Ingo Kleindienst, Department of Management, Aarhus BSS, Aarhus University
Fuglesangs Allé 4, 8210 Aarhus V
+45 93 52 24 70