When the CEO gets a divorce

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. 

Read more: Managers, bring out your empathy and create more advantageous outcomes 

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. 

Listen to a podcast: Do you have the personality to become a CEO? (in Danish)

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. 

Read more: Your boss can boost your career 

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.