Personal scandals are more deadly to CEOs than accounting fraud
When accounting fraud, such as window dressing or embezzlement, is discovered, company executives often apologize and resign to take responsibility. However, a study led by Aaron Hill, an associate professor at the University of Florida's Warrington College of Business, found that company CEOs are more likely to be fired for personal misconduct than for financial misconduct.
CEOs 5 times more likely to survive fraud than a personal scandal News | University of Florida
Why Scandals Hurt CEO Reputations More Than Fraud
https://www.inc.com/kit-eaton/why-scandals-hurt-ceo-reputations-more-than-fraud/91245924
The research team compared over 300 financial scandals that occurred at publicly traded companies between 1997 and 2020 with 59 cases of personal misconduct. The personal misconduct examined included inappropriate relationships, drug and alcohol problems, domestic violence, false resumes, and derogatory statements. The study found that company CEOs were five times more likely to be fired for personal misconduct than for financial misconduct.
A company's recent performance has a certain influence on how a board of directors responds to a scandal. CEOs of companies with strong performance may be able to weather a financial scandal because the board has an incentive not to disrupt the company's success and is less likely to hold the CEO accountable. While financial misconduct can easily be blamed for the scandal, Hill points out that when personal misconduct is an issue, there is no room for excuses and the CEO is often forced to resign.
For example, Steve Easterbrook , the former president and CEO of McDonald's, achieved such great feats that the company's stock price doubled during his tenure. However, he was fired in 2019 for dating an employee, which violated company policy. Similarly, Mark Hurd, the former CEO of HP, was forced to resign after being accused of sexual harassment, despite being praised for turning the company around.
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Scandals also affect how successors are selected: When a CEO is fired for personal misconduct, boards tend to select an internal successor to portray the problem as individual and the overall corporate culture healthy.
A recent example is data operations startup Astronomer, where co-founder Pete DeJoy is serving as interim CEO after CEO Andy Byron was forced to resign after being caught on camera intimately embracing the company's chief human resources officer at a concert.
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Professor Hill points out that CEO dismissals are almost always based on a financially motivated calculation, which means a comprehensive decision about how to maximize future shareholder value, including the company's reputation and brand image.
Retaining a CEO due to a personal scandal could severely damage the company's reputation and future earnings, so even if the CEO is competent, quickly removing him or her is a rational decision to protect the company's long-term financial value.
'The board of directors has a responsibility to protect the interests of the company and its shareholders. Allowing a CEO who has engaged in misconduct to remain in office sends the wrong message to employees, investors and society,' said Professor Hill.
According to data from the Economic Policy Institute , the average CEO's compensation in 2024 will be 281 times that of the average worker, up about 6% from the previous year. Recent data also shows that one in three American workers has had a relationship with their boss, and 91% of those surveyed have used flirtation or charm to advance their own position.
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