Can personal indiscretions hurt your business? Do the actions of managers and CEOs effect business relations? The Consequences of Managerial Indiscretions is a research article conducted by three college professors: Adam Yore (University of Missouri), Brandon Cline (University of Mississippi), and Ralph Walkling (Drexel University). Personal indiscretions were separated into four categories: sexual misadventure, substance abuse, violence, and dishonesty. The study had two hypotheses: the Separate Affairs Hypothesis and the Integrated Affairs Hypothesis.
The Separate Affairs Hypothesis is that personal indiscretions have no bearing on firm value or performance. The dominating factors in an executive’s contribution to a company are skill and experience. This hypothesis claims that managers are able to separate their personal and professional lives and only their raw talent matters.
The Integrated Affairs Hypothesis is that personal indiscretions are associated with losses in firm value, operating performance, and strategic partnerships or stakeholder relationships. This hypothesis claims that a personal indiscretion is distracting and will disrupt the executive’s performance. However, the main way personal indiscretions effect firm value is due to the impact an indiscretion can have on a company’s reputation. It is important to note that executives who commit these indiscretions choose to put themselves in a distracting situation. This is likely to make potential business partners hesitant to do business with a company due to the fear of being cheated.
Stephen McClellan, a 32-year Wall Street veteran and-19 year Institutional Investor All-American analyst said this on the matter, “A critical part of the investment appraisal and company evaluation process is gauging management effectiveness, quality, character, and values. I am put off by executives with a litany of ex-wives, messy public divorces, visits to strip clubs, or heavy drinking.”
A sample size of 325 unique indiscretions and 195 unique executives were used for the study. The information about these indiscretions were gathered from news sources, legal findings, and press releases. Forty-seven percent (153 out of the 325 indiscretions examined) fell under the category of sexual misadventure; sexual misadventure is considered to be: extra-marital affairs, inter-office romances, accusations of sexual harassment, and other similar actions. Dishonesty accounted for about 33 percent of the observations. Substance abuse and violence account for 11 percent and 9 percent of the observations.
The average executive used in this study was approximately 52 years old and almost always male. “Females were seemingly less likely to be in the sample. Mainly because top female executives are rare in their own right, so the research was dominated by males,” said Yore. Executives involved with indiscretions are more likely to be terminated, with roughly 36 percent of executives terminated within 30 days.
Both Yore and Cline had an inclination that the Integrated Affairs Hypothesis would be the correct one. Although both men claim there was plenty of evidence to suggest that personal indiscretions would not affect business relations or profit margins; “I suppose it wasn’t completely clear. I guess I had a feeling [personal indiscretions] would matter but it wasn’t 100 percent clear,” Yore said. “We wanted to measure integrity and pride somehow, and whether we could observe it clearly or not, I can say we were pleasantly surprised with the results,” Cline said.
These indiscretions can also cost a business a lot of money. When an executive is involved in a personal indiscretion, direct costs are imposed on a business because of the indiscretion. These costs include, but are not limited to: legal costs from defending the executive, payouts to plaintiffs in a settled lawsuit, costs due to the unavailability of the executive, and severance costs associated with terminating the executive as a result of the indiscretion. Seventy-four of 325 indiscretions result in some sort of lawsuit involving the company. Firms that disclosed the dollar amount of these legal costs averaged a total of $2.2 million. Time lost by an executive is also a sizeable cost, due to the possibility of sensitivity training, rehab, suspension, or time spent in jail. The average time lost is 28 days and the average cost is $27,465. The average severance pay (an amount paid to an employee following dismissal) is $3.6 million.
Notable executives that were covered in this research article are: William Parker, the CEO of U.S. Airways Group Inc. and Scott Thompson the CEO of Yahoo! Inc. Parker was arrested for DUI while leaving a golf tournament just hours after a failed merger bid for Delta. Thompson falsely claimed to possess a computer science degree from Stonehill College. Thompson was fired for his indiscretion. Getting arrested or fired resulted in significant costs to these companies, ultimately, supporting the Integrated Affairs Hypothesis.
Tyler St.Louis is a Creative Writing major at Western New England University. He is currently in his third year of college. Tyler describes him self as a novella writer, with a focus on the fantasy and horror genres. He is also a strong advocate for professional wrestling (which his friends find weird) because he views it as an art form more than a sport.