separation anxiety: the impact of ceo divorce on shareholders

7/29/2019 Separation Anxiety: The Impact of CEO Divorce on Shareholders

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Topics, Issues, and Controversies in Corporate Governance and Leadership

S T A N F O R D C L O S E R L O O K S E R I E S

stanord closer look series 1

Separation Anxiety: The Impact of CEODivorce on Shareholders

IntroductIon

When Rupert Murdoch, Chairman and CEO

o News Corp, announced that he and his wie

Wendi o 14 years were ling or divorce, shares o

News Corp traded 1.4 percent higher. A prenup-

tial agreement meant that Wendi would not have

access to Murdochs 38 percent economic stake in

the company, nor would the divorce threaten the

planned spino o the companys newspaper assets

into a separately traded corporation. According to a

spokesperson, the divorce would have zero impact

on the company.1

By contrast, when news leaked that Harold

Hamm, Chairman and CEO o Continental Re-

sources, was getting divorced rom wie Sue Ann

o 25 years, shares o the company ell 2.9 per-

cent. Te Hamms did not sign a premarital con-tract, making Harolds 68 percent ownership stake

(worth $11.2 billion) subject to equitable distribu-

tion under Oklahoma amily law. Despite a com-

pany press release that the divorce has not and is

not anticipated to have any impact or eect on the

Companys business or operations, not everyone

was convinced.2 According to RBC Capital, the di-

vorce opens up the possibility that Hamm could

have to sell a signicant amount o his stock to pay

a divorce settlement, or he could be orced to hand

some o his stock over to his ex-wie. We believeboth o these would result in a substantial overhang

on the stock, and could result in Hamm losing ma-

jority control.3

Te previous examples suggest that shareholders

should pay attention to matters involving the per-

sonal lives o CEOs and take this inormation into

account when making investment decisions.

By dv . l, a l. Mc, B ty

ob 1, 2013

Impact of dIvorce

Tere are at least three potential ways in which

CEO divorce might impact a corporation and it

shareholders. Te rst is loss o control or inu

ence. A CEO with a signicant ownership stake in

a company might be orced to sell or transer a por

tion o this stake to satisy the terms o a divorc

settlement. Tis can reduce the inuence that he o

she has over the organization and impact decision

regarding corporate strategy, asset ownership, and

board composition. Shareholder reaction to loss o

control will vary, depending on the view that in

vestors have o CEO perormance and governanc

quality. I they view perormance and governanc

quality avorably, they will react negatively to th

news; i they view management as entrenched o

a poor steward o assets, they will react positivelyShareholder reaction will also depend in part on

what happens to divested shares, including whethe

they are transerred to the spouse, sold in a block

to a third-party, or dispersed in the general market

Each o these can shape the uture governance o

rm.4

Second, divorce can aect the productivity

concentration, and energy levels o the CEO. Ac

cording to Wheatley, Vogt, and Murrell (1991), 37

percent o companies report that employee divorc

negatively impacts rm productivity.5

In the extreme, the distraction o divorce can lead to prema

ture retirement. For example, a recent divorce and

new relationship were speculated to be among th

reasons why A.G. Laey stepped down as Chairman

and CEO o Procter and Gamble in 2009. Laey

who led or divorce in 2007, had been pushin

to leave his CEO post or a couple o years de

spite a previous pledge to remain through 2010.


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Separation anxiety: the impact of ceo Divorce on ShareholDerS

It was done rather abruptly, according to one

analyst. We had been saying A.G. had commit-

ted to deliver the decade, and the decade was one

more year.7 Although we are unaware o rigorous

research on the relation between divorce and CEO

retirement, small samples o data suggest an eleva-

tion in CEO retirement rates ollowing divorce.

Among 24 CEOs who got divorced between 2009

and 2012, seven (29 percent) stepped down within

two years o the settlement (see Exhibit 1).8

Tird, divorce can inuence a CEOs attitude

toward risk. Te board o directors designs a com-

pensation program and imposes ownership guide-

lines on executives to ensure they have incentive

to meet company objectives. A sudden change in

wealththrough loss o equity in the company

they are running or other investments outside the

rmcan alter an executives risk appetite, and

thereore aect decision making.

For example, a CEO who unds a divorce settle-

ment by divesting primarily personal assets outside

o the rm but retaining a large equity position in

the rm might become more risk-averseto protectthe value o a more concentrated (less diversied)

portolio. A CEO in this situation might reject

promising but risky investments because his or her

personal nancial exposure to these decisions has

increased relative to total wealth. Tis will reducethe volatility o the stock price but also lower po-

tential returns or shareholders. While the rm will

be less risky as a whole, the company will also miss

out on promising investments with positive ex-

pected returns that could increase shareholder over

time.

Conversely, a CEO might react to a sudden loss

o wealth by becoming more risk-seekingas he orshe attempts to win back personal wealth that was

lost. A CEO in this situation might approve high-

er-risk investments to boost the value o his or herremaining equity holdings ollowing divorce. Tis

will increase the volatility o the stock price, but

only increase shareholder value i the investments

have positive expected value. Te board might re-

spond to a change in the executives risk appetite by

awarding larger cash or equity compensation to re-

store incentives to what they were prior to divorce.

Tere is modest evidence that this occurs.

Neyland (2012) nds that total CEO compensa

tion increases ollowing divorce. He concludes tha

boards react to changes in CEOs outside wealth

and risk incentives by increasing compensation

and that the cost o compensation increases come

at the expense o the shareholders.9 A separat

sample o divorced CEOs suggests some level o

compensation increase ollowing divorce, although

the results are irregular (see Exhibit 2).

Why thIs matters

1. Divorce can impact the control, productivity

and economic incentives o an executiveand

thereore corporate value. Should sharehold

ers and boards be concerned when a CEO and

spouse separate?

2. Rigorous research demonstrates a relation be

tween the size and mix o a CEOs equity expo

sure and risk taking.10 Should the board mak

whole the CEO in order to get incentives bac

to where they originally intended? Would thi

decision be a cost to shareholders because i

represents supplemental pay that could hav

been used to und protable investments, or

benet because it realigns incentives and risk

taking?

3. Companies do not always disclose when a CEO

gets divorced. Reports only come out much latewhen shares are sold to satisy the terms o th

settlement. Is divorce a private matter, or should

companies disclose this inormation to share

holders? I so, how detailed should this disclo

sure be?

1 People in the News, Te Press Association (Jun. 14, 2013).2 Continental Resources Press Release, Continental Resources Con

rms CEO Divorce Pending, (Mar. 21, 2013).3 Leo Mariani, CLRCEO Harold Hamm Conrms Pending D

vorce; Slight Negative or the Stock, RBC Capital Markets (Ma

21, 2013).

4 For additional background o this issue, see: Cliord HoldernesA Survey o Blockholders and Corporate Control, Economic PolicReview, Federal Reserve Bank o New York (2003).

5 Walter J. Wheatley, Judith F. Vogt, and Kenneth L. Murrell, T

Concern o Divorce in Organizations: A Survey o Human Resourc

Managers,Journal of Divorce & Remarriage(1991).6 Ellen Byron, P&G Chooses a New CEO As it Adapts to Era o

Trit, Te Wall Street Journal(Jun. 9, 2009).7 Jennier Reingold, Te $79 Billion Hando, Fortune (Dec. 7

2009).8 Tese statistics include instances where the CEO let ater thei


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rm was acquired. Without disclosure, it is always difcult to as-

sess the degree to which divorce contributed to resignation decisions.Source: Research by the authors. Data rom the Securities and Ex-

change Commission.9 Jordan Neyland, Wealth Shocks and Executive Compensation:

Evidence rom CEO Divorce, (Sep. 3, 2012). Available at SSRN:

http://ssrn.com/abstract=2140668.10 See: David F. Larcker and Brian ayan, Sensitivity o CEO Wealth

to Stock Price: A New ool or Assessing Pay or Perormance, Stan-ord Closer Look Series, CGRP-10 (2010) and Christopher Arm-

strong, David Larcker, Gaizka Ormazabal, and Daniel aylor, Te

Relation Between Equity Incentives and Misreporting: Te Role oRisk-aking Incentives,Journal of Financial Economics, (2013).

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exhIbIt 1 dIvorce and ceo tenure

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exhIbIt 2 dIvorce and annual compensatIon

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2010 $805,385 $807,350 $982,350 21% 27%

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2011 $825,264 $1,187,270 $1,234,800 4% /

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2009 / $4,933,322 $13,074,747 165% 26%

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2010 $2,836,298 $6,274,121 $8,068,185 29% -11%

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2010 $609,812 $1,975,982 $1,874,507 -5% 3%

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separation anxiety: the impact of ceo divorce on shareholders

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