By Jessica Tasman-Jones
This article is brought to you by Agenda, an FT Specialist publication that focuses on corporate boards
Boards should be told when a senior executive has a personal issue, such as a love affair, a divorce or poor health, experts say.
Almost a third (30 per cent) of UK executives suffered from disturbed sleep in 2021, up by 25 per cent on 2020, according to the latest executive wellbeing index by Bupa Global, the health insurance company.
Executives were also more angry and impatient, with 24 per cent reporting these emotions, the study said.
Despite the fact that these issues occur in people’s personal lives, boards need to be aware of them as they can affect quality of work.
“There is a large body of work in economics, finance and other disciplines that shows, unsurprisingly, that personal circumstances affect performance, including for C-level executives like CEOs,” says Pavel Savor, an economist at DePaul University, Chicago, who studies executive performance and risk-taking.
Love or Money: The Effect of CEO Divorce on Firm Risk and Compensation, a study published in the Journal of Corporate Finance in 2020, found that chief executives became more risk-averse at the time of a divorce.
The author attributed this to personal wealth being more concentrated in company stock as a result of a pending settlement with a spouse.
In relation to health at work, boards in the UK have much the same duty of care to a CEO as a company has to its employees, says Elizabeth Graves, employment partner in Eversheds Sutherland, the global law firm.
An individual dealing with personal hardship may be unable to stand the same level of stress, travel or responsibility as normal. A board might need to accommodate this, at least on a temporary basis, Graves says.
Extensive travel and site visits may be easier to eliminate in the post-pandemic era because many CEOs can fulfil much of their role virtually, she adds.
The level of disclosure will be influenced by whether an individual’s problems affect their ability to do the job in the short or long term, says Alison Kay, UK managing partner for client service at EY, the professional services partnership.
Many chief executives will disclose personal information to the chair, given the trusted nature of that relationship, says William Touche, London senior partner and vice-chair at Deloitte, the accountancy firm. The chair can then decide whether they need to share that information with the board.
“[Support can range] from expressions of support and sympathy to understanding what support other executive team members are providing, and ultimately a decision to take a leave of absence and appoint an interim replacement,” Touche says.
Since the pandemic, many people have become used to sharing personal information, including Covid testing and vaccination status, with employers and others, says Tom Lin, professor of law at Temple University, Philadelphia.
“Blurring of the home and workspace has made it easier, if not more acceptable, for many people to share personal burdens they might not otherwise [have shared].”
If a company is listed, boards must publicly disclose important changes to the role of directors or extended absences, says Stephen Nash, corporate partner at Eversheds Sutherland.
Information that could have a significant effect on stock prices is inside information and should be disclosed as soon as possible, Nash says.
Some executives, though, may choose to conceal parts of their private lives.
In 2018 research into managerial indiscretions, which included sexual misadventures and substance abuse, found that shareholder value fell by an average of 4.1 per cent ($226mn) as soon as a CEO’s indiscretion was disclosed to investors.
Indiscretions by other senior managers affect shareholder value by an average of 1.6 per cent ($110mn), the Sex, Lies and Firm Value study found.
Signs of poor integrity are also linked to meddling with earnings, shareholder class-action lawsuits and CEO turnover, it said.
Board members receive “significantly lower” votes in director elections after indiscretions are reported or disclosed.
One way to address this could be a clause in a CEO’s contract to recoup salaries and bonuses when personal life undermines leadership, says Jianchuan Luo, an assistant professor in enterprise and management at Luiss University, Rome.
His research has found that “unethical CEOs” are linked to a higher occurrence of ineffective internal controls, material weaknesses and class-action securities fraud litigation than “ethical CEOs”.
“Affairs are distracting and very likely undermine a CEO’s leadership,” Luo says.
This article is based on a piece written by Amanda Gerut for Agenda.