Health issues, divorce, court battles, moral turpitude, and more can all distract the CEO and impinge on a company’s performance.
So, how much of their private life should a company disclose? asks Amit Tandon.
Gautam Singhania recently put out a statement announcing his decision to divorce Nawaz, his wife of 32 years.
Given the ‘unsubstantiated rumour-mongering and gossip’ that preceded this announcement, he requested that this personal decision be respected, allowing the family the privacy needed to sort through the various issues. We will do so.
His announcement, however, is an opportunity to consider questions about how ‘private’ the lives of listed company chief executive officers (CEOs) ought to be, as well as what companies should disclose and when.
A CEO’s divorce can affect the company in many ways. First, a divorce may impact the CEO’s efficiency, focus, and energy level.
There is a growing body of work that suggests that family conflict often spills into the workplace.
And because separation may be long-drawn, the negative consequences may manifest even prior to the formal termination of the marriage, and endure for some time thereafter.
However, CEOs benefit from managerial support, which can mitigate any adverse effects resulting from a divorce.
Then, there is the question of the impact on ownership. A CEO holding a substantial ownership stake in a company may need to sell or transfer a portion of this stake to meet the conditions outlined in a divorce settlement.
David F Larcker, Allan L McCall, and Brian Tayan noted that when media mogul Rupert Murdoch disclosed that he and his second wife Wendi Deng were initiating divorce proceedings, after 14 years of marriage, the share price did not react.
In contrast, the authors found that Continental Resources share price dropped on news of its Chairman and CEO Harold Hamm’s divorce because Hamm could have to sell a significant amount of his stock to pay a divorce settlement, or he could be forced to hand some of his stock over to his ex-wife.
‘We believe both of these would result in a substantial overhang on the stock and could result in Hamm losing majority control,’ noted RBC Capital.
In Kings of Capital, a book about Blackstone, the authors have said that Stephen Schwarzman in part was believed to have sold his shares in Blackrock to help defray the cost of his divorce (he later described this sale as his ‘heroic’ mistake).
Money is wiser after the first marriage: Mr Murdoch had a prenuptial agreement, Messrs Hamm and Schwarzman did not.
While anecdotal evidence suggests spouses are more likely to receive cash and other assets, it is not always so.
MacKenzie Bezos got to keep her 4 per cent stake then valued at $35.6 billion, leaving Jeff Bezos holding 12 per cent in Amazon. MacKenzie, however, transferred her voting rights to her husband.
This lower wealth may result in a change in the risk appetite of the CEO, leading to either becoming too conservative or dialling up risk. This has consequences for the company.
Current Indian boards deal less with divorces and possibly a bit more with disclosures regarding health issues of their CEO.
Boards generally offer two explanations for remaining silent on their CEO’s illness.
First, the trade-off between an individual’s privacy and the company’s disclosure obligations.
In the absence of regulations regarding what and when to disclose, companies have preferred to remain silent.
The other is that companies do not view this as material information — unlike order wins or a factory fire, which can be baked into a spreadsheet.
In the US, disclosures regarding a CEO’s health fall along a continuum (external link).
From full briefings early in the cycle, as seen with Berkshire Hathaway announcing that Warren Buffett will have prostate cancer surgery, to partial (CEO is hospitalised), to keeping silent.
Disclosures on both health and personal relationships are rare in India.
HDFC Bank is one of the few instances of a company making a disclosure regarding its CEO’s heart operation (external link).
SKS Microfinance had disclosed matters relating to its founder’s divorce in its offering circular (external link). Such disclosures remain uncommon.
Most disclosure requirements are regarding the firm, with very few concerning its leadership teams.
This is despite CEOs’ personal brands sometimes becoming as powerful as the companies that they manage.
Investors, however, expect that boards will be kept in the know.
This is even more critical when it comes to the CEO’s illness and health.
Rather than waiting for the CEO to inform the board about her health, the board can demand that such disclosures be made mandatory.
This will enable the board to assess the severity and plan ahead.
Health and divorce are not the only elements that affect the CEO.
Protracted battles with siblings, moral turpitude, regulatory misdemeanours, and the like can all distract the CEO and impinge on a company’s performance.
For now, boards must demand disclosures regarding the current situation from the CEO.
Based on this information, they can decide on the materiality of the event, and appropriate disclosures should follow.
Amit Tandon is with Institutional Investor Advisory Services India Limited.
Feature Presentation: Aslam Hunani/Rediff.com
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