Sex, lies and their impact on a corporate reputation

Research shows that when arrests, lies or extramarital affairs of CEOs and other top executives are disclosed, their companies will lose significant amounts of money in the short- and long-term.

Researchers studied 219 cases of executive indiscretions to better understand how signs of low integrity in an executive’s personal life impacted their firms.

Key findings:

  • In the three days after the announcement of an executive indiscretion, firms experience an average shareholder loss of $226 million.
  • In the subsequent 12 months, stock prices of companies of accused executives fell in total between 11 and 14 per cent.
  • Firms where executives behaved badly performed poorly during the year in which the misdeed was revealed. The firms were also more likely to:
    • manipulate earnings
    • be sued by shareholders
    • be accused of fraud by the government
  • While many indiscretions were sexual in nature, these weren’t the most damaging to companies. Shareholders reacted more negatively to dishonesty and appeared concerned with the executive’s ability to manage.
  • The research suggests that companies can help prevent executive mishaps with better corporate governance structures. The researchers found that companies where boards had more power and were closely paying attention were less likely to witness these kinds of executive indiscretions.