How Executive Indiscretions Can Hurt the Bottom Line

Did you ever think about what executives of big name companies do during their time away from the office? If you hear they golf or take lavish vacations, you may just glaze over their activities.  But, what if you heard one of them was arrested for drunk driving or even sexual assault? Would that impact your decision to do business with that company or change the way you look at that company?

A recent study led by Adam Yore, assistant professor of finance at The University of Missouri’s Trulaske School of Business, found that indiscretions at the hands of company executives do indeed affect the bottom line. In fact, they affect them to the tune of billions of dollars of lost revenue.

Yore says he first decided to look into the issue nearly ten years ago after reading about a Boeing executive who lost his job due to an affair.  According to a Washington Post article, the executive’s affair led to questions about his ability to lead going forward. Yore says this got him to thinking, “If you lie to your wife, would you also lie to your shareholders?”

When people see a leader of a company acting unethically after hours, it makes them start to question if that’s how they act in their professional lives as well. If you’re invested in a company you want them to be on the up and up at all times.

Yore and his colleagues looked into 325 cases of executive indiscretions over the years, which they based their study upon. These indiscretions were broken up into four categories: substance abuse, violence, sexual indiscretions, and dishonesty. They found an immediate 1.6% loss in shareholder value in companies where these indiscretions existed. Perhaps not so shocking, dishonesty indiscretions proved to be the most damaging. When these come to light, major customers and potential joint venture partners tend to shy away from doing business with the company that the CEO is associated with. Perhaps there is a fear of guilt by association. Whatever the case, it spells bad business.

“There is market reaction to dishonesty indiscretions, “ says Yore. He also says that indiscretions committed by CEO’s, not employees in a lower position or board members have the most damaging effects on any given company. No one wants a leader whose behavior may be looked upon as being dishonest or puts the company in a negative light.

On the flip side, the study also found that companies that have a tendency not to comply with federal regulations saw less of an impact on their bottom line when executive indiscretions came out.

What can be done to avoid the problem? Yore says, “resume frauds often account for a large number of indiscretions.” He says first and foremost; don’t lie on your resume. He says this is something that he stresses to his students. With all of the online searches available, employers will be able to quickly discover when you’re lying. The truth you are trying to hide will eventually come out.

In the end, it’s about integrity. Yore says, “Personal integrity at the top matters and can have major impacts on these companies.” This is definitely something to keep in mind when it comes to business dealings.

 

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