Sex, Lies and Indiscretions by Executives Can Cost Their Firms Millions

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After the revelations of sexual misconduct allegations involving film producer Harvey Weinstein, the widespread #MeToo sexual abuse awareness movement has brought to light many more allegations of sexual assault and harassment in the workplace. When such indiscretions occur they obviously have consequences for the manager involved, but research out of Drexel University’s LeBow College of Business found that, especially at the executive level, indiscretions can have multimillion dollar consequences for the companies that employ them.

“By the time we notice signals of poor integrity in the boardroom the damage to the firm has been done,” said Ralph Walkling, PhD, Christopher and Mary Stratakis Professor in Corporate Governance and Accountability at Drexel’s LeBow College of Business and founder of the Center for Corporate Governance. “But many executives signal poor integrity with personal actions outside the firm.”

To determine whether signals of personal integrity are an important factor to consider when assessing a firm’s value, Walkling and his coauthors looked at 325 instances of alleged executive transgressions related to substance abuse, violence, sexual indiscretions and dishonesty. In instances of managerial missteps, they found an immediate 1.6 percent loss in shareholder value (the value delivered to shareholders because of management’s ability to grow sales, earnings and free cash flow over time) or an average loss of $110 million in market capitalization. When indiscretions were committed by the CEO, the loss in shareholder value rose to 4.1 percent or $226 million.

CEO indiscretions were also associated with significant declines in the number of customers and joint venture partnerships. Although all indiscretions imposed some reputational damage, reputational costs varied with the type of indiscretion, according to the authors. Cases of dishonesty, for example, were most likely to tarnish the firm’s reputation for honest dealings, while those of sexual misadventure also entailed more direct costs.

While some studies have suggested that managerial misbehavior outside the workplace in a CEO’s personal life will not affect business operations, Walkling and his coauthors’ analysis found “the personal integrity of the top management team plays an important role in the valuation and business operations of the firm.”

“Executives who commit indiscretions choose to place themselves in the potentially distracting situation, and this insight into their personal utility function reflects upon their character,” said Walkling. “Indiscretions can credibly signal that the executive does not highly value their reputation.”

Managerial labor markets don’t stand idle in light of managerial indiscretions. CEO turnover increases dramatically in the wake of an indiscretion and compensation declines for CEOs who are retained. The damage can go further. At least some shareholders seem to hold board members responsible for indiscretions associated with the firm’s executives; board members receive significantly lower votes in the director election immediately following announcement of an indiscretion.

The results differ for firms in “shady” industries—those that are less likely to comply with federal rules and that may intentionally hire managers with low integrity. According to the authors, these firms saw smaller market reaction after such revelations came to light. Announcements of indiscretions are less surprising for these managers and don’t have as much of an impact on the firm’s reputation or the market’s reaction.

The analysis, “The Consequences of Managerial Indiscretions: Sex, Lies and Firm Value,” coauthored by Brandon Cline of Mississippi State University and Adam Yore of the University of Missouri, is in press with the Journal of Financial Economics and available online at this link.

To schedule an interview with Ralph Walkling, contact Niki Gianakaris, executive director, Media Relations, at 215-895-6741 or


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