Markets Punish Behavior That Reflects A CEO's Lack Of Integrity

Jul 24, 2018
Originally published on July 24, 2018 8:29 am
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RACHEL MARTIN, HOST:

If you're a CEO, you face lots of oversight from boards and regulators. If you mismanage money or make a bad business decision, there are consequences. But what about ethical lapses in your personal life? Does the market care about how you treat your spouse, for example? NPR's social science correspondent Shankar Vedantam is here with some new research on this subject. Hey, Shankar.

SHANKAR VEDANTAM, BYLINE: Hi, Rachel.

MARTIN: All right. First off, what kind of ethical indiscretions are we talking about here?

VEDANTAM: Well, everything from having an affair to lying about what's on your resume. I was talking to finance professor Brandon Cline at Mississippi State University. He asked me to think about Scott Thompson, who used to be the CEO of Yahoo. Thompson got caught lying about his degree on his resume. Now, you might say, who cares about a college degree? It was years and years ago.

BRANDON CLINE: He lied about earning a computer science degree from Stonehill College. And what happened subsequently to that, the company lost $390 million just in the days around that announcement. What the market cared about was his integrity, and the fact that he was dishonest about his past accomplishments made investors very leery of what else the executive might be lying about.

MARTIN: Although, could it not have been just a one-off? I mean, maybe Yahoo's stock price tumbled for some totally unrelated reason.

VEDANTAM: That's right. This is an anecdote. This is not data. Cline and his co-authors Ralph Walkling and Adam Yore wanted to know if the stock market punished people for personal lapses, and they looked for data. They tracked down more than 300 cases of personal indiscretions committed by CEOs of companies between 1978 and 2012 and examined whether these had market consequences for companies. Now, most of these lapses had to do with sex, mostly affairs, but also other things that the researchers called sexual misadventures. But they also included everyday dishonesty and cheating. One CEO lied about his golf score at a charity event. The researchers found that these personal transgressions were associated with a market hit of 4 percent on average. That might not sound like much, but these were large companies, so it worked out to over $200 million. And Cline also said, there were both short and long-term effects.

CLINE: Over the long run, these firms experienced decline in value of 10-15 percent. So this suggests that, yes, the market does care. In essence, if you're willing to lie, cheat and steal in your personal life, then as a shareholder, maybe I should beware because you may be willing to lie, cheat and steal in the corporate life, as well.

MARTIN: But we should acknowledge that politics seems to be different, at least in this moment. Some politicians, there has been a separation between their personal ethical lapses and their professional performance. Why is business different?

VEDANTAM: Well, it's possible that the worlds of business and politics are just different from each other. But it's also possible, Rachel, that in the world of business, you do something, the stock market can react tomorrow. The consequences are really quick and immediate. In the world of politics, you might have to wait until the next election before you see those consequences. The larger point of this research, I think, is that when it comes to human behavior, when someone commits a transgression in one domain, we tend to associate it with their behavior in all other domains, as well. So once you are identified as a cheater, you always become a cheater.

MARTIN: NPR's Shankar Vedantam. He's the host of a podcast that explores the unseen patterns in human behavior. It's called Hidden Brain. Shankar, thanks, as always.

VEDANTAM: Thanks, Rachel. Transcript provided by NPR, Copyright NPR.