Deciding which aspects of a CEO’s private life are relevant to his or her performance can prove a tricky task for a public company board. Analysis of a CEO’s private behavior that might uncover work-related ethical violations is imperative to the security of a company’s bottom line, overall performance, and reputation.
A study in the Journal of Financial Economics found CEOs with excessive spending habits often allow for a looser control environment within the company, which can result in a higher possibility for fraud or monetary blunders by employees.
Paying close attention to a CEO who freely uses corporate assets, or who regularly combines personal and professional worlds, is essential, as their behavior may suggest a mixing of corporate and personal expenditures, according to an article in The Wall Street Journal.
As a general rule, if a CEO’s leisure activities utilize corporate resources, pose a distraction, or expose the company to various risk factors, the board more closely should monitor those for potential corporate violations.
That said, CEOs are permitted, like the rest of us, to some semblance of a private life, making it incumbent upon boards to remain diligent without crossing lines. Admittedly, those instances are fewer to categorize, as more scrutiny through social media makes it harder for CEOs to distinguish between their private lives and their companies and other professional affiliations.
So, where is the line?
Bad or questionable behavior obviously is a red flag for a board. There have been plenty of instances in recent years of poor behavior by CEOs, including drunk-driving violations; abusive language toward employees; falsified resumes; and lying about extramarital affairs. A CEO’s actions don't have to be illegal to set a bad precedent for employees, or to contribute to a corporate scandal.
A recent Forbes article attributes employers’ mixed messages regarding behavior policies to employee misbehavior. A lack of clarity often produces an ethical gray area that can allow employees to go from questionable conduct to definitively unethical behavior. When CEO behavior indicates a broad or blatant neglect of ethics that affects employee conduct, boards should address the issues appropriately, including possible termination.
A board must be mindful of complaints through both formal and informal channels to remain attuned to the lifestyle choices and behavior of a CEO. While workplace rumors and chat rooms may not be the most credible of sources, persistent rumors could indicate actual issues, and should warrant closer inspection. Whistleblower hotlines are the most straightforward method to report, according to the WSJ article, as boards are required to review any credible allegation.
CEO misbehavior can short company goals and culture. Risks posed by poor conduct and reckless behavior can't be mitigated or properly reported without measures in place to monitor a CEO’s personal life.