CEO misconduct, be it personal misdeeds, illegal business practices, violations of ethical norms, or something else – seems to be in the news more often these days. And when a CEO misbehaves, the entire company suffers.
The organizational consequences of CEO misconduct are significant. Researchers at Stanford University have shown that when a CEO is caught misbehaving, the stock price of his or her company drops an average of 3.1 percent over the following three days, regardless of the type or severity of misconduct. This drop can result in the loss of billions of dollars in market capitalization. Negative media coverage lasts much longer: References to the CEO’s misdeeds often still occur nearly five years after the event. More significantly, one-third of the companies associated with misbehaving CEOs will face follow-on effects from the event, including shareholder lawsuits, proxy battles, a federal investigation, government legal action, or the loss of at least one major client.