Scoundrels in the C-Suite: How Should the Board Respond When a CEO's Bad Behavior Makes the News?

7 Pages Posted: 9 May 2016

See all articles by David F. Larcker

David F. Larcker

Stanford University - Graduate School of Business

Brian Tayan

Stanford University - Graduate School of Business

Date Written: May 10, 2016

Abstract

The board of director has a responsibility to investigate credible allegations that management has engaged in activity that is not in the interest of the company or its shareholders. In the case of illegal activity, the appropriate response is likely to be very clear. Less obvious are the actions directors should take when the CEO engages in behavior that is questionable but not illegal — such as making controversial public statements, having relations with an employee or contractor, or developing a reputation for overbearing or verbally abusive behavior.

In this Closer Look, we examine the actions that board’s take in response to CEO “bad behavior.” We ask:

• When are allegations serious enough or credible enough to merit boardroom attention? • How can the board assess the impact of CEO misconduct on the organization broadly? • Should the board be proactive in employing information gathering tools to detect early signs of CEO or employee misconduct?

The Stanford Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance and executive leadership. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the books Corporate Governance Matters and A Real Look at Real World Corporate Governance.

Keywords: Board of directors, CEO bad behavior, CEO misconduct, tone at the top, culture, recidivism, leadership, unethical behavior, conflicts of interest, sexual relations, abusive language, arrogance, hubris, corporate governance research

JEL Classification: G30, G32, G34

Suggested Citation

Larcker, David F. and Tayan, Brian, Scoundrels in the C-Suite: How Should the Board Respond When a CEO's Bad Behavior Makes the News? (May 10, 2016). Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance No. CGRP-57 ; Stanford University Graduate School of Business Research Paper No. 16-23. Available at SSRN: https://ssrn.com/abstract=2777692

David F. Larcker (Contact Author)

Stanford University - Graduate School of Business ( email )

Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

Brian Tayan

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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