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

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