Monday, April 28, 2014
Over at his blog, Stephen Bainbridge posted today about a Stanford Business School short case study arguing that a CEO divorce might impact a corporation and its shareholders, and therefore shareholders should take into account the personal lives of CEOs when making investment decisions. He concludes in his post that the corporation's directors likely do not have any legal obligation to affirmatively monitor the CEO's personal life, including his/her marriage. http://www.professorbainbridge.com/professorbainbridgecom/2014/04/the-impact-of-ceo-divorce-on-shareholders-and-the-fiduciary-duty-of-directors.html
While I agree with that conclusion regarding duty to monitor, as I have written about previously, it is a more ambiguous question under the current law whether a corporation that is actively aware of a situation in the personal life of the executive has any obligation to disclose that information to the shareholders.
In my scholarship, I have focused on a closely related question: not whether corporations do have to disclose personal information about its executives to its shareholders, but rather should corporations have to disclose such information to their shareholders?
On the one hand, the Stanford case study is probably correct that a CEO divorce (or other difficult situation including family death, or health situations) might impact a corporation and its shareholders. This general conclusion is not new, as finance scholars at NYU empirical studies studied data from Denmark and found statistically significant drops in company profitability following the death of a CEO's child or parent (although not after the death of a mother-in-law).
That is not the complete story, however, in deciding the normative question. In addition to the shareholders' interest in obtaining potentially relevant (one might arguably say material) information about the CEO, there is also a competing interest by the executive in being able to keep personal information about such deeply personal matters as health information, family deaths, and marital troubles to themselves and their circle of loved ones.
How do we balance these two competing interests? In my 2013 Florida State Law Review article "Disclosing Corporate Disclosure Obligations" I argue that the best way to balance and value these competing interests is to amend the existing corporate disclosure requirements to allow corporations and executives to negotiate and contract up front what the corporation's disclosure policy will be with regard to the personal information of that executive. The corporation will then disclose that disclosure policy to the shareholders. More details about the proposal are of course available in the full version of the paper available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2267414##
In my next post later this week, I will talk about the next portion of the project, where I consider if there might be reasons that we want executives to be able to hold on to some level of privacy because executive privacy might tell us something about how corporations then treat the privacy of their employees and consumes.