Drugs, sex and plunging share prices: Bosses behaving badly can cost companies up to £144m

 
Jessica Morris
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Badly behaved bosses can end up costing a company millions (Source: Flickr)

Badly-behaved bosses are a nightmare if you're the unfortunate employee who has to work for them - but they're also bad news for shareholders, as their rock'n'rolling activities can end up costing millions.

According to a study entitled the Agency Costs of Managerial Indiscretions: Sex, Lies, and Firm Value, senior executives who partake in sexual misadventure, substance abuse, violence and dishonesty can cause a company to lose 1.6 per cent of its market capitalisation - an average of $110m (£70.3m).

Meanwhile, if a chief exec steps out of line, a company's value could shrink by 4.1 per cent, an average of $226m.

"We observe firm value and operating performance decreasing significantly around the disclosure of an indiscretion," it said.

It looked at 219 discretions involving division heads, vice presidents or board members between 1978 and 2012.

About 47 per cent of these involved sexual misadventure, while 33 per cent were to do with dishonesty, and substance abuse and violence accounted for 11 per cent and nine per cent respectively.

"There are, undoubtedly, more indiscretions that we are able to identify," it said.

"Indiscretions are often summarily swept under the rug and never reported as neither the firm nor the executive typically has a vested interest in disclosure."

It then investigated the characteristics and impact of managerial misdemeanors by comparing the sample to all firms listed in the S&P 500 large cap, S&P 400 mid cap, and S&P 600 small cap indices, as well as any company that has left that index but remains publicly traded,

It found execs charged with indiscretions are generally about 52 years old and are almost exclusively male.

Additionally the value of companies with badly behaved bosses declined by 10 per cent to 11 per cent during the year in which the misdemeanor came out.

"Our results indicate that managerial indiscretions pose a significant risk to the company and inflict substantial agency costs upon shareholders, particularly when chief executives are involved," it said.

"Crystal Methodist"

The Co-operative Bank found itself in hot water in 2013 after former chairman, Reverend Paul Flowers pleaded guilty to possesion of drugs including cocaine, crystal meth and ketamine and was ordered to pay £525.

The so-called "Crystal Methodist" had held the role until the summer of 2013, and it was later alleged by the Mail on Sunday that he had been using illegal narcotics, including crystal meth.

The lender subsequently discovered a £1.5bn black hole in its finances.

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