How CEO divorce impacts firm performance

In the high-pressure world of business, CEOs are often perceived as larger-than-life figures, capable of compartmentalizing their personal lives and maintaining peak performance in the boardroom.

But a recent study published in Academy of Management Discoveries featuring two John Molson School of Business researchers challenges this perception.

Denis Schweizer and co-author Juliane Proelss, both professors in the Department of Finance, found that the most accomplished CEOs are not immune to the impact of personal life events on their job performance.

The study’s authors include Ingo Kleindienst and Tündes Cserpes from the Department of Management at Aarhus University and Kaleb Girma Abreha from the Office of the Chief Economist for Africa Region at the World Bank.

Using comprehensive data of Danish CEOs over a twelve-year period, researchers found that CEO divorces can have significant economic ramifications for firms, especially under specific circumstances.

Because CEOs are the top decision maker and lead strategist, much of a firm’s performance depends on their ability to operate at peak capacity. This, referred to as the CEO effect, is well-documented, and highlights how CEOs are pivotal drivers of firm performance.

Yet, like any employee, CEOs face the challenge of balancing personal and professional responsibilities. Research on the family-work conflict has shown how personal life events, such as divorce, can spill over into the workplace, affecting job performance and overall productivity.

Micro firms may not experience the detrimental effect of CEO divorce because their CEOs run the firm independently

Context matters

Researchers found that the negative impact of a CEO’s divorce depends on the size of the firm and whether it’s in a low or high-growth industry. In the study, they looked at micro, small, medium and large firms.

A micro firm has an average of about six employees whereas a small firm has about 19. A medium-size firm is one with between 100 and 499 employees and a large firm is any that has more than 500 employees.

In micro-firms, where CEOs are heavily involved in day-to-day operations and lack extensive support structures, personal distractions from a divorce can lead to a decline in firm operating performance. In contrast, medium-sized firms have more institutionalized support, which helps mitigate the negative impact of CEO divorce.

Despite the lack of support, micro firms may not experience the detrimental effect of CEO divorce because their CEOs run the firm independently. This means that any decline in firm performance could have severe consequences for their personal income and so they can’t afford to be distracted.

Researchers found that the growth of the industry also has an effect. High-growth industries demand frequent and strategic decision-making from CEOs, leaving less room for distractions. As a result, a CEO’s divorce is more likely to lead to a decline in firm performance in high-growth industries.

The study found that another contributing factor is the presence of children in the CEO's household. With children, the CEO’s distraction level increased. Custody arrangements and personal emotional challenges faced by divorcing CEOs with children can further erode their focus on work, adversely affecting firm performance.

The Impact of managerial discretion

Managerial discretion, determined by the CEO's level of decision-making power, plays a vital role in understanding the impact of CEO divorce on firm performance. When CEOs have a higher degree of discretion, such as in small firms in high-growth industries, distractions resulting from divorce can have a more substantial effect on the firm’s performance.

In low-discretion environments, where CEOs have fewer significant decisions to make, firms are often shielded from some of the fallout resulting from a CEO's decline in job performance.

Even the most accomplished leaders can be affected by personal life events

Practical Implications

Understanding the potential impact of a CEO’s personal life events on firm performance has crucial implications for boards and executives. To navigate the potential economic ramifications of CEO divorce effectively, organizations must take proactive measures, including:

1. Increased awareness: Although the privacy of CEOs must be respected, boards and senior executives need to be attuned to the potential impact of CEO personal life events on firm performance. Acknowledging the challenges CEOs face during difficult periods is the first step towards offering support.
2. Tailored support: Although friends and family play a significant role in alleviating the disruption from stressful life events, the workplace can also be an important source of well-being and encouragement. Firms with strong support systems can go a long way towards minimizing the negative consequences of a CEO’s stress from a divorce.
3. Promoting work-life balance: Cultivating a culture of work-life balance benefits not only CEOs but all employees. Prioritizing employee well-being enhances job performance and contributes to overall firm success.

The results of the study highlight the fact that a CEO’s divorce is not just a private matter but a significant factor that affects firm operating performance. The research findings underscore the importance of acknowledging the human side of CEOs and recognizing that even the most accomplished leaders can be affected by personal life events.

By offering tailored support and fostering a culture of work-life balance, the study’s researchers conclude that organizations can navigate the challenges posed by CEO divorce, ultimately ensuring sustainable and successful firm performance.

Read the original publication:
Kleindienst, I., Abreha, K. G., Schweizer, D., Proelss, J., & Cserpes, T. (2022). CEO divorce and firm operating performance. Academy of Management Discoveries, 8(4), 561-584. https://doi.org/10.5465/amd.2020.0031