A Stanford Business School analysis argues that:
The previous examples suggest that shareholders should pay attention to matters involving the per- sonal lives of CEOs and take this information into account when making investment decisions.
The authors explain that:
There are at least three potential ways in which a CEO divorce might impact a corporation and its shareholders. The first is loss of control or influence. A CEO with a significant ownership stake in a company might be forced to sell or transfer a por- tion of this stake to satisfy the terms of a divorce settlement. This can reduce the influence that he or she has over the organization and impact decisions regarding corporate strategy, asset ownership, and board composition. ...
Second, divorce can affect the productivity, concentration, and energy levels of the CEO. ...
Third, divorce can influence a CEO’s attitude toward risk. ...
But do the corporation's directors have any legal obligation to monitor the CEO's personal life, including the health of his/her marriage? I don't think so.
The most directly relevant precedent is Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 833 A.2d 961 (Del.Ch. 2003), aff’d, 845 A.2d 1040 (Del. 2004), which was a derivative action against Martha Stewart and other officers and directors of Martha Stewart Living Omnimedia (MSO), a public corporation with dual-class common stock. Stewart, who held 94.4 percent of the voting control, is, as the court puts it, “a household icon, known for her advice and expertise on virtually all aspects of cooking, decorating, entertaining, and household affairs generally.”
The Board, at the time the case arose, consisted of Stewart (CEO and founder), Patrick (President and Chief Operating Officer), Martinez (former CEO of Sears, Roebuck, which was an important retailer of MSO products), Moore (partner in an investment banking firm and longtime friend of Stewart), Seligman, Ubben, and Doerr (famous partner in a leading Silicon Valley venture capital firm). MSO’s market, as the court explains, is “uniquely tied to the personal image and reputation of its founder, Stewart.”
Stewart was a close friend of Samuel Waksal, who was CEO of ImClone. Waksal learned that the FDA had rejected approval of a drug developed by ImClone and vital to its success. Waksal sold his own ImClone shares and tipped his father and his daughter. (He wound up in jail.) Stewart learned from her broker’s assistant that Waksal was dumping shares. She sold all her shares. The SEC and federal prosecutors investigated the possible violation of Rule 10b-5. Stewart eventually was indicted for obstructing justice and lying to federal prosecutors in defending herself based on the claim of a pre-arranged plan for sale of her shares. In March 2004 the case was tried and a jury found Stewart guilty. She subsequently served five months in prison and an additional five months house arrest.
Plaintiff Beam claimed that the MSO board was derelict in failing to monitor Stewart’s activities. The court rejected this Caremark-like claim, observing that:
Regardless of Stewart’s importance to MSO, she is not the corporation. And it is unreasonable to impose a duty upon the Board to monitor Stewart’s personal affairs because such a requirement is neither legitimate nor feasible. Monitoring Stewart by, for example, hiring a private detective to monitor her behavior is more likely to generate liability to Stewart under some tort theory than to protect the Company from a decline in its stock price as a result of harm to Stewart’s public image.
So while a board--as a matter of best practice--might consider the impact of the CEO's divorce on the business, I don't think they have any legal obligation to do so or to periodically update themselves on the health of the CEO's marriage.
