Sexual misconduct has proven to be very costly for individuals’ reputations and careers in 2017, from Matt Lauer to Harvey Weinstein to Sen. Al Franken (D-Minn.), but individuals aren’t the only ones who feel the fallout. Executive scandals can also severely hit businesses’ bottom lines.
A study conducted by University of Missouri finance professor Adam Yore found that CEO missteps, including substance abuse, violence, dishonesty and sexual indiscretions can result in hundreds of millions of dollars’ worth of financial repercussions. Yore and his colleagues examined 325 instances of executive indiscretions and found that managerial mistakes resulted in an average loss of $110 million in market capitalization, while CEO indiscretions were more costly at loss of $226 million on average.
Out of the four types of indiscretions studied, Yore’s study found dishonesty and violence, the latter of which was rare, to be the most damaging.
“For the majority of indiscretion types (substance abuse, violence, and dishonesty), reputational costs are the dominant factor,” the study read, indicating that reputational risk was highest with cases of violence and dishonesty.
Yore told FOX Business that the mentality behind that conclusion is that if an executive is being dishonest in a certain area, how can business partners and consumers trust him or her in other areas?
“This reflects upon your truthfulness as an executive,” he noted.
Meanwhile, the sexual misadventure cases studied, over half of which were sexual harassment, were less financially damaging than dishonesty cases. Yore noted that “the outward costs aren’t always obvious” in these instances, but added that harassment events are often litigated. However, as noted above, reputational costs played a more significant role among respondents than direct costs.
In 2017 alone, the U.S. experienced at least two cyber breaches--Equifax (NYSE:EFX) and Uber--that were perceived to be handled poorly. Equifax not only waited a month to alert customers to the breach, but it also had a series of botched remedies that led many to wonder whether the company had consumers’ best interests at heart. Uber, on the other hand, kept its breach hidden for a year and even paid hackers $100,000 to keep it from the public.
While Yore’s study focused on individual mistakes, he said firms stand to lose important business partners, and customers, when trust is lost.
“It’s this idea that we can’t contract on everything, so there’s some business opportunities that we just don’t trust you,” Yore said. “How [the breaches] were handled impairs that trust. Once that’s breached, it’s kind of hard to get back.”