The board of directors has a responsibility to investigate credible allegations that management has engaged in activity that is not in the interest of the company or its shareholders. In the case of illegal activity, the appropriate response is likely to be very clear. Less obvious are the actions directors should take when the CEO engages in behavior that is questionable but not illegal — such as making controversial public statements, having relations with an employee or contractor, or developing a reputation for overbearing or verbally abusive behavior. In this Closer Look, we examine the actions that boards take in response to CEO “bad behavior.” We ask: When are allegations serious enough or credible enough to merit boardroom attention? How can the board assess the impact of CEO misconduct on the organization broadly? Should the board be proactive in employing information gathering tools to detect early signs of CEO or employee misconduct?
Copyright held by David F. Larcker and Brian Tayan. Further inquiries about reproduction and use should be directed to the Corporate Governance Research Initiative.
