Earlier in October, investors in Johnson Controls (JCI -0.86%) were treated to the disclosure of the company's CEO Alex Molinaroli extramarital affair with Kristin Ihle, a principal of a consulting firm that was working for Johnson Controls. How and why did all of this come to the public domain? Moreover, why is it so important for a CEO to reveal details about his private life?
Why corporate conduct matters, and some examples
In most walks of life a relationship between two consenting adults is solely their business. However, in the corporate world it's not that simple. Affairs between senior management and subordinates can create the potential for conflicts of interest to take place. For example, Is anyone being favoured or unduly compensated as a result of the relationship? Essentially, if CEOs like Molinaroli have relationships in this manner, they simply cannot keep them undisclosed.
Indeed, recent history is littered with examples of leading corporate figures whose distinguished careers have been ended over falling foul of their companies code of conduct policy or having inappropriate relations. From Boeing's Harry Stonecipher, to Best Buy's Brian Dunn and Lockheed Martin's Chris Kubasik, the issue has claimed the scalps of many leading men.
Frankly, the Stonecipher affair at Boeing comes across as harsh, and investors were entitled to ask questions about the board's decision at the time. Stonecipher was forced to resign by the board after admitting to a breach of its policy, but according to a Seattle Times article on the matter:
"An investigation ordered by the board concluded Stonecipher had indeed begun a consensual affair in January. The probe also concluded that Boeing business operations were unaffected, that the woman's career and compensation were not influenced and that there was no improper use of expense accounts or company property"
Stonecipher later married the woman. Were shareholders best interests served by Stonecipher's forced resignation?
Johnson Controls CEO has affair
Fast forward to the Johnson Controls affair. For those unaware of events, according to a Bloomberg article, in late May, Molinaroli told his wife he was having an affair with Ihle. Clearly, this didn't entirely go down well with his wife, Patsy Molinaroli, who is reported to have sent a threatening email to Ihle on May 29.
Later that day, she allegedly fired a pistol four times in the marital home (Alex Molinaroli was not present at the time), and then took a baseball bat to some windows, a cabinet, and a Pac-Man arcade game..
Of course, there is a more serious underlying matter. Ihle is a principal in Lichter & Ihle, a firm of consulting psychologists that was working for Johnson Controls at the time the affair was disclosed. The potential for a conflict of interest is obvious, after all, Molinaroli is the CEO and Lichter & Ihle is hired by the Johnson Controls.
However, investors need to ask themselves whether anything happened that might change the earnings-per-share number now or in future?
Is it going to affect EPS?
The evidence suggests the answer to this question is "no."
First, Lichter & Ihle specializes in coaching and talent development. Investors need to consider whether those activities are likely to change earnings prospects at Johnson Controls in the short term. In other words, even if Ihle had benefited from favors, it's unlikely to have materially changed prospects at the company.
Second, Lichter & Isle had worked for the company for "several years," according to the Bloomberg article. Although we do not know when the affair started, it appears unlikely that the consultancy was hired on the basis of Molinaroli's personal interest in Ihle.
Third, the board of Johnson Controls investigated the affair and concluded that Molinaroli had not acted inappropriately, and that no conflicts of interest had occurred. In addition, subsequent to the disclosure of the affair, Johnson Controls and Lichter & Ihle had parted company -- a move designed to remove any potential or perception of a conflict of interest.
Fourth, despite concerns expressed in some quarters about the negative press the company received over the issue, there is scant evidence to suggest it negatively affected any of the company's working relationships. Johnson Controls sells car batteries, car interiors, and heating, ventilation, and air conditioning equipment. As yet, there have been no reports of car drivers refusing to change their car batteries out of concern for the private life of the company's CEO.
Fifth, the biggest loser in all of this is Lichter & Ihle. The company is no longer a consultant to Johnson Controls. Therefore, it's unlikely that employees of Johnson Controls will become disaffected because they perceive that Ihle is receiving any undue benefit.
All told, the issue is likely to be quickly forgotten. Issues of corporate ethics are important, but each case has to be judged on its merits, and public figures such as Alex Molinaroli deserve to be treated with some sensitivity and common sense--something the board has done in this case. Moreover, the company has acted swiftly to deal with the situation. Moreover, in doing so, shareholders' best interests have been served.
