How do informal social ties and connections between members of a board of directors and a CEO impact the effectiveness of the board and hence corporate governance overall? This can be a complex and immeasurable phenomenon but Dr. Bang Dang Nguyen of the University of Cambridge, Judge Business School attempts to answer this question in his paper “Does the Rolodex Still Matter Corporate Elite’s Small World and the Effectiveness of Boards of Directors”
To begin with, it should be mentioned that the central findings of Dr. Nguyen’s paper, namely that when a CEO and a number of board members belong to the same social networks, the former is less likely to be dismissed for poor performance, should not come as a big surprise to anyone. However, that was not the only interesting finding.
What Were Dr. Nguyen’s Findings?
Dr. Nguyen’s paper is based on empirical analysis of a sample of the largest publicly-traded firms in France between 1994 and 2001. Yes, times have changed since then and yes, the United States is indeed not France but this type of analysis, of normally non-measurable and non-visible elements of governance are rare and thus at least worth considering.
In the study, Dr. Nguyen found that close ties can adversely affect company performance as a connected CEO was almost three-times less likely to be fired for poor performance than a non-connected CEO. It makes intuitive sense that we tend to be more lenient with those we have something in common with than those where there is no emotional or personal connection. On the other hand, Dr. Nguyen believes that opposing forces are at play in that there is the positive impact from information sharing gained from having close ties between the CEO and the board.
Moreover, Dr. Nguyen’s paper also found that a “socially connected” CEO was more likely to find new and often better positions even after a forced departure for poor performance than a “socially un-connected” CEO. Hence, social networks (in the pre-Facebook sense of the word) appear to impact board effectiveness in its key role of hiring CEOs – a problem when it’s the job of the board to protect shareholder value by hiring the best person for the role.
Where do these ties come from? In France the corporate elite begin long-term friendships when attending a handful of exclusive colleges or so-called “Grandes Ecoles” and through elite civil service (Grands Corps de l’Etat). In the United States some of this occurs with networks formed at Ivy League colleges being fairly permanent and indelible.
A Few Recommendations
Dr. Nguyen did make the comment in his paper that the USA economy is much larger, more deregulated and has more elite schools than France’s – meaning social ties between top executives might be different or work differently than in the smaller and more close knit world of corporate France. He also admitted that there is little regulators can do about social networks as they tend to be resilient while the ties themselves are not readily observable nor quantifiable but he does suggest that regulators might want to broaden their analysis to include factors like common education backgrounds and social connections.
Hence, it’s worth adding that shareholders and executive search practitioners have a role to play in ensuring that the CEO position and slots on the board of directors are open to a greater pool of talent and not just to insiders who are all members of the same small and closed social networks. After all and in today’s competitive marketplace where regulators are increasing breathing down everyone’s necks, drawing names from the same Rolodex or old boys’ or girls’ network simply will not cut it anymore.