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Does the Rolodex matter?

RolodexCan membership of the same social networks as directors offer protection for a poorly performing CEO? And what is the impact on corporate governance?

New research by Dr Bang Dang Nguyen, University Lecturer in Finance at Cambridge Judge Business School, entitled ‘Does the Rolodex matter’, summarises an investigation into how informal social ties between directors and the CEO impacts on the working of the board and the resulting positive or negative impact on corporate governance.

There were three main findings. Firstly, close ties within a board can adversely affect company performance. While his study was not designed to explain why this is the case, Dr Nguyen believes opposing forces are at play: the positive effects of connectedness on information asymmetry as well as the board’s advisory role versus its willingness to be tough on a CEO when circumstances demand.

Secondly, social networks seem to impact board effectiveness in its role of hiring and firing CEOs, a key duty for the board to enable them to protect shareholder value. It appears well-connected CEOs are less likely to be ousted for poor performance than non-connected CEOs. For the same poor performance, the connected CEO is almost three times less likely to be fired.

The third key finding is that a connected CEO ousted for poor performance is much more likely to find a better job, more quickly, than an unconnected CEO.

Among Dr Nguyen’s recommendations are that, faced with widespread and resilient social networks, regulators should not rely on the imposition of restrictions or ratio quotas on boards to make corporate governance more effective. Instead the regulator should put pressure on the firm by focusing on making the market more competitive and increasing transparency.

He admits there is little a regulator can do with social networks but by encouraging competition, firms themselves will need to be more competitive and will open themselves up to talent outside their immediate networks.