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Is a networked executive bad news?

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Is a networked executive bad news?

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Networking has always been important in business, and nowhere more so than in the boardroom.  For instance, various reports have highlighted the crucial role social networks play in the success of a start-up, with one even suggesting that the networking style of the founder can accurately predict the success of that venture.

A recent paper continues on this predictive theme, and suggests that the social network of the executive can provide a good indication of the willingness of that executive to undergo a merger with another company, and what’s more, that this isn’t always a good thing.

“As you might expect, an individual’s position in the social network matters,” the researchers declare. “But this positioning doesn’t necessarily lead to financial gains for the firms they lead. We show that CEOs with higher network centrality – those who are highly connected socially – are more likely to pursue acquisitions, and that these deals are more likely to destroy value.”

The researchers constructed a network map of executives using data from BoardEx, which is a site that provides data on executives and board members from around the world.  It then attempts to connect up executives according to educational, professional or social relationships.

Some 400,000 executives and directors across the US were examined as part of the research to build a social graph, with each node then given a score for their connectedness.  This provided not just a number of connections for each executive, but also a path length between them and others.

This information was then cross referenced against the merger and acquisition performance of S&P 1500 firms between 2000 and 2009.  It’s pretty well known that most mergers fail to deliver value to either firm, but what was interesting was that CEOs were much more likely to pull off a merger when they held a strong position in their social network.

Connected CEOs destroy value

They found that when the CEO had authority and dominance over others, through being at the centre of the social network, it enabled them to push through with the merger, often with extremely negative consequences for their companies.

What’s more, this central position in the social network also protected them from any repercussions from their disastrous foray.  They found that even with falling share prices, the well connected were unlikely to be dismissed from their post.

Why was this?

The researchers suggest that this could be happening because the feedback mechanisms in their companies were so poor.  Even in the light of poor performance, these well connected bosses would receive big salary hikes, and even baubles such as honourary degrees and the like.

“CEOs are often lauded for being influential and well connected,” the researchers conclude. “And yes, personal networks can be very beneficial as they provide an effective channel for the exchange of information. What we found, though, is that highly connected executives can also use their influence to become entrenched and to pursue activities regardless of the potentially negative impact on shareholders. This should be an important concern for corporate boards and other market participants, especially in cases of multi-billion dollar M and A deals.”

So networks appear to be rather beneficial for the executives themselves, but much less so for their employers.  Buyer beware.

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