When Being Connected Is A Bad Thing

Connected Executives

Some research published last year, that I wrote about here, highlighted the important role networking plays in career progression. The study found that the more senior the position, the more likely it is that the role will be filled via one’s social network.

See Also: Your Social Network is Key to Landing the Perfect Job

What’s more, in our social business age, having a good network of collaborators to work with would seem a good thing.

It isn’t always good however. A second study, published last year by the University of Arkansas, found that highly networked executives tended to undertake mergers more frequently than their less connected peers.

“As you might expect, an individual’s position in the social network matters,” the authors say. “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 potential pitfalls of a heavily networked executive are further emphasized by a third study into the matter that found that such connected leaders tend to earn heftier salaries, but often without delivering better returns for shareholders.

Executive Nepotism

The hypothesis being tested was that leaders with strong networks would reward their contacts with good pay in the expectation that they in turn will do the same for them.

"There’s a great deal of research trying to understand how a chief executive officer’s pay is determined," the authors say. "One school of thought is that their pay is determined by a corporation’s board of directors. However, people who make up these boards are often CEOs of other companies themselves and are more likely to receive higher compensation packages because of this exclusive network."

Paying executives higher wages isn’t always a bad thing of course, providing that the results match the salary. Alas, the study found that this often wasn’t the case.

The research saw participants split into two groups, one representing the executives and one representing the shareholders. Among the executive group was then divided into A or B, with each informed that they had worked with the other previously but didn’t personally know them.

They were then required to divide up a set amount of money between this person and the unknown shareholder.

The results revealed that when the executives had even a minor relationship with the other person, they were much more likely to give them a larger share of the cash than they were the unknown shareholder.

"Indirectly reciprocal networks are often overlooked and difficult to track. Imagine three CEOs from company A, B, and C where A sits on B’s board, B sits on C’s board, and C in turn sits on A’s board. In this example, there is no direct conflict of interest because A does not benefit him or herself by inflating B’s salary and the same applies to the other two CEOs. Nevertheless, our findings suggest that everyone in the network is likely to inflate salary for each other. Now imagine this network consists of hundreds of CEOs," the researchers say.

So what can shareholders do to hold executives to account? Not a great deal, but having greater transparency over board meetings would no doubt help.

If you’re looking to boost your earnings, however, then the study provides further evidence of the importance of a good network.

Have you witnessed this kind of Executive nepotism? Has it effective companies that you have worked for negatively? Your thoughts and comments below please...

You scratch his back, he scratches mine and I’ll scratch yours: Deception in simultaneous cyclic networks