Networks and Corporate Governance

Project Start:01/2019
Researchers:Marie Lalanne
Category: Financial Intermediation
Funded by:LOEWE

Topic and Objectives

Social connections between top executives and board members are prevalent. They might seat together on different boards, share leisure activities, have worked together in the past, or have graduated from the same university. These connections might allow a beneficial exchange of information, favoring firm value. They might also bias individuals and lead to detrimental effects on firms' corporate governance.

This project aims at understanding the role of these connections in the recruitment of board members. I focus on U.S.-listed firms between 2004 and 2012. I use a combination of web scraping techniques to gather data on firms - made publicly available by law - together with social network analysis tools to explore the structure of the executives' network - built by linking executives' CVs.

In one sub-project, I first investigate whether social connections lead to recommendations for the hiring of new board members. Secondly, I assess whether recommendations in turn help provide extra information on candidates or allow favoritism to take place. I use director-fixed effects from firm performance equations to measure directors’ abilities and compare abilities of referred and non-referred new directors.

In a second sub-project, I investigate the occurrence of network-based appointments and its impact on board diversity. I first estimate the probability of obtaining a board seat when being socially connected to members of the recruiting board andthen study the change in board diversity following these appointments.

A deeper understanding of how social connections influence corporate practices would advance our knowledge of factors shaping individuals’ employment and career success and incorporate social aspects in the analysis of corporate governance determinants. Moreover, our work contributes to the academic literature on diversity and inclusion, and to the policy debate on the best response to inequalities.

Key Findings

  • Compared to non-connected new directors, connected directors are 14 percent more likely to be referred by current board members with whom they share employment history.

  • Referrals help select directors with higher ability.

  • Being socially connected to someone on the board increases the chance of obtaining a board seat between 35.8 and 41.1 percentage points.

  • While appointments of new independent directors positively affect board diversity, those that are made through networks are not significantly different but this is likely the result of a very homogeneous sample of candidates.

Policy Implications

  • Disclosure regulation (e.g., transparency)     
  • Diversity and inclusion policy (e.g., gender board quotas)