Corporate Governance and the Old Boys' Network - IEDP
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Corporate Governance and the Old Boys' Network

How social networks impact board effectiveness


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When BTR acquired Thomas Tilling in 1983 it was the largest hostile takeover in British history. Within weeks Tilling’s CEO, the late Sir Patrick Meaney, re-emerged from this corporate disaster to become Chairman of The Rank Organization, a job he combined with Deputy Chairmanships of The Midland Bank, and the Horserace Betting Levy Board, and Chairman of Mecca Leisure.

Twenty years on, in the age of the Corporate Governance Code, does this sort of thing still go on? In a recent paper new research, by Dr Bang Dang Nguyen of 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.

Dr Nguyen’s central hypothesis, that close social links between CEOs and directors means CEOs are treated too leniently when a company’s performance has been poor, because the members of a social network go easy on their peers for fear of reprisal or loss of personal and network reputation. His research, achieved by constructing a set of measures of social ties between a CEO and directors within board of directors, was based on empirical investigation into a sample of the largest French corporations from 1994 to 2001.

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: 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, and in any case codes, such as the UK’s 2010 Corporate Governance Code, only directly regulate quoted companies, leaving the majority of companies and public sector bodies well out of their reach.

Networking is of course considered an important executive skill, but it may be dawning on many shareholders, after so much recent bad press surrounding leadership failures and corporate scandals, that it is no longer acceptable for the role of the CEO and Chairman and the composition and performance of boards to be subject to the vagaries of social networks, old boys’ or girls’. In today competitive global business world it may well be the drive for sustainability and profitability that will encourage companies themselves to open themselves up to talent outside these closed networks.

Sir Patrick Meaney turned out to be well thought of as Chairman of the Rank Organization, but his initial soft landing caused considerable consternation among Thomas Tiling’s staff, where rumour had it that it was all something to do with his membership of Harlequins Rugby Club.


Dr Nguyen’s paper Does the Rolodex Matter? Corporate Elite’s Small World and the Effectiveness of Boards of Directors is published by Informs in MANAGEMENT SCIENCE Vol. 58, No. 2, February 2012, pp. 236–252. See:

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