Monday, January 22, 2007

Returns to Social Capital -- Overpaying CEOs Edition

James Surowiecki highlights some interesting research on social networks and CEO pay in this week's New Yorker:
A study of S. & P. 500 companies, by Amir Barnea and Ilan Guedj, finance professors at the University of Texas, found that, even after other factors were accounted for, C.E.O.s at companies whose directors sat on a number of other boards were paid thirteen per cent more than C.E.O.s at companies whose directors were not.

Why? One reason is that the more connections board members have, the more likely they are to end up with what you could call “friend of a friend” links to the company’s C.E.O. A recent study by a team of business-school professors mapped the social networks of twenty-two thousand directors at more than three thousand companies, charting the degrees of separation between directors and C.E.O.s, and found that at companies where there are what the study’s authors termed “short, friendly” links between directors and executives C.E.O.s are paid significantly more. But even in the absence of this kind of explicit back-scratching the tight connections between board members insure that, once an idea takes hold at a few companies, it’s easier for it to spread, in a viral fashion. A host of studies have found that network ties affect how likely companies are to adopt anti-takeover strategies, to embark on specific types of acquisitions, and even to change their organizational structures. The same effect is observable in the matter of C.E.O. pay: Barnea and Guedj found that board members at companies where C.E.O. pay was high were more likely to support high pay when they sat on other companies’ boards as well. And, as with any virus, some people are more potent transmitters: Kenneth Langone, the board member who engineered Nardelli’s hiring at Home Depot, was also the head of the compensation committee that approved Dick Grasso’s extravagant payday at the New York Stock Exchange, and was on the G.E. board’s compensation committee that approved Jack Welch’s luxurious retirement package. Langone is what an epidemiologist might call a supercarrier of the executive-pay virus.

Dear Friends,

A group of researchers at University of Nevada, Las Vegas, are investigating effects of Weblogs on “Social Interactions” and “Trust”. Therefore, they have designed an online survey. By participating in this survey you will help researches in “Management Information Systems” and “Sociology”. You must be at least 18 years old to participate in this survey. It will take 5 to 12 minutes of your valuable time.

Your participation is greatly appreciated. You’ll find the survey at the following link.
I agree 100%. I've written about this in relation to Home Depot, Computer Associates and the NY Stock Exchange.

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