Order from us for quality, customized work in due time of your choice.
Abstract
The present research investigates the impact of networks and connectedness on the CEO compensation, CEO appointments, CEO labour market outcomes, and CEO termination. In addition, this research establishes the connections between the CEO and the hiring board and compares it to the general connectedness of the CEO. The study demonstrates that both forms of connectedness enhance conventional turnover and compensation variables in discrete and economically substantial ways. Precise connectedness enhances CEO appointment. What is more, the current research reveals that a CEOs overall contacts, particularly with respect to employment network, boost the likelihood of CEO departure and re-employment prospects. Also a better turnover-performance sensitivity can be achieved.
The presence of precise connections between CEO candidate and the board of directors improves the prospects of appointment in case a firm opts to appoint an outsider as the CEO. Finally, the present study shows that CEOs with improved general connectedness benefit from better compensation. Finally, the results of the current research show that the CEOs overall contacts, especially with regard to employment network, have considerable economic benefits in comparison to the current CEO-board connections.
Introduction
Overview
This chapter covers the background to the study, problem statement, research objectives and hypotheses and the significance of the study.
Background to the study
Various schools of thoughts including politicians, social media and scholars have given much focus on the excessively liberal compensation levels of executive directors (Bebchuk & Fried 2004; Adams & Ferreira 2007, p.220). There is a part of the research that dwells on the link between the social networks of the executive directors or the chief executive officers and their levels of compensation (Larcker et al., 2005; Barnea & Guedj 2007; Brown et al., 2008; Hwang & Kim 2009). This part of scholarly research generally looks into the significance of the connection of the executive directors to the corporate governance of the organization by paying great attention to the expected costs of the ties and pointing out the definite connection between various executives who are viewed to have the potential of creating agency problems to the organization (David 1965; Dean & Snell 1993; Barcelo 2000; Carter 2009).
It is very imperative to note whether the connection between the executive directors of the firm and the outside directors of the same firm produce any benefit or are expensive to the firm. In fact, these connections do have real benefits as they enhance the development of social networks which further enables the firm to have access to a wider spectrum of information at minimum costs. With regard to this, the worth, significance and relevance of the social networks is improved (Adler & Kwon 2002, p.22; Allen 1974; Westphal 1999, p.12; Wade, OReilly & Chandratat 1990, p.600). Social networks promote the interaction of the executive directors with each other, thus, enabling them to acquire and adopt the most modern business conducts that are practicable in the modern world.
The study has mainly centred on formal ties even though the theory of social capital indicates that the observable ties or connections and social connections supplement each another (Hwang & Kim 2009, p.102; Kay & Van Putten 2007; Mizruchi 1996, p.280; Mizruchi & Steams 1988, p.200; Kennishi 1994). The social connections especially the connections that are cantered on becoming club members or members of charitable organizations are perceived as platforms where amateur board members are acclimatised to the ethical standards and the moral values of the board (Palmer 1983, p.45; Pfeffer 1972; Pfeffer & Salancik 1978). Connections and networks which are cantered on joining together members of the board produce the same results as informal social networks. The act of joining together the board members mirrors in the corporate world and the existing social connection.
Technological innovations have made networking an integral part of business operations. Currently, social networking sites (i.e. Twitter, LinkedIn and Facebook) have attracted millions of users around the globe. It is against this backdrop that the influence of networks on economic outcomes has drawn significant and increasing interest from researchers (Granovetter 1973, p.1366; Granovetter 1974; Kinicki 2009; De Wit & Meyer 2004). In many cases, the hiring board employs networks when it plans to provide an important decision-making process about the CEO (i.e. appointing, retaining, or firing a CEO). The CEO-board connections are likely to hinder the hiring board from efficiently observing and objectively chastising the CEO.
Board of directors who are socially connected with the CEO may approve higher compensation for the CEO without validation or may retain a non-performing CEO (Hwang & Kim 2009; Gui 2000, p.142). What is more, the structure and strength of the CEOs general connectedness signifies his/her social capital as well as outside employment prospects (Burt 1992; Burt 2000). The prospect of a CEO (with better connections) to find a new job after departure from the current firm is quite high. Consequently, general connectedness can influence CEO compensation and turnover in various ways compared to the pair-wise precise CEO-board connectedness (Burt 2001; Burt 2005). Although previous empirical researches on CEO and director networks have not investigated the overall connectedness, the current study reveals that both forms of connectedness are crucial in numerous key roles of the board: CEO appointment, CEO compensation, and CEO firing (Core, Guay & Larcker 2008, p. 22).
This study employs biographical data of executives and directors in approximately 5000 U.S. firms between 1990 and 2007 (Smith & Watts, 1992). This study creates yearly networks ensuing from overlapping employment affiliations. In addition, the present study assesses the general connectedness of an individual by using four diverse measures from the existing relevant literature. For every pair of CEO and board of directors, the researcher tallies the precise links between them. In addition, the current research explores the effect of the two types of connectedness variables with respect to the decision to compensate CEO, hire CEO as well as CEO turnover.
To begin with, the present research explores how the network contacts of the current CEO can influence the prospect of a turnover event. The study establishes that the presence of links between the CEO and the board reduces the prospect of CEO turnover. Also it influences on the turnover-performance sensitivity. This finding implies that a CEO connected to the board can maintain his/her position irrespective of his/her performance. On the other hand, there exists a positive correlation between the CEOs general connectedness and greater turnover-performance sensitivity. This finding reveals that the decision to leave by the current CEO is made easier by the existence more outside employment prospect.
Secondly, the correlation between the nature of employment assumed by the departed executive and his overall connectedness is explored in the current research. This study establishes that enhanced connectedness on the general employment network improves the prospect of a CEO assuming a senior position in another firm. Nonetheless, the pair-wise connection to the previous companys board of directors has negligible impacts on the prospects of the CEO securing a better outside position. The finding of the current study demonstrates the distinctive influence of overall connectedness on CEOs outside prospects, which is disregarded in previous studies (Hwang & Kim 2009).
The third subject addressed in this study is CEO appointments. By holding other discernable attributes of CEO candidates constant, the present study examines whether the prospects of being chosen as the new CEO is subject to the connectedness of the candidate. For the sub-sample of firms that opt to hire the new CEO from outside, this study reveals a positive correlation between the pair-wise connectedness (between the CEO nominee and board of directors) and the prospects of appointment. This outcome is in harmony with survey outcomes revealing that firms looking for a new (outside) CEO mainly depend on references from board members. For the sub-sample of firms that opt to elevate an insider to the CEO position, the present study reveals that general connectedness of the nominee has a negative effect on the prospect of appointment. It appears that the costs of hiring a highly networked CEO overshadow the benefits a firm gets from using the CEOs contacts
Finally, the current study evaluates the relationship between CEOs social contacts and his/her compensation. This study distinguishes between the precise CEO-board connectedness and the overall connectedness of the CEO. The findings of the present study demonstrate that the general connectedness has a larger influence on CEO compensation compared to the pair-wise connectedness. Excluding the CEOs overall connectedness when taking into account the precise CEO-board connectedness can erroneously attribute the better compensation received by the well-connected CEOs to director prejudice only.
The current study makes a number of contributions. First, it illuminates on the network between CEO and the hiring board and compares it to the candidates overall connectedness to executive network This contradiction enables this study to unravel prospective entrenchment effects accruing from pair-wise connectedness from the impact of outside chances produced by general connectedness. Only one form of connectedness has been examined with the help of prior studies on corporate governance and social networks. For instance, a study by Kramarz and Thesmar (2006) focuses on the mutual similarity between the CEO and the board but overlooks the CEOs general connectedness. They postulate that CEO-board connectedness decreases the monetary and disciplinary efficiency of the board, a phenomenon that is harmful to the company. In addition, Ang et al. (2009) examines only the social network of the CEO outside the firm. The findings of this study demonstrates that it is crucial to consider both forms of connectedness since each has considerable and discrete economic impacts on various key corporate resolutions on CEOs.
In addition, the empirical tests of this study offers proof on the significance of connectedness in all key choice variables relating to the CEO. As a result, the current research makes noteworthy contribution in the management sphere (i.e. CEO, hiring, CEO appointment, and CEO turnover literature). For CEO compensation, the findings of this study reveal that overall CEO connectedness improves his/her compensation (holding constant other ordinary variables). Consequently, the better compensation offered to well-connected CEOs could be attributed to the high demand for this human capital. This finding is also consistent with previous studies proposing that well-connected CEOs are offered better compensation as a result of poor governance (Hwang & Kim 2009).
The present study has also presented new findings regarding CEO appointments. Previous studies have explored the characteristic of the firm that influence the decision of a firm to hire a new CEO from within and outside the company (Powell & Smith-Doerr 1977, p.374; Rosen 1992, p.200; Stokman, Ziegler & Scott 1985). The present study investigates attributes of a CEO candidate that influence his/her prospects of being hired. To be precise, this study demonstrates that CEO-board pair-wise connectedness is crucial, particularly for firms that employ an outsider. With regard to CEO turnover, this research sheds light on certain findings reported in previous studies. For instance, Useem (1984) argue that well-connected CEOs display poor turnover performance since their likelihood of getting fired is low.
Furthermore, the network measures employed in this study are more inclusive compared to those used in previous researches on CEO connectedness. The present study defines various forms of connectedness. A distinction is made between overall (general) connectedness and pair-wise connectedness. Furthermore, the current research employs four measures (from graph theory) to expound more on the meaning of overall connectedness. The four measures take into account direct connections, indirect connections, the quality of connections, as well as the tactical position on the basis of the connections pattern (Uzzi 1997, p.43; Yermack 1996, p.200).
As a final point, a considerable cluster of executives (derived from over 5000 U.S. companies) were used as the sample population in the current study. The range of network formation entails connections created in public and private firms, learning institutions, as well as foreign countries. Previous studies on social networks have stereotypically explored a smaller sample of firms (Hwang & Kim 2009; Zahra & Pearce 1989). In addition, given that the unit of analysis in the current study is a single executive (CEO), the magnitude of social networks is bigger compared to those explored in previous studies (Fracassi 2008; Fernández, Castilla & Moore 2000; Hambrick & Finkelstein 1995).
Problem statement
Under the Social Network Analysis (SNA), there are certain measures and techniques that have been formulated to gauge the connection of the executive directors of the firm and the outside directors. It is to be noted that when an executive director or an outside director is well connected, the level of compensation also rises. With regard to this, two inferences can be drawn; the first inference is that both the executive directors and the outside directors are compensated because they have made available precious resources to the firm through their connections (Cressy 1996; Davis & Greve 1997, p.25; Batagelj & Mrvar 2009; Creech 1995). The second inference that can be drawn is that both the executive directors and the outside directors use their managerial influence through their connections to gain their compensations, thus, resulting to them getting paid without proper performance (Bebchuk & Fried 2004; Barr 2000, p. 542; Bryman & Bell 2003; Deci & Ryan 1985).
In order to point out the main distinguishing factor between the above two inferences, this study seeks to explore on the link that exists between the level of connection of the firm in general established by the combined connections of the board members, and the expected performance of the firm in the near future. In this case it is found out that the general level of connection between the executive directors of the firm and the outside directors is directly correlated to the expected performance of the firm in future. These views point out that the firms executives and the outside directors are compensated for the level of connection and resources that they fetch to the firm, and also for the exceptional performance that these resources bring to the firm. All these views hold when various control variables are incorporated to stand-in for the human capital of the firms executives and the directors from outside the firm. This notion is very relevant because the theory of social capital and human capital are distinct from each other (Field 2003, Gabaix & Landier 2008, p.67; David 1958; Hallock 1997, p.333; Cofer & Appley 1967).
Objectives of the study
Paying great attention to this notion, it is relevant to investigate if there are any beneficial informational supplies that can be gained from the link between executive directors of the firm and directors from outside the firm. This connection between the directors can also grant the firms executives with a certain level of managerial influence which they can use for their own individual gain (Baker & Iyer 1992, p.316; Conyon & Peck 1998, p.151; Kinni 1994; David 1965; Coopers 2005). The main distinctive factor of this paper with regard to other related studies is that this paper looks into the expected gain of the general association of the executive directors at both individual level and at firm level. The specific objectives of this study include:
-
To investigate whether the connectedness of the executive directors and outside directors determine their level of remunerations;
-
To examine whether the overall association between the executive directors and the outside directors generates efficient resources to the firm.
Burt (2005) in his study employed a social capital theory in order to investigate the relevance of the connections between executive directors and outside directors with regard to their remuneration level and the general performance of the firm. This theory (social capital theory) has enabled the development of speculative systems or measures that elaborate on whether an executive director can benefit by accessing relevant information, bringing together practical actions, and monitoring those actions as a result of their degree of connectedness.
Literature Review
A number of researches have been carried out in the recent past to explore the correlation between social contacts and CEO compensation. In a study conducted by Hwang and Kim (2009) that is more connected to this, the results revealed that organisations in which the board members are socially connected to the CEOs always reward their CEOs with a bigger amount of compensation. In addition, their results pointed out that those organisations whose board members are more socially tied to the CEOs usually demonstrate a fragile pay-performance ratio and a lower probability of the CEOs coming and going out of the firm, as compared to those firms that have board members who are sovereign in social terms. As opposed to other related papers, this paper addresses divergent issues, employs divergent measures of social connection and improves on the population sample.
The study conducted by Hwang and Kim (2009) mainly centred on a new version of measuring the independence of the board members of the firm that investigates how the social connection or network upsets the reliability of the supervision of the board. This paper on the other hand, tackles the issue from the point of view of the CEO and investigates on how the various types of social networks affect the productivity and the reliability of the CEOs. In the past various authors have pointed out that social ties are described with regard to mutual conditions, for instance, common regional descent, or scholarly disciplines. These mutual conditions imply that there are common characteristics that the CEOs and the board directors have in common which prove that indeed there is a social connection between them. Social networking makes it possible for the CEOs and the directors of the company to gain access to information which is very relevant for the forward movement of the firm (Johnson, Daily & Ellstrand 1996, p.412; Lambert, Larcker & Weigelt 1993, p.442; Lorsch, & Maclver 1989). There is a thick line between general social connection and specific social connection. This study seeks to explore on specific social connection directly. Furthermore, the study reveals new approaches concerning outgoing CEOs previous position and the incoming CEOs employment.
Other scholarly articles in the area of social networks include the studies conducted by Kramarz and Thesmar (2006), Yang (2009), and Barnea and Guedj (2006). The study conducted by Kramarz and Thesmar was to examine social networks in a firms board room, employing a case study of firms in France. The two researchers demonstrated that CEOs with strong connections to the hiring board are less likely to be fired regardless of their work-performance. Just a few scholarly studies contemplate the social network between the executives of the company and the directors from outside the company. The study conducted by Barnea and Guedj revealed that firms or companies which have board members with a stable social network to the outside directors often compensate their executive officers handsomely. In addition, Barnea and Guedj point out that when the directors of a firm are exposed to the normal customs of another firm, their level of compensating their executives is bound to change to be in line with the level of compensation that exist in the other firm.
Ang et al. (2009) also investigated the implications of social networks on the compensation of the firms executives. The study was conducted with regard to the point of view of the CEOs, where it found out that CEOs who had a stable social network or connection were awarded better social benefits. These CEOs have a tendency of demanding a higher amount of remuneration in order to maintain their social status. The same study conducted by Ang et al. (2009) centred only on one type of social network. This study, however, contemplates both the social networks that exist between the CEO and the board, and also the general connection or social network that the CEO enjoys. The most common result that has been revealed by these related scholarly articles point out that social networks often endanger the management of the firm by interfering with the inducements that accrue to the firm, or the capabilities of the board members to efficiently supervise the CEOs to make sure that they do not become egocentric. Executives who have an efficient social connection often are awarded a higher level of compensation and cannot just be fired easily. The findings of this paper reveal the fact that social connection has some other consequences apart from being a sign of inefficient governance. One illustration can be the fact that it leads to the creation of job opportunities from outside of the firm.
One element of this study builds up to the previous studies conducted to investigate the factors that determine the returns of the firms executives. A study conducted by Stuart and Yim (2008) found out that the stock performance of the firm is negatively correlated to the changes in the firms top management. These changes include: replacement of the firms CEO, replacement of the firms president, replacement of the board chairman and replacement of the board members. In a previous study conducted by Krackhardt (1990) (which is also related to link between the stock performance of the firm and the changes in the top management of the firm), a firms stock performance is inversely correlated to the likely changes of the CEOs of the firm. Furthermore, the connection between the performance of the firm and the changes in the top management is very well-built in firms that have board member largely coming from the outside (Boxman, De Grant & Flap 1991, p.55; Burt 1987, p.1293).
A study by Parrino (1997) revealed that the prospect of CEO turnover is higher in industries characterized by homogenous companies than in heterogeneous industries. Using a similar argument, but from a different perspective, this study demonstrates that the presence of attractive outside positions for CEOs seem to be a key aspect in terms of CEO turnover events. A study by Huson et al. (2001) sought to explore CEO turnover events between 1971 and 1994. According to his findings, the turnover-performance link did not alter considerably during the study period, although there were remarkable adjustments in internal governance mechanisms.
What is more, Huson et al. (2001) and Parrino (1997) explored CEO succession decisions in their respective studies. In both cases, the researchers categorized succession outcomes with respect to whether the hiring board appointed an insider or outsider as the new CEO (Huson et al., 2001). According to Parrino (1997), the probability of firms in homogenous industry to appoint new CEOs from outside is high. In addition, Huson et al. (2001) shows a rise in the number of outside succession during the sample period. These findings seem to propose that the rising trend in outside appointment mirrors enhanced board thoroughness in monitoring the CEOs. Consequently, the current study uses previous works to explore, independently, the decisions made by the board to hire an insider and those for hiring an outsider.
In addition, the current study makes significant addition to the existing literature with respect to the significance of social contacts in finance and economics spheres. The current literature demonstrates a strong correlation exists between CEO-board connectedness and business operations. For example, Cohen et al. (2008) explores the links between corporate directors and mutual fund executives through mutual education networks. Stuart and Yim (2008) also explore the relationship between executive networks and the creation of private equity transactions aimed at U.S. firms. The two researchers report that the probability of a company acquiring a private equity is high if some of the executives in the firm possess knowledge regarding leverage buy-out through outside board service. In nutshell, the current study demonstrates that networks are also crucial in the CEO labour market.
This study also employs instruments cultivated in the science and sociology spheres. For instance, Newman (2003) offers an all-inclusive assessment of academic advancement in the sphere of complex networks. According to him, one of the key problems handled in social network research is detecting which people are most central, important, or best linked to others. Usually, researchers employ scientific graph theory to measure the concept of centrality. Some of the commonly used centrality measures are: eigenvector (Bonacich 1972); betweenness (Freeman 1977); closeness (Sabidussi 1966); and degree (Proctor & Loomis 1951). Thus, the present research employs the four measures to define and explain an individuals overall connectedness in the executive network. These measures are described in the following section.
Research Methodology
Introduction
Methodology is the process of instructing the ways to do the research. It is, therefore, convenient for conducting the research and for analyzing the research questions (Easterby, Thorp & Lowe 2008; Saunders, Lewis & Thornhill 2009). The process of methodology insists that much care should be given to the kinds and nature of procedures to be adhered to in accomplishing a given set of procedures or an objective.
Research philosophy
For this part, choosing a philosophy of research design is the choice between the positivist and the social constructionist (Easterby, Thorp & Lowe 2008). The positivist view shows that social worlds exist externally, and its properties are supposed to be measured objectively, rather than being inferred subjectively through feelings, intuition, or reflection. The basic beliefs for positivist view are that the observer is independent, and science is free of value. The researchers should always concentrate on facts, look for causality and basic laws, reduce phenomenon to simplest elements, and form hypotheses and test them.
Preferred methods for positivism consist of making concepts operational and taking large samples. The view of the social constructionists is that reality is a one-sided phenomenon and can be constructed socially in order to gain a new significance to the people. The researchers should concentrate on meaning, look for understanding for what really happened and develop ideas with regard to the data. Preferred methods for the social constructionists include using different approaches to establish different views of phenomenon and small samples evaluated in depth or over time (Saunders, Lewis & Thornhill 2009). For the case of analyzing how social network analysis affect compensation level of executive directors during different economic periods, the philosophy of the social constructionists was used for carrying out the research. Because it tends to produce qualitative data, and the data are subjective since the gathering process would also be subjective due to the involvement of the researcher.
Research methodology
Human resource management has multifaceted subjects. Any researcher can centre on distinct areas, for instance, safety of the workers, remuneration procedures or hiring new staff members. This paper mainly focuses on the impacts of social networks because it entails evaluation of the staff, localization, tapping up and retaining new talents that are essential for the growth of the firm.
This research will manly use the qualitative methodological approach as it describes the precise behaviours of companies. Qualitative methodological approach enabled the researcher to point out clearly the values that drive the strategies of the research (Easterby, Thorp & Lowe 2008; Saunders, Lewis & Thornhill 2009). Qualitative methodological approach is preferred over quantitative methodological approach as the latter does not capture all the variables, thus, producing unreliable results. Quantitative analysis and quantitative analysis serve as the two central methodologies of a research.
Qualitative research is a way of research question captured in various academic fields of study, conventionally used in the social sciences, but also in research on market and other areas (Saunders, Lewis & Thornhill 2009). Exhaustive apprehensions of human demeanour with regard to qualitative researchers are being carried out with an aim to assess the causes that relate to such demeanour. The qualitative method investigates the question as to how and why decision making is carried out; hence, focused and smaller samples are more frequently preferred to huge samples. Quantitative methods on the other hand verified the validity and truthfulness of the hypotheses; qualitative methods can be explained as a source of data or an explanation based on the dimensions of the graph or a non-mathematical data collection (Easterby, Thorp & Lowe 2008; Saunders, Lewis & Thornhill 2009).
Nonetheless, the most customary demarcation between the uses of quantitative and qualitative research especially in the social sciences is that qualitative procedures are employed for illustrating confounding quantitative outcomes or for exploration (i.e., conjecture-engendering). On the contrary, quantitative methods are being employed to evaluate theories. This has been demonstrated as one of the fundamentals of qualitative research. Some critics think that quantitative method of analysis purposes to offer many illustrations, precise and reliable evaluation mainly through cantered conjectures, applied mathematics and evaluation tools (Saunders, Lewis & Thornhill 2009). On the other hand, qualitative data is normally tedious to display or graph in mathematical terms.
Qualitative research is mostly accepted as the best technique for evaluating policies and research programs. Qualitative research provides clarifications to the various issues arising in a unique way that is dissimilar to the quantitative approach. This is especially the case for comprehending why and how some results were accomplished (not just what was accomplished) and also for replying some significant queries about pertinence, unplanned effects and impact of processes such as: were anticipations justifiable; did procedures function as anticipated; were chief policy makers able to do their jobs; did the program create any unintended impacts; and so on.
Network Analysis Instruments
Connectedness or networks are rather complex concepts that permit various interpretations. In essence, they demand more precise definitions in order to measure them in an empirical research. The current study employs network analysis tools (as constructed in science and sociology spheres) to develop director and executive networks. Also it aims at enhance assessment of individual positions.
According to graph theory, a network refers to a cluster
Order from us for quality, customized work in due time of your choice.