A CEO with an extensive social network may leave an organization — and its shareholders — worse for the experience.
That's because CEOs with the thickest Rolodexes, 500-plus LinkedIn connections and the closest ties to board members and other executives might be pull off an acquisition that will ultimately benefit them, but work against shareholder value.
A new study, co-authored by Rwan El-Khatib, PhD, from Zayed University in Dubai, Kathy Fogel, PhD, from Suffolk University in Boston, and Tomas Jandik, PhD, from University of Arkansas in Fayetteville, examines the "network centrality" or overall level of connectivity of CEOs and how this influences M&A activity. Dr. Jandik and his colleagues measured the connectedness of nearly 400,000 corporate officers and directors in the United States by analyzing their biographies and making note of their careers, education and social relationships.
Did CEOs attend college together or serve on the same board simultaneously? Did they cross paths earlier in their careers at another company? All of this information resulted in a family tree of sorts for each executive, identifying who knows who and how connected each person is to the larger social network of C-level executives.
Researchers measured connectivity in four distinct dimensions. One is the sheer size of the basic network. This is similar to counting Facebook friends, as an example. The second is closeness: If you put yourself against everyone else, how many steps on average does it take for you to reach everybody in the network? (This resembles the parlor game Six Degrees of Kevin Bacon.) Next is betweenness, or how many times you're the connection between any two individuals, which is a measure of social importance. Finally, there is eigenvector centrality, or the value-rated number of connections you have. This places greater weight on people who are already influential. For instance, if you have 10 friends and one of them is Bill Gates, you are better connected than if you had 100 unimportant friends.
The researchers measured CEOs' network centrality year over year, placing them in percentiles. The following examples illustrated the breadth of connectedness they saw: One executive who fell in the 100th percentile had 792 direct connections. He could reach each individual in the network in an average of 3.2 steps. Another CEO fell on the opposite side of the spectrum, with only 10 direct connections and an average of 5.5 steps away from everyone in the network.
This all sounds like a very organized and data-driven popularity contest so far, doesn't it? What does this have to do with mergers and acquisitions?
Quite a bit, as it turns out.
After placing executives in percentiles, researchers examined their connectedness in the context of M&A activity among S&P 1500 companies from January 2000 to December 2009. They found highly connected CEOs pulled off transactions more frequently than CEOs with less network centrality.
Deals driven by well-connected CEOs also generated mostly negative stock returns for the bidder's shareholders, and often reduced the combined value of merged companies. Increasing CEO centrality from the 25th to the 75th percentile of the sample deepened bidder shareholder losses by an additional 3.4 percentage points on average, according to the study.