Can CEOs be too well-connected?

A new study has discovered that CEOs can use their social connections with other board members and CEOs to influence the governance decisions of the company board.

by IESE Insight
Last Updated: 23 Jul 2013

This influence may explain why so many companies continue to offer cash-outs and golden parachutes to newly recruited CEOs, even though these incentives are generally unpopular with shareholders.

Cash-outs enable the CEO to get the money for their options or speed up the payment of their bonuses following a change in control. Golden parachutes are severance agreements that provide cash and non-cash compensation to executives upon termination, demotion or resignation.

These incentives can cause conflicts of interest between the individual and the company when, for instance, the CEO is due to gain a cash-out or golden parachute following a merger. The prospect of gaining millions of dollars in a cash-out might, for instance, colour his or her judgment about the attractiveness of an offer for the company from the shareholder point of view.

Rubbing elbows: The harm of CEOs' social ties
Erica Salvaj, Fabrizio Ferraro
IESE Insight, September 2006
Review by Morice Mendoza

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