Top job: appointing CEOs with social capital

The Relation between Strategy, CEO Selection, and Firm Performance

Appointing a new chief executive officer (CEO) is one of the most important decisions a corporate board makes.

But it is not always clear what qualities a board looks for when selecting a new CEO or why those qualities matter.

For this research project, Professor Margaret Abernethy and Associate Professors Flora Kuang and Bo Qin are investigating the importance of CEO social capital, that is the networks that CEOs have developed through corporate board memberships, trusteeships and social club memberships, in the selection process.

The researchers are basing their work on anecdotal evidence showing that social capital is an important heuristic used to determine CEO quality, with it generally assumed that CEOs with high social capital will improve a firm's performance.

However, a CEO can use their social capital in ways that are detrimental to the firm, with the research team demonstrating that CEOs with high social captial are more costly to hire, and also have the potential to gain considerable power. This power can result in actions that destroy firm value and increase the opportunity for CEOs to act in their own interests as opposed to the best interests of the firm.

Drawing on archival data of CEO successions over a 13-year period, the researchers demonstrate that firms pursuing particular types of strategic priorities are more likely to appoint CEOs with high social capital. They also show that if a firm has good corporate governance, some of the unintended consequences of appointing CEOs with high social captial can be mitigated.

Impact

This research sheds light on the CEO selection process and the importance of good corporate governance in ensuring that firm value is enhanced.