It’s Who You Know That Matters in the Corporate World

Author: Maya Thevenot, Ph.D.

Release Date: September 19, 2017

 MEDIA CONTACT: Jim Hellegaard
561-319-2233, jhellegaard@fau.edu

A number of recent articles and anecdotal evidence suggest that “who we know” could be at least as important as “what we know” when it comes to obtaining and maintaining a position in the corporate world.

A 2014 study found that referred candidates are more likely to get hired, have an initial wage advantage and longer tenure, relative to candidates without referrals. These are only few of the benefits derived from social capital, defined as the resources, such as wealth, power and status, available to an individual through their social connections to others who possess such resources. Other documented benefits of social connections include a lower probability of litigation, better investment prospects and higher return on investment.

Having a large social network serves as a potential disciplinary mechanism to conduct honest dealings as the highly connected individuals have greater reputational capital at stake. In our soon-to-be-published research, my colleagues and I document that well-connected CEOs are more likely to maintain higher quality financial reporting.

The likely positive effect of social networks on good behavior is not without controversy. A recent stream of empirical research suggests that certain social network connections might cause management entrenchment and rent extraction behavior. For example, well-connected CEOs have been shown to engage in risky investment, fraud that is more difficult to detect or lower oversight quality.

These studies argue that social networks facilitate misbehavior by encouraging collusion or reduced monitoring. However, a large body of research documents positive outcomes from established social connections stemming from cooperation among connected individuals and disincentives to misbehave.

When a person misbehaves, there is a sense of guilt, which is costly and makes social norms self-enforcing. Hence, it can be expected that highly connected CEOs have inherent interest in creating higher quality financial reporting system in order to preserve their reputation and reduce the potential negative labor market consequences associated with low quality financial reports, such as executive turnover and poor future employment prospects.

Maya Thevenot, Ph.D. is an associate professor and Stone Fellow in the School of Accounting at Florida Atlantic University's College of Business. The opinions expressed in this article are those of the author and do not reflect or represent the opinions of Florida Atlantic University.