Imagine a division manager of a large firm. An underperforming division of a large firm. Shareholders have started questioning whether the manager is the right fit for the job. But plot twist: The division head went to college with the CEO. Will that relationship matter in terms of job security?
Yes, according to new research, it seems to matter quite a bit. In “Protecting Your Friends: The Role of Connections in Division Manager Careers,” published in March in the Journal of Financial and Quantitative Analysis, Culverhouse’s Dr. Joshua R. Pierce along with collaborators Charles J. Haddock (University of Pittsburgh), Jing Huang (Ernst & Young), and Paul Obermann (Idaho State University) investigated the role of relationships with the CEO in career outcomes of division managers.
They found that managers who are connected to the CEO by having a school, former place of work, or other social connection in common are much less likely than others to leave the firm — around 40 percent less likely. They are also much more likely to be promoted, at about double the rate of non-CEO-connected managers. Additionally, connected managers in peripheral segments tend to enjoy more CEO protection. This may be because the CEO knows less about the manager’s segment and is less able to monitor it, and is more likely to give them the benefit of the doubt when performance is in question.
Bottom line? In firms with weak governance and incentives, division managers who are connected to the CEO seem to be more protected.
But what is less clear is whether this is good for shareholders.
Even for managers whose units perform poorly, where dismissal might be an expected outcome, the connection to the CEO seems to protect these people from losing their jobs. And not just because CEOs hire their friends and then do not want to fire them. Connected managers tend to enjoy CEO protection whether the CEO hired them or inherited them when taking office.
Do the CEOs know something shareholders don’t? Probably not. While it is tempting to assume that CEOs defend these underperforming managers because of a warranted confidence in their ability to bring their divisions back from adversity, the evidence does not bear this out. Most of the managers do not seem very able to right the ship after bad division performance.
That may be part of the reason that while these connected managers might enjoy the CEO’s favor, the outside world is less charitable. The researchers found that when connected managers are promoted, the market tends to react negatively. They also found that if and when they do leave the firm, these managers are less likely to find employment on the same level or higher than the job they left.
CEO connections seem to matter a great deal for division managers. But the evidence suggests that the CEO can only protect and promote a manager’s career to a certain degree. Within the firm? Yes, absolutely. But outside of the firm, in landing a new and better job after leaving? There, the CEO’s reach seems to end.