11.3.1 Negative influence of social ties

Morck uses the Milgram experiment to ‘show that human nature includes a reflexive subservience to people perceived to be legitimate authorities’ (2008: 196). These legitimate authorities might be CEOs in a company, who are followed by executive directors and NEDs through a feeling of loyalty, trust and duty. Even if NEDs question certain decisions or practices, loyalty to the CEO and to the group makes NEDs eventually rubberstamp such decisions. This kind of loyalty lets NEDs abandon their duties to shareholders, stakeholders and the entire company (Morck 2008: 180). Or as Mintzberg (1983: 69) states: ‘directors can protect whomever they choose to… depending on their own needs and the pressures to which they are subjected’ (cited by Fredrickson et al. (1988: 258)). Groupthink is an important factor in this behaviour, as becomes clear in the next section. But social relationships between NEDs and executive directors or the CEO may contribute to it as well. Social relationships are here considered to be relationships that are ‘normatively free of instrumental and calculative orientation’ (Silver 1990: 1474).

Research by Hoitash, based on social network analysis, shows that social ties between independent NEDs and the CEO lead to a worse performance of NEDs with respect to monitoring. Companies in which such ties exist have significantly higher levels of CEO compensation (Hoitash 2011: 411-416). This seems to be in line with Fredrickson et al., who use board allegiances to predict CEO dismissal (1988: 258). Less board allegiances are expected to lead to earlier removal of the CEO after poor performance. Contrary to this negative influence, Hoitash finds that more social ties in companies are associated with better internal controls and high-quality financial reports (2011: 419). Even social ties between executive directors and independent members of the audit committee lead to better quality financial reports. These findings are contrary to the dominant perspective that social ties between executive directors or CEO and NEDs have a negative influence on the board’s capacity to monitor and control executive directors, CEO and management critically. This applies to monitoring of the performance of the company and the decision-making process (Westphal 1999: 8). These positive effects are caused by better cooperation within the board room, which is caused by more social ties and consequently lower levels or other forms of independence.