Ever feel that the odds are stacked against you? That, maybe, the bad guys always win? Or that others are just a step ahead? If you want to feel more of that, grab a scotch and please hear what we have to say about a recent study from Professor Westphal from the University of Michigan and his former doc student.
Collusion, Collusion, Collusion
These two researchers lob a grenade smack into the middle of the SEC and, more broadly, in how corporate Boards of Directors work and play the game. And it’s really a quite simple argument that goes something like this. Under the Clayton Anti-Trust Act (and a whole shit-ton of other regulations), it’s illegal to appoint a rival CEO to your board or to have a board member sit on two competing boards within the same industry. There’s a word for that—it’s called collusion and, typically, involves your mugshot on the front of the Wall Street Journal and an all-expense paid trip to San Quentin.
Desperate CEOs do Questionable Things
But, according to the brilliant authors of this journal article, CEO’s are desperate, especially when competitive uncertainty is high. Desperate people do desperate things and CEOs are no different. They’re starved for information about their rivals and, since they can’t do something illegal, they do something questionable. In particular, they recruit the friends of a rival CEO to their own board to capture sensitive information and, also, to relay sensitive competitive signals back to their rivals. Since this is beneath or under the radar of regulators, (until the publication of this piece in the Strategic Management Journal) they’re more likely to get away with it. With this backdoor channel open, rival firms can engage in a sort of collusion, which reduces competition and increases financial performance of both firms. Since it would be untoward, and, maybe illegal, for CEOs to contact friends of a rival CEO directly, they rely on executive search firms to do the bidding. And, straight from the 1980’s Go-Go’s song, their lips are, indeed, sealed since they only stand to win by brokering this arrangement.
To do this study, they examined about 500 medium to large firms and sent surveys to the directors of those firms. Straight to the point– their hunches proved correct. They found a statistically significant relationship between firms that were in competitive uncertain markets and the formation of these so-called, backdoor friendly ties to CEO’s of rival firms. Executive headhunters, at least as reported by the directors of all firms involved, were implicated. In highly uncertain competitive environments, headhunters brokered the deal to create these friendly ties. And the cherry on top? These ties allowed inter-firm cooperation (known as soft-collusion) to improve firm financial performance. In particular, just one additional board-friendship resulted in a staggering $134 million boost to the bottom line. That’s what collusion can do! And, again, this is just flat-out brilliant by these conniving executives since they know that friendship ties aren’t an easy metric to capture and aren’t typically visible to third-parties to include regulators and other stakeholders.
You’re now smarter for reading this. Do yourself a favor, and spread the Kimono to a friend as the world needs fewer stupid people. After all, and as we just learned, friends make the world go round.