CEOs with Diverse Networks Create Higher Firm Value

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As I sit here in the Unifi Conference Room in Yadkinville, NC, I am reminded of the absolute power of networking, as the following article reinforces.

Here sit 25 retail and brand managers from Academy Sports + Outdoors, Columbia Sportswear, FBBrands, Haggar, LaCoste, Patagonia, Superior Uniform, Target, and VF. They and I are meeting most of one another for the first time. At the end of this 5-day bus ride to five industry destinations, we most certainly will know one another – and we will count on that.

Beware of the academia of many Harvard Business Review articles, especially when, like this one, the word ‘hypothesis’ is used more than once. Still, it is hard to argue with this quote, “CEOs with strong connections to people of different demographic backgrounds and skill sets create higher firm value”.

What is an example of this diversity? How about our network of 200 organizations from 30 different links and over a dozen nations? You simply can not put together your own version of this network, it’s already done for you, thanks to over 37 years of this organization working on it with you.

This net works……….

While we are on the subject, HBR has just published the fascinating research that supports all of this.

Research: CEOs with Diverse Networks Create Higher Firm Value
HBR: APRIL 10, 2018

Leaders today hear a lot about the importance of having good networks. For example, firms with better-connected CEOs can obtain cheaper financing, and firms with well-connected board directors see better performance. We wanted to explore whether the diversity of CEOs’ networks might affect their firms.

Our study, published in the Journal of Corporate Finance, found that CEOs with strong connections to people of different demographic backgrounds and skill sets create higher firm value. We also found that this greater firm value comes from better corporate innovations and successful diversified M&As. Our work suggests that the diversity of leaders’ social networks is a key ingredient in how they grow their companies.

Using BoardEx data provided by the Center for Corporate Performance, we examined a sample of 1,212 CEOs who led S&P 1500 firms between 2000 and 2010. We analyzed each CEO’s network by documenting their school ties, work ties, and leisure social ties (for example, clubs and charities) in the past. These connections had to be at least senior managers or higher positions to be considered.

To measure the diversity of their networks, we aggregated six factors — gender, nationality, academic degrees, majors, professional expertise, and global work experience — into a single diversity index using common factor analysis, a statistical tool that extracts the maximum amount of common variations of the six different components. We measured their firm’s value by Tobin’s Q, a ratio between market value of assets to book value of assets. Read More

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