CEO Entrenchment at Network Level

For agency theorists, managerial entrenchment is one of the costliest manifestations of agency problems. CEOs in their attempt to neutralize the discipline of corporate governance mechanisms cause substantive losses to firms' shareholders. In this study, we broaden the concept of managerial entrenchment by considering the network of firms in which CEOs serve as board members. Unlike the traditional agency theory's assumption that entrenchment occurs within the firm, we move the focus from the firm to the network of firms with board ties to the focal firm and suggest that CEOs may create a network of directorships in order to entrench themselves at a network level. We posit that this will happen when firms' internal governance structure are strong and their performance prospects are relatively poor. In creating this network of ties, ideal targets are companies with weak governance structures and located in distant sectors from focal firms. We therefore hypothesize that CEOs will make use of these ties when bad performance is realized. These predictions are empirically supported using a panel data on 4,007 US corporations for the period 2004-2012.

CEO Entrenchment at Network Level Articles