(Gold)Mining Social Networks for Corporate Compensation

Google turned up an article from 2007 about a research paper detailing the relationship between director compensation and the interrelatedness of the directors’ social networks. (The link in the original article is broken, but I found a link to the paper elsewhere.)

This is a great application of  Data Mining to understand, and perhaps help with, corporate governance. Among the findings that the researchers, Ilan Guedj and Amir Barnea, assistant finance professors at the McCombs School of Business at the University of Texas at Austin, detail:

“We find that firms that have more connected directors award their CEOs a higher compensation,” Guedj said. “A CEO of a firm that is in the top quintile of connected firms receives a 10 percent higher salary and 13 percent in higher total compensation than a CEO of a firm that is in the bottom quintile of connected firms.”

and

In the paper, Guedj and Barnea also dispel alternative theories that would explain this higher compensation. The main one was that “good” CEOs get paid higher salaries (they are good, after all), and they also bring in connected board members (since they are good, too). But their research shows that when the connectedness of a board increases during a CEO’s tenure, a salary increase will follow.

It is, of course, the last point that is the most important. It’s the detailing of cronyism and the riches that the connected pocket, at expense to the shareholder, that are the real issue. It’s good to see the mining of social networks put to such positive use.

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