Social Networks in The Boardroom
Francis Kramarzy
David Thesmarz
July 4, 2007
Abstract
This paper provides empirical evidence consistent with the facts that (1) social networks
strongly a¤ect board composition and (2) social networks are detrimental to corporate governance. Our empirical investigation relies on a large dataset on executives and outside directors
of corporations listed on the Paris stock exchange over the 1992-2003 period. This data source
is a matched employer employee dataset providing both detailed information on directors/CEOs
and information on the …rm employing them.
We …rst …nd a very strong and robust correlation between the CEO’s network and that of his
directors. Networks of former high ranking civil servants are the most active in shaping board
composition. Our identi…cation strategy takes into account (1) …rm and directors’ …xed e¤ects
and (2) matching of …rms and director along one observable and one unobservable characteristic.
We then turn to real e¤ects of such network activity. We …nd that …rms where these networks
are most active are less likely to change CEO when they underperform. This suggests that social
networks in the board room impair corporate governance.
1
Introduction
That social networks a¤ect market outcomes is a well-documented fact (see Granovetter, 1973
or Rees, 1966 for early references). The precise mechanisms through which networks operate are
less well-known. To investigate such mechanisms, this paper focuses on the market for corporate
directors, a market where network e¤ects are likely to matter. First, hiring the right individual is
potentially di¢cult: an outside director is both a part-time expert and a supervisor to the executive
management. These are very speci…c and potentially distinct skills and a proper and transparent
market for such jobs may not exist. Hence, being directly or indirectly known to the management
or the …rm’s main owners and shareholders is likely to be a strong comparative advantage to obtain
a director seat. Social networks are therefore likely to grease the wheels of such a market with
high frictions, by providing the management with information about the right candidates. Second,
For their decisive help in collecting the data we are most grateful to Denise François, Claude Jacquin and their
colleagues at INSEE. We also thank Nicolas Depetris-Chauvin and Elsa Kramarz for their research assistance. Many
of the improvements since the …rst draft owe to the valuable comments of Roland Bénabou, Mariasunta Gianetti,
Ernst Maug and Augustin Landier, as well as seminar participants from Stockholm University, the COST conference
at Uppsala, Amsterdam University, the CREST, and the NBER summer institute.
y
CREST-INSEE, CEPR and IZA. Email: kramarz@ensae.fr
z
HEC and CEPR. Address: Dept Economics and Finance, 1 rue de la libération, 78351 Jouy-en-Josas Cedex,
France. Email: thesmar@hec.fr
1
because the director has supervising tasks, the use of social networks may come at a cost. Relying
on executives’ networks to hire their own supervisor might con‡ict with directors’ independence
and quality, being therefore detrimental to corporate governance. Hence, the resulting impact of
social networks on economic e¢ciency is unclear. On the one hand, social networks can be used by
an entrenched CEO to …nd an obedient supervisor or an incompetent expert; while on the other
hand, they can be used by a benevolent manager to facilitate her research of a competent expert
or of a tough supervisor. In this particular setting, as in many others, the economic e¤ect of social
networks is ambiguous and can only be settled through an empirical investigation.
This paper examines this exact question in the case of France. It provides direct empirical
evidence that (1) CEOs’ social networks strongly a¤ect board composition and (2) …rms run by
CEOs belonging to active networks show many signs of bad governance.
To look at social networks in the boardroom, we use a unique dataset on CEOs and non executive
directors of all corporations listed on the Paris Stock Exchange over the 1992-2003 period. France is
a particularly well-suited case when studying the prevalence of social networks in the business elites
because its elites are highly concentrated and (at least some of) these networks are well-known,
easily identi…ed, and easily measured. The sociological literature indeed documents that among
French business elites two broad and distinct networks coexist: engineers and former high-ranking
civil-servants.1 Members of these two networks are mostly recruited within graduates of two elite
institutions: Ecole Polytechnique and Ecole Nationale d’Administration. Firms run by CEOs from
these two networks account for 12% of all …rms traded on the Paris Stock Exchange, and 65%
in asset-weighted terms. Not only alumni of these two schools are over-represented among top
executives but, most importantly, entering ENA or Polytechnique constitutes the virtually unique
way of entering high-level jobs in the civil service and, even more so, the “Cabinets Ministeriels”,
the politically-connected civil service jobs.2 Given these speci…c institutional features, data on
social networks are relatively easy to collect, using the French issue of the Who’s Who, together
with alumni directories.
More precisely, we gather background data on directors/CEOs (education, career, socioeconomic
background) and match them with accounting and …nancial information on their employing …rms.
In the …rst step of our analysis, we provide evidence of social networks in the labor market for
non executive directors. To do this, we estimate, for each individual in our sample, a model of the
probability of being hired in a given …rm. The key regressor in this model is the interaction between
the candidate’s network and the network of the …rm’s CEO: if both are the same, the probability
1
For references in english, see Swartz [1985,1986], Kadushin [1995], Frank and Yasumoto [1998]. References in
french include Bauer and Bertin-Mourot [1997], and Suleiman [1997a,b].
2
As evidenced by Jacques Chirac, Valery Giscard d’Estaing, Lionel Jospin, Laurent Fabius, ..., and even the “new”
Ségolène Royal, most French politicians are former énarques (the second being also a former Polytechnicien), starting
their career in Cabinets Ministériels and turning to politics in the sequel. In fact, the French elite comprises an
incredibly high fraction of former alumni of these two schools.
2
of hiring should be increased. This is our test of the prevalence of networks. Because we exploit
the full variability and identi…cation power provided by our matched employer-employee data, we
are able to account for two important dimensions of unobserved heterogeneity, that are likely to
(upward) bias our estimates of network e¤ects. The …rst dimension is the inherent ability of each
individual to become a director in general, as well as to be appointed in …rms that have particular
observable characteristics. For instance, top level bureaucrats may simply be more intelligent than
others and therefore more apt to run and supervise large …rms. Therefore, they would be present
in the same …rms both as CEOs and as directors. Our methodology allows to account for this.
The second dimension is the …rm level (unobservable) propensity to hire directors and CEOs with
particular observable characteristics. For instance, …rms with an autoritarian corporate culture
may prefer to hire older directors and CEOs, and, say, civil servants may be over-represented
in these generations. Or …rms that are about to experience di¢culties may be willing to hire
politically connected CEOs and directors. We give a formal proof that the data deliver enough
variability in the cross section to identify network e¤ects, even in the cross section, while taking
these two dimensions of unobserved heterogeneity into account. Although some limitations remain,
the identifying power of our matched employer-employee data set is surprisingly large.
We follow the sociological litterature and de…ne three main networks: (1) former civil-servants
who graduated from ENA, (2) former civil-servants who graduated from Polytechnique and (3)
Polytechnique graduates without any past in the civil service. We take all other CEOs (possibly
belonging to other networks, or to none) as the reference. Using this breakdown, we …nd that
the probability of being hired in a given …rm is larger when the individual and the …rm’s CEO
belong to the same network, when this network is related to a past career in the civil service. In
addition, we …nd no evidence that Polytechnique graduates without civil-service experience tend
to be employed in …rms whose CEO has a similar background. We then look at hiring equations
(‡ows), instead of employment (stock) equations. This allows us to discriminate between the e¤ect
of the CEO’s network and the e¤ect of past board composition, on each individual’s probability
of employment. This reinforces our previous results: civil service related networks of CEOs still
a¤ect the recruitment policies of directors. The composition of the board has no signi…cant impact
on the identity of newly recruited directors. We interpret this as partial evidence that it is the
CEO, not the directors, who “shapes the board”. Our result that civil service related networks
are particularly active hold in front of robustness checks designed to account for possible sorting of
directors with …rms along one observable and one unobservable dimension.
The second step in our analysis looks at governance in …rms run by former high-ranking bureaucrats, as corporate governance is what the board of directors actually “produces”. Such …rms
account for 12% of all …rms traded on the Paris Stock Exchange, and 65% in asset-weighted terms.
First, we look at the CEO-turnover-to-performance sensitivity. We …nd that former civil-servants
3
are less likely to leave their CEO position when their …rm performs badly. Second, CEOs who were
bureaucrats are more likely to accumulate directorships. As it turns out, the more directorships
these CEOs hold, the less pro…table is the …rm they run, which is consistent with being “too busy
to run their own …rms”. We then look at acquisitions, an important, strategic, and sometimes controversial decision where board approval is most often required. We look at market’s assessment of
the value created by acquisitions, i.e. the acquiring …rm’s stock returns around the announcement
of the deal. We …nd that these returns are smaller and not statistically di¤erent from zero for corporations run by former civil-servants. Hence, on average, the market tends to think that former
civil-servants add less value in their external growth operations.
When we look at performance, …rms run by former civil-servants are less pro…table than average,
although the e¤ect is statistically signi…cant only for those CEOs who were “cabinet” advisor at
some point in their career (which roughly corresponds to 50% of them), i.e. who are politicallyconnected CEOs. We provide an explanation for this result in a companion paper (Bertrand,
Schoar, Kramarz and Thesmar, 2007): our contention is that labor demand from these …rms is
more sensitive to the political cycle, as their politically-connected CEOs “lend” jobs to incumbent
politicians. We also provide evidence that such job creation helps reelection, but hampers corporate
pro…tability. The present paper provides an explanation as to why these CEOs remain in power,
even though they do not make the most e¢cient use of the …rm’s assets: they, not the investors,
are the ones who govern the company.
Beyond the French context, we believe this paper contributes to two strands of the economics and
…nance literature.3 Clearly, the present contribution belongs to the emerging empirical economic
literature on social networks in markets (see for example Bertrand, Luttmer and Mullainathan,
2000, Munshi, 2003, Bayer, Ross, and Topa, 2005). The …rst important di¤erence between the
existing papers and ours is the ability we have to observe networks at work in more direct or
more precise fashion, because we are able to look inside the …rm, in which we observe both the
referee (the CEO) and the applicant (the director). Being able to look within the …rm gives a
lot of additional identifying power, which we explore in detail.4 In particular, we develop a new
identi…cation strategy and the ensuing (simple) estimation technique that should be useful to people
interested in social networks. The second important di¤erence between this paper and the existing
economic literature on social networks is that we are in position to provide a preliminary assessment
3
To some extent, the present paper also contributes to the sociological literature in that it analyzes a much broader
sample than elite scholars generally use (for instance, Kadushin(1995) studies 28 members of the French business
elite. Frank and Yasumoto (1998) look at a “broader” sample of 125 people.). Hence, our description of the French
“ruling class” goes in less details but is much more representative of the French reality. Our analysis of recent changes
in the French business elites is another contribution of this article. Somewhat paradoxically, even though the State’s
retreated from economic life in the 1990s, former civil servants are more present among top executives in 2003 than
ever before. We suggest that the very process of privatizations of the nineties has caused this persistence.
4
Abowd and Kramarz (1999) who cover related technical issues never mention the potential of matched employeremployee data for network analysis.
4
of the e¤ect of networks on organizational performance, beyond their direct “labor” market e¤ects.
Most of the literature, in particular in relation to theories connecting job search and networks
(Saloner, 1986; Montgomery, 1990), has considered networks to be a good thing for organizational
performance: socially connected referees suggest new names to …rms, and …rms punish the referee if
the newly hired is not as good as promised. Hence, in this theoretical literature, networks improve
organizational performance. However, in the market for directors that we consider, the resulting
outcome may well be lower organizational e¢ciency, as shareholders cannot always directly “punish”
the referee (i.e. the CEO).
Our second contribution pertains to the literature on corporate governance, and in particular
the debate on the role of “independent” directors (for a review, see Hermalin and Weisbach, 2002).
Our results suggest that it is crucial to distinguish formal, from real independence. While a director
may be formally independent (not a customer, not a supplier, nor an employee), she could well be
tied with the CEO through a social network that prevents her from standing openly against his
decisions, or prevents her from voting him out of o¢ce. Instead of raising the minimum fraction
of independent directors, our research suggests that transparency and competition in the recruitement process of directors may be more useful than satisfying formal requirements of independence.
While most academics now recognize that the existing formal measure of independence is far from
satisfactory, very few studies have come up with alternative, possibly more relevant, measures of
board independence.
On this last front, our paper is indeed very close to a recent study on French corporate boards
and the business elite by Nguyen Dang (2006).5 Nguyen Dang’s paper focuses on corporate governance e¤ects, while the present paper focuses more closely on social networks. Exactly like us,
Nguyen Dang gives some evidence that …rms run by former civil servants are less likely to change
CEO in case of bad performance. He also shows - something we do not investigate here - that
CEOs from these networks are more likely to seat on each other’s boards (what the literature labels “interlocking directorships”). Our paper devotes much more attention, however, on presenting
evidence that social networks exist and indeed shape board composition - at least in the French
case. In particular, this explains the central role of our simple (and new) empirical framework that
allows to identify the e¤ects uncovered in this paper. This strategy is widely applicable in many
other contexts (social networks, matched employer-employee data)
The paper is organized as follows. Section 2 looks at the French elite from a historical and
sociological perspective. This allows us to present how we gathered information on networks of
outside directors and executives. Section 3 describes the dataset, providing additional descriptive
information. Section 4 presents the statistical model and discusses identi…cation. Then, Section 5
looks at the extent of networks and Section 6 at their economic costs. Section 7 concludes.
5
This paper was unknown to us when writing the present paper.
5
2
The French Business Elite
2.1
Historical Perspective on the French Elite
For both historical and sociological reasons, France’s economic elites have two distinctive features
(Bauer and Bertin-Mourot, 1997, Swartz, 1985): …rst, they tend to be drawn from a handful of
Grandes Ecoles, which form separated networks. Second, a large part of the contemporaneous
French business elite comes from the civil service, with relatively homogeneous and standardized
careers. These two features are easy to observe and will guide our empirical strategy.
2.1.1
The Tyranny of the Diploma
Bauer and Bertin-Mourot (1997) distinguish two particular features of the French business elite.
The …rst one is “the tyranny of diploma”: college degrees, generally obtained before age 25, tend
to over-determine career prospects. Those students fortunate enough to obtain the most di¢cult
and competitive degrees have almost guaranteed access to top jobs in the administration and/or
the private sector. The French post-secondary educational system splits into two parts (Suleiman,
1997): the …rst one is the usual university system, which is both free and whose access after highschool graduation is guaranteed by law. Most French universities have no right to select their
incoming students; therefore, selection takes place along the way, inducing students to drop out
after 2, 3, or 4 years. Suleiman notes that in the mid-1990s, this system comprised some 1.2 million
students.
The second part of the educational system is much smaller (some 50,000 students), more elitist
and consists of a myriad of di¤erent schools (Grandes Ecoles). In most of these schools, tuition fees
are negligible, but entrance takes place after the successful completion of a nationwide examination
with a numerus clausus. Preparation to these exams is carried out in special classes (classes
préparatoires), and takes two to three years after high-school graduation. The bulk of these schools
consists of engineering and business schools, though some of the most prestigious Grandes Ecoles
do not fall into these categories. The French business elite is however mostly recruited within
the two most prestigious Grandes Ecoles (Swartz, 1986): the Ecole Nationale d’Administration
and Ecole Polytechnique. The Ecole Nationale d’Administration (henceforth ENA) was created
after the second world war to supply the civil service with highly trained professionals. Ecole
Polytechnique is an engineering school originally founded by Napoleon to recruit and train o¢cers
for the French military during the French Revolution, that gradually evolved into an engineering
school. Nowadays, most of the class enter the private sector, but the best students during their years
at Polytechnique (as measured by academic credentials, mostly in maths and physics) enter “en
masse” the civil service. Other prestigious schools (Centrale, Les Mines, HEC etc.), less represented
amongst top executives, have no tie with the civil service and all of their graduates join the private
6
sector right after school.
Grandes Ecoles graduates retain some ties after college not only because they studied together
and formed friendships there (see Kadushin, 1995, and Frank and Yasumoto, 1998), but also through
alumni networks and events. The number of people involved is quite large so that the resulting
networks are loose and uncoordinated (although some best selling books of the early 1970s went
as far as calling them “ma…as”). However, having studied in a Grande Ecole naturally endows a
graduate with a host of weak ties within business people and, for ENA and Polytechnique graduates,
within the high administration. Partly because of their ties with the civil service (more on this
below), ENA and Polytechnique have historically been the most prestigious Grandes Ecoles, in
spite of or perhaps because of, their small size. Together, they train some 500 new students a year.
Firms appears to value their social connection (in particular with the administration, more on this
below), their qualities, but also seem to rely on this elitist feature of the educational system to
produce legitimacy in their organizations (see the case study in Bauer and Bertin-Mourot, 1997,
and also Burt, Hogarth and Michaud, 2000). As a result, they hire top Grandes Ecoles graduates at
the highest levels of the hierarchy instead of training and promoting employees over the long term.
This tendency for …rms to hire managers from Grandes Ecoles dates back to the XIXth century,
though, at the time, most French …rms were still family-owned, and family-run. As some …rms
became more successful and larger, professional managers were hired, and the top-level hierarchies
started to …ll up with engineers from Polytechnique and Ecole Centrale (see Cassis, 1997). In the
mid-XXth century, …rms started in addition to hire civil-servants, as we see now.
2.1.2
Civil Service and Business Elite
The second feature of the French economic system is that a large fraction of its business and
political elite has spent its …rst years on the labor market within the civil service. This ‡ow from
top-level bureaucracy into business started after World War I. Until then, the State was small
and held few levers over the economy. In those years, capitalists sought to in‡uence regulation
through directly lobbying or by bribing politicians elected to the Parliament or employed in the
Government (Garrigues, 2002). During World War I, high-ranking civil-servants had progressively
risen to power as the State budget grew larger. In the early 1920s, diplomats and employees of
the Ministry of Colonies seemed to have been particularly sought after by …rms willing to set up
subsidiaries abroad. In the 1930s, the State started to intervene more heavily in the economy
through nationalizations and regulation.6 At this point, the knowledge of the internal workings
of the bureaucracy and the associated connections started to be valued more strongly by private
6
Most French airlines were nationalized in 1933 and consolidated into what is now Air France. The national
railways were created in a similar way in 1937. In 1936, a left wing coalition (Le Front Populaire) came into power,
got a …rmer hand on the Bank of France (then the private property of France’s top …nanciers), enacted the “congés
payés” (two weeks of paid vacations) and the 40 hours workweek (Asselain, 1984).
7
…rms, in particular in the …nancial industry.
However, the big shift in the relationships between business and the administrative elites occured
after WWII. First, in 1945 the Government, then run by the unlikely coalition of Gaullists and
communists, two dirigist political forces highly involved in the Resistance, took control of most of
the …nancial industry with the intent of channeling savings to priority industries under the tight
supervision of the Treasury (Melitz, 1990). In addition, the Government took over most utilities
and some large manufacturing …rms (like EDF, the electricity monopoly, or Renault, a large car
maker). The Treasury and the Ministry of Industry therefore became, during these reconstruction
years, the real centers of power in …nance and industry (Garrigues, 2002). Simultaneously, ENA
was created, which dramatically increased the supply of high-ranking civil-servants certi…ed by
a prestigious and restrictive selection system explicitely based on education. The new prestige
attached to civil service, along with the creation of this dedicated school, created a new elite,
mostly based on scholarly achievement and sharing a meritocratic Republican ethos.
In a given class at ENA or Polytechnique, the best students have systematically joined one
of the …ve most prestigious bureaucratic careers, or “Corps d’Etat” (Suleiman, 1997 and also
Kadushin, 1995), training altogether some 50 people a year. The best Polytechnique graduates
were entitled to join industry-related “Corps d’Etat”, the famous corps des Mines or the corps des
Ponts et Chaussées. These career paths were designed to train future experts in the manufacturing
industries, to serve both as political advisors and top-level managers. The best ENA graduates
were entitled to enter the Inspection des Finances, the Conseil d’Etat or the Cour des Comptes
(again “Corps d’Etat”). These careers paths were designed to produce experts in public …nance
and law (particularly important in a country where the State has its own jurisdiction). The typicall
successful high-ranking civil-servant career in the postwar years involved a few years in the Treasury
(for ENA graduates) or at the Ministry of Industry (for Polytechnique graduates who joined the
civil service), then as a “cabinet” advisor to the minister of industry, …nance, or the Prime Minister.
With this experience, they could then join the top management of a large private or a State-owned
company. To private …rms, part of their value came from their “carnet d’adresses” (adress book),
built during their years at the top levels of the State, a very valuable asset in a country where State
presence pervaded all industries, be it through regulation, subsidies, …nance or mere in‡uence (for
an example of direct government intervention in a purely private …rm, see the example of the
Schneider empire in Cohen, 1989).
By the early 1980s, ENA and Polytechnique graduates’ involvement in the top management
of French …rms was pretty strong (see Swartz, 1986). It was even strengthened by the 1981 mass
nationalizations undertaken by the then newly elected socialist Government. In 1986, a strong
policy reversal was implemented by the center right coalition led by Jacques Chirac: most of
the State assets were privatized, with a temporary halt during the 1988-1993 period. The State
8
progressively lost its direct grip over manufacturing industries, the …nancial industry; it deregulated
the goods and credit markets and reduced dramatically its subsidies (for a description of this
…nancial liberalization episode, see Bertrand, Schoar and Thesmar, 2004).
In the past 15 years, the State’s loss of power did not, apparently, change the way French
business elites were recruited. Half of the …rms listed on the French stockmarket have no controlling
shareholder (Sraer and Thesmar, 2005). Top-ranking bureaucrats put in place in the 1980s could
remain at the head of their companies. With a congruent board of directors, it was not be di¢cult
for them to choose a successor with similar background and education in the 1990s. Furthermore,
the Treasury set up a network of cross-shareholding and cross-directorships (“the noyaux durs”, or
hard cores) between private and privatized …rms (Garrigues, 2002). The o¢cial goal of this network
was to protect French champions from an hostile (i.e. foreign) takeover. All these factors, along
with further privatizations in the 1990s, contributed to strengthen the grip of former civil-servants
over the country’s largest …rms. This grip is still visible in 2006.
With these two features of the French elite in mind, we turn to a statistical analysis (next
Sections), but …rst, we brie‡y review recent sociological work based on contemporaneous data
sources.
2.2
Contemporary Sociological Evidence
As evidenced above, personal and business relations between members of the French elite have naturally developped from the bonds created during their post-secondary education (see Burt, Hogarth
and Michaud, 2001) and through common careers in the civil service (Swart, 1986; Kadushin, 1995).
This sociological literature has shown that these relations have two prominent features. First, even
though they most often resemble “weak ties” between fairly competitive people, these bonds can
also be very tight and described by their members as true “friendship”.7 Second, the French elite
can be broken down into di¤erent cohesive subgroups, within which friendship bonds prevail, but
between which competition and weaker ties are the norm. These two aspects will provide us with
a simple way of collecting hard information on social networks within the French business elite.
As it turns out, sharing common educational, social or occupational background is a good proxy
for “friendship relations”. Charles Kadushin (1995) studied the frienship relations among 28 members of the “inner circle” of the French …nancial elite (people whose in‡uence was the largest among
125 most in‡uent Frenchmen in business and economics). Consistently with the above discussion
on the relation between bureaucratic and business elites, he shows that a past career in the French
Treasury is highly correlated with being part of this “inner circle”, other things being equal.8 Mov7
Leslie Mitchell De Quillacq (1992), an american-born journalist, conducted in the early 1990s some 67 interviews
among in‡uential members of the business elite. In the words of one of them “Dinners, Luncheons, breakfasts, tête
à tête... It’s always the same who talk, always the same ones who are there. It doesn’t stop. We meet all the time.”
(quoted from Kadushin, 1995, p 210).
8
As it turns out, membership to very exclusive clubs like Le Siècle, AFEP, Entreprise et Cité,... is also strongly
9
ing on to friendship, he …nds that two people of this circle are more likely to de…ne themselves as
“friends” when (1) both are ENA graduates and, most often (in his target sample), members of the
Grands Corps, (2) both were connected to the same political party (often because they worked as
advisers when the party was in government) and (3) when their past career included a few years
at the Treasury. Also, within his target sample, Kadushin …nds that friends were more likely to
seat on the same board of directors. Hence, objective measures of elite cohesiveness so far used by
sociologists interested in elites networks, such as similar education, similar professional experience,
or board interlocks (on this literature see the review by Mizruchi, 1995) seem to be perfectly applicable in our French context. While not entirely surprising - especially to French insiders - this
will serve our purpose well, given that our data does not provide direct information on the family or friendship relations between individuals, but only information on education, socioeconomic
background and past career. To some extent, Kadushin’s study legitimates our empirical strategy,
which relies on assuming that people with share strong features and a common background within
a restricted world will be either willing to reciprocate favors (accumulating social capital through
“reciprocity transaction”) or willing to maintain their reputation vis à vis the same network.
A second useful aspect of the French elite is that its members tend to cluster into di¤erent
subgroups within which social cohesion is very high and between which there is some level of weak
cooperation and competition (Frank and Yasumoto, 1998). Within subgroups (the “Corps d’Etat”
for example), a high degree of cooperation is the norm, and members seek to accumulate social
capital by building their reputation vis-à-vis the network as a whole, and not towards particular
individuals (what Frank and Yasumoto call “enforceable trust”). With potentially competing subgroups, individuals tend to build ties based on interpersonal reciprocity (”reciprocity transactions”)
rather than construct a reputation with respect to the entire (alien) subgroup. Using a somewhat
di¤erent methodology than Kadushin – but the same dataset – Frank and Yasumoto break the
French elite into three groups: right-wing ENA graduates, left-wing ENA graduates and non-ENA
graduates. Consistently with their hypothesis on between/within subgroup interaction, Frank and
Yasumoto …nd that people are more likely to engage in hostile actions towards members of other
subgroups than toward members of their own subgroups. In addition, they …nd that two people
are more likely to engage in reciprocity transaction (help one another) when they do not belong
to the same subgroup. These results are useful when constructing our empirical strategy in that
they guarantee that various social networks actually do cluster the elite in several distinct and
observable groups.
correlated with being a member of the business elite. We do not, however, have access to this (very) private information
and this clearly is a limitation of our study.
10
3
The Data
3.1
Data Sources
Our data set matches information on the employee – the CEO and the directors – with data on
the employing …rms. To construct it, we used three main data sources: (1) the DAFSA yearbook
of French listed …rms provides us with …rm-level variables (including the names of the CEO and of
the members of the board), (2) the French edition of the Who’s Who gives us socioeconomic, career
and educational information on CEOs and directors. The Who’s Who is however not exhaustive,
hence, (3) for ENA and Polytechnique graduates, Alumni Directories were used to obtain education
and partial information on careers for those individuals not listed in the Who’s Who.
All French …rms listed on the stock market are required to issue an annual report including
accounting information. Using the annual reports, the DAFSA yearbook compiles listed companies
accounts in a yearly publication. Available yearbooks go back to the 1950s, but unfortunately,
detailed balance sheet and pro…t account information is only available from the 1984 issue on.
Given that French …rm often take the form of business groups with myriads of subsidiaries, corporate
account are always consolidated at the group-level – although the group leader is most often the
only entity listed. We extracted this information from the 1988-1993 paper issues of the yearbook,
and from its 1994-2003 electronic issues. We restricted ourselves to …rms listed on the “premier
marché” or on the “second marché”, excluding those …rms traded over the counter (“hors cote”) or
…rms listed on the “nouveau marché” (a market for young, innovative …rms which was created in
1995). The “premier marché” consists of all …rms whose market capitalization and volume traded
are large enough. The “second marché” is a market for smaller, in general fairly mature, …rms who
are listed but whose trading volume is too low to enter the premier marché. Both markets have on
average some 300 …rms listed each year.
Along with accounting information, the DAFSA yearbook provides us with the names of the
CEO (directeur général or président du directoire), the chairman (président du conseil d’administration
or président du conseil de surveillance) and the non-executive directors (administrateurs or membre du conseil de surveillance). Henceforth, we will use the words “non executive directors” and
“directors” interchangeably, since their meanings are identical in the French context. As it turns
out however, most CEOs (directeur général) also hold the title of chairman of the board (président
du conseil d’administration). Only when the …rm is a “société à directoire” (a special legal form
imported from German law), is the CEO prevented from holding the chairman seat.
We retrieved personal information on the CEOs and the directors using two data sources.
The …rst one is the Who’s Who in France, a list of prominent people in politics, business and
entertainment. For each individual, the available information is well standardized and includes
self-reported measures of parent’s occupation, place and date of birth, marital status, number of
11
children, education, current occupation and past career (with positions in …rms, …rms’ names, and
dates of entry or accessions to the positions). Each individual listed in the DAFSA database was
coded using his or her …rst and last names. The matching process has been done by hand for all
CEOs, Chairmen and Outside Directors from 1992 until 2003, using the 1994 and 2000 issues of
the Who’s Who. On average, some 51% of all CEOs of all listed corporations were retrieved in the
Who’s Who. Given that we look at the 1994 and 2000 issues of the Who’s Who, this percentage
shows a steady decline over the period under study, from some 60% in the beginning to 45% in
2003. This …gure is somewhat lower for directors, with approximately 36% of them being listed in
the Who’s Who. Again, this percentage goes down from 40 to 27% over the period.
The second source of data on directors and CEOs are the directories of both Polytechnique and
ENA graduates, which are exhaustive, in contrast to the Who’s Who. These directories provide
the obvious information about education, but no information about the socio-economic background
and very little information about career (bureaucratic career - Corps d’Etat - if any). All CEO and
director names present in the DAFSA database over the 1992 until 2003 were cross-checked using
these directories. Given that we are looking at directories of graduates, almost 100% of ENA and
Polytechnique graduates who were CEOs, chairmen, or board members of our listed …rms can be
assumed to have been included in our analysis …le.9
Relying on the historical and sociological evidence reviewed above we identify three networks10
in our sample: (1) ENA graduates, all former high ranking civil-servants, (2) Polytechnique graduates who had a career as “civil service” engineers and (3) Polytechnique graduates who spent their
whole career in the private sector. We now turn to a descriptive investigation of our data to see
how these three networks are prevalent among the directors and CEOs of large listed corporations.
3.2
The French Business Elite in the 1990s
A raw inspection of our data con…rms and updates the …ndings of sociologists on a much larger
sample. First, Polytechnique and ENA graduates dominate the French business elite, as do civilservants. Second, this pattern has become even more pronounced over the recent period for which
we have data (1992-2003).
[Insert Tables 1,2]
Indeed, the data are fully consistent with the sociological and historical evidence outlined above.
Over the 1992-2003 period, (1) ENA and Polytechnique graduates run the lion’s share of French
…rms, and (2) former civil-servants, in particular those actively involved in politics also run a large
share of the …rms. As can be seen from Table 1, ENA and Polytechnique graduates run, on average,
9
Apart from ambiguity in a name and surname, as, for instance, when both are very common.
In a previous version of this paper, available from the authors upon request, we used a …ner breakdown, based
on “Corps d’Etat” or political a¢liation. Results were essentially similar to those presented here.
10
12
some 20% of the …rms; while this may appear small, their …rms are on average very large, since
they correspond to some 70% of all assets traded on the Stock Exchange (at book value). This
pattern can still be found if we restrict our focus to civil-servants that were “cabinet” advisors,
who run 6% of the …rms, but 52% of the assets.
[Insert Figures 1,2]
Second, in spite of a vigourous process of privatization accompanied by the deregulation of
many sectors of the economy during the nineties, civil-servants remain prevalent amongst top
executives of French corporations as late as the early 2000s. Figure 1 shows the change in the
asset-weighted share of CEOs from various backgrounds. During the 1990s, civil-servants with
pure administrative background - ENA graduates - became more and more prevalent. In addition,
Polytechnique “engineers”, either from the civil service or from the private sector declined sharply
after 1999. Last, this movement started with the resumption of privatizations under the right-wing
government, elected in 1993. SOEs run by former civil-servants started to be sold to the public
starting from that date on.
Figure 2 looks at the trend in board composition: it shows the change in the (asset-weighted)
share of directorships held by ENA graduates, Polytechnique graduates with a career in the civil
service and Polytechnique graduates with a pure private sector background. These shares are both
very high and show a strong upward trend in the early 1990s, right when privatizations resume
(1993). In asset weighted terms, between 40 and 50% of all director seats were …lled with members
of one of these three networks. Strikingly, without even mentioning this particular feature of
French business elites, two reports on “best corporate governance practices”, issued in 1995 and
1999 (Viénot I and II), focused on the appointment of “independent directors” to solve governance
problems.
Figures 1 and 2 display similar evolutions: over the the 1990s ENA graduates became more
and more prevalent both as directors and CEOs, while polytechnique graduates, in particular those
linked with the civil service, lost ground. This, along with sociological evidence on French elites,
suggests a relation between board composition and the CEO’s identity: ENA graduate CEOs may
be more likely to appoint ENA graduates as non executive directors.
A preliminary investigation indeed supports this claim: CEO’s identity matters for shaping
board composition. As Table 3 shows, the fraction of ENA graduates seating on the board of
corporations run by ENA graduates is much higher than in other corporations. The same result
holds for Polytechnique graduates when they have a civil service background but not for those
“polytechniciens” with an entire career in the private sector.11
11
Similar tables, using various distinctions such as political a¢liation, are also compelling. We omitted them to
save space.
13
[Insert Table 3]
This …rst direct look at the data indeed suggests that social networks shape the composition
of corporate boards. It is still unclear, though, which structural parameters is identi…ed by this
simple inspection of Table 3. Do we simply measure that ENA graduates are better directors,
and hence more sought-after ? Do we simply measure the fact that some …rms naturally attract
ENA graduates as directors and CEOs - potentially because they operate in regulated industries,
or because the business requires a good knowledge of the bureaucracy ? Or do we capture the
fact that ENA CEOs run larger …rms, that have larger boards and are thus more likely to appoint
ENA directors ? To circumvent these di¢culties, before looking at the networks per se, we brie‡y
describe the empirical model we use in our exploration of the data, and then derive simple, easy to
estimate reduced-form equations that will allow us to recover the parameters we want to identify.
And, of course, this will help us interpret the results presented in Table 3.
4
Empirical Strategy
Appointment of a director depends on each potential applicant’s skills, in particular her own social
networks and whether it overlaps with that (those) of the CEOs. This simple statement generates
a model which is di¢cult to estimate in general, even with the data at hand. However, this
model can be transformed through various aggregations and elimination of nuisance parameters
into relations that can be estimated. These transformations from the structural (economic) model
to these aggregated and estimable forms are not straightforward. Therefore, this Section carefully
spells out how the structural model translates into various estimable models.
4.1
The “Economic” Model
Consider the (matched employer - employee) panel where individuals are indexed by i, …rms by j;
and time by t. We assume the existence of several (possibly overlapping) networks, which we index
by k. As in Munshi (2003), we try to identify whether belonging to the same network as that of
the …rm’s CEOs increases the chance for individual i to be appointed at …rm j’s board. We thus
start by formulating the following linear12 probability employment model:
Eijt =
i :Zjt
+
j :Xit
0
+ Zjt
:M:Xit +
X
kl :
k
Cjt
:Ali + "ijt
(1)
k;l
where Eijt = 1 if individual i works as a director of …rm j at date t, and Eijt = 0 otherwise. k
is an index for the network. Aki = 1 when individual i belongs to network k, and zero otherwise.
k is equal to 1 when the CEO of …rm j at t belongs to network k, and zero otherwise. Z is
Cjt
jt
12
Given that the probability for a given - even if well connected - individual to be hired at a given …rm’s board are
small, a linear probability model seems to be a correct approximation.
14
a vector of …rm level observables. Xit is a vector of individual level observables.
i
and
j
are
vectors of individual and …rm …xed e¤ects.13 M is a matrix of coe¢cients that stand for the various
interaction terms between variables of Xit and variables of Zjt .
In equation (1), we measure the strength of social networks by looking at the
kl
coe¢cients.
If network e¤ects are really present, then we should observe that being appointed as a director in
…rm j occurs more frequently when the individual and the CEO share the same network. Hence,
H0 :
kk
>
kl
for all l 6= k
corresponds to evidence of network e¤ects in the patterns of nomination.
Obviously, …nding directors and CEOs from the same network in the same company is not
always evidence of networks. It could be the, say, former civil servants, tend to join larger …rms,
…rms that operate in regulated industries, or …rms that are dependent on procurement contracts. It
could be, also, that former civil servants are more clever, and that large …rms prefer to hire clever
people both as CEOs and directors. This is why equation (1) adds three types of controls. First,
the term
i :Zjt
stands for the unobserved propensity of people
i
to serve as directors of companies
with observables Zjt - for instance, high IQ workers may obtain seats at the boards of large …rms.
Second,
j :Xit
measures the unobserved …rm propensity
j
to hire directors with observables Xit -
for instance, …rms with an authoritarian corporate culture may prefer to hire older directors. Taken
together, these two terms control for the sorting of directors and …rms along one dimension that is
observable, and another that is not.
0 :M:X stands for matching of directors and …rms along purely observable
The third control Zjt
it
dimensions. For instance, former civil servants may tend to join the boards of former state owned
entreprises, engineers may sort in more technology intensive industries, or educated directors may
be more often found in larger …rms. The elements of the M matrix measure the strength of sorting
along observables in the data.
Model (1) cannot be estimated as such. Indeed, the original data, by construction, only includes
observations for which Eijt = 1. However, it is virtually impossible to generate all observations
for which Eijt = 0. For instance, we do not know who applied as a director to any given …rm
j and was not considered or even rejected. One solution could be to assume that all individuals
applied to all …rms. In particular, all individuals not included in the data are potential applicants.
Another problem with this approach is computational as there are, a priori, some 600 …rms and
5,000 directors every year. Over 10 years, the sample of all (i; j; t) would therefore feature some 30
millions observations ! Hence, in the next subsection we derive estimable models that only require
the knowledge of the “Eijt = 1” observations.
13
Because intercepts are always present in vectors Xit and Zjt , model (1) always includes “pure” person and “pure”
…rm e¤ects.
15
4.2
The Firm-Level Model
This section shows how model (1), expressed as a match between an individual and a …rm, may be
aggregated as a …rm-level model and which parameters of (1) can be identi…ed. Let us introduce a
few more notations. First, let:
nkjt =
X
Eijt :Aki
i
be the total number of directors sitting at …rm j’s board, who belong to network k. njt > nkjt is
the total number of directors of j. nkt is the total number of members of network k and …nally n is
the total labor force (total number of directors in the data source).
In the following derivation, we will assume for simplicity that Xit = 1, i.e. that directors do
not di¤er according to observable characteristics. While this is admittedly a strong assumption,
this is one that we will be able to dispense with in the following section (where we will derive the
“individual level model”). The objective of this hypothesis is thus mostly for clarifying purposes
(but detailed calculations, without this assumption, are reported in Appendix). After a few manipulations, which basically amount to computing nkjt and njt using model (1), we show in Appendix
that:
Yjtk
=
with bmk
=
t
nkjt
nkt
mk
njt
nt
X
l
!
= akt :Zjt +
ml
nlt
nt
X
m
k
bmk
t :Cjt + ujt
(2)
m
where Yjtk is the proportion of members of network k ending at the board of j in excess of the natural
population proportion of people ending at the board of j. The ak :Zjt term in equation (2) allows to
control for …rm - director matching along …rm observables and director unobserved characteristics.
This control is performed by simply including the Zjt …rm level controls in the linear regression of
m . The bmk coe¢cient measures the relation between a CEO’s identity
Yjtk on the CEO’s network Cjt
t
and the board composition, controlling for the above …xed e¤ects. These coe¢cients are not exactly
equal to the ’s, because any network can be present at a given …rm’s board, as the mere result
of its size in the natural population. The expected fraction of m, even in the absence of network
e¤ects, would be nm =n. As a result, the speci…c e¤ect on k will be underestimated in the “…rm
level” speci…cation if we do not correct for this bias.
Finally, testing for the presence of networks is fairly straightforward. By comparing bkk
t and
bkl
t , we are able to restate hypothesis H0 in terms of the estimated parameters from (2):
kl
H0 : bkk
t > bt for all l 6= k
k in the regressions explaining (1)
thus, by looking at the di¤erence between the coe¢cients of Cjt
the proportion of members of k ending in j and (2) the proportion of members of l ending in j.
16
4.3
The Individual-Level Model
Obviously, because our data sources have two dimensions, …rm and individual, an equivalent strategy can be derived using the individual dimension. The advantage of aggregating equation (1) at
the individual level is that we can dispense with the assumption that directors are identical with
respect to observables (Xit = 1). Symmetrically, it is convenient to assume that …rms are identical
(Zjt = 1). Thus, because in the derivation of the individual and …rm level models, we make di¤erent
assumptions on the matching process of directors to …rms, we view their results as complementary.
Let:
k
it
X
=
k
Eijt Cjt
j
be the number of …rms in which, simultaneously, i is a director and the CEO belongs to network k.
We denote
k,
t
the sample number of members of network k,
by individual i and
t
it ,
the number of board seats held
the overall number of board seats in the sample.
We now assume that Zjt = 1. Again, after straightforward manipulations described in Appendix,
we can show that model (1) rewrites as the following equation, estimated with individual level data:
k
it
k
t
Witk =
with dkm
=
t
it
= ckt :Xit +
t
X
km
lm :
l
t
t
l
X
!!
m
k
dkm
t :Ai + vit
(3)
m
Therefore, equation (3) explains, given individual i’s network, the excess share Witk of boards in
on the director’s
which i is sitting and where the CEO belongs to network k. The coe¢cient dkm
t
network Am
i measures the extent to which a CEO from k tends to hire preferentially directors from
k. This estimation strategy allows to control for the unobserved propensity of …rms to match with
directors of known characteristics by including individual observables as additional regressors.
4.4
Sources of Identi…cation
Let us start with a simpli…ed version of our equation (1):
Eij =
i
+
j
+
X
kl :
Cjk :Ali + "ij
(4)
k;l
in which we eliminate all variables but the network a¢liation of person i and of the CEO of
…rm j and in which the time dimension is also discarded. This new equation (4) contains the
so-called pure person and …rm e¤ects. It is crucial to understand why our transformations, both
the person-level and the …rm-level models, are able to get rid of the pure person and …rm e¤ects,
even in the cross-section. Take any person i. We know in which …rms i is employed (a member
17
of the board) and in which …rms i is not employed. This stands in stark contrast with a wage
model with pure person and …rm e¤ects (see Abowd and Kramarz (1999)) because the wage paid
to i is only known in those …rms where person i is employed. Hence, using the linear speci…cation
given above, all the “Eij = 0” observations bring information on the person e¤ect. Because there
are many such observations, it is relatively easy to eliminate the pure person e¤ect using the
appropriate transformation, as described in the individual-level model subsection. Similarly, for
any …rm j, all those persons who do not belong to j’s board bring information. Because there are
many such observations, it is relatively easy to eliminate the pure …rm e¤ect using an appropriate
transformation, as described in the …rm-level model subsection.
Hence, our identi…cation strategy is similar to the so-called “Within”transformation used in
panel data analysis.
4.5
Possible Biases
There are multiple sources of estimation biases; this subsection makes it clear which ones our
empirical strategy will be able to deal with. Obviously, measurement error – aside from handtyping errors – does not appear to be an issue, because we directly measure the network each CEO
belongs to. Of course, measurement error could arise if our categorization of the various networks
was inappropriate. Yet, unbiased mistakes in measuring networks would a priori attenuate the
magnitude and signi…cance of our estimates.
Second, remember that we could not recover the socio-economic background of all directors and
CEOs, but only for those who happened to be present in the Who’s Who.14 It could very well
be that those individuals included in the Who’s Who are also those with high “director” ability.
Independently of being an ENA or a Polytechnique graduate, sheer charisma, skills, or intensive
networking are likely to be correlated with someone’s probability of becoming a director. Our
model includes a speci…c person e¤ect
i
that controls for this tendency. And because our …rm-
level model, by aggregating and di¤erencing, eliminate
i,
this technique controls for such potential
biases.
Third, our model controls for observable tendencies of …rms to hire directors from particular
networks, i.e. for instance …rms in regulated industries may have a propensity to hire former civil
0 :M:X ) term in equation (1). But our approach does not control for unobservable
servants (the Zjt
it
…rm “tastes” for some networks, as for example, when some …rms, because of their corporate
culture, have a tradition of promoting and hiring engineers rather than top level bureaucrats. This
limitation of our approach is easy to see in the individual level model (3) where we allowed director
observables to vary (Xit 6= 1). Let us look at the propensity of …rms to hire from particular
14
Polytechnique and ENA graduates were all included, however, given that we had access to the directory of all
former students of these two schools.
18
networks; in the language of model (1), this means Xit = (Am
i ) for some m. As appears from
equation (3), a linear regression will not be able to identify this e¤ect (ckt :Xit ) separately from
m
network e¤ects (dkm
t :Ai ). Theoretically, it would be possible to account for this by including a
…rm …xed e¤ect in equation (2) - see the derivation in Appendix. Unfortunately, there is a very low
turnover of ENA CEOs and, most often, when they leave, their replacement CEO turns out to be
another former ENA graduate. Clearly, introduction of …rm …xed e¤ects would not generate any
well-identi…ed estimate in this situation. This fact therefore makes the practical identi…cation of
(1) a …xed tendency for a given …rm to hire, say, ENA graduates separately from (2) the additional
tendency due to the fact that currently the CEO is an ENA graduate, virtually impossible using
the …rm-level speci…cation (again, not in theory but in practice).
Fourth, it is impossible to control for sorting along unobservable characteristics on both sides
(pure unobservable matching). If directors with high IQ tend to join …rms with high IQ CEOs, and
IQ is correlated with Grandes Ecoles graduation, our estimates will be upward biased. This concern
is di¢cult to address. Fortunately, our networks are not only related to elite school attendance,
but also to a career in the civil service. Hence, our data will allow us to compare (1) former civilservants from di¤erent top schools and (2) civil and non civil-servant that graduated from the exact
same school.
5
Evidence of Networks
This section looks at network e¤ects using model (1) discussed just above; we estimate the
kl
parameters, which stand for the marginal probability, for a member of network l, to be a director
in a …rm run by a CEO belonging to network k.
5.1
Estimating the Probability of Employment
In a …rst step, let us assume away matching considerations and simply posit that Xit = Zjt = 1,
which means that some …rms have in general a higher tendency to appoint, and some individual
have a general tendency to be appointed. We will deviate from these assumptions in Section 5.3.
We start by estimating the following, slightly modi…ed, version of (2):
nkjt
n0jt
nkt
n0t
= akt +
X
m
(
|
mk
{z
ckm
m
m0 )Cjt
}
+ ukjt
(5)
where j indexes the …rm and t indexes time. k stands for the network under scrutiny (ENA,
Polytechnique with civil service, Polytechnique without civil service). Equation (5) is obtained by
substracting equation (2) for network k from equation (2) for network 0. Thus, the di¤erence with
the previous …rm level equation is that we take one network as the reference. Now, the left-hand
side variable is the fraction of members of network k that are employed in …rm j minus the fraction
19
of members of reference network that are employed in …rm j. We de…ne the reference category to
be members of neither ENA nor Polytechnique networks. ukjt is an error term and the indicator
m is equal to 1 whenever …rm’s j CEO belongs to network k. We are interested in the coe¢cients
Cjt
of these indicator variables (
mk
m0 ),
which have a very simple structural interpretation, since
they measure the probability for a member of a given network k to be a director of a …rm run by
a member of network m, minus the probability that a member of k is a director in a …rm run by a
CEO that does not belong to any of the networks.
[Insert Table 4]
Table 4 reports estimates of (5) for all three networks of interest (ENA, Polytechnique with
civil service, Polytechnique without civil service). These regressions are jointly estimated using the
SURE method, that permits error terms of the three equations to be correlated with each others
for a given …rm. Indeed, for example, if a given …rm has many ENA directors, it is less likely that
it has many Polytechnique graduates, so the two equations are not totally independent. We also
allow the error terms to be correlated across observations of a same …rm using the White correction
method for standard errors. The bottom panel of table 4 provide tests of the null hypothesis of
equality of coe¢cients on CEO across equations.
First, for civil servants, the coe¢cient on CEO’s identity is always very strong and economically
signi…cant; the probability of being director in a …rm is increased on average by some 0.5-1 percentage points when the CEO belongs to one of the two civil service related networks (graduates
from ENA or Polytechnique). This is sizeable, given that, with 600 …rms, the probability of being
employed in given speci…c …rm is on average some 0.2%.
Second, these results do not necessarily constitute very strong evidence of network importance
per se, since we are only comparing members of three networks to “mostly unconnected” directors.
We thus test our H0 hypotheses more directly by looking if, for a given director, the probability of
being employed in a …rm run by a CEO of the same network is signi…cantly higher. In other words
we ask in equation (5) whether ckk > ckm , for all m. These tests are reported in the bottom rows of
Table 4. Our results therefore show that the most important networks are former ENA graduates,
former Polytechnique graduates with civil service career, but not Polytechnique graduates who went
directly to the private sector. These results are strong evidence that the intuitions of Kadushin
(1995) and Franck and Yasumoto (1998) were right: it is networks of former civil-servants, not
networks of engineers, that matter the most.
To con…rm the results obtained in Table 4, we used the individual-level model to run similar regressions, and report the results in supplemntary Table A1. Given our assumptions that
Xit = Zjt = 1, results should be identical to the …rm level model (5), assuming model (1) is not
misspeci…ed. There, the dependent variable is the fraction of seats held by individual i (at date
20
t) that correspond to …rms run by CEOs of network k. The explanatory variables are describe
the network of individual i. We run three regressions, one for each network, and allow residuals
to be correlated across the three equations of each given individual using the SURE estimation
technique. As it turns out, the same orders of magnitude and the same test statistics are obtained
with this alternative way of collapsing the data. The only di¤erence that emerges using this model
is that ENA directors are as likely to sit on boards of …rms run by ENA CEOs as they are to sit on
boards of …rms run by Polytechnique civil servants. This suggests that di¤erent civil service related
networks have links with each other, a pattern that we will …nd again in subsequent analyses.
5.2
Estimating the Probability of Appointment
An important question raised by the previous regression results is whether CEO’s identity matters,
or whether it is simply a proxy for the board’s identity. Imagine for instance that the CEO holds no
real power in appointments, and that all the power in these matters rests with the board of directors.
In this case, the board is going to appoint CEOs that are similar to the set of directors, implying
that the causal relation is reversed. Though this is still evidence of social networks interfering with
the labor market, the direction of the relation matters for corporate governance. Indeed, if the
board turns out to be chosen by the …rm’s CEO - Shivdasani and Yermack (1999) suggest that this
situation might very well hold in the US -, the directors’ ability to monitor the management on
behalf of the shareholders might be severely impaired.15
To look at this issue, we do two things. First, we reestimate model (1), by looking at appointments rather than employment. Hence, Eijt = 1 when i is appointed by …rm j at date t. We use
the …rm level aggregation and thus correlate the CEO’s identity with the …rm’s hiring policy, thus
providing a more stringent test of social interactions.16 We then ask whether the CEO’s identity in
these appointment regressions is a proxy for initial board composition by including in the regression
the past number of directors in the board of either networks. This amounts to running the following
modi…ed version of (5):
nkjt
n0jt
nkt
n0t
= akt + bkjt +
X
m
ckm :Cjt
+
m
X
k
c0km #Am
jt + ujt
m
where the left-hand side variable is now the share of newly hired members of network k hired
by …rm j minus the share of newly hired directors by j. #Am
jt is now the fraction of members
of network m already sitting on the board of …rm j. Note that such a regression could not be
15
Claude Bébéar, the former CEO of AXA, a large French insurance company, and a prominent …gure in French
business, argues that “board members are in general reluctant to …re the president. One general assembly after the
other, a CEO has “his” men appointed on the board of directors. They owe him their seats. After a few years, the
CEO seats with a board composed through personnal ties, various free masoneries, student friendship and so forth.”
(Bébéar, 2003).
16
We also ran - results non reported - individual level regressions using appointments instead of employment, with
pretty much the same estimates and success.
21
estimated using employment instead of appointment - as in the speci…cations shown above - since
faces the well-known re‡ection problem (Manski, 1993): if A and B are similar and sitting on the
same board, then it is di¢cult to know whether A seats because of B or the reverse. By introducing
some dynamics, this methodology makes some kind of “Granger causality” argument: it is A who
matters if A was on the board before B.
[Insert Table 5]
The results of these …rm-level regressions for our three selected networks are presented in Table
5. Estimation of all three equations is made jointly using the SURE methodology, and allowing
for ‡exible correlation across observations of a same …rm using the White correction. As above,
industry and year indicators are included. To avoid spurious correlations, explanatory variables
are lagged one year. In the Table, columns 1 to 3 look at the equivalent of (5), that is assuming
c0km = 0. Columns 4 to 6 add the past board composition controls.
The regression results from columns 1 to 3 con…rm previous …ndings; education (ENA and
Polytechnique vs the rest) and career (civil service vs private sector) networks a¤ect the allocation
of directors to …rms, even when analyzing nominations. Results from columns 4 to 6 support the
idea that CEO’s identity, not board composition, explain the selective directors’ appointments.
First, even though inclusion of the board composition variables reduces slightly the di¤erence
between coe¢cients on CEO’s identity (compare tests values for the …rst regression with those for
the second), all c0km coe¢cients for board composition are signi…cant and strongly positive. All
tests give results virtually identical to those presented in Table 4. In addition, we now have similar
results for boards: boards dominated by former civil servants tend to recruit new directors from
the networks (Polytechnique or ENA) they belong to.
5.3
When Directors and CEOs Sort on Other Dimensions
Last, we assess the biases arising from the fact that directors may sort with …rms according to
observable or unobservable characteristics. As suggested in section 4.5, we run …rm level regressions
including average individual characteristics and individual level regressions including …rm level
characteristics, and see if our results still hold.
[Insert Table 6]
We start by reestimating our …rm-level regressions including observable …rm characteristics, as
in equation (2): a dummy equal to one for former SOEs, industry dummies as well as the …rm’s
past pro…tability (as measured by ROA lagged by one year). This approach allows us to take into
account the fact that these observables matter for directors endowed with particular, unobservable,
22
characteristics that might be correlated with networks. This is done in the …rst three columns of
table 6, for each of the three networks we focus on.
As it turns out, these controls do not a¤ect our estimates very much. The only change is
that now …rms run by ENA graduates are as likely to hire former civil servants from ENA than
from Polytechnique. This does not a¤ect our general conclusion that civil-servants networks are
active, while those related to a Grande Ecole (Polytechnique) without bureaucratic career are not.
Accounting for other possible sorting processes, that could be overlapping with network e¤ects,
does not a¤ect our results neither quantitatively nor qualitatively.
In supplementary Table A2, we use individual level regressions to control for director characteristics (age and years of education), instead of …rm level characteristics. Results obtained are similar
to what was reported in Table A1.
6
Real E¤ects of Social Networks
The above results suggest that networks of former high ranking civil-servants seem to be particularly
active in shaping board composition. When the CEO is a former civil-servant (whether a graduate
from Ecole Polytechnique or ENA), the fraction of directors from the same background is larger.
The existing literature in labor economics suggests that such arrangements might be optimal:
CEOs use their own social networks to “grease the wheels” to …nd more appropriate directors.
One obvious cost here is nepotism, i.e. CEOs using their networks to hire friends rather than
appropriate directors. The con‡ict of interest is particularly strong in the present case, as directors
are supposed to monitor the CEO, and friends are obviously less likely to be “tough” supervisors.
Theoretical models in labor economics assume that shareholders can design an optimal contract
with the referee (here, the CEO). In this case, perverse e¤ects such as nepotism, are dominated
by bene…cial e¤ects in equilibrium. This assumption is, however, unlikely to hold in the context of
large, publicly traded corporations such as the ones we study here.
6.1
Connected CEOs are Less Likely to be Fired
As argued above, an important function of the board of directors in a corporation is to discipline
the management in order to make it act in the …rm’s shareholders interests. In some extreme
cases, when it becomes clear that a change in strategy is needed and cannot be implemented by
the current management, this might force the CEO to resign. This is, however, likely to occur
too late if some directors and the CEO belong to the same social network and are tied by social
connections. Then, the CEO might be able to retaliate on any hostile action undertaken by his
directors, even if he loses his job, or in contrast might be able to bribe - because of their common
relations - his directors more e¢ciently.
23
Hence, we ask if well connected CEOs are less likely to be forced out when their …rm performs
badly. There is a long tradition in the corporate governance literature to investigate CEO turnover
to performance sensitivity. In the spirit of this literature, we start with the following logistic
regression:
Tjt =
+ :P ERFjt + :controlsjt + "jt
(6)
where Tjt is a dummy variable equal to 1 when the CEO loses her job over the next year (between t
and t + 1). P ERFjt is an industry adjusted measure of corporate performance (we use here return
on assets, i.e. EBIT over assets). Following Weisbach (1988), we ask if the number of directors
that we label as “insiders” a¤ects . This leads us to estimate the following equation:
Tjt =
+(
0
+
1 :insidersjt
+
2 :controlsjt ) :P ERFjt
+ + :controlsjt + "jt
(7)
where controls include board size (as measured by log(number of directors)), ownership concentration (as measured by the fraction of votes held by the largest block holder), a dummy equal
to 1 when the CEO is not chairman of the board of directors (which is always the case when the
…rm has a German style two tier board structure), and a dummy equal to 1 when the …rm is or
has been state controlled in the past. These controls enter both additively, but also as interactions
with our performance. Indeed, the …nance literature has shown that (1) large board may be less
e¢cient monitors (Yermack (1996)) and thus should decrease turnover to performance sensitivity
(
2
> 0) and (2) large shareholders are more e¢cient monitors (Shleifer and Vishny (1997)) and
thus should increase turnover to performance sensitivity (
2
< 0). There also some suspicions that
CEOs cannot reduce the odds of getting …red when they do not chair the board of directors (
2
> 0).
Finally, given that, as we saw above, social networks related to civil service are the most active, it
is also natural to control for a potentially di¤erent behavior of …rms who have either been recently
privatized, or …rms that are still partially owned by the government. One clear possibility is that
these …rms are, from a general standpoint, less well governed and therefore have lower turnover to
performance sensitivity for reasons beyond the management’s social networks (
The coe¢cient of interest here is
1,
2
> 0).
which measures the extent to which a board with insiders
may reduce the odds of …ring the CEO in case of bad performance. In a cross section of US …rms,
Weisbach (1988) has shown that this is the case for …rms whose board is dominated by former
employees, current employees, or suppliers of the …rm. The analysis conducted above suggests that,
at least in the French context, a more relevant measure of inside directors rests on computing the
number of directors that belong to the same social network as the CEO. We proceed by identifying
social networks as in the above analysis: ENA graduates, Polytechnique graduates with a past
career in the civil service, and Polytechnique graduates with a pure private sector background.
[Insert Table 7]
24
Logistic regression results are reported in Table 7. We restrict ourselves to the sample of CEOs
aged less than 65, in order to reduce the chances that turnover be due to retirement.17 First, column
1 reports the plain CEO turnover regressions without network e¤ects (i.e. assuming
2
= 0). As
it turns out, the sensitivity of turnover to performance is large and statistically signi…cant at 5%.
Other things equal, a one standard deviation reduction in adjusted ROA (by about 6 percentage
points) increases the probability of next year CEO turnover by 37 percentage points. This is not
surprising since a simple cross tabulation shows that, for …rms experiencing CEO turnover, average
industry adjusted ROA is only 1.8 percentage lower than what it is for …rms with stable CEOs.
Column 1 also shows that other controls have little, if any, explanatory power on the sensitivity
of turnover to performance. As it turns out, …rms with a two tier board and …rms with large
shareholders tend to oust their CEOs less often when performance deteriorates. This is at odds
with intuition but statistically insigni…cant. Less surprisingly, former SOEs do indeed seem to have
a weaker governance, although the di¤erence is, again, insigni…cant. This pattern is unchanged
once we control for the presence of inside directors (columns 2 to 5).
We then look at the e¤ect of inside directors on turnover to performance sensitivity. Column 2
takes as our measure of insiders a dummy equal to 1 if the board of directors has at least two ENA
graduates, when the CEO is also an ENA graduate. As it turns out, the di¤erence in sensitivity
between …rms with inside dierctors and …rms without inside directors is large and statistically
signi…cant at 1%. Point estimates suggest that, in the absence of inside directors, a one standard
deviation reduction in adjusted ROA leads to an increase by 33 percentage point in the probability
of CEO turnover. In the presence of inside directors, the same performance reduction actually leads
to a decrease of turnover probability which is not signi…cantly di¤erent from zero.
Columns 3 and 4 look at networks of Polytechnique alumni. Column 3 focuses on Polytechnique
graduates with a past in the civil service, a network that we have shown to be active in the
above analysis. Thus de…ned, the presence of inside directors reduces the turnover to performance
sensitivity of …rms, albeit to a smaller extent than for networks of ENA graduates. Also, the
di¤erence is statistically insigni…cant. One possibility is that there simply to few of these CEOs
and directors to identi…y networks e¤ects properly. Alternatively, these networks may be blended
into the more general network of former high ranking civil servants (we investigate this in column
5). In column 4, we just look at Polytechnique graduates with pure private sector background. The
analysis above suggests that such networks do not appear to shape board of directors composition,
as Polytechnique CEOs are as likely as other CEOs to hire polytechnique directors. Consistently
with this …nding, boards with CEOs from Polytechnique and Polytechnique directors do shake up
the incumbent management as often as other …rms when performance worsens.
In Column 5, we ask if the overall network of former civil servants from ENA or Polytechnique
17
The distribution of CEO age at turnover date indeed has a spike around 65.
25
actually a¤ect corporate governance. It is natural to put these networks together because Tables
4 and 6 have shown that ENA CEOs also tend to hire civil servants with a Polytechnique degree.
This suggest that there exists a larger networks of former high ranking civil servants. We thus use a
dummy equal to 1 when the board of directors has at least two members of either network and the
CEO belongs to one of these networks. Consistently with the estimates reported in columns 2 and
3, civil servant networks appear strongly associated with reduced monitoring of management. The
turnover to performance sensitivity of …rms with such insiders is equal to zero, while it is strongly
negative for the rest of the population. The di¤erence is statistically signi…cant at 5%.
6.2
Connected CEOs Are Too Busy
Most well-connected CEOs tend to accumulate directorships. Table 8 computes the fraction of
CEOs that have, in addition to their executive job, 1, 2, 3 or 4 non executive director seats in
other listed companies. It presents this distribution for all CEOs who are also directors, and then
separately for former civil-servants and CEOs whose whole career was in the private sector. Overall,
70% of all CEOs hold no director seat in another listed …rm. This …gure goes up to 75% for “pure
private sector” CEOs, and down to only 36% for former high ranking bureaucrats ! Hence, former
bureaucrats are twice more likely to have at least one directorship than other CEOs. Conditionnally
on holding at least one seat, they also tend to hold many more of them: 20% have at least 4 seats,
while this …gure drops to 3% for those who never worked for the French government.
[Insert Table 8]
Can CEOs who accumulate director seats still do a good job at running their own …rm ? On
the one hand, the time that a CEO spends sitting at the board of another company is obviously
lost for the company she runs. But on the other hand, by sitting at other companies’ boards,
the CEO can learn about her competitors or other businesses and accumulate information that
may be useful for the …rm she runs. Which e¤ect does dominate is an open empirical question. A
small literature on US executives has tried to adress it by looking at the correlation between the
number of seats held by each CEO and its own …rm performance (see for example, Kaplan and
Reishus, 1990, Booth and Deli, 1996, Ferris, Janagathan and Pritchard, 2003). Using Tobin’s q
as a measure of performance, Booth and Deli …nd a negative correlation, which they interpret as
the fact that …rms with little growth opportunities can send their CEOs to other …rms, without
much cost. Using ROA as …rm’s performance, Ferris et al. …nd a very strong positive correlation.
Both papers conclude that multidirectorship might not be a bad thing after all. These conclusions
are slightly nuanced in a recent paper by Perry and Peyer (2004), who show that own …rm stock
price reactions to CEO appointment as the director of another corporation are positive when the
receiver …rm is in a related industry, and negative in other circumstances.
26
Using our sample of French CEOs, we follow Ferris et al. and look at the correlation between
the number of director seats held and own …rm’s pro…tability (ROA). We expect this correlation
to be positive if good CEOs are often hired as directors. It can be negative if CEOs who tend to
spend a lot of time networking instead of working tend to be the ones who accumulate board seats.
In Table 9, we present estimates of the following individual level, regression:
nit =
+ ROAit + controls + "it
(8)
where nit is the number of board the CEO i sits on at date t. The upper panel of Table 9 provides
estimates with year dummies as only controls. The lower panel provides estimates of
with the
CEO’s …rm’s log assets, board size and industry as additional controls. Column 1 reports estimates
of
for all CEOs, column 2 focuses on the sample of former civil-servants, and column 3 restricts
the sample to CEOs with a pure private sector background. The regression model is, as in Ferris
et al, an ordered logit, where the last category comprises all CEOs holding 4 and more board seats
outside their own company. All residuals "it are clustered at the individual i level.
[Insert Table 9]
The overall correlation between own …rm performance and seat accumulation is strongly negative
in France, in stark contrast with the US results. One interpretation is that the market for directors
is more competitive in the US, or conversely, that the market for directors in France is far from being
competitive. Yet, such a statement has to be moderated by the fact that the order of magnitude of
the exhibited e¤ect, although statistically signi…cant, is not very large. Taking the parameter from
a purely linear model (estimated with OLS), a 0.07 increase in adjusted ROA (one sample standard
deviation) is associated with a reduction of 0.2 director seats. This reduction is to be compared
with an average number of director seats held by CEOs of 0.7.
Strikingly, the correlation is much more negative, twice as large, when CEOs are former civilservants. Here, a 0.07 increase in ROA is associated with a reduction of the number of director
seats by 0.4. This …gure is largely signi…cant, and has to be compared with an average number of
director seats of 1.8 for CEOs with a civil service background. It is possible to test for the di¤erence
in
for both types of CEOs by including in the regression (8) ROA interacted with an indicator
equal to 1 when the CEO is a former civil-servant. Such tests, available from the authors upon
request, show that the di¤erence is statistically signi…cant, especially for the model with controls.
6.3
Connected CEOs Make Worse Acquisitions
Until recently, the (US based) corporate …nance literature had produced mixed results regarding
the pro…tability of acquisitions. Recent contributions (Bradley and Sundaram, 2004; Mitchell and
Sta¤ord, 2000; Moeller, Schlingemann and Stulz, 2005) have allowed scholars to make sense of the
27
results accumulated so far. While many large acquisitions are clearly value-destroying, the bulk
of small and medium sized acquisitions actually create value, as is evidenced by short run stock
price reactions when …rms announce an acquisition. While some of these acquisitions are clearly
the product of undisciplined managerial hubris (the big ones), the majority of them results from
well-thought external growth strategies (the small ones).
[Insert Figure 3]
Following on this literature, we look at the short run stock returns of acquiring …rms around
the announcement date. We compute such returns using daily stock price data from Euronext - the
…rm operating the French stock exchange, along with acquisition announcement dates from SDC Platinium. The data are then merged with our dataset on CEOs. In Figure 3, we report the cumulative returns starting 10 days before the announcement, up until 10 days after the announcement.
These average cumulative returns are computed separately for …rms run by former high ranking
civil-servants and for …rms run by pure private sector CEOs. For “normal” acquiring …rms, there
is a clear, positive, stock price reaction to announcements. The order of magnitude hovers around
1-1.5%, which is consistent with, albeit slightly smaller than, what Andrade, Mitchell and Sta¤ord
(2001) report for their US data (their results hover around 2-2.5%). The market provides, however,
a di¤erent judgement on acquisitions made by former top ranking civil-servants: on average, the
stock price reaction looks much smaller.
[Insert Table 10]
To obtain a sense of statistical signi…cance, we then compute cumulative returns from x days
before the announcement date until x days after the announcement, for di¤erent time windows (x =
1; 3; 5; 7 and 10). For each of these windows, we then compute separately average cumulative returns
for acquisitions made by former civil-servants, and acquisitions made by other CEOs. Average
short-run stock returns, along with standard errors and number of observations, are reported in
table 10. Whatever the window chosen, it is clear that the short-run market reaction to acquisition
announcement by former civil-servants is half that for private sector CEOs. In addition, it does not
di¤er statistically from zero for most windows, while the short-run price increase for private sector
CEOs is statistically signi…cant. Unfortunately, however, this di¤erence between the two groups is
not signi…cant, except for the (-7 days ,+7 days) window. One possible explanation is that we do
not distinguish here between large and small acquisitions (in the acquisition data, the target size
is not frequently reported). One other possibility is that we do not use the correct asset pricing
model here (we do not use any): di¤erent …rms may have di¤erent exposure to risk factors, which
may explain part of the cross sectional di¤erence in their returns. While we do not see an a priori
reason why this should bias our estimates in a direction or the other, this surely adds noise to our
estimates of stock price reactions to acquisition announcements.
28
7
Conclusion: Connected CEOs Run Less Pro…table Firms
Bad governance would not be too much of a concern if …rms run by connected CEOs were overperforming their industries on average. One possibility, often mentioned in the French public debate
is that investors are short termists, and that entrenchement creates value because it helps to insulate
CEOs from pressure to make short-run pro…ts. CEOs trained in the public service learnt the value
of long-run, pro…table projects. To be able to create value in such a fashion, while keeping their
jobs, they need to appoint like-minded directors.
To examine the pro…tability of …rms managed by connected CEOs, we estimate the following
model using …rm level data:
ROAjt = :Cjt + controlsjt + "jt
(9)
where ROAjt denotes …rm’s j returns on assets, where the indicator Cjt is equal to 1 whenever
the CEO of …rm is a former civil-servant. Controls are …rm size, industry, year dummies, and a
dummy equal to one when the …rm is a former SOE. "jt error terms are assumed to be correlated
across observations of a same …rm.
[Insert Table 11]
Table 11 reports the regression results of (9) for real industries (non-…nancial, non-real estate;
in columns 1-2) and for manufacturing (columns 3-4). For each sample, we look at two speci…cations. First, we simply compare civil-servants to non civil-servants (as in (9), in columns 1 and 3).
Secondly, we split the Cjt indicator into an indicator equal to 1 if the CEO is a politically connected
civil-servant (a former “cabinet” advisor), and an indicator equal to 1 if the CEO is a non politically
connected civil-servant (a former high ranking bureaucrat, yet never a cabinet advisor).
First, in contrast to the “short termist investors view”, …rms run by former civil-servants do
not overperform their industries. On average, these …rms are slightly less pro…table than …rms run
by CEOs with a pure private sector background, but the di¤erence is not very signi…cant. Taking
all non …nancial …rms, the di¤erence in ROA is at 0.5 percentage point (not signi…cant); excluding
service industries, the di¤erence in ROA increases to 1.6 percentage point (signi…cant at 10%).
Second, the underperformance of civil-servant-run …rms becomes both economically larger and
statistically signi…cant when we focus on …rms run by politically-connected CEOs. In this case, for
non-…nancial …rms the di¤erence is 1 percentage point, and for manufacturing …rms, it is as high as
3 percentage points (for a sample standard deviation of 6 percentage points). In a companion paper
(Bertrand, Kramarz, Schoar and Thesmar, 2007), we provide an explanation of this di¤erence in
performance. We provide evidence consistent with the fact that politically-connected CEOs distort
the labor demand of their …rms to favor incumbents in upcoming political elections. The gains of
29
this practice is better access to subsidies as well as lower local taxes, but it seems that the costs of
this management style outweigh its bene…ts. The present paper explains why this behavior persists:
former civil-servants – in particular politically-connected ones – appoint friendly directors; in doing
so, they are able to insulate themselves from shareholders pressure. As a result, even when they
do not run their …rms in the most e¢cient way, they are still able to remain in power.
30
8
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9
Appendix
9.1
Identifying Power of the Firm-Level Model
In terms of the above notations, these four sets of variable write:
nkjt =
X
Aki Eijt , njt =
X
Eijt , nkt =
Aki , nt =
X
1
i
i
i
i
X
hence by using model (1) to get an expression of Eijt , we can compute nkjt explicitly:
nkjt =
X
8
<
Aki :
i
X
=
i :Zjt
:
k
i :Ai
i
+
X
mk :
!
+
j :Xit
:Zjt +
nkjt
nkt
where:
X
j:
Aki :Xit
i
m k
Cjt
:Ai
+
m
which leads to:
0
+ Zjt
:M:Xit +
X
!
X
ml :
m l
:Ai + "ijt
Cjt
m;l
+ Zjt :M:
X
Aki :Xit
i
Aki "ijt
!0
9
=
;
i
= b kt :Zjt +
b kt
=
ck =
X
t
ck
j :Xt
ck +
0
+ Zjt
:M:X
t
X
m
mk :Cjt
m
+b
"kjt
(10)
P k
P
k
k
i Ai :"ijt
i i :Ai
P k ,b
"ijt = P
k
A
i Ai
P i ki
i Ai :Xit
P
k
i Ai
so that b kt is the average …xed e¤ect (ability to …nd any kind of directorship) of all members of
ck is the average X for all individuals of network k.
network k. X
it
t
We then compute board size njt :
9
8
=
X
X<
0
m l
+
"
:
C
:A
njt =
ijt
i :Zjt + j :Xit + Zjt :M:Xit +
ml
jt
i
;
:
i
m;l
!
!
!0
X
X
X
=
Xit + Zjt :M:
Xit
i :Zjt + j :
i
+
X
i
m
ml :Cjt :
m;l
which rewrites:
njt
= b t :Zjt +
nt
X
i
Ali
!
i
+
X
"ijt
i
0
c
c
j :Xt + Zjt :M:Xt +
34
X
m;l
m
ml :Cjt :
nlt
+b
"jt
nt
(11)
where:
b kt
=
ct =
X
P
P
"ijt
i
k
i
P ,b
"ijt = Pi
1
i1
Pi
X
Pi it
i1
so that b kt is the average …xed e¤ect (ability to …nd any kind of directorship) of all the labor force.
We now substract (11) from (10) and get:
nkjt
nkt
njt
nt
=
b kt
X
+
ck X
ck
ct + Z 0 :M: X
X
jt
t
t
!
X
nlt
m
+ b
"kjt b
"jt
Cjt
ml
nt
l
{z
}
b t :Zjt +
mk
m
|
j:
ct
X
e¤ect of networks
which more compactly rewrites as:
Yjtk = ak :Zjt +
X
k
m
bmk
t :Cjt + ujt
m
when Xit = 1.
9.2
Identifying Power of the Individual Level Model
Let
k
it
=
X
k
Eijt Cjt
j
be the number of …rm in which i is a director, whose CEO belongs to network k. Again, we use
model (1) to compute this number:
9
8
=
<
X
X
0
m l
k
k
Cjt
:
i :Zjt + j :Xit + Zjt :M:Xit +
ml : Cjt :Ai + "ijt
it =
;
:
j
m;l
10
0
1
1 0
0
X
X
X
k
kA
k
@
Cjt
:Zjt A :M:Xit
Cjt
:Zjt A + @
=
i: @
j :Cjt :Xit +
0
1
X
X
X
k
kA
@
:"ijt
Cjt
:Ali +
Cjt
+
kl :
j
j
l
let
j
j
j
k
t
=
X
k
Cjt
j
be the overall number of …rms headed by a CEO of network k:
k
it
k
t
=
ck
i :Zt
ck :M:X +
+ ckt :Xit + Z
it
t
35
X
l
l
kl :Ai
+ "kit
(12)
where:
P
k
i :Cjt
P k ,
j Cjt
P
k
j Zjt :Cjt
P k
j Cjt
ck =
t
j
ck =
X
t
"kit
=
P
k
j Cjt :"ijt
P k
j Cjt
We now compute the number of directorship held by a single individual i a date t:
9
8
=
X
X<
0
m l
+
"
:Z
+
:X
+
Z
:M:X
+
:
C
:A
=
ijt
i
jt
it
it
ml
j
it
jt
jt
i
;
:
j
m;l
10
0
1
1 0
0
X
X
X
A :Xit + @
Zjt A :M:Xit
Zjt A + @
=
i: @
j
0
1
X
X
X
mA
@
+
"ijt
Cjt
:Ali +
ml :
j
m;l
again, we divide by
j
j
j
j
t,
the overall number of …rms at date t:
it
=
ct 0 :M:Xit +
c + bt :Xit + Z
i :Zt
t
X
kl :
l
l
t
:Ali + "kit
t
We are now set to substract (13) from (12) and obtain in the process:
k
it
k
t
it
=
i:
t
+
X
m
or, in a more compact form:
ck
Z
t
km
|
ct + ck
Z
t
X
lm :
t
l
{z
dkm
t , e¤ect of networks
Witk = ckt :Xit +
X
m
when we assume Zjt = 1.
l
t
ck
b :Xit + Z
t
t
!
36
k
:Am
i + "it
}
k
m
dkm
t :Ai + vit
"it
ct :M:Xit
Z
(13)
Figures
70
Weighted Fraction of Firms Run by a CEO From
privatizations resume
60
50
40
30
20
10
0
1992
1993
1994
ENA
1995
1996
1997
1998
Polytechnique, private sector
1999
2000
2001
2002
Polytechnique, civil service
Figure 1: Characteristics of the CEOs of France’s Listed Corporations :
1992-2003
30
20
(in percentage points)
Asset Weighted Fraction of Directors From
10
10
Viénot Report II
Viénot Report I
Privatizations
resume
0
1992
1993
1994
ENA
1995
1996
1997
Polytechnique, private sector
1998
1999
2000
2001
2002
Polytechnique, civil service
Figure 2: Board Composition of French Listed Corporations : 1992 - 2003
37
101
100
101
100
-10
-5
0
5
Days Since Acquisition
Former civil servants
10
-10
Other
-5
0
5
Days Since Acquisition
Former 'cabinet' advisor
10
Other
Figure 3: Mean Cumulative Returns Around Acquisition Announcement
38
11
Tables
Table 1: Firm Level Summary Statistics
Mean
Std Dev.
Min
Max
Asset Weighted Mean
CEO Background
ENA graduate
Polytechnique, former civil servant
Polytechnique, always private sector
In Who’s Who
Former civil servant
Former "cabinet" advisor
0.07
0.04
0.08
0.51
0.12
0.06
0.26
0.20
0.27
0.50
0.32
0.24
0
0
0
0
0
0
1
1
1
1
1
1
0.54
0.08
0.33
0.88
0.65
0.52
Outside Directors
Total Number
At least one ENA
At least one polytechnique, CS
At least one polytechnique, PS
6.9
0.30
0.18
0.36
3.8
0.46
0.38
0.48
1
0
0
0
26
1
1
1
0.90
0.59
0.81
Firm Characteristics
Former SOE
Currently SOE
Pct shares held by major block holder
0.13
0.04
50.8
0.34
0.20
25.1
0
0
0
1
1
100
0.64
0.13
27.0
Firm Performance
Assets (bn Euros)
Return on Assets
Return on Equity
Tobin’s Q
Age (years)
5.5
0.06
0.16
1.3
62
45,7
0.06
0.19
0.8
48
-0.13
-0.79
0.3
0
0.27
0.88
6.6
327
-
Note: French public …rms over the 1994-2001 period. Source: DAFSA diary of public …rms for the names of
the directors. Who’s Who and School Diaries
39
Table 2: Director Level Summary Statistics
Mean
Std Dev.
Asset weighted mean
Positions
# of CEO seats
# of director seats held
0.1
1.9
0.4
1.7
0.3
3.0
Past Career and Education
ENA graduate
Polytechnique, once civil servant
Polytechnique, always private sector
Is in Who’s Who
Former civil servant
Former "cabinet" advisor
Age
0.08
0.04
0.10
0.37
0.12
0.06
60
0.27
0.19
0.30
0.48
0.32
0.24
10
0.26
0.07
0.17
0.57
0.33
0.20
-
Note: French public …rms over the 1994-2001 period. Source: DAFSA diary of public …rms for the names of
the directors. Who’s Who and School Diaries
Table 3: Preliminary Evidence on Networks
Board Composition as a Function of the CEO’s Background
All
CEO Education/career
ENA Poly., C.S. Poly., P.S.
Non weighted averages
% of ENA graduates
% of Poly. graduates, civil servants
% of Poly. graduates, private sector
% of other
0.06
0.03
0.07
0.84
0.16
0.06
0.09
0.69
0.13
0.12
0.12
0.63
0.08
0.04
0.12
0.76
0.05
0.02
0.06
0.87
Asset weighted averages
% of ENA graduates
% of Poly. graduates, civil servants
% of Poly. graduates, private sector
% of other
0.25
0.07
0.12
0.56
0.31
0.08
0.14
0.47
0.23
0.13
0.13
0.51
0.22
0.07
0.10
0.61
0.11
0.02
0.09
0.77
Other
Note: French public …rms over the 1992-2001 period. Source: DAFSA diary of public …rms for the names of
the directors. Who’s Who and School Diaries
40
Table 4: Econometric Evidence on Networks
E¤ect of the CEO’s Background on Director Current Employment
Firm level model
Among currently employed
directors, fraction of:
ENA Poly, C.S. Poly, P.S.
CEO is ENA
CEO is Polytechnique
& former civil servant
CEO is Polytechnique
& always private sector
Year dummies
0.6
(0.1)
0.5
(0.1)
0.2
(0.1)
0.3
(0.1)
1.0
(0.1)
0.1
(0.1)
0.1
(0.0)
0.3
(0.1)
0.2
(0.0)
yes
yes
yes
Observations
Test
Test
Test
Test
Test
Test
8,035
ENA(1)=ENA(2)
ENA(1)=ENA(3)
Poly, CS(2)=Poly, CS(1)
Poly, CS(2)=Poly, CS(3)
Poly, PS(3)=Poly, PS(1)
Poly, PS(3)=Poly, PS(2)
0.00
0.00
0.00
0.00
0.50
0.97
Note: SURE estimates - Standard errors between brackets. Residual are allowed to be correlated across
equations and observations of the same …rm. All explanatory variables are lagged by one year. Source:
DAFSA yearbook of listed companies for accounting variables and Who’s Who in France (1994 and 2000
issues) for directors’ education. Polytechnique and ENA graduates directories for CEOs.
41
Table 5: Econometric Evidence on Networks
E¤ect of the CEO’s Background on Director Appointment
Among newly appointed
directors, fraction of:
CEO is ENA
CEO is Polytechnique
& former civil servant
CEO is Polytechnique
& always private sector
% of ENA directors (-1)
% of Poly, former C.S.
directors (-1)
% of Poly., always P.S.
directors (-1)
Year dummies
Observations
Test
Test
Test
Test
Test
Test
ENA(1)=ENA(2)
ENA(1)=ENA(3)
Poly, CS(2)=Poly, CS(1)
Poly, CS(2)=Poly, CS(3)
Poly, PS(3)=Poly, PS(1)
Poly, PS(3)=Poly, PS(2)
Firm level regressions
(3)
(1)
(2)
Poly, P.S.
ENA
Poly, C.S.
(1)
ENA
(2)
Poly, C.S.
0.13
(0.02)
0.10
(0.02)
0.04
(0.02)
-
0.06
(0.02)
0.23
(0.04)
0.05
(0.02)
-
0.03
(0.01)
0.03
(0.01)
0.05
(0.01)
-
-
-
-
-
-
-
yes
yes
yes
(3)
Poly, P.S.
0.09
(0.02)
0.05
(0.02)
0.02
(0.01)
0.35
(0.04)
0.17
(0.05)
0.09
(0.03)
0.04
(0.02)
0.18
(0.04)
0.03
(0.02)
0.12
(0.04)
0.36
(0.11)
0.03
(0.03)
0.02
(0.01)
0.02
(0.01)
0.04
(0.01)
0.10
(0.03)
0.02
(0.03)
0.07
(0.02)
yes
yes
yes
6,759
6,757
0.01
0.01
0.00
0.00
0.72
0.99
0.00
0.00
0.00
0.00
0.18
0.87
Note: SURE estimates - Standard errors between brackets. Residual are allowed to be correlated across
equations and observations of the same …rm. All explanatory variables are lagged by one year. Source:
DAFSA yearbook of listed companies for accounting variables and Who’s Who in France (1994 and 2000
issues) for directors’ education. Polytechnique and ENA graduates directories for CEOs.
42
Table 6: Econometric Evidence on Networks
Robustness to Additional Sorting Variables
Firm level model
(2)
(3)
Poly, C.S. Poly, P.S.
Among currently employed
directors, fraction of:
(1)
ENA
CEO is ENA
0.5
(0.1)
0.4
(0.1)
0.1
(0.1)
0.4
(0.1)
1.0
(0.2)
0.1
(0.1)
0.1
(0.1)
0.2
(0.1)
0.2
(0.0)
yes
yes
yes
yes
yes
yes
yes
yes
yes
CEO is Polytechnique
& former civil servant
CEO is Polytechnique
& always private sector
Former SOE dummy
Past year …rm ROA
Industry dummies
Observations
Test
Test
Test
Test
Test
Test
5,219
ENA(1)=ENA(2)
ENA(1)=ENA(3)
Poly, CS(2)=Poly, CS(1)
Poly, CS(2)=Poly, CS(3)
Poly, PS(3)=Poly, PS(1)
Poly, PS(3)=Poly, PS(2)
0.35
0.00
0.01
0.00
0.35
0.36
Note: SURE estimates - Standard errors between brackets. Residual are allowed to be correlated across
equations and observations of the same …rm. All explanatory variables are lagged by one year. Source:
DAFSA yearbook of listed companies for accounting variables and Who’s Who in France (1994 and 2000
issues) for directors’ education. Polytechnique and ENA graduates directories for CEOs.
43
Table 7: CEO Turnover: Do Networks Matter ?
CEO belongs to:
Base
Industry Adj. ROA
-7.7
(3.9)
-
Industry Adj. ROA
(# directors = CEO > 2)
(# directors = CEO > 2)
Industry Adj. ROA
Former or current SOE
Industry Adj. ROA
% largest blockholder
Industry Adj. ROA
Two tier board
Former/current SOE
% largest blockholder
Two tier board
log(board size)
Log(assets)
Industry dummies
Year dummies
Observations
Losing CEO Position in the Forthcoming Year
ENA
Poly, CS Poly, PS ENA or poly CS
-5.5
(3.4)
2.6
(5.8)
2.8
(4.4)
0.2
(0.2)
1.4
(0.4)
0.4
(0.2)
0.3
(0.2)
0.00
(0.06)
-9.7
(3.9)
14.6
(5.0)
0.2
(0.4)
-5.7
(4.4)
4.7
(5.9)
3.7
(4.3)
0.2
(0.2)
1.4
(0.4)
0.4
(0.2)
0.3
(0.2)
0.02
(0.06)
-8.1
(4.0)
3.2
(10.0)
1.1
(0.4)
-6.0
(4.5)
3.4
(5.9)
2.7
(4.5)
0.1
(0.2)
1.5
(0.4)
0.4
(0.2)
0.3
(0.2)
-0.01
(0.06)
-7.9
(3.9)
3.2
(5.1)
0.4
(0.4)
-5.9
(4.4)
2.8
(5.8)
2.8
(4.5)
0.2
(0.2)
1.4
(0.4)
0.4
(0.2)
0.2
(0.2)
-0.01
(0.06)
-9.8
(4.2)
10.1
(5.0)
0.5
(0.3)
-6.1
(4.5)
5.2
(6.2)
3.4
(4.4)
0.1
(0.2)
1.5
(0.4)
0.4
(0.2)
0.2
(0.2)
-0.01
(0.06)
Yes
Yes
1,629
Yes
Yes
1,629
Yes
Yes
1,629
Yes
Yes
1,629
Yes
Yes
1,629
-
Note: Logit estimates - Standard errors between brackets. Sample of all …rms run by a CEO aged
less than 65. Error terms are clustered at the …rm level. In all regressions, the dependant variable
is a dummy equal to 1 when the current CEO is not the CEO anymore next year. In column 1,
we simply regress this departure dummy on industry adjusted …rm Return on Assets and controls.
We then interact this performance variable with a dummy equal to 1 when (1) the CEO belongs
to a network and (2) at least two directors belong to the same network. In column 2, network
is “ENA graduate”. In column 3, network is “Polytechnique graduate, civil service career”. In
column 4, network is de…ned as “Polytechnique graduate, purely private sector career”. Columns
5 encompasses columns 2 and 3: network is de…ned as “ENA graduate, or Polytechnique graduate
with career in the civil service”.
44
Table 8: Connected CEOs Are Busy Directors ?
No Seat
One Seats
Two Seats
Three Seats
Four Seats or More
All
Former civil servants
Never civil servant
70
14
7
3
5
36
22
13
9
20
75
13
6
3
3
100
100
100
Note: The data is the 1992 - 2003 panel of CEOs of listed …rms. The dependant variable is number of non
executive director seats held in other listed companies: for all CEOs holding more than 4 seats, it is coded
as 4.
45
Table 9: Connected CEOs:
Managerial Performance and Number of Outside Directorships
All
# of director seats held
Former
Always
civil servants private sector
Panel A: No Controls
Own Firm ROA
Observations
Panel B: With Controls
Own Firm ROA
Observations
-5.3
(0.7)
5,286
-9.4
(2.1)
601
-4.1
(1.1)
2,222
-5.5
(1.2)
2,855
-11.0
(2.0)
601
-4.0
(1.4)
2,222
Note: Ordered logit estimates - Standard errors between brackets. The data is the 1992 - 2003 panel of
CEOs of listed …rms. The dependant variable is number of non executive director seats held in other listed
companies: for all CEOs holding more than 4 seats, it is coded as 4. The main explanatory variable is the
CEO’s …rm ROA: this table provides the estimate, its standard error and the number of observations used
in the regression. Panel A reports the results of regressions with year dummies as only controls. Panel B
further includes CEO’s industry, own …rm size and the board size of the CEO’s …rm as controls. Column
1 runs regression on the whole sample of CEOs. Column 2 focuses on former civil servant, while column
3 looks at pure private sector managers. In all regressions, residuals are allowed to be correlated across
observations of the same individual.
46
Table 10: Market’s Assessment of Acquisitions by Connected CEOs
Mean Cumulative Stock Returns
Former
Always
p-value
civil servants Private Sector equality
# of days before till # of days after announcement:
(-1,+1)
0.5
0.7
0.45
(0.1)
(0.2)
(-3,+3)
0.6
1.2
0.12
(0.3)
(0.2)
(-5,+5)
0.7
1.3
0.14
(0.3)
(0.3)
(-7,+7)
0.6
1.2
0.08
(0.4)
(0.3)
(-10,+10)
0.5
1.3
0.12
(0.5)
(0.3)
Observations
379
931
-
Note: Mean cumulative (unadjusted) stock returns around the day of acquisition announcement. All acquisitions reported in SDC Platinium, from 1991 till 2001, for which stock returns and CEO background could
be retrieved. Sources: DAFSA yearbook of listed companies for accounting variables and Who’s Who in
France (1994 and 2000 issues) for CEO background. SDC Platinium for acquisition dates. Stock returns data
are provided by Euronext. Standard errors are between brackets.
47
Table 11: Do Connected CEOs Perform Any Better ?
Return on Assets
Real
Manuf.
(1)
(2)
(1)
(2)
CEO is former S.C.
CEO is former
"cabinet" advisor
CEO is other
former S.C.
log(assets)
Cotation on “premier
marché”
Former SOE
Year Controls
Industry Controls
Observations
-0.5
(0.5)
-
-1.1
(0.5)
-0.1
(0.7)
-1.6
(0.8)
-
-3.0
(0.8)
-0.8
(1.0)
0.0
(0.1)
2.3
(0.4)
-0.7
(0.5)
0.1
(0.1)
2.3
(0.4)
-0.7
(0.6)
0.2
(0.2)
2.6
(0.5)
0.2
(0.9)
0.3
(0.2)
2.6
(0.5)
0.2
(0.9)
yes
yes
yes
yes
yes
yes
yes
yes
5,362
5,362
2,324
2,324
Note: OLS estimates - Standard errors between brackets. Residual are allowed to be correlated across
observations of the same …rm. All explanatory variables are lagged by one year. Source: DAFSA yearbook
of listed companies for accounting variables and Who’s Who in France (1994 and 2000 issues) for directors’
education. Polytechnique and ENA graduates directories for CEOs.
48
Table A1: Econometric Evidence on Networks
Evidence From Individual Level Regressions
Individual level model
Among board seats held, fraction
of …rms run by a CEO from
ENA Poly, C.S.
Poly, P.S.
Director is ENA
Director is Polytechnique
& former civil servant
Director is Polytechnique
& always private sector
Year dummies
0.6
(0.1)
0.3
(0.1)
0.1
(0.0)
0.5
(0.1)
1.0
(0.1)
0.2
(0.1)
0.2
(0.0)
0.1
(0.1)
0.1
(0.0)
yes
yes
yes
Observations
43,858
Test
Test
Test
Test
Test
Test
0.43
0.00
0.00
0.00
0.48
0.25
ENA(1)=ENA(2)
ENA(1)=ENA(3)
Poly, CS(2)=Poly, CS(1)
Poly, CS(2)=Poly, CS(3)
Poly, PS(3)=Poly, PS(1)
Poly, PS(3)=Poly, PS(2)
Note: SURE estimates - Standard errors between brackets. Residual are allowed to be correlated across
equations and observations of the same individual. All explanatory variables are lagged by one year. Source:
DAFSA yearbook of listed companies for accounting variables and Who’s Who in France (1994 and 2000
issues) for directors’ education. Polytechnique and ENA graduates directories for CEOs.
49
Table A2: Robustness to Additional Sorting Variables
Evidence From Individual Level Regressions
Individual level model
Among board seats held, fraction
of …rms run by a CEO from:
ENA Poly, C.S.
Poly, P.S.
Director is ENA
Director is Polytechnique
& former civil servant
Director is Polytechnique
& always private sector
Director’s age
Director’s education
0.5
(0.1)
0.2
(0.1)
0.1
(0.1)
0.4
(0.1)
1.1
(0.2)
0.4
(0.1)
0.1
(0.1)
0.1
(0.1)
0.1
(0.1)
yes
yes
yes
yes
yes
yes
Observations
12,232
Test
Test
Test
Test
Test
Test
0.52
0.00
0.01
0.00
0.67
0.07
ENA(1)=ENA(2)
ENA(1)=ENA(3)
Poly, CS(2)=Poly, CS(1)
Poly, CS(2)=Poly, CS(3)
Poly, PS(3)=Poly, PS(1)
Poly, PS(3)=Poly, PS(2)
Note: SURE estimates - Standard errors between brackets. Residual are allowed to be correlated across
observations and across equations for each given individual. All explanatory variables are lagged by one
year. Source: DAFSA yearbook of listed companies for accounting variables and Who’s Who in France (1994
and 2000 issues) for directors’ education. Polytechnique and ENA graduates directories for CEOs.
50