According to a study published in the Journal of Corporate Finance, a CEO with a diverse social network can have a direct impact on the success of an organization—both in terms of business opportunities and innovation.
Want to make your organization stronger? Take a good, hard look at your network of people.
A new study published in the Journal of Corporate Finance this week makes the case that a CEOs with connections to diverse social environments built of people from a variety of backgrounds can create more value for the organizations they lead.
“Our findings suggest subtle nuances in relationships between network diversity, information, and economic performance, opening a new line of inquiry into the micro-sociological view of CEO networks,” the report—written by researchers at Illinois Tech, Rensselaer Polytechnic Institute, and Fordham University—states. “The implication is that the benefit or cost of social networks comes not only from the number of a CEO’s social ties, but also from the level of diversity within the network.”
The research was based on an analysis of BoardEx data from the Center for Corporate Performance, with a sample of more than 1,200 CEOs surveyed. The CEOs, who led firms on the S&P 1500 between 2000 and 2010, were analyzed based on where they went to school, their work affiliations, their social involvement, and the diversity of their networks. The findings found that companies with CEOs that had high levels of network diversity had a higher ratio of market value compared to corporate assets, a signifier called “Tobin’s Q.”
The report also found that new CEOs who took the place of leaders with less diverse networks often drove better results on the stock market.
In a piece summarizing the results on Harvard Business Review, the research noted that leaders with more diverse networks tended to have more access to foreign investment opportunities and often more access to new, innovative ideas.
“Our findings have broad implications. Today’s CEOs require expansive knowledge to innovate and respond to increased competitive pressure,” the researchers wrote in their summary. “Although acquiring knowledge can be costly, our findings suggest that the more diverse the social networks of the CEO area, the greater the growth opportunities are for the firm through exposure to different types of information and knowledge.”