Ties of friendship between corporate directors and CEOs can compromise firms’ integrity, but public disclosure of the ties can make the problem worse, according to research in the American Accounting Association’s Accounting Review. In a study of 56 board members, 46% of those who were asked to imagine being directors of a fictitious firm whose CEO was a friend said they’d be willing to substantially cut R&D if it meant triggering a hefty bonus for the chief executive (compared with 6% of those who were asked to imagine that the CEO wasn’t a friend). Those who imagined disclosing the friendship were willing to cut 66% more than those who imagined keeping the friendship secret—apparently because disclosing the friendship gave directors the feeling they had a moral license to reward the CEO, the researchers say.

SOURCE:  Will Disclosure of Friendship Ties Between Directors and CEOs Yield Perverse Effects?

This blog first appeared on Harvard Business Review on 7/03/2014.

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