Why CEOs jump ship (or not) when a firm is failing

It’s a fairly common practice in the corporate world, that as a company begins to falter, it is seldom very long before the boss is punted out the door.  Of course, sometimes the CEO jumps before they’re pushed, which is something driven by their ‘social capital’.

That’s the finding of a recent study from the University of Arizona.  They define social capital as the strength of social relationships with colleagues and external stakeholders.  They found that if the boss has strong social capital, they are less likely to voluntarily jump ship.  Interestingly however, those at the opposite end, ie with minimal social capital, were also not very likely to voluntarily leave.  It was those somewhere in the middle that were most likely to walk when things got tough.

Position in the network

The study was based around the position of each executive in their network, and how this influences subsequent decisions.  The authors argue that resignations are essentially cost-benefit dilemmas.  A failing company can damage the reputation of the executive, which is reason enough to leave for many, but that would sacrifice the connections and resources they’ve built up within the company.

Whilst it may seem easier to jump ship when these connections are low, they also make it harder to jump from your sinking ship onto a healthier one.

“If I don’t have strong enough social capital and I don’t know anybody in this business circle, even if I want to escape from my declining firm, I probably won’t be able to find opportunities that will allow me to do so,” the authors say. “I probably will be locked up in my company, so I have no choice but to stay.”

Likewise, when executives have super strong networks, they may have plenty of other options, but they’ve also got exceptional connections internally that they are loathe to lose.

“If my social capital is strong enough, I probably won’t be that worried or concerned about the negative consequences of my company failing. Even if my firm does end up failing, I can still manage to leverage my strong connections to find myself a parachute that will allow me to land safely after that failure,” the researchers say. “More importantly, if I have very strong social capital, I’m probably more confident about using my capability and my resources to save my firm.”

Networks of networks

To further complicate matters, the social capital of our wider network also matters.  For instance, if our peers also have very strong networks, this makes our connection to them even more valuable, both in terms of the benefit it can bring, but also in terms of the damage they could cause to my reputation.

As such, it’s the executive who sits in a kind of Goldilocks position somewhere in the middle that is most likely to jump ship.

“If I have a medium level of social capital, I can leverage my fairly established social network to find myself alternative employment opportunities,” the authors explain. “Compared to extremely socially connected executives, I’m probably not that confident about being able to save my firm, and I probably won’t be that protected from the consequences of a potential public failure. I have both the motivation and the capability to leave.”

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