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How a CEO’s Social Life Impacts Company Performance

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The conversation starts to pick up on the cart ride between the 8th and 9th holes. The CEO of a small but growing business casually mentions that he’s thinking about expanding the company’s operations, investing in new facilities, and hiring a larger staff. His golf partner, a board member at another firm, asks questions and offers advice based on his own experience.

A productive discussion ensues and, by the end of the back nine, the two part ways feeling more informed about their anticipated investments.

This common scenario represents more than just a chance networking opportunity. It could also yield measurable benefits for each company’s economic performance.

Executives’ influence on company performance extends well beyond the corporate boardroom. When they’re not at the office, they serve on boards at nonprofit organizations and social clubs. They play golf with former colleagues and get drinks with old classmates. Often these associates are other executives who are knowledgeable about the current business climate; when the small talk winds down, the shop talk begins.

Just as someone would recommend a restaurant or movie to the rest of his or her group of friends, executives who share social circles tend to give each other advice: whether it’s a good time to make corporate investments, open a new plant, or hire employees. In most cases there is nothing underhanded about these conversations, provided no inside financial information is being exchanged.

Cesare Fracassi, an assistant professor who studies executives’ social networks, says these interactions can equip corporate leaders to make more educated decisions and improve their companies’ financial performance.

“Social networks help to create more informed decisions,” Fracassi says. “When I have more friends, I can decide what restaurant I want to eat at, what movie I want to watch, and how to invest.”

Go with the Flow

In a recent study, Fracassi traced the social ties between 30,860 executives at 2,059 companies over the course of nine years, identifying connections between those who overlapped at school, held management positions in the same company, or had memberships in common social clubs or nonprofit organizations. Next he looked at company decisions, especially investment patterns.

Fracassi observed that companies led by socially connected directors increased their investments at similar rates, while companies with less-connected executives tended to follow more distinct strategies. This occurs because when one member of a social circle decides to ramp up his or her investments, the CEOs and directors of other firms in the group are inclined to follow suit, Fracassi says.

“The more social connections two companies share with each other, the more similar their investment policies are,” the study reports. “In addition, two connected companies change their investment policies over time more similarly than two companies that are less socially connected.”

This tendency is known as informational cascade. And Fracassi says it’s often a good thing.

It Pays to be Social

Being in the loop gives a firm access to a large volume of information to guide financial decisions—but does all that insight translate into good decisions? Fracassi found evidence that when a group of knowledgeable executives starts talking, it pays to be part of the conversation.

“There is evidence that suggests that where the CEO and directors are more socially involved, the company is more profitable,” Fracassi says. “The information they receive helps the company to make the right decisions.”

Specifically, companies that are positioned more centrally in the web of social networks tend to have better economic results—including greater firm value and a higher return on assets—than those on the social fringes, the study reports. That bump could result in a jump in performance of 5 to 15 percent.

Because the word-of-mouth information passed through social networks flows freely and at a low cost, it’s advantageous for companies to collect as much of it as possible.

“A strategic position in the network gives a player a competitive informational advantage relative to other players that are less connected,” Fracassi writes.

Keep Your Friends Close … But Not Too Close

While the research indicates that staying connected to outside social networks can benefit a company’s financial performance, Fracassi says the opposite may be true for close social relationships among directors within the same company—specifically between the CEO and the board of directors.

In a 2012 paper, Fracassi and co-author Geoffrey Tate of the University of North Carolina detailed the risks associated with that type of scenario.

At most companies, board members are charged with monitoring the CEO and holding him or her accountable for poor investment decisions. But if the CEO and directors are connected through outside social ties—say, they worked together in the past, went to the same school, or are members of the same non-profit organization or club—the monitoring tends to be weaker.

In this scenario, the board tends to be more lenient toward the CEO, even if he or she starts growing the company too rapidly by making unwise acquisitions or unproductive investments. This, in turn, can lead to a dip in the company’s share price, especially for firms that have weaker shareholder rights.

The study also indicates that firms with powerful CEOs are the most likely to add new directors who have pre-existing connections to the executive, strengthening those social bonds.

Fracassi says this outcome isn’t always the result of a conscious distortion by directors who want to cut a friend some slack. Rather, it’s that people are naturally more trusting of someone they know.

“But this trust leads to CEOs making decisions that harm shareholders’ value” in the form of unwise merger deals, he says.

Some argue that close ties can help improve the exchange of information between executives at the same firm. But overall, Fracassi’s research suggests that on balance, the negative effects from these internal social ties often outweigh the potential advantages.

“A well-functioning board of directors provides both valuable advice to management and a check on its policies,” the study’s authors write. “An effective director should not just ‘rubber stamp’ management’s actions, but should take a contrarian opinion when management’s proposals are not in the interest of the firm’s shareholders.”

A series of legislative measures, including the Sarbanes–Oxley Act of 2002, have taken aim at boardroom corruption, but Fracassi and Tate have found little evidence that those policies have significantly discouraged the practice of stocking boards with familiar faces. The researchers identify internal networks of CEOs and board members as “an effective target for future governance reform.”

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About the Author

This article was written by Rob Hendrick of Texas Enterprise, a business blog that shares the business and public policy knowledge created at The University of Texas with the world. Rob was born and raised in Austin, writer Rob Heidrick has spent several years as a contributor and editor at local magazines and community newspapers. He earned an English degree from Davidson College in 2006 and a Master’s in Journalism from the Medill School of Journalism at Northwestern University in 2008. Before joining the Texas Enterprise staff in November 2010, he was a senior editor at Community Impact Newspaper, overseeing three publications in Williamson County. see more.

Callum Connects

Jasmine Tan, Director of Stone Amperor

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Jasmine saves her clients time and effort when doing kitchen fit outs with her biz Stone Amperor.

What’s your story?
I started working in the industry in 2003. I was in a marble and granite supplier company for 5 years. Even though I left the company, I still had customers calling me for my services. I referred them back to my previous company but they refused to because they loved the fast response service that I offered. I realised that customers do look at prices, however most of them prefer quality over quantity. Thus I have decided to establish a sole proprietor company also known as 78 Degrees which later rebranded as Stone Amperor in 2014.

What excites you most about your industry?
The kitchen countertop industry is a very confusing market. There are many brands, materials and prices to choose from. What excites me the most is my ability to help clients choose the best materials and brands within their budgets, whilst saving them time and effort.

What’s your connection to Asia?
I have been in Asia all my life and I love Asia. No matter where you go there is no place like home.


Favourite city in Asia for business and why?
I love Singapore. This is because Singapore has always been a stable country and it is great for doing business. However as it is a small country, it can be really competitive. I believe that if just do your best and give your best to your customers, you can overcome this.

What’s the best piece of advice you ever received?
“Take actions. Learn and improve continuously. An idea without action is just a dream.” This was really good advice that I received from my partner.

Who inspires you?
A very down to earth billionaire from Malaysia, Robert Kuok

What have you just learnt recently that blew you away?
Property is the foundation of every business.

If you had your time again, what would you do differently?
Own instead of renting property for my business.

How do you unwind?
I enjoy going shopping, watching movies and hanging out with friends. I am quite a simple being.

Favourite Asian destination for relaxation? Why?
I love going to Taiwan as I love the culture there. Everyone is so polite and the weather is great.

Everyone in business should read this book:
Sun Tzu, Art of war

Shameless plug for your business:
Perfect top, Perfect price, Perfect life from Stone Amperor

How can people connect with you?
Email me at [email protected]

Twitter handle?
@StoneAmperor

This interview is part of the ‘Callum Connect’ series of more than 500 interviews

Callum Laing is an entrepreneur and investor based in Singapore. He has previously started, built and sold half a dozen businesses and is now a Partner at Unity-Group Private Equity and Co-Founder of The Marketing Group PLC. He is the author two best selling books ‘Progressive Partnerships’ and ‘Agglomerate’.

Connect with Callum here:
twitter.com/laingcallum
linkedin.com/in/callumlaing
Download free copies of his books here: www.callumlaing.com

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Entrepreneurship

Is There A Coworking Space Bubble?

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An annual growth rate of nearly 100%, almost five years in a row? More than 60 coworking spaces in a city like Berlin? Are these the characteristics of a bubble? Nope, these are characteristics of a lasting change in our world of work, which has been further catalyzed by the recent economic crises in many countries. But what makes this change different to a bubble? We’ve summarized some arguments of why the coworking movement is based on a sustainable change. However, that doesn’t mean it’s an easy job to open a good working coworking space.

Five reasons why the growth of coworking spaces is based on organic and sustainable growth: 

1. Coworking spaces invest their own money and create real wealth

Already, there is a convincing argument supporting why coworking spaces are not developing in a bubble: the fact that they create real wealth.

Whether referring to the dotcom bubble a decade ago or the real estate crisis in Spain or the United States, the crisis originated in a glut of cheap money, in an environment in which the sender and the recipient were unacquainted. From funds and banks, money flowed in steady streams to investments which offered little resistance and the most promising returns – which only a little while later turned into delusions and ruined investments.

Redistributed risks create illusions. Those people who distributed the money rarely wore the risk of investment decisions. The risk was mainly taken by small shareholders or people who bought parts of those investments. This was because either both parties’ (better) judgement was drowned out by the noise of the market, or because shareholders were unaware of the risk, and were at the mercy of banks and funds for reliable information.

Another fundamental condition for the creation of bubbles are the sheer amounts of money that flow from various locations globally and are concentrated, by comparison, in much fewer places.

Most coworking spaces, however, receive their funding from local or nearby sources and do not operate within this financial system. In fact, the founders mainly inject the bulk of the required investment, and turn to friends or relatives for additional support. They wear the full brunt of the risks that are involved in small-time investment.

They have access to much more information, because it is their own project, rather than a foreign one thousands of miles away. This also includes failures and mistakes that are encountered along the way, but the risk is less redistributed, thereby decreasing the probability of failures.

2. Labor market changes demand on certain office types lastingly

Most users of coworking spaces are self-employed. The proportion of employees is also on the rise, in many cases simply because they work for small companies that increasingly opt to conduct their business in coworking spaces rather than in traditional offices. The industry of almost all coworkers fall within the Internet-based creative industries.

With flexibilisation of work markets, new mobile technologies that are changing work patterns, and the increase of external services purchasing from large and medium-sized enterprises (outsourcing), the labor market has changed radically in many parts of the world.

The long-term financial and emotional security of becoming an employee no longer exists, especially for younger generations of workers. Bigger companies are quicker to fire than hire, and precarious short-term contracts are on the rise. Promising options on the labor market are more often recuded to freelancer careers and starting your own company.

And that’s possible with less money to invest. All you need is a laptop, a brain and a good network. For years, the number of independent workers and small businesses has been growing worldwide – particularly in internet-based creative industries. Anyone who has sufficient specialized skills and the willingness to take risks may adapt more quickly to market conditions if they own a small business or are self employed; more so than if they were to work in a dependent position in an equally volatile market.

Coworking spaces provide an environment in which to do this. Once they have joined a (suitable) coworking space, these factors become apparent to coworkers, who will remain in their space for years to come.

Furthermore, independent workers rarely fire themselves in crises, and even small companies are less likely to give their employees the boot – compared to their large counterparts. This combination enables more sustainable business models – and less business models à la Groupon.

3. Coworking spaces don’t live on crises

Global economic growth is waning while the number of coworking spaces is continually growing. Do coworking spaces thus benefit from this crisis?

The current crises accelerate the formation and growth of coworking spaces, because they offer solutions and space for the resulting problems. Coworking spaces are therefore not a result of a crisis, but the product of change that pre-dates their existence. A crisis is simply the most visible expression of change.

The first coworking spaces emerged in the late 1990s; the movement’s strong growth started six years ago – before the onset of economic downturns in many countries.

4. Coworking spaces depend on the needs of their members

Most coworking spaces are rarely full. Does this mean they are unsuccessful? On average, only half of all desks are occupied. But the average occupancy rate of 50% refers only to a specific date.

In fact, coworking spaces generally serve more members than they can seat at any given time, since members do not use the spaces simultaneously. Coworking spaces are places for independents who want to work on flexible terms. Smaller spaces rely more on permanent members. Larger spaces can respond more flexibilty to the working hours of its members, and, can rent desks several times over.

If a coworking space is always overcrowded or totally empty, the purpose of said space would be defeated. Firstly, it is rather impossible to work in an overcrowded room. Second, it’s impossible to cowork in an empty room. Given the nature of flexible memberships, a coworking space only can survive if they fit the needs of their members. Members would otherwise be quick to leave, and membership would be much more transient.

5. The coworking market is far from saturation

Less than 2% of all self-employed – and even fewer employees – currently work in coworking spaces. Reporting on coworking may increase, but inflated reporting on the coworking movement in the mainstream media is still far away.

Coverage of coworking space are most likely to be found in the career or local sections in larger publications – front cover coverage remains the dream of many space operators. This is because the whole coworking movement can’t be photographed in one picture. What appears to be a disadvantage, however, is actually a beneficial truth: niche coverage allows the industry to grow organically, and avoid over inflation.

Conclusion

Coworking spaces don’t operate in parallel universes – like the financial market. Demand and supply are almost exclusively organic and operate in the real world economy.

For the same reason, there is no guarantee that opening a coworking spaces will be automaticly successful. Anyone who fails to learn how to deal with potential customers in their market, or is unfamiliar with how coworking communities function, will have a difficult time of making one work. In the same way that business people in other industries will fail if they do not understand their market.

Those who simply tack on the word ‘coworking’ to their space’s facade will need to work harder. The structure of most coworking spaces is based on real work, calculated risk, and real-world supply and demand.

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About the Author

This article was produced by Deskmag. Deskmag is the magazine about the new type of work and their places, how they look, how they function, how they could be improved and how we work in them. They especially focus on coworking spaces which are home to the new breed of independent workers and small companies. see more.

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