A new study finds that disclosure of personal relationships between corporate CEOs and members of the board of directors could paradoxically encourage directors to exhibit less independence from management.

In the study, which appears in the July issue of the American Accounting Association’s Accounting Review, a group of researchers surveyed a sample of 56 corporate board directors from a range of companies of various sizes and asked them about a theoretical situation.

Approximately two-thirds of the directors were informed that they “have personal connections with the CEO and are a social friend of the CEO,” with the remaining third explicitly advised that they have no such personal connection and friendship. The friendship group was further divided, with half informed that they had disclosed their relationship with the CEO “to the board, management, and shareholders,” and half advised that they had not.

Participants were asked to consider themselves directors of a fictitious biotech company whose annual earnings are projected to fall about $5 million short of the $805 million forecast by stock analysts. The CEO would receive a bonus amounting to 30 percent of base pay, but only if earnings reached $810 million, and would also receive an additional 1 percent for every million dollars above that target. In the fourth quarter of the company's fiscal year, the only place in which substantial savings could be realized would be in R&D expenses, for which $40 million had been budgeted for the current year. Management estimated that every million dollars shaved off the R&D budget would increase by 1 percent the chance of losing ground to competitors. For example, a $10 million cut would entail, in the worst case, a 10 percent chance of losing ground.

Asked how much R&D they would be willing to cut, directors who were informed they were not friends of the CEO averaged $3.53 million, compared to $7.92 million for those who were considered to be friends of the CEO. Those whose friendship with the CEO was not disclosed would cut an average of $5.83 million, and those whose friendship was open knowledge said they would cut $9.71 million.

Among directors who were willing to cut $10 million or more in R&D funding amounts that would enable the CEO to receive a bonus, only 6 percent of the directors in the “no friendship” category were willing to do so, compared with 28 percent in the “friendship/no disclosure” group, and 62 percent in the “friendship/disclosure” group.

The study was conducted by Jacob M. Rose and Anna M. Rose of Bentley University, Carolyn Strand Norman of Virginia Commonwealth University and Cheri R. Mazza of Sacred Heart University,

"Our findings reinforce the idea that friendships between board members and top executives put shareholders’ interests at risk and that investors should be wary of them,” said Rose. “While requiring publication of these ties has the virtue of alerting the public, disclosure by itself should not lead investors to be less wary.”