Corporate Elite Networks and Governance Changes in the 1980s

Citation

Gerald F. David, Henrich R. Greve. Corporate Elite Networks and Governance Changes in the 1980s, The American Journal of Sociology, Vol. 103, No. 1. (Jul., 1997), pp. 1-37.

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Summary

This paper analyzed the diffusion of two practices adopted by corporations in the United States during the 1980s, in order to deal with hostile takeovers. During a takeover, the initiators of the takeover will buy stocks of the targeting corporation from its shareholders at a high premium, in return for control of the corporation. During this process, the upper management suffers because they would lose their job, should the takeover succeeded.

The "golden parachute" practice awards the management generous severance packages (typically three years' salary) to compensate for their lost of employment; whereas the "poison pill" practice enables the shareholders to buy the stocks at a 50% discount, which in effect raised the cost of hostile takeovers (if the shareholders decide not approve the takeover).

At the end of the 1980s, most corporations have adopted either one of the practices, and the split is around 50/50. However, it took the "golden parachute" 7 years to achieve its saturation (around 50%), whereas "poison pill" took only 3 years.

The author argues that one of the explanation of this difference in adoption speed lies in the fact that the two practices are seen more legitimate from different group of corporate elites, that have distinct ways of spreading and taking information.

Discussion

• Different group's interest

The "golden parachute" practice is more popular in the management layers because it directly protects their interest by giving them direct compensation in the form of cash. Therefore the high level managers are the proponent to this practice, and were urging the shareholders to adopt such practice. However, this method is not seen as legitimate from the shareholder's point of view, because if it allows the possibility that the management team can work with the takeover initiator so that when the takeover is imminent, the shareholders have no way of fighting back.

On the other hand, the "poison pill" practice is much more tailored to protect the shareholder's interest, because it gives them greater control over the company's stock by allowing them to buy at half of the price. Therefore the shareholders here are the proponent to the "poison pill" practice.

• Different group's characteristic of diffusing information

The difference between the upper management and the shareholder's interests means they will each be the proponent for one of the practices. The difference in their information diffusion characteristics then explains why the "poison pill" takes much less time to achieve its popularity than "golden parachute".

The authors suggested that in the 1980s, it's very common for the shareholders of large corporations to sit on the board of directors across multiple companies. Those companies may or may not lies in the geographic proximity. Therefore the board of directors mostly heard of their "best practice" - "poison pill" from the meetings of other corporations.

On the other hand, the upper managers mostly spread their news locally, when they are playing golf together, or talking to each other in the chamber of commerce, therefore the practice of "golden parachute" mostly spread locally.

Related Papers

• Watts, D. J. and Dodds, P. S. 2007. Influentials, Networks, and Public Opinion Formation. Journal of Consumer Research 34: 441-58.
• Leskovec, J. et al. 2007. Cascading Behavior in Large Blog Graphs. In SIAM International Conference on Data Mining.

Study Plan

You may first want to take a look at Binomial regression and Poisson regression.

Also, read the papers in the "Related Papers" section.