If you want to know whether your CEO is going to jump ship when times get tough, look at what kind of relationships they have with other professionals, new research suggests.
A study recently published in the Strategic Management Journal found that a CEO's decision to voluntarily leave a company when it starts to fail is driven by the executive's social capital – the personal relationships they have with business colleagues and key external stakeholders.
The researchers found that executives who have strong social capital as well as those who have poor social ties with business colleagues are the least likely to quit when their organizations start to suffer. It's those right in the middle who are the least likely to stick around and ride out the ship when times get rough.
Han Jiang, the study's lead researcher and an assistant professor at the University of Arizona, said a CEO's decision to stay or go is ultimately a cost-benefit dilemma. He said when a company fails, an executive's reputation could suffer dramatically, which could prompt them to leave before things get too bad.
On the other hand, if they leave, they risk losing out on access to valuable company resources and connections. [See Related Story: Choosing the Right CEO Matters More Than Ever]
The study found that CEOs with low social capital are unlikely to leave a failing company because their minimal connections make quitting not a viable option.
"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," Jiang said in a statement. "I probably will be locked up in my company, so I have no choice but to stay."
Conversely, CEOs with strong professional networks are also unlikely to leave struggling firms. Jiang said CEOs with strong social capital likely aren't worried about the negative consequences to their reputation if their company fails.
"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," Jiang said. "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."
The research discovered that it's those CEOs with a moderate level of social capital who are the most likely to bolt for the door when their companies start to head south.
"If I have a medium level of social capital, I can leverage my fairly established social network to find myself alternative employment opportunities," Jiang said. "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."
The study was based on an analysis of the social capital and voluntary job movements of 278 executives of declining firms in China. The researchers controlled for factors such as CEOs' age, education, gender, compensation, executive shareholding and tenure in their current positions.
Although the study looked specifically at firms in China, the researchers believe the findings hold true across cultures and industries. Jiang believes the research can provide some fresh insight into the operation of declining firms.
"For example, with our findings we can probably predict who will choose to stay in these declining firms," he said. "Practitioners may also be able to identify those who stayed but should have left in order to increase the effectiveness of turnaround efforts of these declining firms."
The study was co-authored by Albert Cannella Jr., a professor at Texas A&M University; Jun Xia, an associate professor at the University of Texas at Dallas; and Matthew Semadeni, an associate professor at Arizona State University.