Ties of friendship between corporate directors and CEOs can compromise firms’ integrity, but public disclosure of the ties can make the problem worse, according to research in the American Accounting Association’s Accounting Review. In a study of 56 board members, 46pc of those who were asked to imagine being directors of a fictitious firm whose CEO was a friend said they’d be willing to substantially cut research and development if it meant triggering a hefty bonus for the chief executive (compared with 6pc of those who were asked to imagine that the CEO wasn’t a friend).

Those who imagined disclosing the friendship were willing to cut 66pc more than those who imagined keeping the friendship secret - apparently because disclosing the friendship gave directors the feeling they had a moral license to reward the CEO, the researchers say.

(Source: The Accounting Review)

Published in Dawn, Economic & Business, July 21st, 2014