Close ties bind CEOs, boards of troubled TARP companies

— -- Troubled Asset Relief Program, or TARP, recipient companies were much more likely than the average company to have had independent directors on the board with social or professional ties to the CEO.

Independent directors aren't employed at the company, and shareholders rely on them to speak up if they see it heading for disaster. New research finds that many of those independent directors have connections to the CEO, including memberships at the same country clubs, attendance at a college at the same time, or volunteerism with the same charitable or non-profit organizations.

For example, among all large, publicly traded banks, 14% of independent directors have social or professional ties to the CEO, similar to the 15% at all companies. But at banks that later accepted bailout money, 39% of independent directors had such ties.

The study by finance professor Geoffrey Tate and doctoral candidate Cesare Fracassi was done at the UCLA Anderson School of Management. It examined 20,000 board members of 2,080 firms year by year from 1999 to 2007 to identify connections. It found that when connections increased, so did earnings restatements and the likelihood of mergers that hurt a company's performance.

At USA TODAY's request, Tate re-examined his data to focus on the smaller universe of 24 publicly traded companies that later accepted TARP money.

Tate says 30% of the independent directors at GM had ties to now-former CEO Rick Wagoner, who was forced out on Monday. GM is the only publicly traded auto company to have accepted government bailout funds. Throughout the auto industry, just 2% of independent directors have social and professional connections with the CEO, Tate says.