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I found out that the CEO/hiring manager finds non-listed 'references' (generally via LinkedIn) for the later-stage candidates, and contacts them without asking permission. These non-listed references are generally strangers to the CEO/hiring manager.

Is contacting references like in this situation allowed and/or ethical? I'd hope my LinkedIn/social media contacts had positive things to say about me, but I'd be offended if I knew the company did this while I was interviewing.

In my experience the right way to go about it is to ask the candidate if they can provide additional references if you need them. Contacting non-listed references is, in my opinion, a violation of privacy (I don't mean this in a legal way, it's perfectly legal).

If you need more references to make a decision, you contact a candidate and ask them to provide additional references. This shows respect to the candidates privacy. Expecting a candidate to explicitly ask for non-listed references to not be contacted is, in my opinion not good practice. This is because a resume asking that non-listed references not be contacted automatically seems suspicious.

It might be different in the US or other countries, it mostly is, but that's how it is in Switzerland from my experience.

First, I find this practice incredibly distasteful and unprofessional.

All job applications should be submitted in confidence. As a hiring manager, you (we) don't know if the candidate is leaving a job quietly, or not. And by contacting "backdoor references" or "non-listed references" you could jeopardize their situation even more. This puts the candidate in an unfair position, especially should they (worst case) get terminated from their current position for looking for work.

Now, if you found the references unacceptable or unsuitable, as a hiring manager it is your prerogative and reasonable to ask for more - or why a person/position was not utilized. However, this too, often puts a candidate in a less than ideal position. As this conversation can lead them to "bad mouth" their current employer inadvertently (or what they say can be perceived as such) - which is also an interview "no-no". If you must ask "why" do so, expecting a response which may be less than apolitical about their current employer, and take into account your question with their response - in terms, of tone, reasoning and adequacy. This way you are not penalizing them and negatively affecting their application for a difficult and (depending on your wording) distasteful question.

As far as your question if this practice is allowed, yes it is. Is it ethical, that I believe is a "no".

Is contacting references like in this situation allowed and/or ethical?

Unless a candidate has explicitly indicated that they did not want certain organizations/individuals contacted then this is OK. Considering that they are using publicly available information to contact these people ( i.e. social media ) there is nothing unethical about this practice.

With regards to lack of transparency, I think it is understood that any good business will perform their due diligence in determining whether a candidate is the best choice for their company.

Is contacting references like this situation allowed and/or ethical?

Yes, it's allowed. IMHO, it's perfectly ethical to talk to anyone who might know about your abilities before offering you a job,, other than someone at your current employer.

My boss used to call this "back door references" and it was routine.

I'd hope my LinkedIn/social media contacts had positive things to say
about me, but I'd be offended if I knew the company did this while I
was interviewing.

I have no idea why this would offend you, but you can always decline any offer from a company that did this if you found out.

And presumably the contact would give you notification about it.