The Significance of Board Interlocks for Corporate Governance

Abstract

Boards of directors of large American corporations are marked by a surprising degree of overlap in their memberships. The median Fortune 500 firm interlocked (shared directors) with seven other large firms during the mid‐1980s, although this prevalence dropped slightly by the mid‐1990s. In contrast to Japan, interlocks among American firms are rarely linked to banking relationships or vertical (buyer‐supplier) relationships; rather, they reflect the embeddedness of corporate governance in social structures (e.g., friendship or other ties). Recent empirical research has linked interlocks to almost every important aspect of corporate governance, from executive compensation to strategies for takeovers and defending against takeovers. These findings suggest that proposals for reforming boards of directors through changing incentive structures (e.g., paying directors in equity rather than cash) are likely to have little effect because they misconstrue the role of the board as a social institution.

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