Lecture 9. Interlocking directorates

Interlocking Directorates

A common business practice where a member of a company's board of directors also serves on another company's board or within another company's management.

Under antitrust legislation, interlocking directorates are not illegal as long as the corporations involved do not compete with each other.

Interlocking directorates were outlawed in specific instances where it gave a few board members control over an entire industry and allowed them to synchronize pricing changes, labor negotiations and so on.

Where Square=boardsCircles=directorsblack=female

Koskinen Johan, Edling Christofer, 2012, Modelling the evolution of bipartite network. Peer referral in interlocking directorates, Social Networks, 34, no. 3: 309-322

Reasons for interlock

Mizruchi’s (1996) in LOIZOS HERACLEOUS, JOHN MURRAY, 2001, Networks, Interlocking Directors and Strategy: Toward a Theoretical Framework, Asia Pacific Journal of Management, 18, 137–160, 2001

The origins• The development of monopolistic structures in industry at the close

of the 19th century led - at first in Germany and the United States - to financial and organizational ties between large corporations which also became interlocked with financial institutions.

• The first extensive and systematic study on corporate interlocks’ in Germany was a dissertation by Otto Jeidels in 1905. Starting from the six biggest Berlin banks, Jeidels discovered 1350 interlocking directorates with German industry. Interlocking directorates as an expression of the sphere of influence of these banks.

• Monopolization of industries requires funds for investments, thus financial capital “capital at the disposition of the banks and used by industrialists” (Hilferding (1909) 1968: 309).

• Following studies in Netherlands, US, UK, Sweden

Fennema Meindert, Schijf Huibert, 1978/1979, Analysing Interlocking Directorates. Theory and Methods, Social Networks, 1, 297-332

US• in 1913, the Pujo Committee conducted an official investigation

and found that the three largest New York banks, J. P. Morgan & Co, First National and National City Bank were represented through 341 directorships on the boards of 1 12 corporations. 180 persons held 746 directorships in 134 corporations. The same 180 individuals held 385 directorships in 4 banks and trust companies. Most interlocks were between railway companies and banks

• The results of the Pujo Committee were used in the adoption of the Clayton Act in 1914, prohibiting interlocking directorates between competing firms (antitrust). The Clayton Act specified prohibited interlocks in three classes:

(1) interlocking bank directorates;(2) interlocking directorates between directly competing firms;(3) interlocking directorates between railroads and their potential suppliers.

The good of interlock?

• Theory of management control (Berle and Means 1932). American economists against the existence of interlocking directorates. According to this theory the Board of Directors is appointed by management. It serves at best as an advising institution, but often directors are chosen for prestige reasons only. The network of interlocking directorates has very little to do with control.

• Channels of communication, increase in experience and knowledge and even “insuring business on profitable terms and with a minimum of selling costs

Financial groups• the theory of management control locates the problem of control at

the level of the individual firm, neglecting the inter-firm relations. • When taking the relations between firms into consideration, the

search for a “locus of power” leads to the problem of financial groups.

• Focus on the role of the merchant banks in relating industry to the capital market. In 1966 Barrat Brown finds 124 merchant bankers on 400 Top Boards. For 1968 he found 120 merchant bankers on 247 Boards. (Barrat Brown 1968)

• Merit of focussing on networks, but lose definition of financial group. Thus various studies find various numbers of financial groups

• No clear definition of interlock (BusinessToBusiness, BusinessToFinance, family relations)

• Not clear how interlock are detected

The sociological approach

• Elite cohesionStudy of the social background of corporate directors, and family ties (old boys network, national and transnational elites)

• Organizational sociologyWhat type of directors carry the interlocks? Which type of company is most interlocked? What is the direction of the interlock between two firms? Is there a geographical basis in interlocking

Lloyd Warner and Darab Unwalla (1967)

• They took a random sample of 500 firms from the Fortune lists of 1961 (US).

• Of the 5776 directors, 1981 are director in but one firm. • Of the citizen directors (those who have no executive function in any

firm), more than 50 per cent do not carry an interlocking directorates. • Of the officer-directors (those with an executive function in one of the

firms) just over 25 per cent do not carry an interlocking directorate.• Of the 6280 officer-interlocks 3696 are carried by officer-directors.

Most of these are local, while New York is “the hub of this system”• Banks appear to have most interlocks (1329) and interlock with other

sectors, closely followed by metal manufacturing (1273) which only interlock internally.

Dooley 1969

Five factors are significant in “explaining” interlocking directorates:(1) the size of the firm;(2) the extent of management control;(3) the financial connections of the corporation;(4) the relationship with competitors;(5) the existence of local economic interests

Allen 1974

Theory of inter-organizational elite• interlocking directorates represent “an attempt by

corporations to anticipate environmental contingencies and to control their relationship with other companies”

• Allen compares the interlocking directorates he finds in 1970 with those of the National Resources Committee in 1935. He also tries to establish (expected) relationships with different variables. Thus the presumed relationship between size of the firm and number of interlocks is confirmed. It is also confirmed that financial corporations maintain more interlocks than non-financial corporations, but the difference is largely due to the larger size of financial corporations in terms of their assets

Longitudinal analysis

• In 1971 Bunting and Barbour analysed the interlocking directorates between 207 companies in 1896, 1899, 1901, 1905, 1935 and 1964. They conclude that the number of interlocking directorates in the United States declines after 1905 - especially interlocks between firms from the same sector; but also inter-sector interlocks decline, although not as dramatically. (Possibly for the Clayton Act)

Longitudinal comparison across countries• For Britain a longitudinal study has been conducted by Stanworth

and Giddens (1975). They conclude that the number of interlocking directorates increases from 1906. Measured as the density of the network there is a steady increase, from 1% in 1906 to 5% in 1970. The number of interlocks is 41 in 1906, 132 in 1930 and 215 in 1970 for a sample of around 90 firms.

• For Spain the data of Muaoz also indicate an increase of interlocking directorates, at least between 1957 and 1967

• For the Netherlands no decline of interlocking directorates has been noticed, neither for the period 1886 - 1902, nor for the period 1960 – 1969

• Hughes and his co-workers (Hughes et al. 1977; Scott and Hughes 1977) find that in Scotland there has been a decline of the number of interlocking directorates after 1939.

SNA• Traces of Power, Helmers et al. 1975Investigates the Dutch business structure of 1969 is investigated. Extensive analysis of the inter-lockings of the 86 most prominent corporations in that year. Then the study is extended to the intra-lockings among a group of 60 financial companies, the stability of lines in the years 1960, 1964 and 1969, the relations between interlocking directorates and other connections as joint ventures and financial participations and a systematic study of relations between the corporations and different parts of the state.

Inter and intra locking

Topics in SNA

• Component analysis• Density of subgroups, and interconnections• Valued networks: strong and weak interlocks• Degree and betweeness centrality• Longitudinal analysis

Heemskerk Eelke, Fennema Meindert, Network dynamics of the dutch business elite, 2009

• Netherlands• 1 mode network• Nodes: Directors• Tie: if they sit together in firms' boards. • ≥4= big linkers (Valued)• Variables: clustering coefficient/betweeness/%of

people in the main component• 3 waves: 1996/2001/2006• Sample: 250 top firms• Finding: decline of interlock

Heemskerk Eelke, The social field of the European Corporate elite. A network analysis of interlocking directorates among Europe's largest corporate boards, 2010

• Europe• 1 mode network• Nodes: Firms, countries and people• Ties: if they have at least one director in common (valued)• Variables: geographical location, degree• Database: FTSEurofirsts• 1 Wave: 2005• Sample: 298 firms, 3484 executive and non executive directors. Advisors, members without voting

power and executives below the level of board are not included.• Results: Uneven geographical distribution of firms. Uk more capital (finance), Germany more labour

(industry) oriented. – Country by country network: most interlock are from industry (old boys), nationally based, but

some european interlocks. UK and France, Germany and Netherland interlock EU, but overrepresentation of firms.

– Firm by firm: 162 firms interlock EU, one dominant component of 156, average distance is 2.7. More industry than banks, banks directors are non executive.

– 16 big linkers (>4)• Further research: does the cohesive core of elite (16 big linkers) also share similar attitudes and

develop an elite identity? Is the core stable or does it change over time? Are there informal meetings where the elite meets? (eg: private associations).

Heemskerk Eelke, Struijs Ferdi, How Network Effects Determine the Evolution of Interlocking Directorates, 2012

• Netherlands• 1 mode network• Nodes: firms• Ties: if they have at least one director in common (Binary)• Variables: decline (degree); reputation; preferential attachment; homophily of degree;

brokerage; closure; national; stock; size• 4 waves: 1996/2001/2006/2011• Database: Amadeus and Orbis of Bureau van Dijk• Sampling: 462 firms which were in the top 250 in at least one of the 4 waves• Results:

– No preferential attachment – Significance of homophily of degree– No brokerage – Significance of closure– National interlock– Homophily of stock

• Further research: comparison across national contexts/ transnational level/ bipartite analysis

Koskinen Johan, Edling Christofer, Modelling the evolution of bipartite network. Peer referral in interlocking directorates, 2012

• Sweden• 2 mode network• Nodes: firms and directors• Ties: peer referral (valued)• Variables:

– Network effects. Homogeneous 4 cycle: men-men; heterogeneous 4 cycle men-women. Bipartite two stars, three path, 4 cycles.

– Covariates. CEO experience, chairman experience, age, gender• 10 years, analysed pair wise• Database: Stockholm stock exchange• Sample: 429 boards, 3177 directors• Results:

– multiple interlock (big linkers >4) reduce through years, while 1, 2, 3 interlocks increase.– Negative effects of two stars and three path. – Strong evidence of peer referral with creating 4 cycles. – Importance of CEO experience declines through years. – Gender effect from 2001, possibly tokens following legislation, as there is no homogeneous female

peer referral• Further research: investigate co-dependence of board networks from other networks, eg:

ownership networks. Either one evolving from the other, or co-evolution

Huse Morten, Solberg Ann Grethe, Gender related board dynamics, 2004

• Sweden and Norway• Qualitative study• Interviews of 8 directors• Open the black box of the board• Study the relational dynamics and task

performances in the boards

Conclusions• Lots of work needs to be done!– National and international networks: US, UK, Europe,

Australasia– Longitudinal networks– Co-evolution of networks: old boys network, non-financial

networks– Qualitative analysis of the meaning of ties and networks

• Problems:– Missing data– Very large data– Hidden data