Board Interlocks and Corporate Governance

Abstract

This paper argues that director interlocks, a phenomenon in which directors sit on more than one corporate board, ought to be an object of expanded discussion in corporate governance research and practice. Thus far, interlocks have attracted little attention from legal scholars, and when interlocks have received attention from regulators, it is usually negative. A growing body of evidence points to interlocks as having a significant role in governance propagation and evolution. Core governance practices, including ones that are closely monitored by professionals, propagate via interlocks. Interlocks are not purely channels for spreading information; they have a significant impact even in an informationally rich environment. Both bad and good governance practices propagate via interlocks, and overall board connectivity is associated with higher returns. Interlocks help explain similarities and variations in corporate governance. Drawing strong normative conclusions in light of the state of the literature would be premature. Instead, we summarize the literature on interlocks and governance, analyze how and why interlocks could matter for governance, and suggest that, at the very least, recognizing interlocks as facilitating the diffusion of governance, and highly connected firms as potentially influential in setting governance practices, is important.