Corporate directors as heterogeneous network pipes: How director political ideology affects the interorganizational diffusion of governance practices

Abstract

AbstractResearch SummaryScholars have long recognized that interlocking directors act as conduits (or “pipes”) in the interorganizational diffusion of governance practices. Yet, this research generally depicts interlocks as homogenous, overlooking the possibility that directors differ in their beliefs about a given practice. Our study explores this idea in the context of the spread of two practices—lone‐insider board structures and CEO‐chair separation—across S&P 500 firms from 1997 to 2016. We theorize and show that politically conservative directors are more likely to transmit the lone‐insider structure, whereas politically liberal directors are likelier to transmit the CEO‐chair separation structure. We further illustrate that these effects are stronger when the focal firm faces shareholder pressure for governance reform, and weaker when the institutional norms curtail director discretion.Managerial SummaryPrior research suggests that corporate directors who sit on multiple boards cause those firms to learn from each other and adopt similar practices. Yet, directors differ in their views on governance practices, which means that they should also differ in their propensity to act as “pipes” in this diffusion process. We argue and show that interlocking directors' political ideologies influence this process, such that conservative directors are likelier to transmit the lone‐insider board structure (where the CEO is the only firm employee on the board), whereas liberal directors are likelier to transmit the practice that separates the CEO and board chair roles. These differences are most evident when firms' shareholders exert pressure for governance reform, although they have diminished somewhat since the 2002 Sarbanes‐Oxley Act.