Director Interlocks: Information Transfer in Board Networks

Abstract

Director interlocks occur when a board member or an executive of a firm sits on the board of directors of another firm. As an essential social network application in the business world, interlocking directorates are documented to be non-trivial from the 1930s and continue to gain popularity thereafter. Corporate information and business practices can be transferred to another firm through an interlocking director sitting on both companies’ boards. Such information dissemination leads to changes in an interlocking firm’s decision-making processes. Existing business research attempts to decipher the underlying reasons why board interlocks become prevalent, how and what information is being transferred through this channel, and the intended or unintended consequences to firm strategic, governance, financing, and accounting practices. We first introduce theoretical research on board interlocks in management and then follow up with empirical evidence in finance and accounting. Since extant studies have not reached a consensus on various consequences of board interlocks, we contribute to the literature by summarizing the findings from multi-business disciplines, discussing their advantages and disadvantages, and calling for more research on the topic.