Interlocking Directors in Headquarters-Affiliate Relationship of Business Groups

Abstract

This study aims at disentangling the decision of interlocking directors along the hierarchy of business groups. Considering boards as information-processing groups and grounded in agency theory and resource dependence theory, the monitoring and advising functions in the relationship between headquarters and affiliates may be better achieved through interlocks. Analyzing an international sample of 512,607 boards’ positions in affiliates of business groups, our model empirically checks whether three contingent factors –geographic, institutional, and industrial distances between headquarters and affiliates- as proxies of the cost of information acquisition, hinder the decision to appoint interlocking directors. We find that geographic, institutional and industrial distances reduce the presence of interlocking directors in the relationship headquarters-affiliates. We also provide evidence suggesting that there is an association between the type of directors –executive and non-executive directors- and the probability of being an interlocking director. Furthermore, we find that there are characteristics of business groups -such as ownership links and the position of affiliates in the hierarchical structure - that influence this decision.