Comparative Analysis of Corporate Governance
The Role of interlocking directories in corporate governance
Dr. Maria Aluchna Andrea Tundo
Academic Year 2009/2010
“They sit on the board of the largest companies in America, many sit on government committees. They make decisions that affect our lives. They rule”
The quotation above, explains, somehow, the reasons why I chose this topic. Taking into consideration the historical changes of corporations in the last 20years, with the massive expansion of global companies, top management ...view middle of the document...
Besides, I chose this topic reminding to myself, with regret, when artlessly I decided to leave my country in order to pursue a better life. Seeking opportunities in an emerging market of European Union, where I was sure to find a different environment compare to the Italian one. Unfortunately, in my country everything works thanks to networking and connections, the conflict of interests are ordinary and the current prime minister is the human evidence of how corrupt is the system.
Sadly, after couple of years abroad, between Norway, Poland and UK, I figured out on my own experiences that the whole world is one big country, with the same strengths and weaknesses. In fact, interlocking directorates enable directors to be economic and social elites who share a sense of camaraderie and reciprocity.Therefore, it does not exist a full competitive system based on merit, but the advantages are created thanks to connections between important directors.
1. Theoretical Framework
Taking into consideration the tripod of corporate governance, we can have a clearer picture about interlocking directorates.
Company A Company B
Figure 1: The potential connections between Company A and Company B.
Therefore, we can have this situation in three main condition: 1)When a member of board of Company A sits also on the board of Company B (represented in Figure 1 by the red arrow); 2)When a member of the top management team of Company A is, as well, a part of the board of Company B (represented in Figure 1 by the green arrow); 3) When a close relative, like wife or father, of a member of the board of directors, of a top executive or even one of the owners of Company A serves as a member of the board of directors of Company B(represented in Figure 1 by all the arrows). This was a simple example between two corporations, the links among directors usually involve several firms. Interlocking directories have long been used by corporations to maintain and expand their power. Indeed, they were used in order to form a cartel, which is a form of collusion between firms in the same industry aimed at restricting output and increasing prices. This form is also used to gain bargaining power over major suppliers or customers. However, this tool has also positive features, it depends how it is used by organizations. In fact, interlocking directories enables the usage of different knowledge and skills, improving the creativity. In particular, new ideas can diffuse from one company to another fairly easily. Indeed, if a director at firm A sees that the company's new research unit is functioning quite well, he/she might suggest that a similar research unit be adopted at other companies on whose boards he/she sits. Vice versa, directors from those companies may transmit the idea to still other companies. Interlocking directories support the socialization...