Why Do Ceo's Reciprocally Sit on Each Other's Boards?
39 Pages Posted: 31 Oct 2008
Date Written: January 2001
The reciprocal interlocking of chief executive officers (CEOs) is a non-trivial phenomenon of the composition of boards of directors and of corporate governance: among large companies in 1991, about one company in seven is part of a relationship whereby the CEO of one company sits on a second company's board and the second company's CEO sits on the first company's board. We are aware of no previous efforts to explain these reciprocal relationships. We hypothesize that reciprocal CEO interlocks are (a) more likely when a board has more outside directorships, (b) less likely when a CEO has more of his total annual compensation paid in the form of stock options, (c) less likely when a company's board is more active and holds more meetings, (d) less likely when a CEO has a larger ownership share of his company, and (e) more likely when there are more CEOs from other companies as outside directors on a CEO's board. Using a sizable sample of largecompanies in 1991, we employ simple probit and step probit models to test these hypotheses, with the use of control variables that encompass other company, board, and CEO characteristics. These multivariate analyses support our first three conjectures but do not support the remaining two.Since there is considerable academic and policy debate concerning board composition and the effectiveness of interlocking directorships in general, investigations focusing on reciprocal CEO interlocks, which link the highest ranked executives of two different firms, represent a significantcontribution to the knowledge base in this field.
Keywords: Interlocking directorates, CEOs, Board of directors, Corporate governance, Stock options
Suggested Citation: Suggested Citation