Corporate Governance Contagion Through Overlapping Directors

Abstract

Directors at large, publicly-listed firms tend to hold several directorships. The literature on "social networks" suggests that directors with multiple directorships may spread what they learn on one board to another board. This suggests that overlapping directors may cause corporate governance practices to be propagated across firms in contagion-like fashion.

The first goal of this paper is to empirically test the hypothesis that director overlap leads to governance similarity. Fourteen governance practices are targeted for this examination to see if firms that share directors have governance practices that are more similar than those of other firms that do not. Strong supporting evidence is found for most of the fourteen governance practices examined.

The second goal is to examine whether these results are driven by a "familiarity effect" or an "influence effect". The familiarity effect says that the relationship between director overlap and governance similarity arises because firms are simply selecting directors who are already serving at firms with similar governance practices. The influence effect says that the relationship arises because a director - even one currently serving at firms with dissimilar governance practices - exerts influence on the firm's governance practices after joining the board. Since influence is based on what the director has learned from the other directorships, governance practices tend to become more similar. Empirical support is found for both the familiarity and influence effects.

Keywords: Corporate Governance, Directors, Board Composition, Social Networks, Geography

JEL Classification: D8, G32, G34, R1