Board Interlocks and Outside Directors’ Protection
38 Pages Posted: 21 Jun 2013 Last revised: 10 Feb 2018
Date Written: October 1, 2013
We examine the role of outside directors’ interlocks, in restoring directors’ indemnification protection in response to the Delaware case Schoon v. Troy Corp. The case, which permitted a board to alter indemnification and advancement of expenses arrangements for a former director retroactively, left directors vulnerable unless their firm acted to restore protection. Using a hand-collected data set, we find that firms became more than two times as likely to adopt enhanced indemnification protection once a firm with which they share an outside director adopted protection. Our results suggest that interlocks contribute to outside directors’ knowledge and bargaining power within the boardroom. Consistent with the bargaining power hypothesis we find that other measures of outside directors’ power: (i) a large proportion of outside directors; (ii) a designated independent lead director, and, with marginal significance, (iii) more board meetings in executive session. These results have legal and practical implications for corporate governance.
Keywords: Outside Directors, Interlock, Indemnification, Advancement
JEL Classification: G38, K22
Suggested Citation: Suggested Citation