Why Do CEOS Reciprocally Sit on Each Other's Boards?

40 Pages Posted: 15 Dec 2000

See all articles by Eliezer M. Fich

Eliezer M. Fich

Drexel University - Department of Finance

Lawrence J. White

New York University (NYU) - Leonard N. Stern School of Business, Department of Economics

Abstract

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 was part of a relationship whereby the CEO of one company sat on a second company's board and the second company's CEO sat 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 large companies 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 significant contribution to the knowledge base in this field.

Keywords: Interlocking directorates, CEOs, Board of directors, Corporate governance; Stock options

JEL Classification: G34, J33, K22

Suggested Citation

Fich, Eliezer M. and White, Lawrence J., Why Do CEOS Reciprocally Sit on Each Other's Boards?. Journal of Corporate Finance, Vol. 11, pp. 175-195, 2005. Available at SSRN: https://ssrn.com/abstract=249975 or http://dx.doi.org/10.2139/ssrn.249975

Eliezer M. Fich (Contact Author)

Drexel University - Department of Finance ( email )

LeBow College of Business
3220 Market Street – 11th Floor
Philadelphia, PA 19104
(215) 895-2304 (Phone)

Lawrence J. White

New York University (NYU) - Leonard N. Stern School of Business, Department of Economics ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

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