Social Corporate Governance

64 Pages Posted: 8 Oct 2020 Last revised: 8 Oct 2020

See all articles by Jeremy McClane

Jeremy McClane

University of Illinois College of Law

Yaron Nili

Duke University School of Law; European Corporate Governance Institute (ECGI)

Date Written: December 15, 2019

Abstract

Corporate directors, like most people, are social creatures, and their social networks affect their decisions. But directors’ social networks remain both understudied and under-theorized by scholars and inconsistently addressed by courts. This Article comprehensively examines the importance of director networks to corporate governance for the first time. Using qualitative and quantitative data, the Article uncovers the importance of director networks to corporate governance and the implications that network theory poses for the study of corporate law. In doing so, the Article tackles an understudied corner of corporate decision-making at a critical time, when directors have an outsized influence over their companies and in many cases, the United States economy as a whole.

This Article builds on a robust literature in corporate governance and decision-making. Much of the existing scholarship has focused on whether directors—especially “busy directors” who serve on multiple boards—are meeting investors’ and regulators’ expectations. However, the literature overlooks an important aspect of busyness, that when directors serve on multiple boards, they also build a social network that extends beyond the companies they serve, spanning several degrees of separation. This Article shows how these broader connections affect corporate governance and discusses the legal implications of what it terms as “Social Corporate Governance.”

This Article makes three contributions to the literature. First, the Article identifies the significance of network theory to contemporary corporate governance discourse and develops a theoretical framework to better account for directors’ service on multiple boards. Second, it empirically examines the direct impact that director networks have on the governance of public firms. It does so through an original data set that reveals some of the positive effects that director networks have on companies’ governance and further demonstrates how network analysis adds important insights to existing empirical studies regarding director service on multiple boards, at times significantly altering their results. Finally, the Article suggests that the current discourse by regulators, institutional investors, and academics may underestimate the importance that director networks have for companies. The Article then suggests several policy reforms to address these findings.

Keywords: Directors, Corporate Governance, Networks, Accounting, Entrenchment

Suggested Citation

McClane, Jeremy and Nili, Yaron, Social Corporate Governance (December 15, 2019). 89 George Washington Law Review, Forthcoming, University of Illinois College of Law Legal Studies Research Paper No. 20-21, Univ. of Wisconsin Legal Studies Research Paper No. 1608, Available at SSRN: https://ssrn.com/abstract=3623335 or http://dx.doi.org/10.2139/ssrn.3623335

Jeremy McClane (Contact Author)

University of Illinois College of Law ( email )

504 East Pennsylvania Avenue
Champaign, IL IL 61820
United States
2173003756 (Phone)
61820-6909 (Fax)

Yaron Nili

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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