Does antitrust enforcement against interlocking directorates impair corporate governance?

Abstract

This study examines how recent government antitrust enforcement against potentially illegal interlocking directorates (“competitor interlocks”) reshaped boards. After the first major enforcement announcement, competitor-interlocked directors were more likely than other directors to leave boards and were replaced by individuals with less industry experience. Further, newly appointed directors were less likely to form competitor interlocks. The resulting reduction in relevant board industry experience and competitor interlocks is likely to affect firm outcomes. In their advisory role, competitor-interlocked directors with more industry experience have historically produced higher profit margins, likely due to superior R&D investment advice. In their monitoring role, competitor-interlocked directors with greater industry experience are more likely to hold CEOs accountable for restatements and poor performance. Overall, our results highlight that corporate governance may be weakened if competitor-interlocked directors with substantial industry experience are replaced by directors without such experience.

Keywords: Corporate Governance, Antitrust, Board Interlocks, Director Labor Market, Firm Performance

JEL Classification: G34, K21, L41, M41