A new study that York University’s Schulich School of Business has collaborated on finds that corporations that share board members with other firms tend to have similar corporate governance practices due to a phenomenon known as “board interlocking.”
Pouyan Foroughi
The findings are presented in a research paper titled “Peer Effects in Corporate Governance Practices: Evidence from Universal Demand Laws,” forthcoming in Review of Financial Studies. The article is co-authored by Pouyan Foroughi, assistant professor of finance at Schulich; Alan Marcus, professor of finance at Boston College; Vinh Nguyen, assistant professor of finance at the University of Hong Kong; and Hassan Tehranian, professor of finance at Boston College.
“The study shows that firms not subject to new legislation nevertheless change corporate practice when they are board-interlocked with peer firms that become subject to that legislation,” said Foroughi. “The specific transmission mechanism for this propagation of practice across firms is the interlocking board network.”
The research paper included a number of key findings. First, firms with boards composed of directors with greater experience, especially experience in takeover attempts, appear less influenced by the impact of their interlocked directors. Second, governance policy is most affected by board interlocks when the interlocking directors serve on the governance committee in particular. Third, firms with busier boards seem more influenced by the presence of interlocking directors. And lastly, directors serving at firms whose governance practice most changed following the implementation of universal demand laws, which impose restrictions on shareholder litigation rights, have a greater impact on their interlocked firms.
The complete paper is available for download here.