What is interlocking directorship and why it could lead?
Interlocking directorates is a business practice wherein a member of one company's board of directors also serves on another company's board or within another company's management. Under antitrust legislation, interlocking directorates are not illegal as long as the corporations involved do not compete with each other.
Who used interlocking directorates?
Interlocking directorates -- defined as the linkages among corporations created by individuals who sit on two or more corporate boards -- have been a source of research attention since the Progressive Era at the turn of the 20th century, when they were used by famous muckraking journalists, and future Supreme Court ...
What if there is an interlocking board of directors?
Interlocking Board of Directors Directors are often invited to serve on more than one Board other than their own company's board of directors, where they serve on another companies board. This practice, and the relationship created, is known as an interlocking directorate.
What is the common disadvantage of interlocking directorates?
The issue of interlocking directorates is usually an undesirable situation for both companies and for the director. A board director who accepts a board seat for a competing company will likely gain access to privileged information, which sets the stage for unfair competition.
Are interlocking directorates legal?
Although interlocking directorates are generally legal, interlock between competing corporations may be prohibited.
When was interlocking invented?
The first attempts at interlocking switches and signals were made in France in 1855 and in Britain in 1856. Interlocking at crossings and junctions prevents the displaying of a clear signal for one route when clearance has already been given to a train on a conflicting route.
What are the two interlocking directorates?
An interlocking directorate occurs when the same person sits on the board of directors of two or more companies. There is a danger that an interlock between competing firms (direct interlocks) may be used to co-ordinate behaviour and reduce inter-firm rivalry.
Can a company have two board of directors?
A Dual Board or Two Tier system is a corporate structure system that consists of two bodies i.e. the Council of Delegates to govern the Board of Directors and the Board of Directors to manage a corporation.
Can you be on two boards of directors?
Many people serve on more than one board of directors at the same time. It is not likely to be a substantive conflict if the organizations are not “competitors” in providing similar goods or services. It may create a conflict if both organizations expect the directors to solicit their friends for contributions.
Why is interlocking directorship unethical?
It is generally illegal for monopolies to establish interlocking directorships that can be seen as directly serving to reduce competition and thereby increase profits1.
Did JP Morgan use interlocking directorates?
Morgan placed associates on the boards of directors, mainly to protect the interest of the financiers but also made a web of interlocking directorates who would vote in Morgan's interest.
Can you be on the board of multiple companies?
What are board interlocks? Interlocks occur when a single director sits on the board of two or more different companies. Lots of corporate directors have more than one board seat. Research, including our paper, increasingly points to these directors as important channels through which corporate practices spread.
Did JP Morgan use interlocking directorates?
Morgan placed associates on the boards of directors, mainly to protect the interest of the financiers but also made a web of interlocking directorates who would vote in Morgan's interest.
Who was one of the first businessmen to use horizontal integration?
John Rockefeller was one of the first people who created horizontal integration. 2. After 1870, corporations in America increased largely.
Are interlocking shareholdings and directorates outlawed under the Sherman Act or Clayton Act?
Since 1914, Section 8 of the Clayton Act has prohibited interlocking directorates — when competing corporations are represented on each other's boards.
Under what circumstances does an indirect interlocking directorate exist?
Answer and Explanation: The correct answer is E) when two corporations have directors, who serve on the board of a third firm. Reason: The indirect interlocking directorate is a concept present in a business when directors of two companies sit on the board of a third company.
What Are Interlocking Directorates?
In simple terms, board directors who accept positions on the boards of two or more companies are called interlocking directorates. Under most circumstances, that arrangement is legal and perfectly acceptable. However, when the firms that a board director serves are mutual competitors, the waters become a little murky.
Regulations Regarding Interlocking Directorates
The issue of interlocking directorates is an antitrust matter. The Federal Trade Commission (FTC) is the federal regulating agency for antitrust laws. As part of the Clayton Act, U.S. antitrust laws disallow interlocking directorates.
When Does the Clayton Act Apply to Corporate Directors?
According to the Clayton Act, the interlocking directorate rule refers to a situation where each company competes on at least 2% of their sales and one of the companies competes on at least 4% of one of the company’s sales.
Problems With Interlocking Directorates
Research by GMI Ratings reports three distinct problems with interlocking directorates. They include:
A Notable Example of Interlocking Directorates
One of the most notable examples of interlocking directorates occurred in 2002 between Google and Apple. Eric Schmidt was the CEO of Google, and Arthur Levinson was the former chief executive of Genentech Inc. Both men served on the boards of directors for Google and Apple. The FTC conducted an investigation, citing Section 8 of the Clayton Act.
Why are interlocks important?
According to some observers, interlocks allow for cohesion, coordinated action, and unified political-economic power of corporate executives. They allow corporations to increase their influence by exerting power as a group, and to work together towards common goals. They help corporate executives maintain an advantage, ...
How many directors were on the board of directors in 1970?
In 1979 Levin and Roy reported on interlocking directors at 797 corporations in 1970 where the board of directors ranged from 3 to 47 members, with a mean size of 13. Only 18% of the 8623 directors were on more than one board, though the mean number of interlockers for a corporation was 8. The components of the graph were 62 isolated boards, four pairs of corporations interlocked by one or more directors, a triad of interlocked corporations, and the greater component of 724 corporations. For an arbitrary pair of corporations in this component the median path length was 3. Levin and Roy tested the graph for cut points and failed to find any with their search starting with corporations with large boards.
How many directors sit on two boards?
Approximately 15–20% of all directors sit on two or more boards. The largest corporations tend to have the most interlocks, and also tend to have interlocks with each other, placing them at the center of the network. Major banks, in particular, tend to be at the center of the network and have large numbers of interlocks.
What is interlocking in business?
Interlocks act as communication channels, enabling information to be shared between boards via multiple directors who have access to inside information for multiple companies. The system of interlocks forms what Michael Useem calls a "transcorporate network, overarching all sectors of business". Interlocks have benefits over trusts, cartels, and other monopolistic / oligopolistic forms of organization, due to their greater fluidity, and lower visibility (making them less open to public scrutiny). They also benefit the involved companies, due to reduced competition, increased information availability for directors, and increased prestige.
What is interlocking in the corporate world?
Bowman, interlocks "facilitate a community of interest among the elite of the corporate world that supplants the competitive and socially divisive ethos of an earlier stage of capitalism with an ethic of cooperation and a sense of shared values and goals.".
Why does the Clayton Act prohibit interlocking directorates?
In the United States, the Clayton Act prohibits interlocking directorates by U.S. companies competing in the same industry, if those corporations would violate antitrust laws if combined into a single corporation. However, at least 1 in 8 of the interlocks in the United States are between corporations that are supposedly competitors.
What is the inner circle of the corporate class?
Thus, these individuals (known as the "inner circle" of the corporate class) tend to contribute disproportionately to the policy-planning and government groups that represent the interests of the corporate class, and are the ones that are most likely to deal with general policy issues and handle political problems for the business class as a whole. These individuals and the people around them are often considered to be the "ruling class" in modern politics. However, they do not wield absolute power, and they are not monolithic, often differing on which policies will best serve the interests of the upper classes.
How can a monopoly influence the political system?
Perhaps the most effective, and least risky, way in which a monopoly can use interlocking directorships to influence the political system is to establish an interlocking directorship with a major media organization. Of course, it can be even more effective for corporations in different fields to directly own major media organizations, a practice which has become increasingly common in the U.S. in recent years.
What is a monopoly in business?
A monopoly is a company that is the sole supplier or a product (i.e., a good or service) for which there are no close substitutes. Antitrust laws are laws which are designed to regulate or break up abusive monopolies. An abusive monopoly is a monopoly that engages in any of a variety of anti-competitive practices, including using its monopoly in one product line to establish a monopoly in another product line. It is generally illegal for monopolies to establish interlocking directorships that can be seen as directly serving to reduce competition and thereby increase profits 1 .
How can interlocking directorships be effective?
Moreover, interlocking directorships can be an effective tool in influencing the political system. For example, a monopoly can use it to help persuade other companies, even those in very different industries, to assist in lobbying efforts to prevent antitrust laws from being enforced with regard to the monopoly or to allow it to extend its monopoly to new product lines.
Why do corporations use interlocking directorships?
Interlocking directorships have long been used by corporations to maintain and expand their power. For example, they can be used to form a cartel, which is a form of collusion between firms in the same industry aimed at restricting output and increasing prices.
What is interlocking directorship?
The term interlocking directorship in its strictest sense refers to the situation in which a member of the board of directors of one corporation also serves as a member of the board of directors of another corporation.
What is a close relative of a board of directors?
A broader and more useful definition is the situation in which (1) a member of the board of directors of a company, (2) a top executive of that company or (3) a close relative (e..g., wife or father) of a member of the board of directors or of a top executive of that company serves as a member of the board of directors of another corporation.
When did Melinda Gates join the Washington Post?
2 This appointment was widely reported in the U.S. media. See, for example, Melinda Gates Joins Washington Post Co. as Director, washingtonpost.com, September 2004. Curiously, however, this article failed to mention how this appointment could be of strategic value to Microsoft's battle against the enforcement of antitrust laws, but it was able to devote considerable space to discussing Mrs. Gates' other activities.
Interlocking directorate
Describes cross-memberships of directors on each other's company Board of Directors.
Interlocking Directorates
A situation or state in which one person is a member of the board of directors in more than one publicly-traded company. This creates the possibility of a conflict of interest; indeed, interlocking directorates are illegal when two companies are competitors.
Overview
Interlocking directorate refers to the practice of members of a corporate board of directors serving on the boards of multiple corporations. A person that sits on multiple boards is known as a multiple director. Two firms have a direct interlock if a director or executive of one firm is also a director of the other, and an indirect interlock if a director of each sits on the board of a third firm.
Socio-political importance
According to some observers, interlocks allow for cohesion, coordinated action, and unified political-economic power of corporate executives. They allow corporations to increase their influence by exerting power as a group, and to work together towards common goals. They help corporate executives maintain an advantage, and gain more power over workers and consumers, by reducing intra-class competition and increasing cooperation. In the words of Scott R. Bowma…
Modern interlock networks
Analyses of corporate interlocks have found a high degree of interconnectedness amongst large corporations. It has also been shown that inbound interlocks (i.e. a network link from external firms into a focal firm) have a much greater impact and importance than outbound interlocks, a finding that laid the foundation for further research on inter-organizational networks based on overlapping memberships and other linkages such as joint ventures and patent backward and fo…
Legality
In the United States, Section 8 of the Clayton Act prohibits interlocking directorates by U.S. companies competing in the same industry, if those corporations would violate antitrust laws if combined into a single corporation. However, at least 1 in 8 of the interlocks in the United States are between corporations that are supposedly competitors.
In 2022, the Department of Justice (DOJ) Antitrust Division signaled it would reinvigorate enforce…
1970 graphs
In 1979 Levin and Roy reported on interlocking directors at 797 corporations in 1970 where the board of directors ranged from 3 to 47 members, with a mean size of 13. Only 18% of the 8623 directors were on more than one board, though the mean number of interlockers for a corporation was 8. The components of the graph were 62 isolated boards, four pairs of corporations interlocked by one or more directors, a triad of interlocked corporations, and the greater component of 724 …
See also
• Cartel
• Insider trading
• Oligarchy
• Price fixing
• Revolving door (politics)
Further reading
• Domhoff, G. William (August, 2005); Interlocking Directorates in the Corporate Community.
• Mizruchi, Mark S. (August, 1996); "What Do Interlocks Do? An Analysis, Critique, and Assessment of Research on Interlocking Directorates". Annual Review of Sociology, Vol. 22: 271-298.
• Phillips, Peter S. (June 24, 2005) "Big Media Interlocks with Corporate America".
External links
• TheyRule.net—tool for mapping out board interlocks between large corporations, foundations, nonprofits, and universities, using data from SEC filings