This paper argues that director interlocks, a phenomenon in which directors sit on more than one corporate board, ought to be an object of expanded discussion in corporate governance research and practice. Thus far, interlocks have attracted little attention from legal scholars, and when interlocks have received attention from regulators, it is usually negative. A growing body of evidence points to interlocks as having a significant role in governance propagation and evolution. Core governance practices, including ones that are closely monitored by professionals, propagate via interlocks. Interlocks are not purely channels for the spread of information; they have a significant impact even in an informationally rich environment. Both bad and good governance practices propagate via interlocks, and overall board connectivity is associated with higher returns. Interlocks help explain similarities and variations in corporate governance practices between firms. Drawing strong normative conclusions in light of the state of the literature would be premature. Instead, we summarize the literature on interlocks and governance, analyze how and why interlocks could matter for governance, and suggest that it is important, at the very least, to recognize that interlocks facilitate the diffusion of governance practices, and that highly connected firms are potentially influential in setting governance practices.
We examine the role of outside directors’ interlocks, in restoring directors’ indemnification protection in response to the Delaware case Schoon v. Troy Corp. The case, which permitted a board to alter indemnification and advancement of expenses arrangements for a former director retroactively, left directors vulnerable unless their firm acted to restore protection. Using a hand-collected data set, we find that firms became more than two times as likely to adopt enhanced indemnification protection once a firm with which they share an outside director adopted protection. Our results suggest that interlocks contribute to outside directors’ knowledge and bargaining power within the boardroom. Consistent with the bargaining power hypothesis we find that other measures of outside directors’ power: (i) a large proportion of outside directors; (ii) a designated independent lead director, and, with marginal significance, (iii) more board meetings in executive session. These results have legal and practical implications for corporate governance.