Importance of Interlocking Directorates Software

Nicholas J Price
Corporations exist within an ecosystem of other corporations. Many relationships and interrelationships exist within the ecosystem. It's an ecosystem where the names of the leaders of the largest, most successful companies are well-known and quoted in the media often. Corporate board members also have relationships with board directors of other companies. Together, corporations and corporate board directors have powerful influence.

Corporate interlocks are prevalent in the United States and they're growing in Europe and East Asia as well.

There has been some research done about what interlocks represent, why companies form interlocks and whether they create a conflict of interest. For now, interlocking directorates do exist and board management software is the most secure way for board directors to serve on multiple boards.

What Is an Interlocking Directorate?

An interlocking directorate is the connection that gets created when a board director of one corporation accepts an appointment to be a board director of another corporation.

For example, in 2002, Sanford Weill, who was then the CEO of Citigroup, accepted a seat on the board of AT&T, and thus created a connection between the two firms.

The government soon recognized that interlocks had the potential to enable two corporations to willfully conspire to upset the competition in ways that benefit both of them. Such an issue could upset the necessary balance in the marketplace, especially in the banking industry, which could set up a complete disaster.

Congress passed the Clayton Antitrust Act in 1914 to clarify the Sherman Antitrust Act of 1890, which many felt had too many loopholes to prevent an adverse effect on competition. Among other things, the Clayton Act prohibited interlocks between competitors.

Why Do Companies Establish Interlocks?

There may be several reasons why companies establish interlocks. In some cases, they may be entirely unintentional. Boards should be looking for board directors who have the necessary skills, talents and abilities to round out a well-composed, diverse board. Nominating and governance committees may recruit a board candidate based on a board director's qualities, rather than their affiliations.

Two other possibilities consider that companies may form interlocks because of inter-organizational or intraclass reasons.

Some corporations may entertain establishing interlocking directorates for inter-organizational reasons. Interlocks could be a means for managing uncertain issues related to major suppliers, top customers or something else.

Banks are sources of capital and, as such, help to keep checks and balances on financial issues. Banks and banking institutions were the most important interlock partners up until about 1980. There was some suspicion that AT&T may have put Sandy Weill on its board because they were indebted to Citigroup. Weill most likely had personal relationships with other AT&T board members, including Michael Armstrong, AT&T's CEO, who was also on the board of Citigroup.

Still another theory is that corporations have an interclass mindset in choosing which corporations should share board directors, which is called an intraclass concept. An interclass approach suggests that interlocks create ties between people. Those ties play an important role in upholding the tradition of creating a cohesive upper class within the world of boardrooms. Up until recent best practices for good governance that have focused on skilled and diverse boards, intraclass directorships tended to focus more on individuals who hailed from wealthy families, who had elite educations and who were prevalent in important social clubs.

Either way, the reasons for establishing interlocking directorates can have unintended consequences. Relationships formed may create unity among corporate elites, and they can take what they learn from one corporation and use it for another. For example, a board director for a company that is known for takeover defense plans could apply the same strategy at other corporations where they serve on the board of directors. By the same token, a board director of a company that is known for engaging in mergers and acquisitions could take those practices to another corporation where there is an interlocking directorate. It's also common for companies that have interlocking directorates to come closer to their views on political issues and political contributions.

Benefits of Software for Interlocking Directorates

At the current time, for better or worse, interlocking directorates are part of the capital markets and will continue to be for the foreseeable future. Considering this, it's important for boards to have a way for board directors to give their all to each board that they serve on and keep confidential matters private. Fortunately, technology provides a way for that to happen. Diligent's latest addition to their board portal platform is the Nomination & Governance platform. Diligent's Nomination and Governance application provides the largest global governance data set for boards to stay up to date, identify opportunities and reduce governance risks ' and is integrated directly into your Diligent platform. Nomination and Governance committees can gain instant insights into their board's composition, benchmark against competitors, and support their executive search firm to identify potential candidates.

The nomination and governance platform is available as part of Diligent's board management software solution that allows corporations to use the same board management software platform for multiple corporations. The benefit to board directors is that it gives them just one log-in, while they have confidential access to multiple corporation portals.

Diligent Corporation designed the Diligent Boards platform with user permissions so that board administrators can set up the system so that all board directors and executives can only access the parts of each portal that they need to access, keeping all private business private. There's no concern over collusion.

Diligent Boards allows boards to create online board books, and the security of the system keeps them highly secure. Imagine boards shipping board books with hundreds of pages to a board director across the nation. There's a huge risk of the pages getting lost or not arriving on time. The more boards that a director serves on, the more risk there is that important, confidential board documents could get into the wrong hands. Imagine all the notes that board directors write on their paper board documents and the risk of those documents going astray. With Diligent Boards, board directors can make notes and annotations and choose whether or not to share their notes with others.

Confidential communications in between board meetings are also important. With Diligent's board management software program, board directors can communicate securely right inside the board portal of each corporation of the board that they serve on. That means that interlocking directorate board members can access board materials in between meetings at any time of day or night using any electronic device of their choice.

Despite the advantages, disadvantages, risks and opportunities of interlocking directorates, Diligent board management software systems provide the best software solution that allows board directors to perform due diligence for every corporation that they serve.
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Nicholas J. Price
Nicholas J. Price is a former Manager at Diligent. He has worked extensively in the governance space, particularly on the key governance technologies that can support leadership with the visibility, data and operating capabilities for more effective decision-making.