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Board Interlocks and Diversification Strategies  

Christine Shropshire

The board of directors serves multiple corporate governance functions, including monitoring management, providing oversight on strategic issues, and linking the organization to the broader external environment. Researchers have become increasingly interested in board interlocks and how content transmitted via these linkages shapes firm outcomes, such as corporate structure and strategies. As influential mechanisms to manage environmental uncertainty and facilitate information exchange, Board interlocks are created by directors who are affiliated with more than one firm via employment or board service and allow the board to capture a diversity of strategic experiences. One critical corporate decision that may be influenced by interlocks and strategic diffusion is diversification (i.e., in which products and markets to compete). Directors draw on their own experiences with diversification strategies at other firms to help guide and manage ongoing strategic decision-making. There is broad scholarship on interlocks and the individuals who create them, with extant research reporting that some firms are more likely to imitate or learn from their interlock partners than others. Prior findings suggest that the conditions under which information is transmitted via interlock, such as an individual director’s experience with diversification strategies at other firms, may make that information more influential to the focal firm’s own strategic decision-making related to diversification. A more holistic framework captures factors related to the individual interlocking director, the board and firm overall and the context surrounding these linkages and relationships, helping to promote future research. Understanding the social context surrounding board interlocks offers opportunities to more deeply examine how these interconnections serve in pursuit of the board’s fundamental purpose of protecting shareholder investment from managerial self-interest. Overall, integrating multi-level factors will offer new insights into the influence of board interlocks on firm strategies on both sides of the partnership. Expanding knowledge of how inter-firm linkages transmit knowledge influential to board decision-making can also improve our understanding of board effectiveness and corporate governance.