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date: 29 March 2020

Board Interlocks and Diversification Strategies

Summary and Keywords

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.

Keywords: corporate governance, boards of directors, board interlocks, interlocking directors, shareholder activism, diversification

As an entity created to represent shareholder interests, the board of directors serves multiple functions within the organization from monitoring management and overseeing strategy to providing critical linkages to the external environment (Hillman & Dalziel, 2003; Pearce & Zahra, 1991). While extensive research has explored monitoring and control, less studied are the strategic role and the nature of the relationship between board membership and firm strategy. Boards can shape firm strategy through advice-giving (Westphal, 1999), yet despite decades of research into board composition and structure, an understanding of how to design effective boards or when boards will have a greater impact on strategic decisions and performance is still lacking (Carpenter & Westphal, 2001; Golden & Zajac, 2001; Gulati & Westphal, 1999). When viewed as a mechanism to manage environmental uncertainty, the board and its particular membership provides several major benefits to firms, including access to diverse resources, communication and information channels, advice and counsel, and legitimacy (Pfeffer & Salancik, 1978; Wry, Cobb, & Aldrich, 2013).

Interfirm linkages, specifically director interlocks, are often examined as a means of scanning the business environment and as conduits for information exchange across firms (Haunschild & Beckman, 1998; Useem, 1984). A board interlock (occupied by an interlocking director) is created when an executive or director at one firm joins the board of another (Burt, 1980; Mizruchi, 1996). Network perspectives suggest that corporate actions reflect interactions and relationships from a broad environment (Gulati, 1999; Uzzi, 1996) and that embeddedness and isomorphic processes impact the diffusion of information and innovation between firms (DiMaggio & Powell, 1983; Gnyawali & Madhavan, 2001; Granovetter, 1985). Directors are influential not just as advisors but often in articulating and refining corporate strategy (Johnson, Daily, & Ellstrand, 1996; Zhu, 2013). In particular, directors affiliated with more than one firm (either by employment or board appointment) have multiple pools of knowledge and experience from which to advise and define strategies (Burt, 1980). Research has tracked the spread of corporate strategies and structure across interlocked firms, since board linkages serve as credible and low-cost channels of trustworthy, fine-grained information (Haunschild, 1993; Mizruchi, 1996; Uzzi, 1996). Board interlocks allow researchers to investigate when specific strategies and practices diffuse across firms.

An overview of research on board interlocks suggests a persistent need to understand whether interlocks matter and the conditions under which information carried via interlock may be more influential. Empirical findings shed light on organizational causes and effects of these linkages, with more recent attention paid to individual characteristics that appear to influence inputs or outcomes of board interlocks. Yet, to some extent, incremental advances in this research stream have left the field without a holistic understanding of how interlocks create or sustain value for their linked organizations. This article suggests that attention to the social context within and surrounding the interlocked board can expand one’s knowledge of strategic diffusion and outlines an agenda to advance more comprehensive understanding of board interlocks in a changing environment for corporate governance.

Board Interlocks

The paths and connections between organizational actors have been shown to be influential in determining access to resources, information, opportunities, and more (DiMaggio & Powell, 1983; Meyer & Rowan, 1977). Corporate actions are embedded in social networks, and the patterns of connectedness and relationships affect the behavior of the network actors (Granovetter, 1985). As boards are generally involved in initiation and development of corporate strategies (Haunschild, 1993; Johnson et al., 1996), directors can help manage complexity and uncertainty around strategic decisions by scanning the business environment and sharing advice (Rindova, 1999; Useem, 1984). One primary source of information for directors is experience on other corporate boards (Beckman, Schoonhoven, Rottner, & Kim, 2014; Podolny, 2001; Richardson, 1987).

Under greater uncertainty, organizations are generally more likely to model themselves after successful others (DiMaggio & Powell, 1983). Consequently, interlocks may be formed to bring in expertise from outside the organization, to fulfill the governing fiduciary duties of the board, or to coopt the interests of an external stakeholder (Diestre, Rajagopalan, & Dutta, 2015; Pfeffer & Salancik, 1978). These directors via their interlocked position likewise influence board outcomes, since “the organization may be altered by the bringing of external organizations into its councils” (Pfeffer & Salancik, 1978, p. 165). Research has noted, beyond mimetic pressures, the potential for coercion in driving the spread of helpful or harmful practices via board interlocks (Krause, Wu, Bruton, & Carter, 2019).

As linkages between firms, board interlocks convey information regarding innovation and strategy (Bazerman & Schoorman, 1983; Haunschild, 1993). In particular, interlocks provide more detail, and insight regarding strategic design, alignment, and implementation than can be observed by outsiders. Numerous studies have examined the value of interlocks, as well as how these linkages impact corporate structure and practices (see Mizruchi [1996] for a review). Early work on interlocks focused on their cooptation benefits, namely the reasons underlying interlock formation (Mizruchi & Stearns, 1988) or what resource dependencies were managed via interlocks (e.g., Mizruchi & Stearns, 1994). For example, bank representation on a board significantly relates to the firm’s capital requirements, and the presence of lawyers as corporate directors has been shown to covary with the extent of industry regulation (Pfeffer, 1972).

Research explains the diffusion of corporate strategy and structure across board interlocks because these linkages serve as low-cost, highly credible information sources (Haunschild & Beckman, 1998; Shropshire, 2010). Lorsch and MacIver (1989) quote one CEO who argues that “Serving on the board is a way of seeing how somebody else is doing the same thing you are doing,” thus promoting better informed boardroom discussions and strategic decision-making (p. 27). The range of strategic outcomes that may be tied to the influence of interlock experience is broad, and researchers continue to explore how conditions surrounding an interlock affect its influence along with characteristics of each individual director linkage. Evidence of the influence of interlocks on firm strategies has been found related to acquisition decisions (Cai & Sivilir, 2012; Haunschild, 1993) as well as product and geographic market expansion (Connelly, Johnson, Tihanyi, & Ellstrand, 2011; Diestre et al., 2015). Research has also explored the adoption of particular practices and diffusion of policies between interlocked firms. For example, patterns in corporate philanthropy (Galaskiewicz & Burt, 1991; Saiia, Carroll, & Buchholtz, 2003), and diversity and equity employment practices (Cook & Glass, 2015, 2016) have been shown to diffuse via board interlocks, while other research identifies similarities in sustainability and environmental strategies, specifically (Ortiz-de-Mandojana, Aragón-Correa, Delgado-Ceballos, & Ferrón-Vílchez, 2012; Walls, 2013), and corporate social responsibility more broadly (Barka & Dardour, 2015; Jo & Harjoto, 2011) between interlocked firms. Not all diffused practices are adopted to model successful others, however, as recent research also notes the spread of certain financial practices as a form of forced compliance via board interlocks (Krause et al., 2019).

Interlocks are most commonly viewed as inexpensive and credible tools for scanning the business environment (Useem, 1984) and managing environmental uncertainty (Beckman et al., 2014). Many studies on board interlocks test how these linkages transmit innovation or structure, with most research assessing diffusion as adoption in a dichotomous way. For example, prior research asks whether a firm adopts the M-form structure or establishes an investor relations department based on its interlock partners (Palmer, Jennings, & Zhou, 1993; Rao & Sivakumar, 1999). Even research that examines similarity in behavior beyond the direct interlock partners (e.g., Westphal, Seidel, & Stewart, 2001) tends to consider imitation as its outcome of interest. While interlocks can be used as scanning tools for the broader competitive environment, these linkages can carry not only innovations or practices but may also direct ongoing strategic management to achieve tighter coupling of strategy and financial performance. Following previous research that suggests strategy follows structure (Amburgey & Dacin, 1994), board structure, such as interlocks, may specifically inform firm strategy to achieve superior performance.

Fundamental to the social network perspective is the relational nature of firm linkages and their ability to reduce environmental uncertainty, specifically by increasing access to information and alleviating resource constraints. Research taking this perspective has identified several benefits of networks, including access to resources, legitimacy, and a web of connections housing valuable information (Pfeffer, 1972; Zald, 1969). Scholars have applied social network perspectives to investigate how firms learn about interlock partners’ strategies and then apply this knowledge to improve their own firm’s strategic decisions. Beckman and Haunschild (2002) explore director interlocks as a source of learning about corporate acquisitions by tapping into linked firms’ experience. They argue that firms do not simply imitate but rather learn from the experience of their interlock partners to customize strategic behaviors. Their findings suggest that the knowledge available and its distribution within a network may allow a firm to improve strategic decisions. Beyond the actions of the interlocked firm, the portfolio of experience carried by the interlocking director may more directly influence boardroom discussions and strategic decision outcomes.

In a number of studies, Westphal and Zajac (1997) and Zajac and Westphal (1996) explore the spread of systems and processes, rather than specific practices, via interlocks. For example, board independence diffuses via interlocks with power differentials between the CEO and board impacting the subsequent selection of directors and their influence on corporate outcomes. The authors argue that the market for corporate directors is segmented, such that individual directors differ with regard to active or passive behavior, and knowledge of these tendencies can be exploited by powerful CEOs to maintain control of their organizations. Similarly, decision processes themselves may diffuse (Westphal et al., 2001), as directors develop their advisory positions through experience at other firms and transfer a procedure or approach rather than specific strategic content. Overall, research has shown that interlocks can have both dark and bright sides, through their influence on outcomes such as joint venture formation (Gulati & Westphal, 1999) and societal income inequality driven by high CEO pay (Kim, Kogut, & Yang, 2015).

Empirical evidence supports the spread of practices via director interlocks, yet scholars continue to note that actors themselves, as well as intra- and interorganizational conditions, impact the diffusion of those structural or strategic changes. For example, whether board interlocks have a positive or negative relationship to firm performance (e.g., Zona, Gomez-Mejia, & Withers, 2018) is influenced by characteristics such as interlocking director bandwidth or potential to monitor (Ferris, Jagannathan, & Pritchard, 2003; Hambrick, Misangyi, & Park, 2015). To bridge the wealth of research on interlocked firm imitation (e.g., practice or policy adoption; Haunschild, 1993; Westphal et al., 2001) with more recent attention to the interlocking director and the potential for knowledge transfer (e.g., Shropshire, 2010), the following section discusses corporate diversification as a specific context for strategic diffusion and proposes relationships to derive new insight into the effects of board interlocks on the coupling of strategy and performance.

Strategic Diffusion

The transmission of various practices and policies has been explored via board interlocks, and yet little is known about corporate strategic diffusion. The topic of corporate diversification is considered one of the “oldest, broadest and most consequential to the field of strategic management” and “one of most important strategic challenges facing top executives” (Bergh, 2001, p. 363). Managing the lines of businesses in which a company chooses to compete also remains among the most frequently studied and debated research topics (e.g., Amihud & Lev, 1999; David, O’Brien, Yoshikawa, & Delios, 2010; Denis, Denis, & Sarin, 1999; Kim, Hoskisson, & Lee, 2015; Lane, Cannella, & Lubatkin, 1998; Su & Tsang, 2015). Following lengthy debate, meta-analytic findings on 30 years of research regarding diversification and firm performance reveal a curvilinear (inverted-U) relationship, following a positive return on related diversification with declining performance as the firm pursues unrelated diversification (Palich, Cardinal, & Miller, 2000). These results reflect the arguments posed by Lubatkin and Chatterjee (1994) that risk is best minimized through moderate diversification, using the metaphor of eggs in similar baskets rather than in the same or many different baskets. This finding that related diversification outperforms single-business and unrelated diversification has been replicated in other studies using different samples and methodologies (e.g., Boyd, Gove, & Hitt, 2004; Kumar, 2013; Villalonga, 2004).

Firms that pursue related acquisitions expect to benefit through improved synergies (Hill & Hoskisson, 1987), renewed utilization of dormant resources (Helfat & Eisenhardt, 2004), and competency in organizational learning (Vermeulen & Barkema, 2001). Helfat and Eisenhardt show that related diversification not only produces economies of scope but also intertemporal effects due to resource redeployment and capability sharing. The benefits of a related diversification strategy are realized with experience, whether unfolding over time within the firm itself or through informed counsel from others’ diversification experience. For example, Vermeulen and Barkema noted the diversity benefits of such a strategy, arguing that a firm’s past diversification experiences enable organizational learning and build stronger technological capabilities. Boyd, Gove, and Hitt (2004) find that board control more greatly constrains unrelated diversification than related strategies, such that boards recognize the greater potential for related diversification than unrelated in creating shareholder value.

Alternatively, under conditions of increasing unrelated diversification, organizations tend to rely more on financial controls (Hoskisson, Hill, & Kim, 1993) and develop a culture of competition rather than cooperation (Hill, Hitt, & Hoskisson, 1992). Increasing levels of unrelated diversification over time lead to divestiture, which may allow the firm to refocus on core, related businesses and regain a culture of cooperation and use of strategic controls (Hitt, Hoskisson, Johnson, & Moesel, 1996). Diversification has been depicted as a “too-much-of-a-good-thing” phenomenon (Pierce & Aguinis, 2013), where a strategy of related diversification is superior to an unrelated one. Yet other than the board’s collective influence on diversification related to CEO succession (Westphal & Fredrickson, 2001), it is not known whether and how firms benefit from directors’ experience with diversification strategies at other firms.

An underlying premise is that strategic decision-makers can better couple the firm’s strategy and performance by utilizing the experiences and advice of its board of directors. If individuals indeed carry knowledge and experience to significantly impact strategies at their affiliated firms (Bertrand & Schoar, 2003), then a director’s strategic experience with related diversification elsewhere will inform and shape strategic change at a newly interlocked firm. Several internal and external factors, related to the influence of interlocking directors on diversification strategies, are proposed as worthy of review and exploration. Beyond a baseline effect of whether related diversification strategy will diffuse following the creation of a new board interlock, implying a purposeful directionality of the diffusion suggests that a new board linkage between two firms can improve ongoing strategies given the new channel of communication for exchanging business practices and knowledge (Beckman & Haunschild, 2002). Thus the baseline effect in corporate strategy diffusion is proposed that a new interlocking director bringing related-diversified experience will increase related diversification at the focal firm.

Internal Drivers of Board Receptivity

The climate on the board may be more or less receptive to the advice and experience brought by a new interlocking member. Thus diffusion across board interlocks is likely moderated by relative firm differences (Shropshire, 2010), such as the social capital or status differentials between decision-makers (Certo, 2003; Granovetter, 1985). The board’s receptivity to interlocking director experience is expected to differ based on the perceived legitimacy of the message. The influence of an interlocking director’s outside strategic experience increases with the status of interlocked firms (Luoma & Goodstein, 1999), following the institutional argument that better-performing firms are more likely imitated (DiMaggio & Powell, 1983).

Rather than imitation, though, interlocking directors are expected to inform and enrich boardroom discussions and understanding of diversification strategies with exposure to the improvements of focusing widely unrelated business lines or diversifying from single-business into related segments. Prior research indicates that board composition appears to reflect some awareness of knowledge deficiencies along with the cost of related information acquisition (Duchin, Matsusaka, & Ozbas, 2010). Thus the formation of new board interlocks is expected to play a critical role in expanding the firms’ exposure and understanding of effective strategic management. As Beckman and Haunschild (2002) suggest that firms learn by “sampling diverse experiences of their network partners” (p. 92), interlocking director influence around CEO succession appears to be greatest relative to product diversification decisions when the interlocked firms have stronger performance relative to the focal firm (Westphal & Fredrickson, 2001). Both the firm’s ability to recognize strategic effectiveness in its interlock partners (Diestre et al., 2015) as well as the board’s receptivity to knowledge transfer (Kaczmarek, Kimino, & Pye, 2012) reflect status differentials. In addition to improving strategy coupling with performance via related diversification, a directionality to the information flow is expected to reflect larger, better-connected, and better-performing firms (e.g., Diestre et al., 2015; Erkens & Bonner, 2013; Haunschild & Beckman, 1998). While prior work suggests generally increasing board receptivity based on the perceived legitimacy of knowledge carried and relative status differentials (Shropshire, 2010), the question of strategy-performance coupling in this diversification context trains the focus on the relative performance of each interlock partner. Thus boards will be more receptive to the corporate strategy experience of a new interlocking director when the interlocked firm has higher status than the focal firm. Put differently, the baseline effect of diffusion in related-diversification strategy will be moderated by interlocked firm status, such that the effect is strengthened with superior relative performance or size of the outside firm.

External Drivers of Board Receptivity

While relative firm differences impact how an individual’s message is received in the boardroom, the external environment and the firm’s alignment with it also likely influence receptivity to outside director knowledge and experience. Building upon research on the impact of uncertainty in the competitive environment, the diffusion of strategy is likely moderated by the firm’s environment, since external conditions constrain the board’s ability to influence strategic change (Carpenter & Westphal, 2001) as well as by the firm’s tendencies toward or away from industry standards and norms. Environmental turbulence refers to the volatility or uncertainty a firm faces in its broader external environment (Boyd, 1990), and turbulence in the competitive environment negatively affects the process of information transfer (i.e., the new interlocking director serving as a mechanism for the exchange). While turbulence has operationalized in a number of ways, its dimensions of munificence, dynamism, and complexity have commonly been utilized to capture resource abundance, variability in growth opportunities, and stability in industry leadership, respectively, as external conditions influencing strategic action and performance (e.g., Baum & Wally, 2003; Boyd, 1995; Dess & Beard, 1984).

Board linkages become more important in turbulent operating conditions (Aldrich, 1979), as these links to the external environment help to coopt external dependencies or protect access to critical external resources. Research has found consistently across time that industry-wide uncertainty, through constrained resource availability or ambiguity, leads firms to reconsider their reliance on their current network of interlocks (Howard, Withers, Carnes, & Hillman, 2016). Environmental turbulence hampers typical processes within decision-making groups (Cooper, Patel, & Thatcher, 2014; Rajagopalan, Rasheed, & Datta, 1993) and thus likely moderates the diffusion of diversification strategy. Instability and complexity in the environment may change the focal firm’s receptivity to outside director knowledge and experience with diversification strategy.

The decision environment shapes the likelihood that an individual’s strategic experience is actually heard in the boardroom. Hough and White (2003) highlight the importance of external context in studies of team decision processes, such that rational decisions are both more possible and more critical in stable environments, since what seems rational at one time in a dynamic environment may soon be invalid under conditions of constant change. Further, comprehensiveness in strategic decision-making may be positive only in stable environments while harmful in unstable ones (Frederickson, 1986; Fredrickson & Iaquinto, 1989). Environmental turbulence alters the relevance and contribution of directors’ external experience toward board functions of monitoring and resource provision (Carpenter & Westphal, 2001). In a more stable environment, a director with strategically relevant experience is more likely to recognize its relevance and share that expertise. Alternatively, a more uncertain environment is noisier, making the outside experience of one director more difficult to apply in a complex decision-making boardroom context. Thus the baseline effect of diffusion of related-diversification strategy will be moderated by environmental turbulence, such that the effect is contingent upon munificence, complexity, and dynamism in the focal firm environment.

Further, to the extent a firm aligns itself with industry norms in resource allocation, such as research and development or advertising investment, it may be generally less open to change (Zhang & Rajagopalan, 2003). Research on strategic conformity examines the degree to which a firm follows standards or averages in its industry. Linkages to firms outside one’s industry increase the adoption of strategies less similar to industry norms (Geletkanycz & Hambrick, 1997). Firms that deviate from general industry practices may be more willing to entertain suggestions from a new interlocking director to incorporate aspects of different strategies into their current portfolio, while firms may be less receptive to a new interlocking director’s strategic experience if its corporate strategies tend to align with industry norms. Thus the baseline effect of diffusion of related-diversification strategy will be moderated by strategic conformity, such that the effect is weakened with focal firm conformity to industry strategic norms.

Framework for Future Research

The literature on board interlocks and this article’s proposals regarding strategic diffusion of corporate diversification suggest that a solid foundation of knowledge exists, but far more remains to be clarified. Understanding how interlocking directors impact firm strategies has implications for corporate governance and strategic management. There is still much to learn about the role of individual directors as carriers of strategic knowledge between firms, along with how the broader context constrains the receptivity of the board and firm to that diffusion of strategy. Beyond the proposed baseline effect that a new interfirm linkage will inform the corporation’s scope toward related diversification, a number of contextual moderators could further impel that strategic change by facilitating the board’s receptivity to the interlock’s portfolio of knowledge and strategic experience.

New Frontiers in Board Interlocks Research: Performance and Beyond

Potential value resides in board interlocks, yet firms continue to wrestle with managing board composition and interfirm linkages in a way that consistently improves governance effectiveness and performance. Several studies report performance advantages linked to interlocking directors, such as return on assets and risk-adjusted stock returns (e.g., Larcker, So, & Wang, 2013; Pombo & Gutierrez, 2011). Despite these direct effects, however, specific financial performance metrics are often moving targets. Research that incorporates multiple perspectives and definitions of performance is still needed, along with methodological advances that capture the dynamic and multifaceted nature of firm performance (e.g., Dass & Shropshire, 2012). Understanding the board’s contributions toward performance would be enhanced with scholarly consideration of inherent tradeoffs, such as those between time horizons or conflicting preferences among owners (e.g., Hoskisson, Hitt, Johnson, & Grossman, 2002; Souder & Bromiley, 2012). Recent studies support the contention that shareholders are concerned with more than stock price alone and indeed value profitability balanced with environmental and social performance (Flammer, 2013; Porter & Kramer, 2011). As evidence of evolving shareholder concerns, proxy proposals related to sustainability concerns represent the majority of shareholder activism in the 21st century (Serafeim, 2016). Dominant institutional logics continue to evolve and diffuse via interlocking directors, shaping value orientations not only at the focal firm but often across intercorporate networks and economies (Bell, Filatotchev, & Aguilera, 2014; Shipilov, Greve, & Rowley, 2010). Therefore, research is needed that goes beyond the relationship between board interlocks and stock performance to study the ability of interlocking directors to collect the most relevant knowledge and experiences that improve the board’s effectiveness to provide appropriate resources and monitoring.

One avenue to expand interlocks-performance research is a perspective toward the life cycle dynamics of firms, boards, and their correspondent resource needs (Lynall, Golden, & Hillman, 2003; Quinn & Cameron, 1983). Board interlocks appear to be positively perceived by investors at the time of initial public offering; having more board interlocks disclosed on the prospectus leads to higher valuations in the United States and even stronger effects in the United Kingdom (Filatotchev, Chahine, & Bruton, 2018). Some economic benefits of board interlocks, such as those revealed in stock returns and positive analyst forecast errors, are concentrated among high-growth opportunity firms or firms confronting adverse circumstances, in line with the idea that interfirm linkages are most critical and influential in contexts that increase the value of information and resource access beyond the firm’s boundaries (Larcker et al., 2013). Given that “boards are expected to perform qualitatively different roles at various points in the (firm life) cycle” (Zahra & Pearce, 1989, p. 298), there is promise in interlocks research that focuses on the evolving needs of the firm at various points in time or that follows the dynamics of interlocking directorates in a richer way than previous studies have attempted.

It is not only the financial performance implications of interlocks themselves, however, that remain complex. Complications to extracting value from interlocks appear in research from a variety of settings that identify diminishing returns or contingencies in relationships between board interlocks and firm outcomes. For example, there is evidence that interlocks influence corporate environmental performance (Ortiz-de-Mandojana et al., 2012; Walls, 2013) yet some studies find significant effects only at high or low levels of interlocks (Ortiz-de-Mandojana & Aragon-Correa, 2015). The field needs far more attention to the contingencies of interlock contributions, such as industry or other differences that affect how interlocks inform a focal firm’s adoption of interlocked practices or diffusion of strategies.

Because the relationship of board composition to firm performance is so distal, scholars have sought to identify more proximal effects of board interlocks, though these outcomes are also mixed. For example, Haynes and Hillman (2010) find that a board’s embeddedness in its firm’s focal industry limits its strategic conformity, while McDonald, Westphal, and Graebner (2008) conclude that previous director experience with acquisitions informs the focal firm’s acquisition behavior, most beneficially under conditions of greater board independence. The influence of prior experience with particular decisions such as related or unrelated acquisitions or in specific industries or product markets improves the chances of successful acquisition for the focal firm (Cai & Sevilir, 2012). In an interesting study using patent and board interlock data from the U.S. biotechnology industry, Ni Sullivan and Tang (2013) find that board interlock quality as well as innovation capabilities increase the likelihood of research and development alliance formation. However, market and firm-specific uncertainty weaken the effects of innovation capability strength while increasing the impact of board interlock quality. Similarly, Howard and colleagues (2016) examined how industry conditions increase firms’ willingness to revisit and expand their interlock and alliance networks to better manage environmental uncertainty. Thus, like the benefits of interlock experience to corporate strategies in turbulent environments, the value of interlocks to collaborative strategies such as alliances may also depend on characteristics of the external environment.

Despite evidence of interfirm learning, improved strategic efficacy, and even superior performance, the literature has also noted costly outcomes for board interlocks. Even within the board, there may be differing perspectives on how to define or respond to performance shortfalls (e.g., Desai, 2016), suggesting that interlocks research might explore similarities not just in practices or strategies but in shared understanding or productive conflict resolution via extra-firm experiences. While some studies point to improved acquisition outcomes (e.g., Cai & Sevilir, 2012), prior research has evidenced that as directors pool their collective exposure to various acquisitions, the possibility also arises that less effective acquisitions may result, since past experiences at other firms may lead the focal board to more extreme (e.g., higher premium) outcomes (Zhu, 2013). The same social-psychological bias has been evidenced with board behavior and interlock influence toward CEO compensation decisions (Zhu, 2014). As with strategies, board interlocks appear to increase conformity in levels of CEO pay; more embedded Chinese firms are less likely to establish a compensation committee and more likely to pay excessive CEO compensation (Markóczy, 2013). Interlocks with private equity ties increase a firm’s likelihood of being targeted in a private equity deal (Stuart & Yim, 2010), as well as reveal a propensity to spread earnings management practices and concerns over financial transparency (Chiu, Teoh, & Tian, 2013). Thus, far from uniformly positive outcomes, board interlocks continue to serve as conduits for exchange between firms that can also carry risky, unhelpful, and even damaging practices.

The Dynamics of Diffusion and Board Membership

More research is needed examining the nature and dynamics of diffusion—what is being transmitted and by whom—inclusive of more nuanced considerations of the person, practice, and context. Questions about what is being transmitted via interlocks have motivated research exploring how the intent to learn affects the dynamics of interlocking directorates (e.g., Simoni & Caiazza, 2012). Studies on environmental performance showcase some advantages of vicarious learning through interlocks, in that directors’ past experiences enable them to strengthen environmental practices, yet the board’s embeddedness in the institutional network also appears to hamper its ability to leverage past experience to improve environmental practices (Walls, 2013). Assessing the profile of previous board experiences may offer a compelling mechanism to track the dissemination of ideas and innovation that resides in the board’s interlocking ties (Kaczmarek et al., 2012). Yet the tension between potential benefits of outside experience and potential threats to extant power structure may endanger and

Not only what is transmitted via interlocks but by whom continues to generate scholarly interest. Diminishing returns have been identified tied to individual characteristics of the interlocking director, as individuals with too many outside appointments often have negative performance implications for their affiliated firms. Across a number of country environments, directors with excessive interlocks—often operationalized as three or more board affiliations—negatively impact the firm’s value (Fich & Shivdasani, 2006; Santos, da Silveira, & Barros, 2012) by compromising the attention of directors (Cashman, Gillan, & Jun, 2012; Kaczmarek et al., 2012; Lublin, 2016). One series of articles examines the effects of minority interlocking directorates on the adoption of lesbian, gay, bisexual, and transgender–friendly policies (Cook & Glass, 2016) and on equity and diversity policies (Cook & Glass, 2015). The board’s own experience matters also, as having previous experience with minority directors and with more interlocked minority directors, increases minority influence and renders their opinions more trusted in board decisions (Westphal & Milton, 2000). Experienced directors increase the likelihood of new market entry; however, their influence is weakened if the focal firm lacks new product development experience or has a high degree of market overlap with the interlocked firm (Diestre et al., 2015). Similarly, positive relationships between interlocks and new market entry have also been found in other country contexts, with results indicating a stronger effect if the interlocked director previously supervised entry into the same market (Tuschke, Sanders, & Hernandez, 2014).

The Role of Context

These studies begin to assess how factors at multiple levels may work in combination (or negate one another) to facilitate director, board, and firm outcomes. Changes in the institutional environment provide ongoing opportunities to examine the changing nature of relationships within and between boards. For example, a number of corporate scandals in the early 2000s preceded an “era of shareholder activism,” which ushered in a sharper focus on the failures of the corporate governance system (Goranova & Ryan, 2014). Frustrations over massive losses in market value, corporate bankruptcies, large-scale layoffs, and ethical breaches are reflected in a number of social activism campaigns, just as outrage over a lack of representation for shareholder interests has motivated years of financial and governance-related activism targeting corporations. While managers tend to resist shareholder demands (e.g., Ertimur, Ferri, & Stubben, 2010; Gillan & Starks, 2007), the momentum of shareholder activism that transcends topics and industries has led to a sea-change in board representation and firm transparency. The context of shareholder activism is elaborated to further outline future research avenues to organize and promote understanding of the social context of board interlocks and the fundamentally relational nature of interfirm linkages.

The External Environment

Given that “organizational decision makers have a strong preference for certainty, stability and predictability” (Oliver, 1991, p. 170), the context in terms of social connections and external environment likely shapes how board members’ experiences with strategies in other firms may help control uncertainty around strategy formulation at the focal firm. More research is needed to explore the context surrounding board interlocks to understand how they affect the ability and motivation for interlocking directors to bring their experiences to the focal firm. As examples, which networks do various interlocking directors access for the focal firm, and how might the membership of those networks uniquely shape its future prospects or strategic decisions? Stuart and Yim (2010) found that firms are 42% more likely to be targeted by private-equity offers when its board interlocks carry previous private-equity exposure. How industry and institutional differences moderate the effects of interlocking director experience on decisions to enter new markets (Diestre et al., 2015; Tuschke et al., 2014) or the focal firm’s recognition of relevant board interlock experience toward environmental strategies (Ortiz-de-Mandojana et al., 2012) are also likely fruitful questions to explore. Linkages across multiple governance environments, including developing or emerging economies, may offer new insights into how the external context relies on interfirm relationships and alters the role and responsibilities of owners as well as boards.

The external environment changes not just in terms of munificence or stability but also in terms of social contract. With the rise of shareholder activism, the relationships and expectations of powerful shareholders can facilitate or prevent a board from effectively managing environmental uncertainty—as investors represent a range of resources from financial capital through advocacy and support that may help with reputation maintenance or rebounding from crisis (Goodstein & Boeker, 1991; Marcel & Cowen, 2014). Shareholder support or disapproval of firm decisions can have both immediate and long-term consequences for the board (Hillman, Shropshire, Certo, Dalton, & Dalton, 2011), though their influence over board elections remains somewhat mixed (e.g., Campbell, Campbell, Sirmon, Bierman, & Tuggle, 2012).

Interlocking directors and their impact on board effectiveness become ever more important in an era of shareholder activism. Researchers have begun to explore board responsiveness to shareholder concerns in areas of critical board responsibility, such as incentive and risk alignment via CEO ownership and executive compensation (Alessandri & Seth, 2014; Brunarski, Campbell, & Hartman, 2015). Shareholders have also battled for increasing voice over proxy access and the director nomination process (Campbell et al., 2012; Francis & Lublin, 2015), with rising expectations that directors face penalties for failing to fulfill their responsibilities to constrain managerial self-interest at shareholder expense. The scope and impact of shareholder activism presents a number of interesting relationships for research to explore relative to the influence of interlocking directors. Activist demands have thrust boards into new responsibilities akin to investor relations (e.g., Flaherty, 2015), offering additional avenues of influence for interlocking directors. The extent of activist targeting and the nature of their demands may have differential impact based on the directors who connect the focal firm to outside entities as well as their motivation and ability to share resources embedded in their intercorporate networks. When boards fail in their fiduciary oversight, as revealed through earnings restatement or cases of financial fraud, interlocking directors are more likely to lose their outside board seats (Cowen & Marcel, 2011; Fich & Shivdasani, 2007). As activists increasingly demand their own representation on boards, external environmental concerns, including risk and uncertainty created by activist investors, may raise the stakes for interlocking directors to respond to specific needs and justify their contribution to each of their affiliate boards. Further research may reveal new insights into the effects of having inter-firm linkages like interlocks bring aspects of the external environment directly into the focal firm.

Relationships Within the Boardroom and Intercorporate Network

In addition to calls for research to understand the interplay between the external environment and the effects of board interlocks, more scholarly attention is also needed regarding the individuals who create these interfirm linkages relative to the boardroom overall. Rather than assuming they are uniform, a number of social attributes are expected to influence individual directors’ attitudes and behaviors toward their various firm affiliations in a way that likely moderates the effect of director interlocks on each firm’s strategies (Cook & Glass, 2016; Ortiz-de-Mandojana & Aragon-Correa, 2015; Ortiz-de-Mandojana et al., 2012).

The formation of new interlocks and maintenance or replacement of former connections shapes intraboard relations, with influence from and implications for the power dynamics and stability of relationships within the board (e.g., Stearns & Mizruchi, 1986; Westphal, Boivie, & Chng, 2006). With proliferating demands and successful campaigns for board representation, shareholder activists are likely reshaping the intercorporate network of directors (Campbell et al., 2012; Thurm & Benoit, 2012). Rather than interlocks reflecting embeddedness among the top corporate executives, activists are increasingly gaining board membership—through creation of seats or director replacement—and shaking up the social order and small world of the corporate elite (Davis, Yoo, & Baker, 2003). Research that explores how shareholders versus other stakeholders benefit from corporate strategic change (e.g., diversification; see David et al., 2010) points to the outsized influence that shareholder representation may have over more stakeholder-minded orientations (Fiss & Zajac, 2004; Shipilov et al., 2010).

Far more research is needed to understand the role of the interlocking director and factors granting individuals power and boards greater receptivity to outside knowledge and experiences in board discussions (Krause et al., 2019; Shropshire, 2010). For example, as suggested by Connelly and colleagues (2011), interlocks formed by lead directors may have disproportionate, position-based influence. Similarly, top executive backgrounds and equity positions of interlocking directors, along with their involvement in prior strategic and organizational changes, shape the prospects of individual board members as well as the influence of their inputs toward boardroom decisions (Feldman, 2016; Feldman & Montgomery, 2015). Recent work into CEO personality also sheds new light onto the complexity of intraboard negotiations and influence over firm decisions (Zhu & Chen, 2015). Many of these relationships are ideal candidates for qualitative research. Interview and case studies could provide powerful new insight, especially given the field’s frequent acknowledgement of its limited understanding tied to failures to observe directly what is discussed in the boardroom (e.g., Tuschke et al., 2014). Fieldwork could more systematically and richly shed light on the knowledge exchange dynamics in boards.


As a topic with significant practical implications, board interlocks and an understanding of their relationship to important firm outcomes continues to evolve. In the Harvard Business Review, Heemskerk (2016) discussed how companies build resilience against weak economies and broaden their global business perspective by sharing board members internationally and influencing decisions collectively. As this analysis suggests, changes in the regulatory and institutional environments continue to shape corporate governance. The framework for future research suggests integration across individual, board, and firm-level factors to develop a more holistic understanding of how board interlocks influence firms on both sides of the partnership. Studies exploring board interlocks as conduits of knowledge balanced with awareness of potential coercion have promise to improve understanding of how to build and maintain more effective boards and interorganizational networks and improve the practice of corporate governance.

Further Reading

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