IMPACT OF CORPORATE DIRECTORS’ SOCIAL CAPITAL ON FIRM GOVERNANCE IN

EUROPE BASED ON SOCIAL NETWORK ANALYSIS

Shivendra Rai

(833722)

Supervisor

Prof. Marco Giorgino

A thesis submitted in partial fulfillment of the requirements for the degree of Master of

Science (Laurea Magistrale) in Mechanical Engineering

Department of Mechanical Engineering

Politecnico di Milano

Italy

2017

IMPACT OF CORPORATE DIRECTORS’ SOCIAL CAPITAL ON FIRM GOVERNANCE IN

EUROPE BASED ON SOCIAL NETWORK ANALYSIS

Shivendra Rai

(833722)

Supervisor

Prof. Marco Giorgino

A thesis submitted in partial fulfillment of the requirements for the degree of Master of

Science (Laurea Magistrale) in Mechanical Engineering

Department of Mechanical Engineering

Politecnico di Milano

Italy

2017

i

ACKNOWLEDGEMENT

I would like to thank my advisor Professor Marco Giorgino, whose expertise and

guidance help made this work possible. He was readily available to answer any of my

queries and showed considerable forbearance with me. It was a great pleasure working

with him. My special thanks goes to Professor Giacomo Tavola, whom I owe this

opportunity to. I would also like to thank my parents, whose steadfast support has helped

me grow as an individual. A special thanks, goes to all my professors and lecturers at

Politecnico di Milano, whose invaluable guidance and teaching helped me in my studies.

Lastly, I’d like to convey my thanks to all my friends and family, they helped me silently

in background without them life would be a lot less fun.

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ABSTRACT

The boards of directors at large European companies overlap with each other to a

sizable extent both within and across national borders. This could have important

economic, political and management consequences. In this work we study in detail the

topological structure of the networks that arise from this phenomenon. Using a

comprehensive information database, we reconstruct the implicit networks of shared

directorates among the top 800 European firms in 2015, and suggest a number of novel

ways to explore the trans-nationality of such business elite networks. Powerful

community detection heuristics indicate that geography still plays an important role:

there exist clear communities and they have a distinct national character. Together with

central actors and assortativity analyses, we provide statistical evidence that, at the level

of corporate governance, Europe is getting closer.

Purpose – The purpose of this research is to provide an account of board interlocks in

relation to independent directors and their potential implications for corporate

governance practices Europe.

Methodology - Using Social Network Analysis, this research examines whether a pattern

of interlocked directorates exists among the 800 publicly traded corporations in Europe

based on data from 13,094 supervisory and executive board members of the whole

corporations traded in the STOXX ® All Europe TMI Index as of 31st Decemeber 2015.

Findings - We found that in Europe, independent board members have created a network

structure of social relationships through board interlocks. The paper demonstrates that a

few individuals are far more powerful than others due to the connections they hold with

the network. We argue that this has severe consequences in maintaining the

independence, transparency and accountability of corporate governance affairs to

shareholders.

Research Implications – It will be of great value to researchers and practitioners seeking

to gain a better understanding of corporate governance frameworks in various settings.

This finding has policy implications for the economic development programmes often

prescribed by the multilateral agencies without considering the local context.

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Value – Boards of directors serve two important functions for organizations: monitoring

management on behalf of shareholders and providing resources. Agency theorists assert

that effective monitoring is a function of a board's incentives, whereas resource

dependence theorists contend that the provision of resources is a function of board

capital. Combining the two perspectives and drawing on Pierre Bourdieu’s theory of

social capital and applying social networking analysis, the paper reveals the

interconnectedness of board members, especially independent directors. This helps

unravel the most powerful actors in the corporate governance field in Europe.

Key words: Corporate Governance, Resource Dependency Theory, Interlocking

Directorates, Social Network Analysis, Graph Theory, Social Capital, Europe

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TABLE OF CONTENTS

List Of Figures ............................................................................................................................. ix

List Of Tables ............................................................................................................................... xi

Introduction .................................................................................................................................. 1

Firm Governance And Functions Of Corporate Directors ..................................................... 5

The European Corporate Governance System: History And Reforms .............................. 11

Social Capital And Board Of Director’s Power ..................................................................... 15

Interlocking Directorship Networks And Performance ....................................................... 19

Assumptions And Hypothesis Deveopment ......................................................................... 25

Director Connectivity And Future Director Appointments ................................................ 29

Literature Review Of Previous Studies .................................................................................. 31

Research Methodology .............................................................................................................. 37

Social Network Analysis ........................................................................................................... 41

Sampling And Data Collection ................................................................................................ 49

Results And Analysis ................................................................................................................ 51

Discussion ................................................................................................................................... 59

Conclusion And Future Research ............................................................................................ 61

Bibliography ............................................................................................................................... 65

Appendix I .................................................................................................................................. 72

R-Codes .................................................................................................................................... 72

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LIST OF FIGURES

Figure 1: Map of Europe ........................................................................................................... 11

Figure 2: Integrated Model of Board Functions, Antecedents, and Firm Performance ... 26

Figure 3: Two simple graphs .................................................................................................... 37

Figure 4: Bipartite network of directors and corporations................................................... 52

Figure 5: One-mode network of corporations ....................................................................... 53

Figure 6: Degree distribution of corporation network ........................................................ 55

Figure 7: Degree distribution for director network .............................................................. 57

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LIST OF TABLES

Table 1: Effects of interlocked directorate on firm performance ......................................... 24

Table 2: Top 15 corporations in each category of centrality ................................................ 54

Table 3: Top 15 board member in each category of centrality ............................................. 56

Table 4: Degree centrality of top 15 board members ............................................................ 57

Table 5: Network measures ...................................................................................................... 58

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CHAPTER 1

INTRODUCTION

The board of directors is central to corporate governance. It is the prime decision-

making body. An important feature of such boards is that they are often connected to

each other by a shared director. Such network connectivity has important economic

consequences. Research studies of company managers and directors look at multiple

directorship holders just as ’interlockers’, people who create linkages between

corporations. Network study of interlocking directorates begin from the following

information base: lists of the directors and managers of major corporations. Researchers

select a population of large companies and then make a census of all persons on the

boards of these companies. That they analyze this information in different ways creates

an impression of distinct research traditions. Networks studies of interlocking

directorates ignore most of the personal information. They shift the material to find those

directors who have two or more positions. Then they reconstitute this basic information

as a set of linkages, a network, between the companies of the original selection set.

This research investigates the structure of interlocked directorates and their

potential implications for corporate governance practices in Europe. Research on

interlocked directorates has received attention from academics, policy makers and

practitioners, especially in the developed economies (Mintz and Schwartz, 1981; Mariolis

et al., 1982, Burt, 1983; Stokman et al., 1985; Richardson, 1987; Gerlach, 1992; Pederson

and Thomsen, 1997; Conyon and Muldoon, 2006). Nevertheless, recent economic crises

have brought to the fore various corporate governance issues, especially the

independence of independent directors in both developed and emerging economies

(Heemskerk and Schnyder, 2008; Johnson and Ellstrand, 1996; Lim and Porpora,

1987;Peng et al., 2001; Ong et al., 2003; Silva et al., 2006). The banking failures heavily

question the corporate governance frameworks generally and the protection of

shareholders more specifically (Wearing, 2005).

In addition, board interlocks and networks of directors strongly influence the

effectiveness and efficiency of corporate governance regulations. In order to understand

the activities of boards of directors, it is becoming more important to understand the

network position that the directors hold. The abilities of a board of directors and

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independent directors perhaps depend on the network of cognate companies to which

the board is linked. These links can take many forms including flows of information,

personnel or authority. Interlocking may facilitate the collusion between firms creating

an informal communication channel between directors who could use it to make

agreements against consumers. Interlocking directorships can be a useful instrument to

cartelize a market because sharing directors allows cartel participants to have an observer

in place monitoring activities that could undermine the cartel agreement. A system based

on direct interlocking directorates may thus potentially produce economic inefficiencies

(Carbonai and Di Bartolomeo, 2006). Pennings (1980) found a positive association

between industry concentration and horizontal ties, while Burt (1983) found an inverted

U-shaped function: in the case of very high market concentration, the few producers have

little need to interlock to set prices. A second reason for the formation of interlocks is

cooptation and monitoring (Dooley, 1969 and Mizruchi and Stearns, 1994). Firms invite

on their boards representatives of the various resources they depend on to reduce

environmental uncertainty and maintaining their position in the market. For this reason

companies have on their boards bankers, suppliers, and clients. As regards monitoring,

information theories maintain that there are information asymmetries between creditors

and debtors, since creditors, that is banks, know less about the quality of debtors.

Interlocking is one of those institutions that can help surmount information asymmetry.

Through membership in directorates and boards banks are able to keep the company

management under their influence.

So far interlocking directorate is presented as a negative feature for a firm. In

section 5, we will discuss theories trying to explain why an interlock may occur. Among

those, at least one of them suggests a positive explanation for this: the Career

Advancement Model (Stockman et al., 1988; Zajac, 1988) suggests that directors interlock

simply following higher wages and opportunities. Therefore, Interlocks occur because

firms are interested in hiring highly skilled directors.

The European situation is particularly useful for developing our understanding of

networks of directors for many reasons. Previous studies on corporate governance in the

UK and the USA have identified a number of essential elements in governing

corporations including well-developed capital markets, professional bodies, democratic

institutions and a justice system free from political influence (Hopper et al., 2009;

Tsamenyi & Uddin, 2008; Uddin & Choudhury, 2008). Studies focusing on the settings in

the UK and the USA have indicated that these institutions are independent but

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inextricably linked with each other (Chua and Poullaos, 1993). Studies in emerging

economies have often argued that institutions, such as professional bodies, stock

exchanges and other associated institutions, are politically charged and family oriented

(Uddin and Choudhury, 2008). Studies in Mexico and in Latin American countries have

also argued that institutions in these countries show similar traits. The study of board

interlocks and the identification of powerful actors in Europe have the potential to raise

interesting questions and issues.

Although the corporate board is a popular research agenda, few studies have

focused on finding whether there is a pattern of board interlocks in Europe or identifying

the most powerful and influential actors and the implications for the European corporate

governance field (Boyd, 1990). This study aims to contribute to the literature on

interlocked directorates in developed economies. This study poses two simple empirical

questions: Does a pattern of board interlocks exist in Europe? What positions do actors

occupy in the network structure of board interlocks in Europe? In order to gain an insight

into the network structure of board interlocks in Europe, social network analysis (SNA)

was adopted to determine the social relationships linking board members and

corporations. Previous accounting studies have adopted this analysis to demonstrate the

network of accountants, standard setters and managers (Chapman, 1998; Richardson,

2009; Tichy, Tushman and Fombrun, 1979). This study demonstrates the network of

boards of directors. It relates individuals with corporations and allows the production of

spatial maps to visualise the network structure of board interlocks (Freeman, 2004). The

basic concepts of the social network analysis will be presented later. The study also aims

to answer the following theoretical questions: Why does the network occur? What are

their implications for corporate governance practices especially the practices of boards?

In order to provide further explanations, this study draws in particular on the

Bourdieusian notion of social capital (Bourdieu, 1986; Bourdieu and Wacquant, 1992).

Finally, a significant number of studies have been devoted to understanding the

role of independent directors and their implications for interlocked board directorates

(Fama and Jensen, 1983; Huse, 2005; Johnson, Daily and Ellstrand, 1996; Stiles and Taylor,

2001; Zattoni and Cuomo, 2010). Interlocked boards give rise to some powerful and

influential actors in the field which may prevent the independent directors from playing

a role to protect the interests of shareholders, especially minority shareholders.

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The paper is divided into several sections. A brief review of firm governance and

functions of corporate directors is presented in the first section. A detailed account of the

European corporate governance system provided in the following section. This is

followed by a section on social capital. The subsequent section focuses on the board

interlocks, relationships, networks and powerful actors. Section 6 covers the literature

review of previous studies. Sections 7, 8 and 9 presents the assumptions, hypothesis

development and research methodology. In section 10, the sampling and data collection

process is described. Followed by SNA (Social Network Analysis) and results. Further,

the discussion, along with the concluding sections, provides an account of why networks

occur and how they perpetuate the current status of board influence and corporate

governance affairs in Europe.

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CHAPTER 2

FIRM GOVERNANCE AND FUNCTIONS OF

CORPORATE DIRECTORS

The term Firm Governance relates to the manner in which an organization should

be governed or managed. The concept is more relevant in the case of companies which

have germinated or grown based on equity capital taken from investors. Stocks of many

such companies are listed in stock exchanges, which exposes them to the public and

automatically brings them under closer regulatory scrutiny. As per the principles

enshrined in quintessence of corporate governance, the affairs of any organization should

at all times be managed as per the relevant regulatory framework where the interests of

shareholders/stakeholders is supreme. Here, corporate governance refers to the spirit of

the statute rather than its letter alone. Thus morality, ethics etc. come into play in a big

way. Though these “Utopian” ideas may seem irrelevant on the capitalistic turf, past

experience has shown that similar philosophies could have prevented fraud &

mismanagement, therefore ceasing the erosion of shareholder wealth.

It is also pertinent to mention that all enterprises are basically valued based on

their present performance and expected long term success in achieving growth and

profitability. For this purpose, there has to be a free flow of information (financial and

strategic) amongst the shareholders, so that they can measure the economic potential and

value of the organization’s strategies & activities. Also, since people (investors) have their

money at stake in these companies, they have a right to decide on the selection of the

Directors and influence the manner in which the organization should be run to achieve

optimal results. Some schools of thought therefore highlight the importance of

stakeholders as well as shareholders.

Historically, corporate governance principles have evolved in countries based on

their political, economic & cultural philosophies. For example, if a country (e.g. France)

has a socialistic ideology, it is somewhat natural that the corporate governance there is

based on inclusion of all stakeholders, especially the employees. In Japan & Germany, if

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the banks have a major financial stake in the organizations through collaterals for credit,

they will obviously give due weightage to what the banks think could be the best strategic

course for the organization. Cultures where capitalism is at the core of strategic

management ideology (e.g. USA), would like to concentrate on increasing wealth of

shareholders alone and let the market forces determine the winner.

Obviously, these principles change with time and all countries learn from each

other, especially from exceptional negative events. These disasters, like the collapse of

huge organizations due to fraud, helps all concerned understand the gaps in regulatory

or moral fabric of corporate governance which enable such mishaps. However, broad

differences between the corporate governance models of various societies remain easily

discernible.

At the core of corporate governance is the board of directors, which is the primary

decision making body of any corporate company. The composition of the board of

directors is an important factor affecting the relationship between corporate owners and

managers on one hand and the liaison among corporate players on the other. The board

of directors usually consists of inside directors and outside directors. The inside directors

are important persons who are directly associated with the firm such as the CEO, top

executives, retired managers, directors of subsidiaries or parent organisers, etc.

(Pennings, 1980) while outside directors are persons not directly associated with the firm.

The practice of including outside directors has over the years given rise to the

phenomenon of interlocking directorate which refers to the situation in which members

of a board of directors serve on the boards of multiple companies. Two firms A and B

may be interlocked directly when their boards share a director, or indirectly when they

each have directors who also serve on the board of a third company.

One important function of the director appears to be to set ethical guidelines for

the firm. This seems to be a role component that is widely accepted as legitimate, and is

generally carried out in a formal, definitive manner (24). It is manifestly for this purpose

that businessmen look for highly respected persons on the boards of the firms with which

they deal. In the words of Stanley Vance, "A person of good repute and national

prominence would very likely be a most reluctant party to any corporate actions which

might reflect negatively upon his reputation" (25). Directors are apparently effective in

this task. One executive states: The board is not really a decision-making body, but it is

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involved in the decision-making process as a sort of corporate conscience. The board

rarely, if ever, rejects out of hand a proposal by the president, but their existence in the

management scheme of things influences the president and helps keep his decisions

within the bounds of conscionable conduct (26).

Obviously, the corporate executive wants to appear as a respectable and ethical

person in the eyes of his directors, who are, after all, his peers or even his superiors in the

social and business world. If the members of his network were to label the executive

devious and untrustworthy, it would become very embarrassing to him personally and

a significant handicap to his corporation in its dealings with other firms. "Ethics," of

course, will make for uniformity among persons who constantly interact, since they often

come to share a common worldview. Values are thus passed through the network. The

simple reading of the daily newspaper leads one to suspect that one principal ethical

value is to not go beyond certain boundaries in hurting business peers. Such a value is

reinforced by the fact that all-out battles with competitors are "bad business," since they

are likely to cut into profits, as the attacked firm fights back on many fronts. From a

network perspective the institution of interlocking directorates, which allows the placing

of representatives of the top echelon of the business establishment on most of the largest

corporations, appears to be a vital aid in maintaining the value consensus which makes

such cooperation possible. For example, directors are pictured in the management control

thesis as helpless to oppose the president's policies unless those policies are clearly

economically disastrous to the corporation in question, in which case they may be able to

replace him.

However, it is rare that directors actually try such an action. Unless the president

is dearly "off his rocker" (by corporate standards), it would be difficult and time

consuming to lead a directors' revolt. If a private word to the president gets no result and

it is not possible to use the "objective science" of the efficiency experts to prove that

unconventional policies will eventually be disastrous, the director often simply resigns

from the board. This is cited in the management control literature to demonstrate the

weakness of the director when faced with a determined management. He can cooperate

or he can leave. He does not appear to have much of a power base. However, the

statement of one multiple director leads one to question whether resignation is

necessarily only the last act of a powerless director:

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"The stockholders' interest may be served indirectly by your resignation. If a couple of

outside people with some prominence depart from the board of a company, it is not going

to do the company any great commercial good in the eyes of the investment community,

the commercial banking community and all those guys. This starts putting a question

mark around the company itself. There again, I think most management with much

brains just doesn't have directors leave for no good reason. You start getting writeups in

the financial magazines, a Wall Street Journal reporter calls, and it's just not good. The

first thing you know a New York bank asks, 'What's the problem here?' And maybe you

owe them 10 million bucks. You've got lines of credit. This is bad. People who aren't smart

enough to know these things don't usually get to be chief executives of companies

anyway" (27).

Perhaps the previous sentence should be amended to read, "people who aren't

smart enough to know these things and do get to be chief executives do not remain in

office long anyway." Hunter interviewed a typical example:

One man, a demoted executive of one of the national corporations, said as he looked over

a list of leaders in the upper group of policy makers, "If I had played footsie with the guys

of this list, I'd still be top man in my company. I should have got around to see them

more, but I refused to believe they could shake me. I was twenty years younger then. I

wouldn't make the same mistake now" (28).

Thus, the power of the network of multi-board directors can be seen as subtle, but

still very great. The prestigious, socially well-connected outside director may have little

or no financial power of his own within the company but still be able to harm or destroy

a management team simply by quitting his "window dressing" position on the board,

since to leave is to publicly accuse the firm of misbehaving; an accusation deleterious to

stock prices and thus to personal fortunes. It follows that an attempt to influence

managerial policy by an outside director backed by knowledge of both manager and

director of the damage that could be caused by a resignation is not the act of a powerless

person. Other, more powerful sanctions exist once it has been established that a company

is misbehaving. That corporations will cooperate to sanction firms which break the

unwritten code of ethics was clearly demonstrated in 1970 when Leasco tried to acquire

the socially well-connected Chemical Bank.

Business Week reported:

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Leasco's stock plunged from 140 to 106 in two weeks. Though even Leasco's Saul P.

Steinberg would never admit it publicly, it appeared that bank trust departments and

perhaps other institutions dumped their shares to protect Chemical. "I always knew there

was an Establishment," said Steinberg at the time. "I just used to think I was part of it"

(29).

A director with friends who own company stock does not appear to be powerless.

Class hegemony theorists would argue that the cultural homophily that they

hypothesized among the leadership of very large firms would take place even without

the institution of interlocking directorates. Corporate leaders would still meet socially

and on business, and in so doing create bonds of trust and cohesion, thus forming a power

and influence exercising network. The majority of corporate leaders would still have

similar careers, aspirations, class backgrounds, and life-styles. More important, systemic

forces make reciprocity and other forms of log-rolling profitable and thus "good

business." Increasing mutual profits at the expense of the consumer is generally more

attractive than struggling to the death against rivals. In fact, purely economic pressures

would strongly encourage cooperation between giant firms even if social clubs and

interlocking directorates never existed.

This is not necessarily an action based on class consciousness, rather it is simply

good business. It is not desirable to hold stock in a company whose policies seem likely

to bring a decrease in profits. Consequently, when one institution begins to sell its stock

holdings in another firm, word passes along the network and others may also quickly sell

in an effort to keep from losing money as the stock's price plunges. Thus, economic forces

and the network may reinforce each other. The network is not merely based on the

personal qualities of its members. Those who control strategic resources develop key

positions in it. Thus, banks, for example, seem to be the "pillars of the establishment"; the

first among equals (31). The system of shared nonconscious assumptions developed

through the social aspects of the network and the economic pressures support each other

in maintaining the social order, in the class hegemony view.

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CHAPTER 3

THE EUROPEAN CORPORATE GOVERNANCE

SYSTEM: HISTORY AND REFORMS

The word “Europe” may be used to describe several different entities. For

example, it can refer to the 47 member countries of the Council of Europe. On other

occasions it may be used to refer to the 18 Eurozone countries that share the euro

currency. More frequently, the word is used as a collective term to describe the 28

member states of the European Union. The population of the European Union is about

490 million people, and the land area is nearly 4.5 million square kilometers. Over time,

this membership is likely to grow, with the addition of EU candidate countries and

Figure 1: Map of Europe

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potential candidate countries. Germany has the largest population, with 80 million

people, and Malta has the smallest, with about 400,000 people.

Although the EU comprises 28 member states that are all extremely proud of their

distinctive national identities, the EU has created a region where business cooperation

between member states is becoming increasingly common. Europe has become one of the

fastest changing corporate governance environments in the world. These governance

changes have been caused by many international factors, including the European

Commission’s focus on corporate governance.

As an independent supranational authority separate from the member states’

governments, the European Commission has been described as “the only body paid to

think European.” Article 17 of the Treaty on European Union identifies the

responsibilities of the Commission to

include the following:

Developing strategies;

Drafting legislation and arbitrating in the legislative process;

Representing the EU in trade negotiations;

Making rules and regulations;

Drawing up the budget of the European Union;

Scrutinizing the implementation of the treaties and legislation.

Originally the driving forces of the European Commission were:

1. To cement the single market by creating common standards in governance as in

other areas;

2. To bolster market and public confidence in the wake of the dotcom and other

scandals.

The European authorities have always seen corporate governance as an important plank

of their regulatory program. Thus many commentators suggest that the European

Commission does not see corporate governance as value creating, whereas investors and

enlightened corporate managements do.

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The corporate governance model in Europe gives importance to all stakeholders

including the shareholders. The separation between ownership and management is not

that clear with boards comprising of representatives of various stakeholders like majority

shareholders, lenders (banks), employees, suppliers etc. The board is a two tier structure

with a supervisory board comprising of Non-Executive Directors which controls decision

making by the Executive Directors.

The presence of these stakeholders, who are also shareholders (owners), on the

board further increases their influence in strategic management decisions. The ownership

patterns are more concentrated & complex with cross-holdings being common. The

relevant financial markets are less liquid and there is higher dependence on debt to fund

growth and operations of the companies. The concept of audit committee is existent in

the European model also, but the composition of the committee is not that stringently

laid down. The Chairman & Chief Executive Officer positions may or may not be held by

the same person.

For instance, Bayerische Motoren Werke AG (ETR:BMW) (ETR:BMW3)

(FRA:BMW) has a Supervisory Board (SB) & a Board of Management (BOM). The BOM

regularly provides information to the SB (regarding strategy, sales volume, growth

prospects, production planning etc.) which has a monitoring and advisory role. The SB

also reviews the compensation of the BOM members and examines if there are any

instances of a conflict of interest. Of course, the SB monitors its own efficiency and

performance from time to time. In addition, there are several other Committees in the

BMW board including an Audit Committee. The two boards have different Chairpersons.

As per the BMW Annual Report 2015, “Corporate culture within the BMW Group

is founded on transparent reporting and internal communication, a policy of corporate

governance aimed at the interests of stakeholders, fair and open dealings between the

Board of Management, the Supervisory Board and employees and compliance with the

law”. Here, the importance of stakeholders (as opposed to shareholders alone) is clearly

reflected. Similar board structures and roles can be seen in other European organizations

like Renault SA (EPA:RNO) though the nomenclature of the Supervisory & Management

bodies may be different.

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The rules and regulations in the European countries are not that strictly enforced

as there is a philosophy of “comply or explain”. This approach gives room for deviations,

provided a proper justification is furnished for non-compliance. This flexibility is perhaps

necessary because the influencing stakeholders are more diverse and they monitor the

performance of the company more closely. The diversity mandates an incorporation of

the principles of accommodation in enforcement to achieve collaborative decision

making. There is longer term orientation in the with the stakeholders, as the stakes are

deeper than simple stock holdings. These pulls and pressures by the large stakeholders

obviously rein innovation and risk taking ability of the management. This may be good

in certain situations but mostly, the lack of ‘out of the box’ thinking may be detrimental

to the competitive advantage of the firm. These effects increase the response time of the

organizations making it less lean and mean.

Some commentators have suggested that the EU has a fragmented approach—

with several dispersed topical recommendations and directives—that is quite different

from the more principle-led approach of the OECD. However, there is general agreement

that EU directives have created a solid framework for improving corporate governance

in its member states and have triggered many corporate governance improvements.

European Commission Directive 2006/46/EC required all listed companies to produce a

corporate governance statement in its annual report to shareholders for the first time.

This and other EU corporate governance reforms have succeeded in bringing about

substantial convergence in corporate governance regimes among its member states.

Yet significant challenges still face the EU in ensuring that the hard and soft laws

are well absorbed and become a norm rather than an imposed requirement. The

Commission’s Europe 2020 and EU Action Plan (2012) are examples of long-term plans

for developing corporate governance practices, increasing competitiveness, and

developing sustainability among European companies.

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CHAPTER 4

SOCIAL CAPITAL AND BOARD OF DIRECTOR’S

POWER

Board social capital encompasses two types of relationships: (i) external social

capital, those ties with various outside contacts, and (ii) internal social capital, those ties

with persons within the firm, mainly other directors (Kim & Cannella, 2008). Both types

of social capital can be of tremendous value both to the firm as well as individual

directors. For the organization, the board’s external social capital provides it with

linkages to other firms, thus creating channels of information-sharing and resource

acquisition. Internal social capital enhances the trust and collaboration among board

members, thus facilitating their role as strategic advisors to management. For individual

directors, both external and internal social capital provides the director with personal

contacts that can be critical to the member’s personal advancement (Useem & Karabel,

1986)

4.1 External Social Capital and Centrality

In order to measure board power based on its external social capital, we rely on

the network concept of centrality. For a board, centrality is derived from being tied to

other boards through shared directors, and is determined by a simple count of the total

number of other boards on which its directors serve (Davis & Robbins, 2005). Numerous

directorships are a source of both expertise and prestige. Through their experience as

directors on other boards, members increase their opportunities to deal with multiple

elements in the task environment. Directorships also create personal contacts with

representatives of relevant organizations which create valuable sources of information

and resources, such as door-opening and legitimizing (Borch & Huse, 1993). In addition

to general management or governance experience, expertise power may also be based on

the relevance of a director’s expertise with respect to a particular strategic choice

(Finkelstein, 1992). Strategic relevance means that the impact of a director’s expertise may

lie in the director’s capacity to reduce uncertainty stemming from the firm’s dependence

on task environments most problematic to the organization (Pfeffer, 1972; Pfeffer &

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Salancik, 1978). Hillman & Dalziel (2003) noted that boards with prior experience in a

particular situation facing the firm showed more effective monitoring. Formal

connections with organizations in the focal firm’s institutional environment may be

sources of external information that, when included as inputs to the focal firm’s

information processing system, lead to a reduction of uncertainty for the focal firm. Ties

to other organizations through interlocking directorates also enhance a board’s prestige

power. (Mizruchi, 1988; Mizruchi & Stearns, 1988; 1994). A central tenet in the resource

dependence perspective (Pfeffer, 1972; Pfeffer & Salancik, 1978) is that prestigious

individuals are recruited as directors to enhance the legitimacy of the focal firm. Hence,

the prestige power of the board and its individual directors is a singularly apt application

of Finkelstein’s (1992) concept of power to the domain of boards due to the importance

of external interconnections directors often bring. Thus, the overall measure of the

board’s centrality within the business environment is a valid construct for power.

4.2 Internal Social Capital and Density

To measure the power created from a board’s internal social capital, we use the

network measure of density. When members of a network, in this case, the board itself,

have close personal ties to many other members, the network is characterized as dense.

Closure in a group results from full connectedness; everyone in the network is connected

with each other member (Oh, Chung & Labianca, 2004). As density increases,

communication becomes more efficient (Rowley, 1997), members tend to share similar

attitudes and values (Krackhardt, 1988), and mutual trust develops (Coleman, 1988).

Dense networks are also characterized by strong norms and a deep-seated expectation

that shared behaviors will be established (Rowley, 1997). Through their interactions with

other network members, institutionalized norms develop, and players imitate each

others' behaviors through a mimetic process (Galaskiewicz & Wasserman, 1989). Further,

norms are well enforced through sanctions against any selfserving behaviors (Coleman,

1988). Network members are also more willing to accommodate other network members

because they know their favors will be reciprocated (Oh et al., 2004). A consequence of

density is the likelihood of cohesiveness within the network; when network actors

subsume their own interests in favor of the general consensus of the group, agreement

among the actors will occur more often and more quickly. Moreover, the network will act

in unison to fend off any threats to it or its members and is more likely to oppose any

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challenge to its values and shared expectations (Balkundi & Kilduff, 2006). Thus, highly

dense boards will be more powerful to object to or question management decisions which

do not conform to their notions of good governance or a sound strategy.

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CHAPTER 5

INTERLOCKING DIRECTORSHIP NETWORKS AND

PERFORMANCE

The origin and growth of interlocking in the corporate world, as well as its socio-

political impacts, have been an area of interest to many researchers (see Scott (1991),

Glasberg (1987), Mizruchi (1996) and references therein). There are conflicting views as

to the cause of the origin and spread of interlocking practice in the corporate world. Some

researchers hold that the heightened dependence on resources and the need to reduce

uncertainty have led to an increased demand for individuals holding multiple director

ships as they are supposed to have greater access to information, resources, etc. (Salancik

and Pfeffer, 1978). Class hegemony theory, on the other hand, assert that interlocks are

formed based on social ties among the upper class where the elites seek to promote upper

class cohesion through interlock across corporations (Koenig and Gogel, 1981; Sonquist

and Koenig, 1975). Some companies go for co-opting executives of successful corporate

players into their board to enhance their reputation and earn the good will of their

stakeholders. Whatever be the reason, the increased linkages between board of directors

resulting from interlocking has been reckoned as a key characteristic of the development

of the global economy over the past two decades (Kentor and Jang, 2004).

Interlocks act as communication channels, enabling information to be shared

between boards via multiple directors who have access to inside information of multiple

companies. Thus interlocks can be seen as a diffusion instrument through which

information is disseminated through a network (Chua and Petty, 1999). In particular, this

may also lead to sharing of strategic information and inter-organizational knowledge

among corporates allowing powerful and influential firms to exercise control over others

(Seidel and Westphal, 2004; Haunschild and Beckman, 1998). The information flow

resulting from interlocks may also promote coordinated action by two or more firms

towards achieving a common objective (Sonquist and Koenig, 1975). This may also help

develop mutual trust and obligations in an otherwise competition-ridden corporate

world. Interlocks have reportedly helped improve the performance of companies in

many cases. In particular, profits made by firms have been shown to have a direct and

positive correlation with the number of interlocks (Haunschild and Beckman, 1998). In

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business environments with greater uncertainty, firms with more interlocks exhibit better

performance as measured by sales growth and return on equity (Nicholson et al., 2004).

There have been a few studies on the phenomenon of interlocking directorate in specific

countries like the US (Roy, 1983), Kuwait (Mahdi et al., 2012), France (Yeo et al., 2003),

Italy (Rinaldi and Vasta, 2005), New Zealand (Firth, 1987), Australia (Stening and Wai,

1984), Canada (Ornstein, 1984), etc. This paper examines the existence and implications

of interlocking in the context of European corporate sector, using tools of social network

analysis.

5.1 Interlocking directorate: theoretical framework

In 1914 Interlocking Directorate (abbreviation: ID) has been pointed out as “root

of many evil” by Brandeis (1914). Probably due to the fact that Brandeis was one of

President Wilson’s counselors, in 1914 the Clayton act prohibited IDs among competitors.

According to the principle that “no man can serve two masters”, ID was seen as a tool do

decrease competition damaging the market. In the second part of the 20th century ID has

been studied and object of several contributions both theoretical and empirical. During

the past decades the first theoretical problem was to justify the presence of interlocking

among board of directors. Among those theories trying to explain the phenomenon, there

are two main streams: the first one sees ID as a relation between institutions; the second

one focuses its attention on the relation among individuals. Divided in this two

categories, theoretical contributions can be grouped into five theories or models: 2

referring to ID as a link between institutions and 3 referring to ID as a link among

individuals.

5.1.1 Resource dependence model

The first model was proposed by Selnick (1947) and then followed and supported

by many other contributors [Dooley (1969), Pfeffer (1972), Allen (1974), Bunting (1976),

Pfeffer and Salancik (1978), Koening et al. (1979), Pennings (1980), Schoorman et al. (1981),

Burt (1983), Ornstein (1984), Ziegler (1984), Galaskiewicz et al. (1985), Palmer et al. (1986),

Mizruchi and Stearns (1988), Lang and Lockhart (1990), Sheard (1993) and Cross and

Cumming (2004)]. Firms face an enormous uncertainty during their business life.

Uncertainty may be about customers, suppliers, competitors, macroeconomics conditions

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or other features. The Resource dependence model sees ID as a tool to reduce uncertainty.

Firms create interlocks in order to have more power to control and predict at least some

part of the uncertainty they face. That is why a part of IDs brings to vertical/horizontal

integration or is between institutions belonging to the same industry (Dooley, 1969). The

resources firms are looking for when they interlock are also intangible, such as

information, business practice or prestige. Davis (1991) discovered how firms belonging

to a same network are more likely to adopt the same poison pills in order to avoid an

hostile takeover. Maggio and Powell (1983) suggest that a bank is more likely to lend

money if the borrower has directors with high prestige and reputation.

5.1.2 Financial Control model

Capital is probably the most important resource a firm needs to run its business.

That is why a specific model explains ID as a tool to have easier access to capital. There

is high empirical evidence of IDs among banks and industrial firms (Dooley, 1969;

Mizruchi, 1998) and Mizruchi and Stearns (1988) found more ID with banks in those firms

with an increasing demand for capital. Moreover, often banks have a central role in

networks (Davis and Mizruchi, 1999; Farina 2009). Having a banker (the director holding

both industrial and banking directorships) on a firm board reduces information

asymmetries between the bank e and the industrial firm. Therefore firms may benefit

raising more debt capital; in addition the banker ensures a better monitoring during debt

life. When this relation follows or precedes a lending relationship conflicts of interests

arise. The banker faces a contrast: sitting on the board of the industrial firm should

maximize shareholders’ values; at the same time he should maximize bank debt value. A

simple way to maximize bank debt value is to reduce firm leverage. But reducing firm

leverage is a benefit for shareholders only if the current leverage ratio is above the optimal

level. On the other hand, we explained before how having a banker on their board may

give industrial firms the opportunity to raise more debt. Empirical evidence on the topic

is mixed (Byrd and Mizruchi, 2005; Rommens et al., 2007).

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5.1.3 Management Control Model

In our synthesis this is the first model that considers ID as a link among individuals

and not institutions. An important contribution supporting these theories is proposed by

Palmer (1983) who investigated what happens when a link between two firms disappear

due to director’s death or retirement. Only a minority of these links are created again after

they disappeared: if these links were functional to connect two institutions, they would

be promptly reconstituted. Ornstein (1984) reports similar results from a Canadian

context. According to Koening et al. (1979), managers use ID to increase their power.

Interlocked directors are often passive and never vote against managers that “hired”

them. Hallock (1997) studies the effect of cross interlocks between CEO on directors’

compensation. His findings show an increase in CEO salary of about 17% due to the

presence of interlocks. Fitch and White (2005) discovered a negative relation between the

number of interlocks and CEO turnover. This work brings to conclusion closely related

to those suggested by Cochran et al. (1985) who found a positive relations between

interlocks and the quality of golden parachute for top managers.

Class Hegemony Model Mills (1956) and Useem (1984) propose a different

interpretation for ID. They describe ID as result of a strong social cohesion. Directors call

other director following a relationship pattern: they go the say golf club or country club,

they share the same beliefs and values, and they often have a shared political view. In

other words they all belong to the same upper class and, calling each other, form a

business elite (Useem, 1984). They share a common view of the world and of their social

behavior (Bazerman and Schoorman, 1983). Mizruchi (1992) report how firms linked by

ID are more likely to report and share the same political view. Also Keoning et al. (1979)

studied 1972 Nixon Presidential Campaign and observed that those firms belonging to

the same network were more likely to contribute for Nixon Campaign if one corporation

had contributed before.

5.1.4 Career Advancement Model

Stockman et al. (1988), Zajac (1988) and Perry and Peyer (2005) propose a theory

focused on the interest of each single interlocked director. According to them, directors

decide to interlock following mainly three drivers:

- compensation;

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- prestige;

- future network and job opportunities.

Therefore, directors decide to interlock simply following their specific interest and

we shouldn’t take into account institutions, governance or the social context. This theory

supports the idea that interlocks is about skills and knowledge: in order to gain higher

salary, prestige and opportunities directors will fight to offer those competences that the

market is looking for.

5.2 Interlocking directorate and performance

The five models presented so far bring to different conclusions about the effects of

Interlocking directorships on firm performance.

The Resource Dependence Model suggests a positive effect on firm performance:

the ability to control or at least reduce environmental uncertainty give an advantage.

Same conclusions can be drawn starting from the Financial Control Model: having the

opportunity to gain easier access to capital markets produces an important advantage for

any firm. On the other side the Management Control Model suggests a negative effect on

firm performance. The assumption supporting this theory is that managers hire

interlocked directors in order to have a higher degree of freedom and move from their

fiduciary duties towards shareholders.

The Class Hegemony Model could support positive or negative effects of ID on

firm performance. According to this theory, directors are not chosen for their

competences or skills; therefore they should produce a disadvantage for the firm. On the

other side, being part of a business elite could generate new contracts, opportunities and

other advantages for the firm. The Career Advancement Model supposes a positive effect

of ID on firm performance. If directors are chosen for their ability and their skills they

will bring beneficial effects to the firm.

The following table summarizes the expected effects of ID Models on firm

performance:

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MODEL EFFECT EFFECT ON FIRM

PERFORMACE

RESOURCE DEPENDENCE POSITIVE

FINANCIAL CONTROL POSITIVE

MANAGEMENT CONTROL NEGATIVE

CLASS HEGEMONY MIXED

CAREER ADVANCEMENT POSITIVE

Table 1: Effects of interlocked directorate on firm performance

Looking at the table above we are not surprise to report mixed empirical evidence.

Among empirical contributions, there are different findings. Burt (1983) and Bunting

(1976) find an inverse U-shaped relation between ID and firm performance. This means

that ID has beneficial effects at the beginning, but adding new interlockers firstly reduces

margin contribution and then brings to a negative effect. As suggested by Richardson

(1987) this may be the combination of two different forces: 1) directors like to join well

performing firms; 2) firms experiencing business or financial problems are those more

interested in creating new links.

Rommens et al. (2007) find no evidence about this issue using a Belgian sample.

While with a Dutch sample Franses and Non (2007) find a slightly negative effect of a

new ID on firm performance with one lag after the link is created, Cuyvers and Deloof

(2007) find the opposite using a different Dutch sample. Yeo et al. (2003) find a positive

relation between number of links and profits, measuring profits with ROA. The same

conclusion is drawn by Brantleys and Flingstein (1992) with a US sample.

Differently from other research topics, for ID mixed empirical evidence could be a

confirmation about how different may be the reason why a link is created. Studying

samples from different context, with different legal or cultural environment can easily

mean studying different ID models.

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CHAPTER 6

ASSUMPTIONS AND HYPOTHESIS DEVEOPMENT

The socio-cognitive perspective developed in this study suggests the importance

of directors' networks of appointments to other boards in determining whether they have

the appropriate strategic knowledge and perspective to monitor and advise management

in the strategic decision making process. As noted above, critics of corporate governance

have typically argued that directors' appointments to other boards reduce their ability to

contribute to decision making at a focal board. Such an argument assumes that the

knowledge and perspective gained on other boards are largely irrelevant to decision

making at the focal firm. In contrast, our study indicates how experience on other boards

can enhance or diminish directors' ability to contribute to strategy, by focusing their

attention on relevant strategic issues.

The socio-cognitive perspective on organizational decision making suggests that

individuals cope with complex decision making tasks by relying upon the schemata or

"knowledge structures" they have developed about their environment (Kiesler & Sproull,

1982; Walsh, 1995). In the absence of complete information, or given uncertainty

regarding the relevance of different pieces of information, individuals tend to follow a

top-down or theory-driven approach to decision making, rather than a bottom-up or

data-driven approach based on present information (Abelson & Black, 1986; Nisbett &

Ross, 1980; Ocasio, 1997). Given the extreme information complexity facing directors in

evaluating strategic decisions (Lorsch & Maclver, 1989), they can be expected to rely

heavily upon the implicit theories that they have developed regarding corporate strategy

and the competitive environment. Moreover, from this perspective, the knowledge

structures that individuals use to cope with information-processing demands are

developed from experience in similar roles (Dearborn & Simon, 1958; Walsh, 1995).

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Figure 2: Integrated Model of Board Functions, Antecedents, and Firm Performance

In our framework, directors are likely to use knowledge structures developed from

their experience on other boards. The literature on interlocking directorates supports this

view. This work demonstrates how the involvement of directors on other boards

provides an important source of information about business practices and policies (cf.

Mizruchi, 1996; Palmer, Jennings, & Zhou, 1993). For example, Useem (1982) observed

that executives use their board appointments as a way to scan the environment for timely

and pertinent information. He quoted several executives who suggest that board

appointments provide a vehicle for learning, making such statements as "Direct

involvement in other companies' affairs replaces an awful lot of reading . . . it's a hell of a

tool for top management education" (1982: 209-210). Similarly, directors can learn about

the efficacy of different practices and how to implement them properly by observing the

consequences of management decisions (Haunschild, 1993). Such learning is particularly

vivid because directors observe the decision-making process firsthand in their

monitoring role, participate actively by giving advice to management, and then witness

the consequences of those decisions.

Directors also learn about business practices through their communication with

other directors in board and committee meetings. Information acquired from fellow

directors may be particularly influential because it often comes from a trusted source

(Davis, 1991; Useem, 1982; Weick, 1995). This information is typically more timely and

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upto-date than that derived from secondary sources, and it may also be more salient

because of its recency (Kahneman, Slovic, & Tversky, 1982). Thus, a sociocognitive

perspective on board involvement emphasizes how directors' social structural context,

including their ties to other boards, provides direct strategic experience and indirect

access to strategic information through social contact with other directors. Such

experience and information can, in turn, critically inform the knowledge structures used

to monitor decisions or give advice on a focal board. In the following section, we further

develop our sociocognitive perspective to consider variation in the strategic context of

director ties to other boards, in order to address whether and when those ties provide

relevant strategic knowledge and perspective for monitoring and advising the

management of a focal firm.

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CHAPTER 7

DIRECTOR CONNECTIVITY AND FUTURE DIRECTOR

APPOINTMENTS

The argument that corporate action is embedded in social networks has moved

from critique to conventional wisdom in organization theory in just over a decade

(Granovetter 1985). Organizational scholars have come to pay explicit attention to the

causes and consequences of the various ties linking corporations, such as the interlocks

created when corporations share directors. Moreover, conceiving of corporations as

nodes in networks allows researchers to build on the well-developed concepts and

methods of network analysis to uncover unexpected regularities. Several studies find that

a corporation’s interlock network centrality (i.e. the number of other firms with which it

shares board members) has a systematic influence on corporate decisions. Central firms

are more likely than peripheral firms to adopt takeover defenses, to make acquisitions

and divestitures, to be involved with political policy organizations and to be imitated

when they adopt golden parachutes and switch stock markets. Centrality is not simply a

proxy for other omitted variables: although correlated with size, it has little relation to

corporate performance and at most a modest relation to alternative measures of

‘prestige’, and its effects persist when measures of size and performance are controlled

for (see Davis, Yoo, and Baker 2003 for a review). And centrality proves quite stable over

time, both during the 1960s and the 1980s and 1990s: among large US firms, centrality in

1982 was correlated 0.75 with centrality in 1994 (compared to a 0.85 correlation for sales

during these years).

Centrality is thus both causally important and stable over time. Why should this

be the case? The answer depends on what it is one thinks board members are for. A

central board is composed of directors who sit on many other boards. The traditional

managerialist view sees directors as ‘ornaments on the corporate Christmas tree’—

decorative objects chosen by the CEO to burnish the firm’s image for the outside world

(particularly the financial markets that evaluate them) while interfering as little as

possible in the operations of the corporation. Directors who serve on many outside

boards—particularly boards of prestigious firms—make better ornaments. In contrast,

agency theorists see director centrality as a form of validation by the market for corporate

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directors, which rewards effective agents of shareholders with multiple board seats

(Shivdasani 1993). A board’s centrality is a proxy for its quality as a monitor; thus, the

stock market responds differently to the same corporate actions according to who is on

the board, indicating that the market ‘trusts’ some boards more than others (Brickley et

al. 1995). But according to the first view, centrality should have little systematic influence

on corporate action, while the second view implies that centrality should have a positive

influence on corporate performance. Neither of these implications is true: centrality has

a systematic influence on corporate decision-making but not on performance.

We argue that the construct of board status provides a means to integrate research

on the causes and consequences of centrality. A producer’s status in the market is the

perceived quality of its products compared to those of its competitors (Podolny 1993:

830). What boards ‘produce’ is governance for the shareholders that elect them and for

other constituencies of the corporation. Thus status—as an attribute of boards—is distinct

from the reputation of the corporation as a whole. Status is particularly important in cases

where more direct evidence of quality is missing. The quality of governance is largely

unobservable, and the actual quality of any individual director is almost completely

opaque from an outsider’s perspective. In the absence of direct measures, shareholders

and others have to rely on imperfect indicators of quality—such as what other boards

directors serve on. Board centrality, as an indicator of status, can thereby insulate a

corporation from shareholder oversight. Once in place, centrality will expose a firm both

to a greater volume of information about governance at other firms and to more extensive

normative pressures from other boards (Useem 1984), thereby influencing its practices.

Our results suggest that interlock network centrality is self-reproducing:

independent of performance, size, and corporate reputation, central boards are better

able to attract central directors and CEOs of major corporations, leading to a relatively

enduring status order among corporations (White 1981). Moreover, while firms that out-

perform their industry are somewhat better able to recruit CEOs and central directors,

there is no evidence that boards composed of these individuals enhance subsequent

performance. In other words, board composition appears to be an effect of performance,

not a cause.

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CHAPTER 8

LITERATURE REVIEW OF PREVIOUS STUDIES

Studies on board interlocks go back a century or more (Jeidels, 1905; Hilferding,

1910; Brandeis, 1914; National Resources Committee, 1939). According to Mizruchi and

Bunting (1981), the causes and consequences of board interlocks have been a source of

debate since the Pujo Committee identified interlocks as a problem of corporate

concentration in the early 20th century. Also, Brandeis (1914) used interlocks as indicators

of control, as did the National Resources Committee (1939) and Perlo (1957). Davis (1996)

observed that board representation has been recognized as a corporate practice for

intercorporate collusion or cooptation (Pfeffer and Salanick, 1978), for bank control over

corporate decision making (Kotz, 1978), and for the aggregation and advancement of the

collective interests of the corporate elite through which powerful interests are present in

corporations (Useem, 1984).

One of the advantages of research on board interlocks is that interlocks are easily

identifiable in publicly available information from highly reliable sources, such as

corporate annual reports. However, critics of research into board interlocks have argued

that the availability of information has meant that board interlocks are largely irrelevant

and that research on the interlock network represents the dominance of method over

substance (Stinchcombe, 1990, cited by Davis, 1996:154). For example, one way of

measuring influence in networks of corporations is to total each firm’s number of

interlocks; those firms with the highest number of interlocks would be the most

influential in the network (Mizruchi and Bunting, 1981:476). Despite that, board

interlocks are relevant because, through them, it is possible to trace the social

embeddedness of corporate governance (Davis, 1986). Through their experiences on

other boards, interlocking directors provide a conduit for social influences that create an

informational and normative context - “an embeddedness” – for board decisions

(Granovetter, 1985, cited by Davis, 1986:154).

Another characteristic of board interlocks is that they are created by both inside

and outside directors. Mizruchi et al. (1993) observed that a firm’s inside directors,

especially its leading officers, often sit on the boards of other firms. However, most

interlocks are created by a firm’s outside directors. Hence, any board member who is

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affiliated with another company creates an interlock between the two corporations. Allen

(1974) found that inter-organizational elite cooptation, in the form of interlocking

corporate directorates, is viewed as a cooperative strategy between economic

organizations for reducing sources of uncertainty in their environments. Boards of

directors participate in the strategic decision-making process, support top management

in defining the strategic context of the firm, and provide external legitimacy and

networking (Stiles and Taylor, 2001).

Mizruchi (1996:272) observed that, in the United States, in most small, family-

owned firms, the board is likely to consist of the firm’s president, some relatives and/or

managers, and perhaps the firm’s attorney and a few trusted friends. However, in a large

firm, the typical board consists of a range of inside and outside directors, where inside

directors are those whose primary affiliation is with the firm and usually include the

firm’s CEO and other top officers. Retired and stockholding family members are also

included in this group.

Previous studies have recognized board representation as a corporate practice for

intercorporate collusion or cooptation (Pfeffer and Salanick, 1978), for bank control over

corporate decision making (Kotz, 1978), and for the aggregation and advancement of the

collective interests of the corporate elite through which powerful interests are present in

corporations (Useem, 1984). Some studies have argued that board interlocks are

interlocks that serve as a means of communication, interdependence and political and

ideological coordination for the capitalist class (Mariolis and Jones, 1982; Ornstein, 1984).

The probability that interlocked companies will be audited by the same public accounting

firm as the focal company is partially explained by the ties between those clients’

companies that are created by interlocking directorates (Davidson, Stening and Tai, 1984).

That is possible because directors who sit on many boards do so in the company of other

directors who also sit on many boards (Conyon and Muldoon, 2006).

Galaskiewicz et al. (1985) found that where the CEO was also a member of the

social elite, members of this elite were most likely to be represented on local boards and

tended to choose one another to sit on their own boards. That has significant implications

because companies get information on their respective markets through their other

directors (Galaskiewicz et al., 1985). Non-executive directors may contribute to board

control and service tasks with varying degrees of effectiveness (Lorsch and MacIver,

1989).

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In Latin America, some shareholders of Latin American corporations have

significant control rights, and typically, it is the controlling shareholders who run

business groups, not professional managers with little equity ownership (Santiago and

Brown, 2009). This means that Latin American corporate governance mechanisms differ

from those in developed countries: a) it seems that boards of directors in Latin America

are under the influence of controlling shareholders and do not perform their legitimate

fiduciary duty to safeguard minority shareholders´ interests; b) the ownership structure

is concentrated in the hands of the controlling family or families; and c) formal

institutional protection is often lacking, corrupted, or not enforced (Santiago and Brown,

2009). The degree of directors’ independence affects the potential for the expropriation of

minority shareholders’ rights because the monitoring duties of independent directors

may not play an important role in increasing the number of opportunities for

expropriation by majority shareholders (Santiago and Brown, 2009).

Santiago and Brown (2009) observed that in Latin America, the conflict is between

majority and minority shareholders, because the former benefit from the expropriation

of minority shareholders’ rights through nepotism and political corruption. That conflict

is due to a) the corporate governance structure of public-listed companies that shield

majority shareholders from takeovers and monitoring activities, and b) a legal system

that does not protect minority shareholders because of the lack of enforcement (Gomes,

2000). Under these circumstances, majority shareholders do whatever they can to keep

control of the corporation, by occupying top management positions, sitting on the board

of directors, limiting the trade in shares, and creating business conglomerates (Santiago

and Brown, 2009a). These issues, predictably, have led to serious debate about the severe

consequences of board interlocks for minority shareholders, especially in concentrated

shareholding companies. Despite this, not many studies have focused on exploring the

implications of board interlocks in emerging economies or developed economies where

families rule the companies.

Scott, (1985), Glasberg (1987) and Mizruchi (1996) review the interlocking data

literature and show why the study of interlocks is important. These theorists classify

perspectives on interlocks into four sets: management control, class hegemony, resource

dependency, and financial control. According to Mace (1971), management control

theory argues that a board of directors is appointed by management to act only as

“passive rubber-stamps”. This theory views management as isolated and autonomous

from external pressures. Therefore, interlocks are considered accidental and are less

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significant. But Mintz and Schwartz (1985) argue that a well integrated system of

interlocking directorates disagree with the fundamental logic behind the management

control theory. Class hegemony theory (Sonquist and Koenig (1975)) asserts that

interlocks highlight upper-class contribution in business. Interlocks are integrative ties

whose main function is to support class cohesion. Belonging to the same social clubs and

schools also supports this perspective.

If elite individuals are always appointed to the board of directors, they will

frequently control corporate power. Researchers like Pfeffer and Salancik (1978) judged

resource dependency as the greatest justification for interlocking among boards. This

theory argues that interlocks are established to reduce uncertainty. Many researchers

(Burt (1980), Burt (1983), Boyd (1990) and Lang and Lockhart (1990)) justified that a firm

creates a connection through an interlock to guarantee access to external resource.

Consequently, uncertainty is reduced. Therefore, interlocks are viewed as a transfer

device. It has been complicated to validate resource dependency because this view

proposes that reducing uncertainty will raise profits. The firm’s mutual profits will be

higher if an interlock offers additional information to a company.

On the one hand, Pennings (1980) and Burt (1983) have found positive relation

between interlocking and firm profitability. On the other hand, Fligstein and Brantley

(1992) demonstrate a negative association between wealth and connections among

boards. These contradictory findings can be clarified by the nature of interlocking ties.

Based on interviews with bankers, Mizruchi (1996) and Richardson (1987) suggest that

generally bankers sit on a board of a distressed firm, in other words firms in financial

difficulty. From the side of the distressed firm, it seeks additional interactions to obtain

funds.

Financial institutions are a central actor in the interlocking network. Resource

dependency theory states that interlocks diminish improbability while financial control

theory asserts that access to funds increase the greatest concern. Mintz and Schwartz,

(1985) consider that financial control theory as a stem of the resource dependence model.

The grouping of these two theories would imply that interlocks take place more often

between industrial companies and financial firms in particular banks. This provides

industrial firms the ability of obtaining funds when required.

To conclude, interlocks are a means for firms to exchange knowledge and strategy

(Useem (1984), Lorsch and MacIver (1989), Haunschild and Beckman (1998), Carpenter

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and Westphal (2001)) The major hypothesis of interlocking directorates that this social

embeddedness supposes that the individuals holding many directorships will have better

access to information, resources, etc and will be remarkably thought after for their

knowledge and experiences by firms in less favorable situations.

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CHAPTER 9

RESEARCH METHODOLOGY

The main components of any social network are actors and relations, while their

joint combination constitutes a social network. There are a number of ways social

networks can be measured and understood (Tichy, Tushman and Fombrun, 1979,

Borgatti and Foster, 2003, Wang et al., 2009). In this study, we calculated a Two-Mode

Network with board members and corporations, where board members constituted the

first mode and corporations represent the second mode. And common board members

link corporations.

A graph is made up of nodes and lines connecting the nodes. In this study

corporations and board members are nodes and connections between them are edges. To

understand social network analysis, we need to analyze the structural relation of board

members and corporations.

In the following example from Conyon and Muldoon (2006: 1325), we visualize

the net of connections among nodes.

Figure 3: Two simple graphs

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In Figure 3 above, on the right side, the nodes numbered 1 and 2 are adjacent,

while those numbered 5 and 3 are not. The connected component is associated with a

node, which is the part of the graph consisting of the node itself and all those nodes that

can be reached by paths running along the edges of the graph. So, in Figure 2, the graph

on the left has a single connected component, while the one on the right (in blue with the

numbered nodes) has two connected components: one associated with nodes 1, 2, 3 and

5 and another associated with nodes 4,6,7,8, and 9. For the purpose of this study, our

interest is on those components associated with a node. That is, board members

associated to a corporation.

Another important concept of graph theory is degree, which is the number of

edges connected to a node. In Figure 2, on the left side, all the nodes have degree 5. This

metric is relevant for the purpose of this study as explain below. Since, we want to

measure the number of board members connected to a corporation.

Knove and Yang (2008:62) observed that a primary use of graph theory in social

network analysis is to identify the important or prominent actors at both the individual

and group levels of analysis. Centrality and prestige concepts and measures seek to

quantify graph theoretic ideas about an actor’s prominence within a complete network

by summarizing the structural relations among all nodes. In the following sections, the

features of affiliation networks and the measures of centrality are explained.

In SNA a two-mode network is also known as affiliation network representing the

association between two or more sets of nodes where each set is a different social entity

(Wang et al., 2009:12). That is, one set of nodes represents board members while the other

set of nodes represents corporations, with ties representing directors sitting on company

boards. And the number of entities within the network is the mode of the network. We

calculated a Two-Mode Network with board members and corporations. These micro-

level data are useful to infer the presence of social structure at the macro level.

One of the main purposes of social network analysis of board interlocks is to search

for the most influential, important and powerful members within the network. In helping

to attain this objective, centrality is an important conceptual tool for analyzing power in

social networks. Also, the notion of group centrality provides a measure of social capital

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for an embedded group and individual social capital is easily thought of in terms of

centrality (Brass and Burkhardt, 1992). There are different positional measures that reflect

the location of actors in a network. The focus is on the centrality of the board member or

the bringing location of the board member in the network. In this study, we calculated

two measures of centrality; Degree centrality, Closeness centrality and Betweenness

centrality, which are explained in the following section.

In this study, we visualize the two-mode data in a bipartite graph and this is

relevant for board interlocks research, because the participation of two board members

in the same corporation indicates the existence or potential for some form of social bond

between them (Everett and Borgatti, 2005). Because the bipartite graph is simply a graph,

we can apply the traditional centrality measures directly to this graph” (Everett and

Borgatti, 2005). Hence, in this study, we rely on the work of Borgatti and Everett (1997)

and Freeman (1979) and their approach to measure centrality and power in a network

graph with two measures: Density and Clustering coefficient

For the analysis, we have selected the largest European firms as listed in the

STOXX ® All Europe TMI Index as per market capitalization. This excludes firms from

Eastern European countries, although several among them belong to the European

Community. This should not be a problem as those countries have joined the Community

recently. Some countries from the AELE such as Norway and Switzerland are also

included. For each firm we recorded the country where its headquarters are located, the

prevailing economic sector to which it belongs, as well as the composition of the board of

directors. The data have been checked for true duplicate names and for differently

reported names. From the knowledge of which director sits in which board, one can build

a bipartite network by assigning a node to each director and to each board.

A link between a director and a board means that the director sits on that board.

When two boards share the same director it is said that there is an interlock. Multiple

interlocks are also possible, in which at least two directors of a board sit together on

another board. From the bipartite graph it is easy to obtain two derived graphs also called

projections. One in which two directors are connected if they sit on the same board and

another in which two boards are connected if they share a common director. In this work

we focus on the boards weighted projection. On those graphs, we performed the

following statistical analyses. In the first place, we measured the network density, which

was defined as the ratio between the number of edges present in the networks and the

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number of edges of a complete graph with the same number of vertices, which can

equally be expressed in terms of ratio between the average degree and the maximum

possible degree. Then we have studied the clustering coefficient C, i.e. the propensity to

form triangles that show transitivity in the network connectivity, is defined as the ratio

of the number of closed paths of length two to the number of paths of length two. Both

the metrics have been calculated for the unweighted graphs.

All the data treatment and analysis has been carried out in R, for the most part

with the ‘‘igraph’’ package.

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CHAPTER 10

SOCIAL NETWORK ANALYSIS

Overview

From the financial documents of the top 800 corporations of Europe, the names of all the

13,094 board members have been extracted and listed in an affiliation matrix with

corporations in the columns and directors in the rows, resulting in a 13,094 X 800 order

matrix. Using matrix algebra, the affiliation matrix is dissociated into 2 adjacency

matrices, namely for one-mode directors network and one-mode corporations network.

The affiliation matrix provides the dataset to be used in the statistical analysis software

R to plot the two-mode network of the board members and the firms, whereas the

corporations adjacency matrix provides the dataset to be used to plot the one-mode

network of the corporations. Furthermore, these datasets are also used to compute

various social network metrics, as described in this section, which help quantify several

aspects of the network under study, such as social power, ease of the flow of information,

important links, among other things.

10.1 Basic Terminology

A network or a graph is a set of items termed vertices (or nodes) with connections

between them called edges. Networks can be used to represent a multitude of

phenomena (from family ties through marriage in 15th century Florence to needle

sharing among drug addicts, to networks of friendship and advice among managers).

We restrict our attention to networks derived from the world of corporate boards of

directors and adopt the following conventions. Let denote by N the number of nodes in

a graph and by E the number of edges. We can represent nodes as points and

relationships as segments connecting pairs of points. This representation is called a

graph.

There are different kinds of graphs. There are directed and undirected graphs. In

directed graphs (also known as digraphs), the ties have direction and we refer the lines

as arcs. In undirected graphs, the ties have no direction. For example, there is a

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relationship between A and B, this is the same thing saying there is a relationship

between B and A.

Graphs may be valued or non-valued. A valued graph has numbers attached to

the edges, which may be used to indicate the strength, capacity, frequency, duration

and other quantitative measurement of the link. In our case, we consider a valued and

undirected graph.

One of the most important uses of network analyses is identification of most

central units in a network. Measures of centrality can be defined in two different ways:

- For each firm respectively: unit of centrality

- For the whole network: network centralization

10.2 Centrality Measures

A traditional issue in social sciences is the centrality of a node in a network of

social actors. In fact some actors (or nodes) are not only more connected than others, but

their position in the network allows them for playing the role of mediating information

from one part of the network to one another. Other nodes have to rely on these "central"

nodes to communicate between each other (Padgett and Ansell [1993]). In other words,

in social network analysis, centrality measures are used to characterize the importance

and the role of particular actors in the larger network by analyzing their position within

the network. Degree, closeness and betweenness are common measures of importance

in Social Network Analysis.

One of the most important uses of network analyses is identification of most central

units in a network. Measures of centrality can be defined in two different ways:

- For each firm respectively: unit of centrality

- For the whole network: network centralization

Centrality measures are used for undirected graph. Selected unit is central, if:

- It has high degree;

- It is accessible (close to) other units;

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- It lies on several geodesics (shortest paths) between other units.

A key idea in the structural approach to social science is that the way an actor is

embedded in a network offers opportunities and imposes constraints on the actor.

Occupying a favored position means that the actor will have better access to

information, resources, social support etc. and will be exceedingly thought after for

such opportunities by actors in less favorable positions.

In particular, power and influence in informal networks stem from occupying

positions that are central to the network. The measure of centrality has been the subject

of several studies in Social Network Analysis.

10.2.1 Degree Centrality

Actors (here firms) who have more ties to other to other actors may be advantaged

positions. Since we are interested to undirected data, centrality degree is computed by

ignoring the direction of ties. Degree Centrality is defined as the number of nodes that a

given node is connected to.

Where n is the total number of nodes in a network and, a(i,k) is a binary variable

indicating whether a link exists between nodes i and k.

The greater a person's degree, the more potential influence they have on the network,

and vice versa.

Freeman's approach

Freeman (1979) developed basic measures of the centrality of actors on their degree, and

the overall centralization of graphs.

In our graph, degree is the number of corporations that a given firm is in relation with.

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Where di is the degree centrality of actor j, and aij is the number of links that actorhas with

all the other actors (i = 1…(n-1)).

In Freeman's approach, actors who have more connections are more likely to be powerful

because they can directly affect more other actors. But having the same degree does not

necessarily make actors equally important.

Bonacich's approach

Bonacich argued that actor's centrality is a function of how many connections one has,

and how many the connections the actors in the neighborhood had.

An actor is likely to be more influential if one is connected to central others, because one

quickly reaches a lot of other actors with one's information. But if the actors that an actor

is connected to are, themselves, well connected, they are not highly dependent on him,

they have many contacts, just as he does. Bonacich argued that being connected to others

makes an actor central, but not powerful. And being connected to others that are not well

connected makes an actor powerful, because these other actors are dependent on him,

whereas well connected actors are not.

The centrality of an actor i (denoted ci ) is denoted by:

Where:

A is an adjacency matrix,

α is a value used to normalize the measure. The Normalization parameter is

automatically selected so that the sum of squares of the vertex centralities is the size of

the network.

β is an attenuation factor which gives the amount of dependence of each vertex's

centrality on the centralities of the vertices it is adjacent to. The parameter β is arbitrary

selected, negative values should be selected if an individual's power is increased by being

connected to vertices with low power and positive values selected if an individual's

power is increased by being connected to vertices with high power.

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Therefore, the centrality of each vertex is therefore determined by the centrality of the

vertices it is connected to.

10.2.2 Closeness Centrality

Closeness centrality is defined as the total graph theoretic distance to all other nodes in

the network. Closeness centrality thus characterizes the reach of the ego to all other nodes

of the network. A node with a low central closeness score (⇒ highly central), it tends to

receive anything flowing through the network very quickly.

Where l(i,k) is the length of the shortest path connecting nodes i and k. ccmin and ccmax the

minimum and maximum lengths of the shortest paths respectively.

10.2.3 Betweeness Centrality

Other measures of power and influence are therefore related to the advantage gained

through weak ties and/or brokering positions. Betweeness centrality measures the extent

to which other parties have to go through a given actor to conduct their dealings.

Consequently, betweeness is defined as the proportion of paths -among the geodesics

between all pairs of nodes- that pass through a given actor.

Where gij(k) indicates whether the shortest path between two other nodes i and j passes

through node k.

The values of these three normalized centrality measure from 0 to 1.

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10.3 Network Measures

10.3.1 Density

The density of a network is a measure of the connectedness in the network, and takes on

a value between 0 and 1. Link density measures how complete a group is in terms of the

relations among its members. It is defined as the proportion of the maximum possible

number of links that actually exist among all group members.

Where n is the size of the group and, a(i,j) is a binary variable indicating whether a link

exists between nodes i and j. Members in a dense group have relations to a large number

of other group members. When density is close to one, the network is considered dense;

otherwise it is sparse. Communication and collaboration are easier for members in a

dense group and this imply more efficient planning and execution of corporate strategies.

However, a dense group may also be vulnerable because one member may release critical

information about other group members.

When the density achieves 1, a group becomes a clique where each member connects with

every other member.

10.3.2 Clustering Coefficient

Watts and Strogatz [1998] introduced the clustering coefficient graph measure to

determine whether or not a graph is a small-world network. The clustering coefficient

quantifies how well connected are the neighbors of a vertex in a graph. In real networks

it decreases with the vertex degree, which has been taken as a signature of the network

hierarchical structure.

First, let us define a graph in terms of a set of k nodes N = n1, n2, n3, …, nk and a set of

edges E where eij denotes an edge between nodes ni and nj. We define the neighborhood

N for a vertex ni as its immediately connected neighbors as follows:

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The degree d(ni) of a node ni is the number of nodes in its neighborhood Ni. The clustering

coefficient Ci for a node ni is the proportion of links between the vertices within it

neighborhood divided by the number of links that could possibly exist between them.

- For a directed graph, eij is distinct from eji, and therefore for each neighborhood Ni there,

are d(ni)(d(ni) - 1) links that could exist among the nodes within the neighborhood. Thus,

the clustering coefficient is given as:

An undirected graph (which is our case) has the property that eij and eji are considered

identical. Therefore, if a node ni has d(ni) neighbors, 𝑑(𝑛𝑖)(𝑑(𝑛𝑖) − 1)

2 edges could exist among

the nodes within the neighborhood. Thus, the clustering coefficient for undirected graphs

can be defined as:

10.4 Small World Phenomenon

The number of actors in a network may be quite large and most actors not

neighbors of one another, yet most actors may be reachable from every other by a chain

of very few intermediate actors. This situation, referred to as the phenomenon of small

world, has been observed in many social networks. We will now describe a few measures

commonly used to identify the existence of small world in a network.

The geodesic between a pair nodes in a network is the shortest path between them,

that is, the minimum number of edges that must be traversed to go from one node to the

other. The diameter of a network is the longest of all the calculated geodesics between all

possible pairs of nodes in the network. It is a measure of the linear size of the network.

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CHAPTER 11

SAMPLING AND DATA COLLECTION

The data used in the study consisted of 13,094 inside and outside board members

of the population of 800 European corporations that traded in the STOXX ® All Europe

TMI Index as of 31st December 2015. The corporations include 136 natural resources, 269

industrials, 118 services and goods of non-basic consumption, 245 frequent consumption

products, 81 health, 112 financial services, and 84 telecommunications.

In this paper, we focus on names of directors listed on annual reports and several

other financial documents published on the web page of the corporations as of June 2016.

The information provided in the corporate reports includes the names of the board

members; these are classified as main, substitute, patrimonial, related and independent.

In some cases, the annual report also includes biographical information of board

members. In the following section, we and use these links to document the powerful

actors in the network of directors and organizations to calculate the centrality, power and

prestige of board interlocks in Europe

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CHAPTER 12

RESULTS AND ANALYSIS

Power is a fundamental property of social structures, and the location of a board

member within the network directly shows his or her access to information. This is

relevant if board members are seen as conduits of information between corporations

(Everard and Henry, 2002). In the social network approach, power is inherently

relational, and from the analysis of a network, it is possible to observe that an actor is

embedded in a relational network. So, one of the primary uses of SNA is the identification

of the most important actors in a social network (Wasserman and Faust, 1994). An actor’s

location in a social network determines his prominence and importance in the network.

In this study we use three measures of centrality for a single dichotomous relation: degree

centrality, betweenness centrality and closeness centrality. These measures of centrality

were calculated with the statistical computing software, R for the entire population of

board members and corporations in the STOXX ® All Europe TMI Index as of December

2015.

In order to visualize the network structure of companies sharing two or more

board members, a technique called spring embedding was applied. The rationale is that

board members who are connected by lines are drawn closely together whereas

unconnected board members are pushed apart. The spring embedded technique treats

the lines of the networks as springs with a particular elasticity and strength. The

procedure searches for a situation in which the system of springs is in a stable situation

(De Nooy, 2003). The result is a graphical representation of the linkages between board

members and corporations. Visualization of the network is drawn with the igraph

package in the statistical computing software R, as shown in figure 4 below.

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In Figure 4 above, the red bullets represent board members, the green bullets

represent corporation, and the yellow lines represent ties between board members and

corporations. We can observe that in the European Stock Market, the independent board

members have created a network structure of social relationships through board

interlocks. The concentration of board interlocks has severe consequences in maintaining

the independence, transparency and accountability of corporate governance affairs to

shareholders. This section has shown the interconnection among two or more board

members and corporations. In the following section, we look at the interconnection

among corporations.

Figure 4: Bipartite network of directors and corporations

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Companies: one-mode network

Another way to visualize the implications of board interlocks in Europe is by

analyzing how corporations are directly linked. We transform the two-mode network

(board members and corporations) into two one-mode networks of corporations and

board members. This corporation one-mode network contains a direct line between any

two companies. We calculated a one-mode network for the companies to find out the

relational structure between corporations.

In figure 5 above, we can see a strong linkage among corporations throughout

board membership. On the periphery, we observe those companies with two or three

connections with other companies in the network, and the companies with no connection

have not been represented for the purpose of clarity of the plot. Those are isolated

Figure 5: One-mode network of corporations

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companies with no relationship through board interlocks. From a total of 800

corporations in the STOXX ® All Europe TMI Index, only 59 corporations do not share a

board member, which have been excluded from this network plot for clarity purposes.

That shows a strong structural relationship among companies created by the linkages of

board members in publicly traded corporations in Europe.

In table 2 above, we have enlisted the top 15 corporations according to the three

measures of centrality, which provide an insight in to a different aspect of their

importance in the network. Degree centrality counts the number of ties that a node has

with other nodes in the network. It is a measure of immediate connectivity or popularity

of a node and its vulnerability to catching whatever flows though the network. While the

degree centrality counts only the immediate ties of a node, the closeness centrality takes

into account the distance of each node to every other node in the network. Thus, the

greater the value of closeness centrality the shorter is its total distance to all other nodes

in the network. It is often used as a measure of how long it will take for information to

pass between a node and all other nodes. Betweenness centrality measures the proportion

of times a node falls along the shortest path between pairs of other nodes. Betweenness

measures the ability of a node to control the flow of information through it and nodes

RANK DEGREE BETWEENNESS CLOSENESS

1 ENGIE SIEMENS ENGIE

2 SIEMENS EURAZEO AXA

3 INVESTOR ENGIE SUEZ ENVIRONNEMENT

4 LUFTHANSA SUEZ ENVIRONNEMENT SIEMENS

5 EURAZEO AXA E.ON

6 AIRBUS GROUP SE NESTLE HENKEL

7 IMERYS MONCLER BRITISH AMERICAN TOBACCO

8 FAURECIA ROCHE HLDG P RIO TINTO

9 DEUTSCHE TELEKOM LUFTHANSA EURAZEO

10 LVMH MOET HENNESSY BRITISH AMERICAN TOBACCO ROLLS ROYCE HLDG

11 SAFRAN ACCOR GRP SOCIETE GENERALE

12 DEUTSCHE BOERSE DEUTSCHE TELEKOM AKZO NOBEL

13 CARREFOUR AIRBUS GROUP SE MUENCHENER.RUECK

14 NESTLE TESCO NESTLE

15 MUENCHENER RUECK AKZO NOBEL DEUTSCHE TELEKOM

Table 2: Top 15 corporations in each category of centrality

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with high betweenness centrality may have the ability to change or hinder the flow of

information through them.

The figure 6 below, displays a frequency distribution of the dataset of corporation

network. With 163 isolated corporations. The downtrend signifies decreasing number of

companies having ties with other companies in Europe.

In the following section, we look at the location of actors in the network structure

of board interlocks in Europe. The actors’ level of centrality is calculated using three

different measures of centrality: degree centrality, closeness centrality and betweenness

centrality.

Actors’ location in the social network

The board of directors is a determinant for corporate governance as it represents

the primary decision-making body. Boards of directors are interlinked with each other

by a shared director. This is an important characteristic, because the network represents

the connections among directors or companies and the opportunity for face-to-face

interaction. Board members are the actors who, via co-membership on boards, interact

and communicate with one another.

Figure 6: Degree distribution of corporation network

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A matrix was constructed with the 13,094 board members and 800 companies

traded on the STOXX ® All Europe TMI Index. The two-mode data were transformed

into one-mode data to carry out the analysis of centrality measures. The centrality output

ranks the actors from a higher to a lower level of centrality. The results from the top 15

board members in each category are shown in Table 2 below.

RANK DEGREE BETWEENNESS CLOSENESS

1 ULLA LITZÉN VIRGINIE MORGON GÉRARD MESTRALLET

2 IAN GALLIENNE GÉRARD MESTRALLET ANN-KRISTIN ACHLEITNER

3 NICOLAS BAZIRE ANN-KRISTIN ACHLEITNER ISABELLE KOCHER

4 ULRIK SVENSSON DIVA MORIANI BARBARA KUX

5 ANN-KRISTIN ACHLEITNER SARI BALDAUF STÉPHANE PALLEZ

6 GÉRARD MESTRALLET VIVEK BADRINATH LUCIE MUNIESA

7 HENNING KAGERMANN ULRIK SVENSSON ALDO CARDOSO

8 SERGIO MARCHIONNE ODILE DESFORGES CATHERINE GUILLOUARD

9 ODILE DESFORGES STÉPHANE PALLEZ FABRICE BRÉGIER

10 CHARLES EDELSTENNE ISIDRO FAINÉ CASAS MARI-NOËLLE JÉGO-LAVEISSIÈRE

11 CLARA GAYMARD MICHEL DE ROSEN JEAN-PIERRE CLAMADIEU

12 BARBARA KUX ALESSANDRO PROFUMO AMPARO MORALEDA

13 ROBERT CASTAIGNE BYRON GROTE CARLOS TAVARES

14 ERHARD SCHIPPOREIT ANNE LAUVERGEON NICOLAS BAZIRE

15 DAVID NISH BARBARA KUX SARI BALDAUF

Table 3: Top 15 board member in each category of centrality

In Table 2, we note the (interpersonal) network of boardroom contacts among the top

fifteen board members in the European Stock Market. The actor with the highest number

of degree is Ms. ULLA LITZÉN. This section has shown the actors with the highest level

of centrality, that is, the actors sitting in many boards. we look at the most powerful board

members in the network structure of board interlocks in Europe.

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In table 4, The most influential board members are ranked from the highest to the

lowest according to their degree centrality. The directors are often well-known

businesspeople that serve on more than one board of directors, usually from the same

business group, and their multiple directorships help to establish the necessary links that

enable companies to gain edge over their competitors.

DIRECTORS DEGREE

CENTRALITY

ULLA LITZÉN 135

IAN GALLIENNE 133

NICOLAS BAZIRE 131

ULRIK SVENSSON 118

ANN-KRISTIN ACHLEITNER 110

GÉRARD MESTRALLET 109

HENNING KAGERMANN 108

SERGIO MARCHIONNE 105

ODILE DESFORGES 104

CHARLES EDELSTENNE 104

CLARA GAYMARD 99

BARBARA KUX 98

ROBERT CASTAIGNE 96

ERHARD SCHIPPOREIT 92

DAVID NISH 91

Table 4: Degree centrality of top 15 board members

Figure 7: Degree distribution for director network

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The figure 7 above displays the frequency distribution of the degrees of the board

of directors. As is evident, the mode of the dataset is 20 with highest frequency of 850,

meaning 850 directors have a connectedness of 20. We can see that the range of degrees

is 1 to 45. Hence, there are board members, who have direct contact with several other

directors along with isolated board members.

Description of networks

In conducting any form of social network analysis, it is important to understand

the characteristics of the network involved. It is also important to not only understand

what is going on in a network, but how one network differs from another. The network

characteristics discussed here include density and clustering coefficient of the director

and corporation networks.

Density is a measure of the overall amount of ties that are present. Density in a

valued graph is the average value attached to each path across all possible paths. This

measure can be interpreted as the average number of board members shared by each

possible pair of companies. The overall graph clustering coefficient is simply the average

of the densities of the neighborhoods of all the actors. The weighted version gives weight

to the neighborhood densities proportional to their size, that is, actors with lager

neighborhoods get more weight in computing the average density. The network

measures for the two networks (directors and corporations) are shown in table 5.

DIRECTORS NETWORK CORPORATIONS NETWORK

DENSITY 0.001640063 0.004493591

CLUSTERING COEFFICIENT 0.845549 0.2081373

Table 5: Network measures It is interesting to note that interlocking directorships related to the center of the

network tend to have a higher impact (as coefficients) than interlocking directorships

related to a peripheral role in the network. Moreover, we find that big companies

(measured by their market capitalization) are the central actor in these networks firms.

The results suggest that the location of big European listed firms in this network (STOXX

® All Europe TMI Index) is more important than simply the number of ties. The findings

point to the role of links between listed companies.

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CHAPTER 13

DISCUSSION

Board members in European corporations serve as a means of communication and

control for both the individual corporations and the majority shareholders of European

corporations through the network of connections they have created and the social capital

(economic, cultural or symbolic) each board member possesses. That raises the question

of whether the traditional monitoring role of outside directors is present and efficient in

Europe and if the mere inclusion of an outside director into a small board may improve

the minority shareholders´ situation. It has been observed that in Europe, it is the

misalignment of interests between majority and minority shareholders is the root of

agency problems, not the divergence between the goals and objectives of management

and owner.

In the literature review above, board interlocks are seen as conduits of information

flows and social influences (Useem, 1984, Granovetter, 1985, Davis, 1996, Mizruchi, 1996).

In Europe independent board members by participating in board meetings and sitting in

different boards are performing ritual practices that do not contribute to the effective

monitoring of company´s affairs. In other words, the creation of a network of board

interlocks in European listed corporations aims to institutionalize a particular corporate

governance practice, that is, of independent board member who perform a social ritual

tending to consecrate or legitimate an arbitrary boundary with the aim to produce and

reproduce lasting, useful relationships that can secure material or symbolic profits

(Bourdieu, 1986, 1991). This study contributes to the literature that investigates

interlocked directorates in the STOXX ® All Europe TMI Index firms. This study also

represents a contribution to the study of powerful and influential actors in the network

structure of interlocked directorates in Europe. The SNA of interlocked directorates in

this paper has great potential to contribute to the corporate governance research. They

are described below.

First, the results suggest that the interlocked directorates and positions of powerful

and influential actors have the potential to render corporate governance reforms

ineffective. It would be reasonable to assume that strong capital markets and the presence

of institutional investors protect minority interests better even in strongly interlocked

60 | P a g e

directorates. Without strong capital markets and institutional investors, a network of

directors may prevent independent directors from acting independently. Further

research needs to be conducted to explore these issues.

Second, it would be useful to examine cross-cultural differences in networks of

directors. It has also been suggested (LaPorta, Lopez-de-Silanes, Shleifer, & Vishny, 1997,

1998) that corporate governance regulations and implementations vary across countries

with different legal systems. Also, countries’ linkages with translational bodies should be

considered. More generally, the approach used here could be replicated in other

countries. In addition, the view of social capital as resources embedded in networks may

be helpful in understanding why minority shareholders’ interests are infringed more in

some areas than in others (Uddin and Chowdhury, 2008).

Third, the network mapped in this paper is based on directors’ links. While these

are important, other types of network linkages are also important, and the relative effects

of different kinds of links on outcomes should be explored, for example, political

networks of big corporations, regulatory networks, family networks, and various other

informal networks. All these have an influence on protecting shareholders’ interests and

the overall transparency and accountability of company affairs. As previous studies have

indicated, we need to understand better the role of family networks with political

affiliations in corporate governance failures (Uddin and Choudhury, 2008).

Unfortunately, these areas, though important, remain under-investigated and under-

theorized.

Finally, board interlocks and networks are not static, and a longitudinal analysis

would provide evidence of the network dynamics that affect board activities and the role

of independent directors in company affairs.

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CHAPTER 14

CONCLUSION AND FUTURE RESEARCH

This paper presents a study of the phenomenon of interlocking directorate in the

European corporate sector, employing the tools of social network analysis to examine its

structure. The data consists of 800 companies listed in the STOXX ® All Europe TMI Index

encompassing 13,094 directors sitting in various boards of directors. The position of a

company in the network has a significant impact on its access to market resources such

as capital, status, prestige and legitimacy within the corporate environment.

About 35% of the total directors hold cross-company directorships, but this

minority makes 80% of companies’ director-interlocked, showing the presence of a power

elite in the European corporate field. Using various centrality measures we have

identified the major players in the network, both among the firms and the directors. It

turns out that the most influential directors and firms, as measured by means of the

degree centrality, are not necessarily the most active power brokers and mediators, as

measured by the betweenness centrality and closeness centrality.

Another important observation is that both the network of firms as well as the

network of directors satisfy the small world property, meaning that it is possible to go

between two firms or two directors by a small number of hops across the networks,

though the exact path along which to do so may not be visible to the players immediately.

Thus there is a greater possibility of ideas and knowledge being transferred between

firms much faster than expected, often inadvertently and unpremeditatedly. Because of

this, the major players in the field, as identified by the centrality measures, ought to have

a greater influence on the governance practices of other companies via articulation and

the sharing of prospects. This study furnishes an overall view of the effects of interlocking

among the company director boards of European Corporations.

A full account of the corporate governance practices in Europe is beyond the scope

of this paper. This paper provides insights into one aspect of this complex subject by

focusing on the structure of relationships between directors. The literature on SNA has

demonstrated the important effect that network structures can have on the performance

of the network and the outcomes for the individuals that comprise the network

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(Richardson, 2009, p.586). By applying SNA, this paper identifies the connections

between European corporations and actors. In this study, we investigated the patterns of

board interlocks in Europe. Using the measures of SNA developed by Freeman (1979),

we found the most powerful and influential actors in the network structure of board

members in Europe. We also found that in Europe, independent board members have

created a network structure of social relationships through board interlocks. For example,

in Figures 5, we can visualize the network structure of those companies sharing two or

more board members. Also, we calculated the network of connections each board

member can effectively mobilize. Table 4 shows the names of the board member of the

network in the decreasing order of the ability to mobilize. In Table 3, we note the

(interpersonal) network of boardroom contacts among the top 15 board members in the

using different measures in the European Stock Market. All those board members occupy

a central position in the network and are able to transmit information and to influence

other board members.

This paper has drawn on the notion of social capital advanced by Bourdieu and

has mobilized previous accounting studies in order to provide further explanations of

networks. Social capital is defined by Bourdieu as the aggregate of the actual or potential

resources which are linked to the possession of durable network of more or less

institutionalized relationships of mutual acquaintance and recognition - or in other

words, to membership in a group - which provides each of its members with the backing

of the collectively owned capital, a ‘credential’ which entitles them to credit, in the

various senses of the world. These relationships may exist only in the practical state, in

material and/or symbolic exchanges which help to maintain them. This is similar to the

case of Europe. The networking structure of board interlocks in Europe shows a relational

practice of board members and the social capital created by board interlocks.

It is by sharing different boards of directors that social capital is created. In other

words, the ensemble of connections, contacts, relations, friendships and obligations give

him the power to act in relation to the quality and quantity of their relations, and of the

relationships with other board members and businessmen. That network of relationships

is “the product of investment strategies” which the independent board member has

obtained, individually or collectively, with the objective of establishing or reproducing

social relationships “that are directly usable in the short or long term” (Bourdieu, 1986:

249). As Portes (1998) argued, social networks are not a natural given; on the contrary,

they must be constructed through investing in strategies oriented to the

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institutionalization of the relations of groups as a function of other benefits. Bourdieu

pointed out that individuals’ interaction reinforces mutual recognition and

acknowledgment as members of a network or group (Lin, 1999). Those investment

strategies in socio connections are created to perpetuate the governing elite in European

corporations.

In Europe, board members have created a network structure of social relationships

through board interlocks. That can be observed in Figures 4 and 5 above. Figure 5 shows

the network structure of companies that share two or more board members; that is a

better representation of social capital created by board interlocks. As Bourdieu stated,

“The volume of the social capital possessed by a given agent thus depends on the size of

the network of connections he can effectively mobilize and on the volume of the capital

(economic, cultural or symbolic) possessed in his own right be each of those to whom he

is connected”. Hence, “capital is seen as a social asset by virtue of actor’s connections and

access to resources in the network or group of which they are members”. In order to

determine the social capital possessed by board members, we calculated the network of

connections each board member can effectively mobilize. Table 4 shows the name of the

board member and the size of the network of connections he/she can mobilize.

Further, there is a brief description of the volume of capital (economic, cultural,

and symbolic) possessed in its own right by the board members of the table 3. Table 4

describes the metrics of SNA calculated with R. Board members are arranged from the

highest to the lowest degree level of “connections”. According to Bourdieu, the existence

of a network of connections is not a natural given, or even a social given, constituted once

and for all by an initial act of institution. It is the product of an endless effort at institution,

of which institution rites – often wrongly described as rites of passage - mark the essential

moments and which is necessary in order to produce and reproduce lasting, useful

relationships that can secure material or symbolic profits.

Hence, the networking structure of board interlocks in Europe is a product of a

continuous series of exchanges between board members in which recognition is endlessly

affirmed and reaffirmed. As Bourdieu pointed out, “Every group has its more or less

institutionalized forms of delegation which enable it to concentrate the totality of the

social capital, which is the basis of the existence of the group”. So, the process of

articulation and the concentration and distribution of links between board members

show the positions of the main actors who are interlocked. Drawing on Bourdieu’s notion

64 | P a g e

of social capital, it is possible to observe how European corporations have created a

durable network of institutionalized relationships where board members are part of a

selected group in the practical sense and pursue material and symbolic exchanges.

As Gilbert et al. observed, Social networks can exhibit temporal dynamics in a

number of ways. The instances in the data may appear and disappear over time whereby

different time windows may exhibit different characteristics. For example, a person might

change his affiliation with a business organization by joining a different business

enterprise and developing new social ties within this new environment. This approach

could also be combined with a deep focus on key players to track their paths within the

network. As we have revealed, several high-profile individuals have important positions

in some big corporations. It would be interesting to find out how they reached the key

positions in the network. This would, perhaps, unravel the workings of wider corporate

governance issues, such as reforms. We wish to claim that this study perhaps provides

the foundations for the deeper understanding of the cozy relationship of directors, family

networks and their influence on corporate governance practices in Europe and elsewhere.

These results provide us an idea about the European interlocking network, but

leave many of the most interesting questions beyond reach. For example, our data is

snapshots of the European corporate networks: it would be very interesting to collect

similar data over a period of years in order to look at the dynamics of connections within

the corporate world. Another questions that should be considered, is to study the effects

of these networks measures on firm performance.

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APPENDIX I R-CODES

1. Bipartite network plot

library('igraph')

affiliation_data <- read.csv(file.choose(),header=TRUE,row.names=1)

affiliation_matrix <- as.matrix(my_data)

two_mode_network <- graph.incidence(affiliation_matrix,mode=c("all"))

V(two_mode_network)$color[1:13094] <- rgb(1,0,0,.5) #color of directors

V(two_mode_network)$color[13094:13885] <- rgb(0,1,0,.5) #color of firms

V(two_mode_network)$label <- NA

V(two_mode_network)$label.color <- rgb(0,0,0,0)

V(two_mode_network)$label.cex <- 0

V(two_mode_network)$size <- .001

V(two_mode_network)$frame.color <- NA

E(two_mode_network)$color <- rgb(.5,.5,0,.2)

plot(two_mode_network, layout=layout.fruchterman.reingold)

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library('zoom')

inout.zoom(plot(two_mode_network, layout=layout.fruchterman.reingold))

2. Two-mode to one-mode (Affiliation matrix to two adjacency matrices)

library('igraph')

my_data <- read.csv(file.choose(),header=TRUE,row.names=1)

my_matrix <- as.matrix(my_data)

my_network <- graph.incidence(my_matrix,mode=c("all"))

one_mode_networks <- bipartite.projection(my_network)

one_mode_networks

get.adjacency(one_mode_networks$proj1, sparse=FALSE,attr="weight")

get.adjacency(one_mode_networks$proj2, sparse=FALSE,attr="weight")

3. One-mode network (directors), Plot

library('igraph')

affiliation_data <- read.csv(file.choose(),header=TRUE,row.names=1)

affiliation_matrix <- as.matrix(my_data)

two_mode_network <- graph.incidence(affiliation_matrix,mode=c("all"))

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one_mode_networks <- bipartite.projection(two_mode_network)

one_mode_networks$proj1 <- delete.vertices(one_mode_networks$proj1,

V(one_mode_networks$proj1)[degree(one_mode_networks$proj1)==0])

#$proj1

V(one_mode_networks$proj1)$color[1:13094] <- rgb(0,1,0,.5) #color of directors

V(one_mode_networks$proj1)$size <- .01

V(one_mode_networks$proj1)$label <- NA

V(one_mode_networks$proj1)$label.color <- rgb(0,0,0,0)

V(one_mode_networks$proj1)$label.cex <- 0

V(one_mode_networks$proj1)$frame.color <- NA

E(one_mode_networks$proj1)$color <- rgb(0.5,0,0.5,.3)

plot(one_mode_networks$proj1, layout=layout.fruchterman.reingold)

#library('zoom')

#inout.zoom(plot(one_mode_networks$proj1, layout=layout.fruchterman.reingold))

4. One-mode network (corporations), Plot

library('igraph')

affiliation_data <- read.csv(file.choose(),header=TRUE,row.names=1)

affiliation_matrix <- as.matrix(my_data)

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two_mode_network <- graph.incidence(affiliation_matrix,mode=c("all"))

one_mode_networks <- bipartite.projection(two_mode_network)

one_mode_networks$proj2 <- delete.vertices(one_mode_networks$proj2,

V(one_mode_networks$proj2)[degree(one_mode_networks$proj2)==0])

#$proj2

V(one_mode_networks$proj2)$color[1:791] <- rgb(1,0,0,0.7) #color of corporations

V(one_mode_networks$proj2)$size <- 4

V(one_mode_networks$proj2)$label <- NA

V(one_mode_networks$proj2)$label.color <- rgb(0,0,0,0)

V(one_mode_networks$proj2)$label.cex <- 0

V(one_mode_networks$proj2)$frame.color <- NA

E(one_mode_networks$proj2)$color <- rgb(.5,.5,0,.8)

plot(one_mode_networks$proj2, layout=layout.fruchterman.reingold)

5. Metrics of directors network

library('igraph')

affiliation_data <- read.csv(file.choose(),header=TRUE,row.names=1)

affiliation_matrix <- as.matrix(affiliation_data)

affiliation_network <- graph.incidence(affiliation_matrix,mode=c("all"))

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one_mode_networks <- bipartite.projection(affiliation_network)

degree(one_mode_networks$proj1)

betweenness(one_mode_networks$proj1)

closeness(one_mode_networks$proj1)

transitivity(one_mode_networks$proj1, type = c("globalundirected"), vids = NULL, weights =

NULL, isolates = c("NaN", "zero"))

edge_density(one_mode_networks$proj1, loops = FALSE)

library(xlsx)

write.xlsx((degree(one_mode_networks$proj1)), "C:\\Users\\Shivendra

Rai\\OneDrive\\Thesis\\Degree Centrality (Directors).xlsx")

write.xlsx((betweenness(one_mode_networks$proj1)), "C:\\Users\\Shivendra

Rai\\OneDrive\\Thesis\\Betweenness Centrality (Directors).xlsx")

write.xlsx((closeness(one_mode_networks$proj1)), "C:\\Users\\Shivendra

Rai\\OneDrive\\Thesis\\Closeness Centrality (Directors).xlsx")

6. Metrics of corporations network

library('igraph')

affiliation_data <- read.csv(file.choose(),header=TRUE,row.names=1)

affiliation_matrix <- as.matrix(affiliation_data)

affiliation_network <- graph.incidence(affiliation_matrix,mode=c("all"))

one_mode_networks <- bipartite.projection(affiliation_network)

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#degree(one_mode_networks$proj2)

betweenness(one_mode_networks$proj2)

#closeness(one_mode_networks$proj2)

#transitivity(one_mode_networks$proj2, type = c("globalundirected"), vids = NULL, weights =

NULL, isolates = c("NaN", "zero"))

#edge_density(one_mode_networks$proj2, loops = FALSE)

library(xlsx)

#write.xlsx((degree(one_mode_networks$proj2), "C:\\Users\\Shivendra

Rai\\OneDrive\\Thesis\\Degree Centrality (Corporations).xlsx")

#write.xlsx(((betweenness(one_mode_networks$proj2)), "C:\\Users\\Shivendra

Rai\\OneDrive\\Thesis\\Betweenness Centrality (Corporations).xlsx")

#write.xlsx((closeness(one_mode_networks$proj2)), "C:\\Users\\Shivendra

Rai\\OneDrive\\Thesis\\Closeness Centrality (Corporations).xlsx")