Does Antitrust Enforcement Against Interlocking Directorates Impair Corporate Governance?

Does Antitrust Enforcement Against Interlocking Directorates Impair Corporate Governance?

Dain C. Donelson

University of Iowa

Christian M. Hutzler

University of Iowa

Adrienne Rhodes

University of Iowa

Abstract

This study examines how recent government antitrust enforcement efforts led to widespread director resignations based on potentially illegal interlocking directorates (“competitor interlocks”). Following the initial regulatory enforcement announcement, we find that competitor-interlocked directors were 48.1% more likely to resign than other directors. These resigning competitor-interlocked directors were more likely to leave smaller firms and were replaced by individuals with significantly less experience in the relevant industry, potentially weakening corporate governance. This transformation of boards is likely to affect firm performance because competitor-interlocked directors with more industry experience have historically produced higher profit margins at their firms. Our findings suggest these higher margins are due to superior advice on research and development investment. Notably, our results are not consistent with competitor-interlocked directors colluding on price or committing other antitrust violations. The loss of these advisory benefits is likely to be difficult to replace given the shortage of qualified directors.