Director interlocks and cross-cultural impact on strategies affecting shareholder–creditor conflicts

Abstract

Purpose Director interlocks, with their extended resources and shared experiences, have the potential power to go beyond the basic role of providing advice and monitoring the activities of an organization. Interlocked directors can have a cross-cultural role in manipulating corporate choices and strategies in several areas, including capital structure, based on learned behavior in their internal company. Shareholders and creditors are the two main capital providers for a company. However, their risk return horizons are very different, and policies that benefit one group may not be optimal to the other. Interlocks can act as carriers of sub-par practices that affect the behavior of several organizations. Such transactional and relational activities may increase short-term value for equity shareholders, but increase the risk for the creditors. The purpose of this paper is to examine cross-cultural effects of interlocks on corporate strategies that affect this essential agency relationship. Design/methodology/approach This paper surveys the extant literature on board interlocks, board practices, equity valuation and credit risk to develop a link between such interlocks and creditor protection. Based on a brief survey of the central concepts of governance and the role of directors, this paper then provides various propositions on the role of interlocking directorships and their effect on the shareholder–creditor agency problem. Findings Director interlocks, through their linked common practices, have the potential to increase or worsen shareholder–creditor conflicts by magnifying strategic practices like short-termism, earnings management or through its effects on chief executive officer compensation. Such cross-cultural effects persist across ownership structures and cultural differences in governance. Research limitations/implications The paper is not an empirical study of the conflict. This paper uses a literature review to arrive at propositions that may impact shareholder–creditor conflicts. Practical implications Several studies have shown cronyism and the dense corporate network has been a large factor in the financial crisis that affected both shareholders and creditors. As the influence of creditors grows with the current availability, and therefore increase in debt levels, this conflict can be magnified through homophily inherent in interlocks. For an organization to be successful in its role of protecting all stakeholders, especially the two major providers of equity capital, factors that cause conflicts must be taken into account while developing the tenets of governance policies and, on a regular basis, during the strategic planning process within the organization. Regulations affecting interlocks, including governance policies, must therefore take into account such influences. Social implications Board interlocks act as channels of information between companies, creating a social network where processes and polices are shared and implemented as defined by the concept of homophily. Such management actions reduce both the quality of information available to creditors and their monitoring capabilities. This juxtaposition of shareholder and creditor interest can, therefore, be worsened by director interlocks. Originality/value Prior literature has not specifically linked director interlocks and their mutual impact on the culture and strategy of linked corporations to the shareholder–creditor conflict.

Busy boards and accounting conservatism – an Australian perspective

“…For instance, the presence of directors who belong to multiple boards concurrently results in better earnings quality (Hashim and Abdul Rahman, 2011), less earnings management (Yang and Krishnan, 2005; Tham et al , 2019) and less likelihood of financial statement fraud (Beasley, 1996). By contrast, multiple directorships are linked to inferior financial reporting quality (Ferris and Liao, 2019), greater levels of earnings management (Baatour et al , 2017; Ramaswamy, 2019) and greater probability of financial statement fraud (Beasley, 1996). Although much research has examined the link between busy directors and quality of financial reporting, to the best of our knowledge, no existing research has yet explored the potential association between directors with multiple directorships and accounting conservatism.…”

“…For instance, many prior studies find that firms with more busy directors exhibit better earnings quality, less earnings management and financial statement fraud (Beasley, 1996;Yang and Krishnan, 2005;Hashim and Abdul Rahman, 2011;Tham et al, 2019). Other papers (Baatour et al, 2017;Ferris and Liao, 2019;Ramaswamy, 2019), however, report the opposite. Although numerous studies have examined busy directors' effectiveness, to the best of our knowledge, no research has assessed the potential association between directors' busyness and accounting conservatism.…”

Board reforms and the choice of debt: international evidence

“…In contrast to dispersed public debtholders, interventions by block creditors (such as banks) exacerbate value-impairing conflicts of interest between shareholders and debtholders (Jensen and Meckling, 1976; Rajan, 1992; Houston and James, 1996; Gorton and Kahn, 2000; Ramaswamy, 2018; Mazumder and Rao, 2023). Private block lenders such as banks tend to use their superior information access and negotiation power to extract information monopoly rents from borrowers (Diamond, 1991; Rajan, 1992; Houston and James, 1996).…”

Does board interlock control high-tech firm performance? Evidence from ASEAN's Growth Triangle Countries

“…In addition to high growth potential, high-tech firms are characterized by inherent uncertainty in the company regarding their firm value, where this value depends on unproven or uncharted future results (Kohers & Kohers, 2000). As a result of the combination of characteristics they have, risk-taking is needed by high-tech firms (Saeed et al, 2019) In the corporate governance system, the executive board is a very important position, in which making company policies, making decisions and monitoring the majority of company activities is carried out by the executive board (Ramaswamy, 2019). It is not uncommon for companies to practice interlocking directorate considering the important role played by directors in influencing company performance.…”