The Money Center Cannot Hold: Commercial Banks in the U.S. System of Corporate Governance

Abstract

the Arts at the University of Michigan. We thank Mark Granovetter, Harry Makler, Christine Oliver, and the anonymous ASQ reviewers for comments on previous versions of this paper, and seminar participants at the University of Michigan, Northwestern University, and Stanford University for their insightful suggestions. We are grateful to Kathleen Much and Linda Johanson for editorial help.This paper examines how the place of banks in the intercorporate network has changed as a result of their decreasing role as financial intermediaries in the U.S. economy. An analysis of comprehensive data on the boards of the fifty largest banks and their connections with the several hundred largest nonbank corporations from 1982 to 1994 shows that the centrality of banks has significantly declined as executives of major corporations, particularly those representing central firms, joined bank boards at a substantially lower rate. Declining centrality reflects a strategic choice on the part of the banks: as the returns available from lending to major corporations have declined, the largest banks have moved into other forms of business and reduced their recruiting of centrally located directors. We conclude with a discussion of the role of financial intermediation in shaping the social organization of the economy.'In corporate governance, the economic and the social are inextricably linked. Board members are typically recruited from among friends and acquaintances of current directors. Conversely, relations that begin as economic ties often become overlaid with social relations, and the resulting social structures shape corporate decision making. Board interlocks, created when two firms share a director, may reflect a number of economic and social influences ranging from coopting powerful suppliers to extending relations from golf course to boardroom. Regardless of their origins, they lend a social organization to the economy that in turn influences economic and political decisions (Mizruchi, 1996). Chief Executive Officers (CEOs) get higher salaries when their outside directors are well paid (O'Reilly, Main, and Crystal, 1988), and firms adopt takeover defenses or engage in takeovers themselves when they share directors with other firms that have done so (Davis, 1991; Haunschild, 1993). Corporations tied to the same financial institutions make the same sorts of political contributions (Mizruchi, 1992). More heavily interlocked firms are opinion leaders whose actions are more likely to be imitated (Davis and Greve, 1997), while they are also more susceptible to normative pressure in the social system of corporations (Useem, 1984). Specific interlocks, and the overall configuration of the interlock network, thus shape economic decisions in important ways. Researchers' burgeoning interest in the role of board interlocks in corporate governance attests to the economic influence of those social ties, but less attention has been paid to changes in the intercorporate network in recent years that may affect the prominence of one central in...

Corporations, Classes, and Social Movements After Managerialism

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State activism and the hidden incentives behind bank acquisitions

“…Owing to strong public support for a geographically limited banking industry, restrictive banking laws were popular in many states. But, because of banks importance to the state economy, as well as their informal power (Mizruchi, 1992;Davis and Mizruchi, 1999), states also had an incentive to devise means to allow banks to circumvent these restrictions to facilitate their expansion. Economies of scale allow larger banks to provide a much wider array of services at lower rates; therefore, states bent on promoting local economic growth may be invested in promoting bank consolidation within their borders.…”

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Industry consolidation and network evolution in U.S. global banking, 1986–2004

“…The directorate network became diffuse and decentralized as banks reduced the size of their boards and their recruiting of centrally located directors. For the first time since the rise of publicly-traded companies in the U.S., banks were no longer the center of the directorate network (Davis & Mizruchi, 1999).…”

“…As banks retreated from the corporate lending business during the 1980s and 1990s, they also shrank their boards and curbed their traditional practice of recruiting "celebrity directors" (Davis & Mizruchi, 1999). Having a well-connected board was a consequence of pursuing a strategy of lending to business.…”