UK: Interlocking Directorates: Looking For Signs Of Collusion, Conflict Of Interest And Overboarding

Last Updated: 11 October 2019
Article by Rob Alport

Conflicts of interest, collusion and the overboarding of directors on publicly listed companies have been known to grab the attention of the biggest media outlets.

As many companies are unfortunately aware, this unwanted attention raises questions, creates risk to a company's reputation and can ultimately affect the value of company shares. However, there is a way that all of this can be avoided right from the start.

Interlocking directorates are nothing new. It occurs when two firms share a common director, and the tie or connections that he/she creates is also referred to as a board interlock.

Although lawful and not illegal, it does raise questions about the independence of decisions made in the boardroom and can be seen by the U.S. Federal Trade Commission (FTC) as an anti-competitive practice prompting an investigation.

As stated by the FTC it is their responsibility to "take(s) action to stop and prevent unfair business practices that are likely to reduce competition and lead to higher prices, reduced quality or levels of service, or less innovation".

An example of where interlocks became a concern for the FTC was during 2009. During this year Apple's director Arthur Levinson abruptly resigned his seat on Google board following pressure from regulators. Following the announcement FTC's chairman praised Google and Levinson "for their willingness to resolve our concerns without the need for litigation".

That same year also saw Google's Eric Schmidt resign from Apple's board, three years after accepting a seat.

It's important to mention that prior to these resignations, the FTC had been looking into whether interlocking directorates between Google and Apple raised competitive issues. These competitive issues may have violated U.S. antitrust laws.

The only safe way for companies to avoid situations of interlocking directorates that prompt investigation is by having oversight of every board members' seats on other companies. By gaining this oversight companies can instantly see any risks or red flags, which are likely already on the radar of investors with governance issues coming under greater scrutiny of late.

This is also hugely important when a company makes new appointments to their board, or an existing director takes on additional responsibilities. Without oversight, companies might be opening themselves up to governance risk and wider liability.

CGLytics online solution provides instant information about a company's board composition, director skills and expertise, as well as interlocking directorates for corporations, investors and advisors.

Interlocking directorates are common. It is not new. Most directors will have other board positions across one or more industry, however with highly confidential information that they are privy to, it is vital to identify potential conflicts of interest.

That being said, interlocking directorates can be indicators of the following:

  • Collusion: Two or more members of the board holding appointments on another board and using this connection to influence the decision-making away from the best interests of either company.
  • Conflict of interest: Directors with specific industry experience will often sit on boards that could be in competition. This can lead to questions from investors on if these board members are performing their duties in the best interests of the company.
  • Overboarding: Directors must have the adequate time to devote to their duties of providing oversight for a company. US Proxy Advisory standards state that a director is considered to be overboarded when he/she is a non-executive director and sits on more than five boards, or he/she is an executive director and sits on more than three boards.
  • Chairmen of the board are expected to spend double the amount of time as a NED and are considered overboarded with one chair and three other NED roles.

By identifying whether a board member is also on the board of a potential competitor (sometimes inevitably in niche markets where experience is necessary), or if two or more members of the board sit on the same board of another company, is vital for the nomination and governance committees to be aware and ensure that they have the correct policies and procedures in place, as regulators, investors and activists are constantly monitoring.

Think Like an Activist

Activist investor campaigns are continuing to show a year-on-year increase with more focus being placed on the composition of the board and the board members existing commitments. Leading investors are voting against the re-appointment of directors who are perceived to be overboarded. In addition, never before has there been as much scrutiny on the skills a director brings to the board.

The CGLytics platform offers oversight of board effectiveness of listed companies worldwide. It helps companies, their boards and stakeholders to promote good governance through monitoring director interlocks and indicate any potential red flags. Boards can identify potential skills gaps and conduct proactive succession planning from a database of more than 125,000 director profiles drawn from 5,500 publicly listed companies across 40 indexes and 24 countries.

Curious to see how companies are viewed through the eyes of investors? Click here

RESOURCES

https://www.ftc.gov/enforcement/anticompetitive-practices

https://www.reuters.com/article/us-google/arthur-levinson-quits-google-board-appeasing-ftc-idUSTRE59B2R120091012

https://techcrunch.com/2009/08/03/google-ceo-eric-schmidt-resigns-from-apple-board-surprised/

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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