姝 Academy of Management Review
2010, Vol. 35, No. 2, 246–264.
THE ROLE OF THE INTERLOCKING DIRECTOR
AND BOARD RECEPTIVITY IN THE DIFFUSION
OF PRACTICES
CHRISTINE SHROPSHIRE
University of Georgia
Board interlocks are frequently examined as conduits of practices between firms. I
propose that variance among the individual directors who create these linkages
affects the likelihood information is transmitted across them. Further, I discuss organizational characteristics that shape how receptive a board is to the diffusion of
practices. I conceptualize a model to investigate, first, which directors are more likely
to transmit experience or knowledge about organizational practices and, second,
what factors influence how that information is received.
A board interlock is created between firms
when an executive or director at one firm joins
the board of another (Burt, 1980; Mizruchi, 1996).
Following a study of reciprocal interlocks (two
firms with employees sitting on each other’s
boards), Hallock (1997) concluded that the prevalence of interlocks is too high to be random but,
rather, reflects meaningful organizational
mechanisms (see also Fich & White, 2005). One
reason board interlocks are so popular is that
they are a credible and low-cost channel of information and communication across firms
(Haunschild, 1993). As a result, interlocking directorates are a way to manage environmental
uncertainty, gain access to diverse skills and
resources, facilitate communication across
firms, and provide legitimacy for the focal firm
(Pfeffer & Salancik, 1978).
Board interlocks are commonly studied as
mechanisms for the dissemination of practices
between interlocked firms, including structures,
strategies, systems, and processes. Because directors primarily advise but may also initiate
and articulate corporate strategy (Johnson,
Daily, & Ellstrand, 1996), they are often carriers
of knowledge from an outside firm. As examples, scholars have documented the diffusion of
organizational structures, such as the multidivisional form (Palmer, Jennings, & Zhou, 1993), investor relations departments (Rao & Sivakumar,
1999), and board independence (Westphal &
Zajac, 1997) across interlocked firms. Studies
have also shown that interlocked firms share
similar strategies and behaviors, including acquisitions (Haunschild, 1993), diversification
(Chen, Dyball, & Wright, 2009), poison pills and
golden parachutes (Davis, 1991; Davis & Greve,
1997), defections between stock exchanges (Rao,
Davis, & Ward, 2000), and decision processes
(Westphal, Seidel, & Stewart, 2001). Despite the
preponderance of interlock studies on constructive outcomes, diffused practices are not necessarily legal or beneficial to the firm, as demonstrated by the viral diffusion of stock option
backdating (Colvin, 2006) and financial misrepresentation and restatement (Fich & Shivdasani,
2007).
Many interlock studies code diffusion as the
adoption of a practice from an interlocked firm,
thus assuming the diffusion of information
about a practice as well as its subsequent implementation. To integrate the vast and disparate interlock literature, I broadly define the diffusion of practices from an interlocked firm to
include the transfer and receipt of knowledge
relevant to issues on the board’s agenda. This
definition captures awareness, not just adoption, of practices. Whether the focal firm eventually adopts a specific practice is an interesting
theoretical extension of the current model. I use
the term diffusion of practices inclusively to capture stepwise components of (1) knowledge
transfer by an individual director and (2) receptivity of a focal board and organization.
In a large body of research scholars have investigated the spread of structures or practices
across board interlocks, yet none have consid-
I am grateful for helpful comments and feedback from
associate editor Mason Carpenter, Andrew Ward, and three
anonymous reviewers.
246
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ered the mechanism underlying that exchange.
That is, existing research treats interlocks as
homogeneous. I argue that diffusion between
organizations depends on critical inputs from
individuals rather than on anthropomorphized
firms that imitate one another. I present a holistic perspective on the benefits of interlocking
directors by proposing which individual directors carry interorganizational information, as
well as which boards are most receptive to director experience at outside firms. I ask two
questions. First, are some directors more likely
to transmit knowledge across firms than others,
and, if so, which individual characteristics predict this? Second, what factors make some
boards more receptive to the diffusion of practices via interlocks than others?
To explore these questions I review the board
interlock literature, including work from institutional, resource dependence, and social network
traditions. For the first question I consider individual director characteristics that affect the
likelihood of knowledge transfer between interlocked firms. To explore the second question I
discuss characteristics of the board and the firm
that make them more receptive to the diffusion
of practices from outside the organization. Formulating my model in this manner is based on
the prediction that, first, some interlocking directors possess and share knowledge and, second, some boards and firms are more receptive
to that information.
I limit my discussion to practices that fall
within the realm of board business—that is, decisions that are reasonably expected to involve
board consideration and approval. The role and
influence of the board on organizational outcomes have been the subject of much theory and
discussion. Finkelstein, Hambrick, and Cannella note that “board characteristics affect
such fundamental choices as acquisitions, diversification, divestitures, research and development spending, strategic change, executive
compensation, and, of course, CEO dismissal”
(2009: 11). Primary board functions are monitoring and resource provision (Hillman & Dalziel,
2003), which include such responsibilities and
activities as selecting, compensating, and monitoring the CEO and other senior executives (including succession planning); ensuring audit
and regulatory compliance; and overseeing corporate strategy and financial performance (National Association of Corporate Directors, 2005).
247
Since boards provide oversight on strategic decision making (Baysinger & Hoskisson, 1990),
board information can significantly affect firm
performance (McDonald, Westphal, & Graebner,
2008; Westphal, 1999).
Some studies have established that information flows between firms through director interlocks (e.g., Davis, 1991; Haunschild, 1993), while
other studies have maintained that interlocks
may not matter because boards have varied influence over strategic outcomes (e.g., Golden &
Zajac, 2001) or because directors defer to CEOs
in order to gain future board appointments (e.g.,
Westphal & Stern, 2007). These contrasting
views point to the complexity of knowledge
transfer between firms, a process of diffusion
that unfolds as a director has and shares information and a focal board receives it. I fill this
gap in the literature by identifying the mechanism for the diffusion of practices as the individual interlocking director.
Propositions focused on the individual director as the mechanism for diffusion provide the
first contribution of this theory. The multilevel
orientation also enhances our understanding of
how the diffusion process between organizations develops across the individual, group, organization, and network levels. This paper responds to an interlock question long debated in
the sociological literature of “what flows across
the links” (Stinchcombe, 1990: 381; see also
Mizruchi, 1996), as well as to recent calls for research on board influence on organizational outcomes (Finkelstein et al., 2009). Given that prior
work on board interlocks assumes their homogeneity, interlocks have been treated as though
they uniformly transmit information between
firms. However, recent studies have begun to
explore the individual or node in the intercorporate network. Kang (2008) has suggested the importance of interlocking directors’ individual
characteristics, given that interlocks act as
channels for both positive and negative outcomes to diffuse between firms. Chen and colleagues have called for research on board interlocks and their influence on strategic choice to
“consider directors’ knowledge, relevant expertise, availability, and length of tenure” (2009:
208). Extending findings that board interlocks
serve “as a conduit to disseminate ideas and
innovations” (Galaskiewicz & Wasserman, 1989:
456), I theoretically examine variation in the diffusion of practices by considering factors at
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multiple levels, including conditions that influence receptivity of the board to outside experience, as well as the qualitative nature of the
director creating the interlock.
The paper is structured as follows. First, I review the literature on board interlocks, which
draws on institutional, resource dependence,
and social network theories. This overview provides the background for the next section, where
I explore which individual characteristics make
a director more likely to carry information between firms. From there I turn to the board and
organizational characteristics that influence
receptivity to knowledge about practices
shared via interlocks. I conclude with a discussion of the implications of the theory for
practice and the opportunities that it creates
for future research.
BOARD INTERLOCKS AND THE DIFFUSION
OF PRACTICES
In a large body of literature researchers have
examined the nature of board interlocks; this
literature includes foundational work on how
these linkages convey information regarding innovation and strategy (Bazerman & Schoorman,
1983; Haunschild, 1993; Mizruchi, 1996). Scholars
have invoked a variety of theories to explain the
existence and impact of interlocking directors.
Rather than relying on one lens, I review and
integrate findings across the corporate governance literature to propose a multilevel theory
of interlocking directors and the diffusion of
practices. As defined above, the diffusion of
practices reflects a stepwise process of knowledge transfer by an individual interlocking director and receptivity of a board of directors.
The tradition of research on board interlocks
comes largely from institutional theory, which
suggests that the imitation of practices across
interlocked firms follows normative, coercive,
and mimetic pressures. For example, research
on acquisition rates and premiums suggests
that information transmitted via interlocks is
significantly more influential than that available from other information sources due to normative aspects (Haunschild & Beckman, 1998).
Similarly, Rao and Sivakumar (1999) used institutional theory to investigate coercive and mimetic conditions leading to the establishment of
investor relations departments. Their results
showed that social activists and financial ana-
April
lysts act to influence the creation of these
boundary-spanning departments through legitimacy pressures, and the establishment of these
structures is then facilitated by board interlocks.
Other scholars have concluded that firms observe the behaviors of peer companies and imitate their choices for new market entry and expansion (Baum, Li & Usher, 2000; Haveman,
1993). Institutional theory provides a compelling
perspective on board interlocks, yet research in
this tradition has been limited to imitation and
the role of legitimacy.
While much corporate governance research
has focused on the role of directors in controlling diverging preferences of agents and principals, a resource dependence perspective suggests that directors also help the organization to
deal with uncertainty associated with strategic
decisions (Galaskiewicz & Wasserman, 1989;
Pfeffer & Salancik, 1978). Through a resource
dependence lens, directors help to manage complexity by scanning the business environment
and sharing advice (Rindova, 1999; Useem, 1984),
advice often gleaned from experience on other
corporate boards (Davis, Yoo, & Baker, 2003; Richardson, 1987). Podolny (2001) described such
linkages as conduits or pipes for information
and resources. In particular, interlocking directors can provide detail and insight as to the
design and implementation of practices in
other firms that cannot be easily observed by
outsiders. Through their positions, board
members have both access to timely information and channels to needed resources (Zahra
& Pearce, 1989) so that “interlocks play a crucial role in this process of information acquisition and interpretation” (Rao et al., 2000: 276).
Gaining insight through exposure in multiple
firms gives interlocking directors the opportunity to contribute their firsthand knowledge of
practices elsewhere.
Resource dependence theorists also reason
that environmental turbulence and complexity
affect the value of boards and interlocking directorates (Keats & Hitt, 1988). For example, under conditions of increasing uncertainty, boards
tend to be smaller but have more interlocking
directors, especially among high-performing
firms (Boyd, 1990). Carpenter and Westphal
(2001) found that a firm’s environment affects the
relevance of directors’ outside board experience
and the likelihood that directors contribute to
strategic decision making.
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Interlock studies from this perspective imply
that directors help the firm to navigate uncertainty through their external connections, but
existing theory fails to explicate individuallevel factors (Davis et al., 2003). In collapsing
differences among directors to the board level,
Davis and colleagues suggest “theoretical and
practical ramifications of this neglect” (2003:
318). Ignoring variance may mask important relationships, such as the effect of board independence on firm performance. Thus, as with work
in a related institutional vein, none of the resource dependence– based inquiries examine
how the individual director affects the likelihood of interfirm diffusion. Prolific scholars in
the area recognize that their findings “show that
we need to reconsider the implicit assumption
that all interlocks share uniform importance”
(Haunschild & Beckman, 1998: 842).
A third theoretical perspective—social network theory—is also commonly invoked to understand interlocking directorates. Social network theorists recognize that corporate actions
are embedded in social networks, and the patterns of connectedness and relationships affect
the behavior of the network actors (Granovetter,
1985). Research supports the influence of social
embeddedness on organizational behavior, and
interlock studies establish the role and importance of interlocks in the process of embeddedness (Davis, 1991; Mizruchi, 1996: Rao et al., 2000).
The resulting network of information is a powerful resource because interfirm linkages promote the development of capabilities to learn
adaptive responses (Kraatz, 1998), as well as
board-level schema for decision making (Westphal et al., 2001). Studies in this tradition reveal
differences among inside and outside director
influence on strategic outcomes (e.g., Geletkanycz & Hambrick, 1997; Westphal & Fredrickson, 2001) and suggest varying positions or experiences and differing commands of social
influence among interlocking directors. Davis
and colleagues call the prior experience of directors “the raw material of board decisionmaking” (2003: 305), and Phan, Lee, and Lau
(2003) suggest that research focusing on the individual may help us to understand when an
interlock is more or less influential.
Across these theoretical lenses, the research
fundamentally suggests that interlocking directors disseminate information across firms (Bazerman & Schoorman, 1983; Geletkanycz & Ham-
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brick, 1997). However, even beyond the
management literature, our understanding of
the process side of diffusion remains incomplete. The sociological literature on interlocks
highlights the process of embeddedness, cooptation, and the flow of information, as well as
how interlocking directors alleviate critical resource dependencies through these linkages to
improve firm performance (Mizruchi, 1996;
Pfeffer, 1972; Zald, 1969). Alternatively, research
on interlocks from the finance literature tends to
focus on the transfer of discrete practices, such
as executive compensation (e.g., Hallock, 1997),
and on the effect of multiple board linkages
individually and collectively at the focal board
(e.g., Fich & Shivdasani, 2007; Perry & Peyer,
2005).
Noting the lack of consideration of individual
director heterogeneity in earlier work on interlocking directorates among institutional, resource dependence, and social network scholars
across disciplines, I now turn my attention to
when interlocking directors are more likely to
have and contribute their experience in the
boardroom, and I then consider when that outside knowledge is more likely to influence board
decision making.
INDIVIDUAL-LEVEL PREDICTORS OF
KNOWLEDGE TRANSFER
In multiple country environments the population of directors remains a small-world phenomenon of highly connected individuals, many of
whom are executives of other firms (Conyon &
Muldoon, 2006). Preference for recruiting directors from well-connected boards helps to maintain the small-world nature of interlock networks (Davis et al., 2003) and reflects the value
of individual director linkages in managing external uncertainty and resource dependencies.
By definition, interlocking directors are affiliated with at least one other firm, which signals
some generic exposure to how other firms operate and follows the resource dependence model
of board interlocks as a means to manage critical dependencies. The likelihood that given directors possess and contribute their relevant
experiences depends on their individual characteristics. First, I discuss individual-level predictors of knowledge transfer through interlocks as
representative of an individual’s motivation to
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provide such information and its potential influence in the boardroom.
Motivation of the Interlocking Director
Institutional, resource dependence, and social
network theories point to individual director
characteristics that affect the likelihood of diffusion of practices from an interlocked firm. Recognizing the value of outside experience and
contributing relevant information to the current
boardroom discussion first depend on the individual’s motivation to do so. I begin with the
microlevel intrapersonal characteristics of the
interlocking director and work toward interpersonal factors of the director’s ability to access
influence and facilitate diffusion.
Organizational identification. In several
streams of corporate governance research,
scholars have explored factors that differentiate
the motivation of directors to fulfill their board
functions (e.g., Hillman, Nicholson, & Shropshire,
2008; Westphal & Stern, 2007). Any two directors,
no matter how similar in demographics or structural positioning, are unlikely to have identical
voice or influence in board decisions. One cause
may be their differential inclination to contribute to the boardroom discussion by sharing their
outside experience. Some directors may develop
idiosyncratic preferences for strategies observed in other firms and push for similar practices at the focal board (Westphal et al., 2001).
Rather than assuming that two interlocked firms
will automatically learn about one another’s
practices as a result of an interlock, we need to
recognize the interlocking director’s motivation
for transferring that knowledge.
Identity is a powerful mechanism for understanding how individuals behave, especially
when similar individuals act differently in a
given context (Ashforth, 2001; Stryker & Serpe,
1982). The strength of identification with a particular social identity reflects the extent to
which an individual defines himself or herself
by that social group membership (Mael & Ashforth, 1992), which, in turn, provides guidelines
and norms for behavior in a particular social
context. Social identity theorists argue further
that an identity’s behavioral influence depends
on its relevance in the given setting (Ashforth &
Mael, 1996). Thus, individual behavior is shaped
by an identity most in contexts where the identity is salient and identification is strong.
April
Hillman and colleagues (2008) linked contextually relevant director identities with the fulfillment of board functions, including monitoring
and resource provision. They argued that identification with the organization motivates the
director to be engaged and to share relevant
experience in the boardroom. The salience of
focal organizational identification, or “the degree to which a member defines himself or herself by the same attributes that he or she believes defines the organization” (Dutton,
Dukerich, & Harquail, 1994: 29), shapes an individual’s engagement in the boardroom. If a director only weakly identifies with the focal organization, he or she will be less likely to relate
outside experiences to inform the discussion at
hand. Strong identification with the focal firm,
however, will lead a director to seek the best
outcomes for the organization, including contributing personal and relevant experience to
shape the current boardroom discussion. Identification with the organization has been found to
predict cooperation, prosocial behaviors, and individual motivation (e.g., Ashforth & Mael, 1989;
Foreman & Whetten, 2002; Golden-Biddle & Rao,
1997), suggesting that the more a director identifies with the focal firm, the more likely he or
she is to act in the interests of the firm.
As noted above, a variety of information has
been found to diffuse via interlocks, including
some related to unethical or destructive practices. However, with stronger focal firm identification, an interlocking director is more likely to
search for opportunities to inform and contribute
to the focal firm. Regardless of the nature of the
practice and independent of promoting adoption
of a specific practice, directors motivated to help
the firm are more likely to reflect on their interlocked firm experience and to share previous
exposure relevant to current issues on the
board’s agenda, even stock option backdating
(Colvin, 2006). In expanding our view of the diffusion of practices, I consider the initial step of
transfer of information about practices from
linked firms, rather than their ultimate adoption.
Proposition 1: The likelihood of
knowledge transfer increases with
the strength of the interlocking director’s identification with the focal
organization.
Ingratiatory behavior toward the focal board.
Strength of organizational identification moti-
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vates directors to be engaged and to fulfill
boardroom functions, thereby facilitating knowledge transfer from a linked firm. In addition to
this motivation, a director’s desire for prestige
and career success, as well as self-preservation
and recognition as a corporate director, may
motivate specific behaviors to gain additional
outside directorships. Conscientious execution
of monitoring and resource provision duties may
create tension for a director who wishes to capitalize on opportunities in the director labor
market (Hillman & Dalziel, 2003; Westphal &
Khanna, 2003). Specifically, relaying advice and
counsel from outside experience is a resource
provision behavior that may increase the likelihood a director will gain new appointments
through board connections (Carpenter & Westphal, 2001; Westphal & Stern, 2007). However, a
director may also benefit in the market for corporate directors by engaging in a very different
set of behaviors. Rather than sharing knowledge
from outside experience, an interlocking director may suppress that information in deference
to the CEO or other board members.
Westphal and Stern (2006, 2007) have investigated how ingratiation affects an individual’s
standing within a corporate board. Ingratiation
includes such interpersonal influence behaviors
as flattering others, rendering favors, or conforming one’s opinions to validate another’s
(Gordon, 1996; Westphal & Stern, 2006). By acting
in deference and ingratiating oneself to other
board members, a director may gain recommendations for new board appointments. Provision
of advice and counsel versus ingratiation represents a conflict of motivation for directors to
bring their outside experiences to bear on the
boardroom discussion. Jones (1964) called this
tension “the ingratiator’s dilemma,” which, as
applied here, may diminish the likelihood that a
director will share relevant knowledge or, if he
or she does share it, that the information will be
presented influentially.
While flattering fellow board members at the
focal firm may facilitate new board appointments, this behavior also will decrease the ingratiatory director’s influence on the focal board
(Westphal & Stern, 2007). In other words, flattery
or favors may help a director garner invitations
to additional outside boards, but these behaviors will also minimize the director’s standing
and influence inside the focal boardroom. Ingratiatory behaviors suggest a submissive and
251
compliant director, one who is more likely to be
a passive board member. In contrast to some
individual characteristics that motivate directors to share their experiences effectively, ingratiation instead diminishes the likelihood of
knowledge transfer and mitigates director influence on the board as a whole.
Proposition 2: The likelihood of knowledge transfer decreases with the interlocking director’s ingratiatory behavior on the focal board.
Ability to Facilitate the Diffusion of Practices
Beyond individual motivation, board member
characteristics differentiate the likelihood that a
given director will possess a store of relevant
knowledge to draw upon. Focusing at the individual level, I explore the question, “Which directors are more likely to transmit experience or
information?” Exposure to a portfolio of strategic
knowledge through outside experience reflects
a given director’s ability to bring relevant information from an outside firm to the focal boardroom. These factors progress from within-board
to across-board characteristics of the interlocking director as indicators of an individual’s ability to transfer knowledge.
Access to the focal firm CEO. Identification
and ingratiation suggest behavioral motivators
for interlocking directors to share or withhold
information drawn from outside experience.
Other interpersonal factors also have a profound effect on the influence of that information.
Directors with access to the CEO may face a
boardroom audience far more open to their experience and knowledge from other firms. Directors sharing similar backgrounds with the CEO
will have more opportunity to influence decisions toward their favored choices and outcomes (Golden & Zajac, 2001), given a greater
sense of trust in their advice and counsel, especially in their area of expertise (Westphal, 1999).
These trusted individuals are more likely to
shape boardroom opinions and enjoy access to
and influence with management.
CEOs rely on their advice networks, particularly leaning on individuals with similar backgrounds or external ties (McDonald & Westphal,
2003). Social ties such as shared membership in
clubs, outside boards, or philanthropic organizations facilitate access to channels of influence
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(Haunschild & Beckman, 1998; Useem, 1984).
These network connections, such as joint membership in the Business Roundtable, may help to
socialize directors into behavioral norms of the
role, including sharing advice from outside experiences (Palmer, 1983).
The CEO can further encourage a board to
heed knowledge shared by a given interlocking
director. Similarity not only establishes affinity
(Tsui, Egan, & O’Reilly, 1992) but also increases
influence (Cialdini, 1995). The similar experiences that develop cognitive overlap between a
CEO and an interlocking director encourage the
CEO’s endorsement of shared knowledge, granting that information more sway in boardroom
discussions.
Proposition 3: The likelihood of knowledge transfer increases with the interlocking director’s access to the CEO of
the focal firm.
Minority director experience. Research shows
that a demographic majority disproportionately
influences decision outcomes in boards of directors and that minority directors tend to be less
engaged in board discussions (Westphal & Milton, 2000; Westphal & Stern, 2006). The power of
the majority is compounded by the outgroup status and stereotyping of minority directors, undermining the value of their information. Many
demographic characteristics could signify minority status; indeed, a director could be a minority member in one categorization and a majority member in another. Westphal and Milton
(2000) considered multiple dimensions of minority status, including race, gender, educational
degree, and functional and industry background, and found that each of these individual
factors interacts with prior minority experience
to affect the level of influence a director wields
over board decisions. They found that previous
experience as a minority director has a direct
effect on current minority influence at the focal
board. Thus, I suggest that directors who have
experience swaying board opinion from a minority viewpoint in other groups are better
equipped to utilize that experience toward the
focal board’s decision outcomes.
Beyond the drivers that motivate a director to
contribute knowledge, how information is
shared also affects the likelihood of diffusion.
Self-categorization and ingroup/outgroup biases shape the perception of shared information
April
in such decision-making groups as boards of
directors (Tsui et al., 1992; Williams & O’Reilly,
1997). These biases may lead majority members
to devalue or disregard input from minorities
(Mackie, 1987), although demographic minorities
who overcome the outgroup bias can lead the
group to generate more creative alternatives
and discuss broader implications of various decisions and practices (Crano & Chen, 1998; Nemeth, 1986). By highlighting commonalities and
creating new and shared ingroups, minority interlocking directors may position the information or experience from their linked firms to
have more influence on focal board outcomes.
Westphal and Milton (2000: 371) found that minority directors’ experience in winning over a
majority boardroom helped them “learn how to
frame their message in a way that makes other
board members receptive,” garnering influence
in board discussions.
Proposition 4: Among minority directors, the likelihood of knowledge
transfer to the focal firm increases
with previous minority experience of
the interlocking director.
Committee membership at the focal firm.
Finkelstein and colleagues (2009) outlined the
growing proportion of board work completed via
committees, noting that especially in the postEnron era of governance activism, boards
charge committees with handling critical tasks
and doing so thoroughly. Board decisions increasingly reflect information and suggestions
that originate in board committee meetings
(Peterson & Philpot, 2007), which likely involve
those directors with the greatest expertise in a
given content area (Bilimoria & Piderit, 1994;
Kesner, 1988). Whether the knowledge held by
an interlocking director reaches the boardroom
discussion depends on that individual’s proximity to the relevant conversations and decision
outcomes. For example, executive pay decisions
require compensation committee approval, so
whether CEO pay at one firm will resemble that
of an interlocked firm is likely contingent on
participation of the interlocking director in compensation committee deliberations.
Research on board committees is still emerging, but the literature has consistently underscored the importance of committee assignments to the board’s influence on organizational
outcomes. Boards can initiate strategic change
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through committee work (Henke, 1986). Finkelstein and Mooney (2003) advised oversight of
board committee membership to avoid harmful
rifts while maximizing the capture of relevant
expertise to ensure comprehensive discussion
and high-quality decisions. Whether directors
have the ability and opportunity to transmit
knowledge from interlocked firms depends on
their access to and involvement in the dialogue
and decision.
While Sarbanes-Oxley and NYSE listing rules
now require fully independent audit, compensation, and nominating committees, the constellation of additional board committees reflects the
needs of the organization. For example, some
firms have standing finance committees to oversee decisions related to investments, dividends,
or raising capital, and interlocking directors are
more likely to diffuse capital-related practices
or knowledge when they sit on these committees. By focusing on the individual connecting
two firms, I reason that awareness of a practice
is more likely transmitted if the interlocking director sits on the focal board committee responsible for that particular content area. As noted
by Peterson and Philpot, committees “provide
the means, opportunity and structure that enable members to perform their fiduciary and
other corporate governance duties” (2007: 181).
Given the increasing weight of committee work
on board outcomes, I suggest the following.
Proposition 5: The likelihood of knowledge transfer increases if the interlocking director serves on the relevant
board committee at the focal firm.
Depth of focal firm experience. A wealth of
firm-specific knowledge also increases an interlocking director’s influence and ability to diffuse
knowledge from an outside firm. Therefore,
depth of focal firm experience, through director
tenure or through serving as an executive at the
focal firm, may also affect an interlock’s utility
in information exchange. More experience at the
focal firm gives directors advantages in controlling the flow of information as a critical decision-making resource (Harris & Helfat, 2007), and
it affords them a more nuanced understanding
of the dynamics and balance of power between
the board and CEO (Hermalin & Weisbach,
1998). More experienced directors may then more
effectively transfer their knowledge from an interlocked firm.
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The likelihood that a director has relevant
knowledge to contribute may also vary with that
director’s standing within the focal board.
Length of board service is one source of power
and positioning (Finkelstein, 1992), and directors
with more experience at the focal firm may enjoy greater legitimacy in the boardroom. Longertenured directors may be more committed to the
status quo (Golden & Zajac, 2001), but the likelihood of diffusion focuses on the transfer of
knowledge, regardless of whether the information suggests strategic change or reaffirms the
current strategic direction. Directors with
greater focal firm experience may enjoy a more
established position on the board from which to
voice outside experience.
Proposition 6: The likelihood of knowledge transfer increases with the interlocking director’s depth of focal firm
experience.
Breadth of outside experience. Knowledge
varies not only with the nature of focal firm
experience but also with outside experience, in
terms of the number and status of outside affiliations. As suggested above, the diffusion of
practices from an interlocked firm depends primarily on whether the interlocking director has
and shares relevant expertise. For example,
holding more directorships expands an individual’s pool of available resource linkages. Useem
quotes a director:
You’re damn right it’s helpful to be on several
boards. It extends the range of your network and
acquaintances, and your experience. That’s why
you go on a board, to get something as well as
give. . . . It just broadens your experience, the
memory bank that you have to test things against
(1984: 47– 48).
At a minimum, directors with more outside
experience have broader exposure to and
awareness of practices, given the number of
firms they are connected to. As one illustration,
directors can better inform succession planning
at a focal firm when they have experienced CEO
turnover elsewhere, a greater likelihood with
more firm affiliations that may include exposure
to multiple types of successors and a range of
CEO tenure (Shen & Cannella, 2002; Vancil,
1987). Directors with experience across multiple
firms are legitimized in the boardroom and better positioned to influence board outcomes
(Finkelstein, 1992). Directors who are heavily in-
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Academy of Management Review
terlocked are also more likely to receive invitations to join additional boards (Davis, 1993) and,
with that prestige, to wield greater influence
and nuanced understanding of bringing their
experience to bear in boardroom discussions
(Bigley & Wiersema, 2002; D’Aveni & Kesner,
1993).
However, while Carpenter and Westphal
(2001) found that directors on multiple boards
make a greater contribution to firm strategy,
individuals who hold a large number of directorships may inadequately engage on each
board. For example, Ferris, Jagannathan, and
Pritchard (2003) suggested that directors sitting
on three or more boards might lack the time and
resources to devote adequate attention to each
firm. Similarly, directors serving as executives
elsewhere face time constraints in effectively
fulfilling their board responsibilities (Monks &
Minow, 1996), especially when jobs at their home
firms become more demanding (Perry & Peyer,
2005). Debate continues in the popular and academic press as to an optimal number of directorships to ensure individual engagement and
maximize experience for one to draw on without
becoming “overboarded” (Buchholtz, Amason, &
Rutherford, 2005; Perry & Peyer, 2005). Indeed,
wisdom on board selection and composition
holds that a firm should seek directors with both
relevant expertise and the time to serve (Finkelstein & Mooney, 2003). Given this conflict, a moderate number of directorships may best enable
interlocking directors to gather strategic exposure as well as position them to share their
experience with the focal board in an influential
way. The exact number represented in the idea
of a “moderate” count of directorships is likely to
be different for a full-time CEO, a professional
director, and a retired part-time director. While
an optimal number of outside directorships may
be difficult to specify, in general, I expect a
curvilinear (i.e., inverted U-shaped) relationship
between breadth of experience and the likelihood of diffusion to the focal firm.
Proposition 7: The likelihood of knowledge transfer increases, and then decreases, with the breadth of the interlocking director’s experience.
Status of outside experience. While escalating
outside affiliations may yield diminishing benefits, the status of those connections reinforces
the positioning of the individual’s message. Di-
April
rectors sitting on the board of GE, as opposed to
an average S&P 500 firm, for example, may be
more likely to believe their knowledge is worth
sharing. High-status appointments confer esteem and privilege (Washington & Zajac, 2005),
paving the way for directors to diffuse practices
from their outside firms. Relative firm differences reflect a firm-level effect on board receptivity, but the status of outside affiliations first
affects the likelihood that a given director will
have and share relevant knowledge. Status
“flows through associations” and represents
how “an individual’s location within a hierarchy . . . determines the opportunities and constraints that the individual confronts” (Podolny,
2005: 11, 14). A director’s ability to contribute as
enabled by status suggests boundary-spanning
self-efficacy, reflecting confidence to offer information about practices from external experience (Bandura, 1997; Marrone, Tesluk, & Carson,
2007: 1426).
Research on CEO and board social capital
has explored how status impacts the influence
of information. In their study of celebrity CEOs,
Hayward, Rindova, and Pollock (2004) found that
high-status executives tend to internalize their
success and become more confident about their
own contributions. When an interlocking director is affiliated with high-status (e.g., large,
well-performing) outside firms, the ability to facilitate the diffusion of practices increases.
Proposition 8: The likelihood of knowledge transfer increases with the status
of the interlocking director’s experience.
BOARD RECEPTIVITY AND THE DIFFUSION
OF PRACTICES
While individual characteristics affect the
motivation and ability of a director to transmit
knowledge, external and internal factors at the
board and firm levels influence how receptive
the board is to an interlocking director’s outside
experiences. As discussed above, diffusion
across a board interlock depends first on
whether the individual director has and contributes knowledge. A subsequent consideration is
how the board receives information about organizational practices at interlocked firms. I now
turn to factors that influence board receptivity.
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Shropshire
Focal Board Power
The nature of collaboration and the relationship between the focal firm’s board and CEO
reflect path dependency and affect the extent of
any individual director’s influence. Golden and
Zajac (2001) explored the influence of boards on
strategic change and the battle for power between the board and CEO. They found that weak
financial performance stimulates strategic
change, but the effect is much stronger in firms
with powerful boards, suggesting that they may
be more receptive to having members share
ideas and experiences. The CEO-board balance
of power also constrains the framing of opportunities, as evidenced by the greater likelihood of
alliance formation in firms with cooperation and
trust between the CEO and board, as opposed to
either CEO- or board-controlled firms (Gulati &
Westphal, 1999). Recent findings also suggest
that the power (im)balance between the CEO
and board moderates the relationship between
board composition and firm performance
(Combs, Ketchen, Perryman, & Donahue, 2007;
Finkelstein et al., 2009), adding to our understanding of how boards affect organizational
outcomes.
Influence on firm outcomes, therefore, depends in part on the power position of the board
relative to the CEO. Boards can “impel, impede,
or exert no effect on strategic change in organizations,” depending on their power and inclination for altering the firm’s practices (Golden &
Zajac, 2001: 1107). As regulatory changes such as
the Sarbanes-Oxley Act in the United States and
the Cadbury Report in the United Kingdom mandate increasing board independence and encourage board activism, the balance of power
will likely remain fodder for debate among academics and practitioners.
When the board wields power over management, decision outcomes are more likely to reflect the preferences of influential directors
(Zajac & Westphal, 1996). For example, executive
pay is being reined in at some firms with powerful boards:
Directors . . . are increasingly cutting back the
pay-setting power of CEOs. Bold boards are killing practices long popular among big bosses,
such as retention grants of restricted shares, generous exit rewards and “gross-ups” to cover the
taxes that executives have to pay for certain benefits (Lublin, 2008: R1).
255
Pettigrew and McNulty (1995) argued that the
structural context shapes the board’s influence
on the firm’s strategic direction, specifically by
enabling interlocking directors to translate potential power into actual influence. Alternatively, with a powerful CEO, decisions are more
likely to reflect the CEO’s preferences and experience, rather than those of interlocking directors. So while power may not solely determine
the influence of the board, it does dictate the
opportunities to receive information about practices via interlocking directors that may shape
strategic outcomes.
Proposition 9: Board receptivity increases when the focal board is powerful vis-à-vis the focal CEO.
Focal Board Demographic Diversity
As discussed at the individual level, each interlock’s information does not carry uniform influence. I now consider board receptivity when
the director linking two firms is a demographic
minority. Elements of board composition, particularly diversity, can make group decision making more complex, offering advantages and disadvantages in terms of decision speed, quality,
and outcomes (cf. Jehn, Northcraft, & Neale, 1999;
Pelled, Eisenhardt, & Xin, 1999). Research on
group diversity has shown that the negative effects of surface-level demographic heterogeneity on group conflict and the blocking of cooperative norms decrease over time (Chatman &
Flynn, 2001; Harrison, Price, Gavin, & Florey,
2002). As directors gain more interaction and
familiarity working with a diverse board, the
benefits should increase while the negative outcomes should diminish.
The environment in which information is presented determines individual influence on
board outcomes. Receptivity of the board to individual input may reflect the legitimacy and
delivery of the carrier’s message. As discussed
above, having prior experience as a minority
director and having network ties to focal majority directors increase the influence of a given
minority director (Westphal & Milton, 2000).
Haunschild and Beckman (1998) discussed the
influence of unique over redundant information,
although the impact of the information is also
contingent on the uniqueness of similar inputs.
To the extent that a minority is a token director,
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Academy of Management Review
however, he or she may not enjoy the same influence, regardless of how exclusive he or she is
as an information source. A greater proportion of
minority directors can augment the influence of
each minority director, especially when one
speaks from experience at an interlocked firm.
Scholars have suggested critical representation breakpoints in the influence of minority directors. For example, Konrad and Kramer (2006)
have argued that the benefits of gender diversity on boards are only available to firms who
surpass token female director status. The baseline advantage may be available with the first
introduction of heterogeneity, but I reason that
information presented to the board is more
likely to influence decision outcomes if the
board has experience receiving information
from diverse inputs. Once a board includes multiple women, for example, gender differences
become less salient, and women may wield
greater influence in boardroom discussions and
decisions (Konrad & Kramer, 2006). Board members tend to focus on minority differences, rather
than the message, if the group is relatively homogeneous, whereas diverse groups establish
more collaborative and cooperative norms for
positive interaction, regardless of demographic
characteristic (Ely, 1994; Martins, Milliken,
Wiesenfeld, & Salgado, 2003). The literature on
diversity, conflict, and decision making suggests that board composition affects the ability
of a demographic minority to influence group
outcomes.
Proposition 10: Board receptivity increases with demographic diversity
on the focal board, relative to boards
with no or only one demographic minority member.
Strategic Conformity with the Industry
Sometimes decision makers in organizations,
through path dependence or other patterns, develop a proclivity for or an aversion to strategic
change. For example, to the extent that a firm
aligns with industry norms (i.e., strategic conformity) in resource allocation decisions such as
R&D spending or financial leverage, it may be
less likely to consider new strategies or initiatives (Zhang & Rajagopalan, 2003). Such firms
lean toward more comprehensive programs of
conformity, maintaining consistent strategies
April
and performing similarly to industry averages
(Finkelstein & Hambrick, 1990). On the other
hand, ceteris paribus, firms that deviate from
industry norms may be more willing to entertain
suggestions and information about less familiar
practices from interlocked firms.
Interlocks may shape strategic choices to be
more or less aligned with industry norms. In
previous research scholars argued that most interlocks exist outside the focal industry (Westphal et al., 2001), and extraindustry interlocks
encourage the adoption of strategies less
aligned with industry norms (Geletkanycz &
Hambrick, 1997). Strategic conformity reinforces
the status quo and suppresses a board’s willingness to listen to directors’ experiences and stories from outside the focal industry. Given these
findings, I argue that a firm that generally
aligns with industry norms is likely to have a
board that is less receptive to outside information from interlocking directors.
Proposition 11: Board receptivity decreases with the focal firm’s strategic
conformity to industry norms.
Relative Firm Differences
Beyond individual indicators of having and
sharing knowledge, network characteristics affect the likelihood of board receptivity to the
interlocking director’s knowledge. The number
and nature of a given director’s outside affiliations reflect idiosyncratic experience at the director level, while differences between interlocked and focal firms may affect the receptivity
of the board to a given director’s information.
Centrality of the focal firm. Firm centrality
reflects the board’s connectedness and positioning within the broad intercorporate network. For
example, if a board has only one or two interlocking directors, only those directors can provide concurrent accounts of outside experience,
thus increasing their influence. Prior research
shows that unique information—that is, information not accessible through other channels—is more influential in leading a board of
directors toward strategic change (Haunschild &
Beckman, 1998). If a firm has many interlocking
directors, a vast range of outside experiences
must be sifted through and considered. Even if
multiple directors have specific and relevant
knowledge to contribute, the boardroom may not
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Shropshire
benefit from having so many interlocking directors, given the challenges of weighing a large
amount of information from multiple outside
firms. Furthermore, a board with many interlocking directors is also more likely to have passive members—that is, those reputed to rubber
stamp management decisions and to avoid actively monitoring the CEO (Zajac & Westphal,
1996). When a board is highly interlocked, most
of its directors hold multiple board seats and
face challenges to maintain in-depth knowledge
of each firm’s practices, given their “part-time”
status at each firm (Pettigrew, 1992).
Applying the logic from Proposition 7, the
board must balance the breadth of ideas among
interlocking directors to bring a broad range of
experiences while enabling active engagement
and contribution. The benefits of director interlocks and of interlocking directors’ advice to the
focal firm are expected to rise and fall at the
board level in a manner similar to an individual’s breadth of experience. When a board has
only one interlocking director, informed counsel
from his or her outside experience is likely to
garner attention and influence. Once the board
has many interlocking directors, however, the
influence of any one director’s experience may
diminish. Focal firm centrality via interlock ties
reflects social capital in the form of information
access (Davis, 1991). The receptivity of the board
to practices from outside firm boundaries reflects how interlocked the firm is within a wide
organizational network.
Proposition 12a: Board receptivity to a
given interlocking director increases,
and then decreases, with the focal
firm’s centrality in the interlocking
directorate.
Relative age and status of the interlocked
firm. While centrality focuses on conditions at
the focal firm, the focal board’s receptivity to
directors’ knowledge reflects the nature of their
outside affiliations. Networks are conduits for
status transfer such that a firm’s links to others
may signal quality (Benjamin & Podolny, 1999).
Differing network resources create status differentials (Brass & Burkhardt, 1993), which affect
individual and organizational behavior
(D’Aveni & Kesner, 1993). Higher-status and more
established contacts are valuable and influential (Cialdini, 1995).
257
As discussed in Proposition 8, sitting on the
board of GE may increase directors’ willingness
to share knowledge, given the perceived value
of their experiences. Compared to a director
with a less visible interlock, an interlocking director from GE may also enjoy a board more
willing to listen to shared information. Firm performance and size have been used as proxies for
status, following the institutional logic that
lower-performing, smaller, or younger firms
seek to emulate more successful, well-established, and larger firms and, thus, may be more
receptive to knowledge about practices in place
at older or higher-status firms (Haunschild &
Beckman, 1998). Therefore, via relative firm differences, I suggest the following.
Proposition 12b: Board receptivity to a
given director increases with the status of the interlocked firm relative to
the focal firm.
Proposition 12c: Board receptivity to a
given director increases with interlocked firm age relative to focal firm
age.
Environmental Turbulence
Conditions outside the focal firm can also
make the decision-making environment more
receptive to information about practices shared
across interlocks. For example, environmental
turbulence or strategic conformity may constrain the board’s ability to initiate change (Carpenter & Westphal, 2001; Zhang & Rajagopalan,
2003). Environmental turbulence refers to the extent to which a firm faces complexity and uncertainty in its external environment (Boyd, 1990),
and it determines the salience of particular strategic issues (Wiersema & Bantel, 1993). These
external constraints may limit the board’s (or
any individual’s) opportunity to influence decisions. In particular, when the competitive environment is less turbulent, boards tend to discuss
current practices or changes with fewer moving
variables and less uncertainty. Boards are less
likely to pursue change under highly unstable
conditions (Goodstein, Gautam, & Boeker, 1994).
While resource dependence logic suggests
that having a more diverse board provides the
organization with greater access to critical resources, under conditions of increasing environmental turbulence, more diverse groups may
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Academy of Management Review
also be less responsive and slower to make decisions. Some of the benefits of diversity, such
as generating broader alternatives, also correspond to slower decision times (Eisenhardt,
1990). Keck (1997) discussed types of environmental change and argued that continuous
change, similar to environmental turbulence,
further differentiates the benefits of heterogeneous experience and input to strategic decisions. Environmental turbulence alters the relevance and contribution of directors’ external
experience toward board functions of monitoring and resource provision (Carpenter & Westphal, 2001). A more uncertain environment is
“noisier,” making the outside experience of
one director more difficult to receive in a complex decision-making context. The stepwise
process where a director shares relevant information and the board receives it unfolds with
less interruption in more predictable, certain
environments.
Proposition 13: Board receptivity decreases with the focal firm’s environmental turbulence.
In sum, by considering the role of the interlocking director along with board receptivity, I
offer a more complete perspective on the likelihood of the diffusion of practices between interlocked firms. The propositions imply a stepwise
diffusion process. First, a director must have the
motivation and ability to contribute knowledge
and experience, and, second, the board must
be receptive to that shared knowledge. The collec-
April
tive effects of individual characteristics and organizational factors influencing the diffusion of
practices are summarized in Table 1. Some characteristics of interlocking directors and boards
increase the likelihood of diffusion, whereas
others decrease the likelihood. Also captured in
the table are the curvilinear effects predicted for
breadth of experience, an individual factor, and
focal firm centrality, a network characteristic.
Up to some optimal number of outside directorships and up to some point of network embeddedness, the identification of which is an empirical question, having more interlocks and being
more central in the intercorporate network increase the likelihood of diffusion. However, beyond optimal points, these characteristics indicate that a focal firm is less likely to benefit from
the idiosyncratic knowledge of a given interlocking director.
It may also be useful to think about the proposed relationships as concentric circles, with
the individual-level characteristics at the center, surrounded by factors of boardroom receptivity, including firm- and industry-level features. The graphic complexity arises from the
reality that an interlocking director depicted on
a board is actually a boundary spanner (Zahra &
Pearce, 1989), residing not wholly within one
firm but, rather, within multiple firms. The challenges of studying hierarchical, nonnested phenomena are explained in Hillman et al.’s (2008)
description of directors who manage multiple
identities in the boardroom, and they are made
more complex by the stepwise process where an
TABLE 1
The Role of the Interlocking Director and Board Receptivity in the Diffusion of Practices
Summary Factors That INCREASE the
Likelihood of Diffusion
Summary Factors That DECREASE the
Likelihood of Diffusion
The role of the interlocking director
in knowledge transfer
⫹
⫹
⫹
⫹
Organizational identification (P1)
Access to CEO (P3)
Minority experience (P4)
Focal board committee membership
(P5)
⫹ Depth of focal board experience (P6)
⫹ Breadth of experience (P7)
⫹ Interlocking director status (P8)
⫺ Ingratiatory behavior (P2)
⫺ (Breadth of board experience)2
Board receptivity
⫹
⫹
⫹
⫹
⫹
⫺ Strategic conformity (P11)
⫺ Environmental turbulence (P13)
⫺ (Focal firm centrality)2
Levels
Board power (P9)
Board diversity (P10)
Focal firm centrality (P12a)
Interlocked/focal firm status (P12b)
Interlocked/focal firm age (P12c)
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Shropshire
individual transfers a practice and the board
receives it. Aspects of some identities may be
aligned, but not truly nested, since the board
seat represents a part-time appointment. Multilevel theory such as this one represents a diffusion process involving multiple steps at the intersection of organizations, which unfolds
across individual, group, organization, and network levels.
DISCUSSION
This paper examines the characteristics of interlocking directors that make them more likely
to have and contribute relevant experience, as
well as the focal board’s receptivity to that
knowledge. I discuss indicators of an individual’s motivation and ability to carry knowledge
between firms so as to propose microlevel differences among interlocking directors. While
scholars have considered how some contextual
factors affect the imitation of systems or structures between firms, critics of interlock research
point to a lack of understanding of the qualitative nature of these linkages. Internal and external contexts establish a climate of receptivity to
outside information available through interlocks. The relationships proposed include the
characteristics of interlocking directors, the context of the focal firm, and the likelihood that
practices diffuse through board interlocks.
Rather than jumping to the adoption of practices, my model proposes knowledge transfer as
the initial action in a stepwise, multilevel process of diffusion— one that begins with individual action but is moderated by context.
Scholars have repeatedly called for multilevel
theory that integrates microlevel and macrolevel factors in order to understand organizational behavior (Hitt, Beamish, Jackson, & Mathieu,
2007). Zajac and Westphal (1996) noted the complexity of such frameworks, compared to those
that consider only factors at a single level, but
they argued for their necessity in capturing the
reality and multilevel nature of board interlocks.
Recently, Bamberger (2008) echoed the need for
management academics to move beyond contextualizing extant findings toward generating
their own context theories. By acknowledging
interlock characteristics at the individual and
board levels, we can more fully model the diffusion of practices via interlocks as a phenomenon of interest. In this paper I identify indi-
259
vidual-level predictors of knowledge transfer
by an interlocking director and contextualize
this mechanism for exchange by identifying
higher-level factors likely to influence the focal construct and its relationships (i.e., “context theorizing”).
This theory proposes a broad research
agenda, although challenges exist for empirical
testing. The diffusion of organizational practices
as an observable phenomenon is the outcome of
multiple boardroom processes, while the process itself may remain unmeasured and less
visible. Strategic change could involve measuring changes in resource allocation decisions or
diversification levels or, as in previous research,
coding the occurrence of an event, such as an
acquisition or structural innovation. Given the
multiple steps and multilevel nature of this
model, it is possible that experiences and strategies may be introduced to the boardroom discussion, and even found to be highly relevant
and informative, yet have no measurable outcome. Even if measurable change occurs, its
meaning may not fully diffuse. Westphal and
Zajac (2001) explored the decoupling of policy
and practice, when an organization symbolically adopts a new plan without substantively
instituting the change. This overarching model
of diffusion provides a number of opportunities
for empirical testing of its components, although
a test of the complete model appears unlikely.
While the complexity of multilevel theory presents some challenges for empirical testing,
several proposed relationships lend themselves
to quantitative study. For example, in prior research scholars have developed indicators for
power in the boardroom (e.g., Golden & Zajac,
2001; Zajac & Westphal, 1996), and some propositions offer readily measurable characteristics,
such as demographic minority status and focal
board tenure. Additional individual-level factors may be important, and those proposed here
represent an initial exploration to integrate extant research and to stimulate discussion of individual differences in motivation and ability
among interlocking directors. While I discuss
how strong organizational identification motivates directors to bring their experiences to benefit boardroom discussion, Hillman and colleagues (2008) have proposed the salience of
multiple director identities, such as being a
CEO, customer, or supplier, as behavioral predictors of boardroom behavior. Rather than an
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Academy of Management Review
insider-outsider dichotomy of board membership, they suggest that the strength of identification with a number of board roles predicts
resource provision, including the contribution of
advice and counsel. Beyond the individual- and
board-level factors here, further variance may
exist among directors with similar standing and
influence in their motivation to share knowledge from experience with other firms. Understanding the drivers of individual director engagement in board function is a fascinating and
promising area for future research.
A given board’s context may also amplify the
importance of any one level relative to others. In
extreme uncertainty environmental turbulence
may prevail; in other contexts or decision settings board committee membership may be essential to the diffusion of a specific practice
from an interlocked firm. If a board has multiple
interlocking directors, it could be that the interlocking director who strongly identifies with the
focal organization will be the only one who engages in environmental scanning for relevant
experiences and information; thus, in some contexts organizational identification may determine whether diffusion occurs. The institutional
context may also affect diffusion, since the
small-world nature of corporate boards appears
in a variety of country environments (Conyon &
Muldoon, 2006). Within and across levels there
may be interaction effects that reinforce or inhibit the process of diffusion through knowledge
transfer and board receptivity. The vast research agenda integrated here also creates new
opportunities for theoretical extension and empirical study.
Given this paper’s inclusion of individual,
board, and firm levels, I also leave for future
study a component critical to our understanding
of diffusion across board interlocks—namely,
the content of the practice. While I suggest that
characteristics of the interlocking director and
interlocked firms influence the likelihood of diffusion, it is possible that specific practices are
differentially likely to transmit between firms.
For example, both constructive and destructive
practices are empirically shown to diffuse via
interlocks, but whether one is more likely than
the other has not been established. A subsequent step in diffusion, whether a practice is
adopted, could be examined to understand
when firms act on transmitted and received information about practices. Upper echelons stud-
April
ies suggest avenues for future research on the
diffusion of specific strategies, including acquisition and diversification (e.g., Chen et al., 2009;
Jensen & Zajac, 2004). How outside experiences
and the characteristics of interlocking directors
actually shape practices at the focal firm is a
rich area for future exploration (e.g., McDonald
et al., 2008).
In bringing attention to individual interlocking directors, I illustrate the importance of levels
of analysis issues in research on boards of directors. Theory on interlocking directors and the
diffusion of practices focuses not only on the
individual director but also on the individual
relative to the group. This type of cross-level
theory (Klein, Dansereau, & Hall, 1994; Rousseau, 1985) is particularly promising in specifying heterogeneity and avoiding the aggregation
errors of single-level theory (Klein & Kozlowski,
2000). Empirical research in this area may be
fruitful in testing the proposed model, but only
with careful attention paid to variance within
the group (i.e., the board) based on individual
differences—for example, characteristics of interlocking directors, traits, and so forth (Cannella & Holcomb, 2005; Klein et al., 1994).
My theory also has implications for board
composition and the ongoing debate about limits to the number of directorships. Previous work
suggests that firms may not proactively manage
interlocks, since ties with a specific firm are
rarely reconstituted when one director exits
(Westphal, Boivie, & Chng, 2006). However, given
institutional pressures around director tenure
and board term limits, consideration of previous
and concurrent director experience may help to
structure a board for efficacy and responsiveness to changing environmental demands. By
considering outside experience along with individual differences among director nominees,
both management and shareholders may gain
confidence in and a more complete understanding of board composition and effectiveness. Furthermore, individual directors may become
more cognizant of outside experiences that inform discussion in the focal boardroom and provide suggestions that are not pre-scripted by the
CEO. Since CEOs often determine the agenda
for board meetings and may constrain the realm
of options presented to the board, directors have
long been dependent on management reports to
understand the scope of the business, current
issues, and the range of strategic choices avail-
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Shropshire
able to the focal firm. With fewer inside directors, increasing calls for board activism, and the
changing corporate regulatory environment, the
role of the interlocking director specifically and
board influence over organizational outcomes in
general are expected to expand (Finkelstein et
al., 2009). This paper integrates research on
board interlocks to improve our understanding
of effective boards by theorizing when directors
influence board discussions, as well as which
boards are most receptive to director expertise
from outside the organization.
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Christine Shropshire ([email protected]) is an assistant professor of management in the Terry College of Business at the University of Georgia. She received her
Ph.D. from Arizona State University. Her research interests include corporate governance, stakeholder management, and diversity in the upper echelons.