What Do Interlocks Do? An Analysis, Critique, and Assessment of Research on Interlocking
Directorates
Author(s): Mark S. Mizruchi
Source: Annual Review of Sociology, Vol. 22 (1996), pp. 271-298
Published by: Annual Reviews
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Annu. Rev. Sociol. 1996. 22:271-98
Copyright ? 1996 by AnnualReviewsInc. All rights reserved
WHATDO INTERLOCKSDO? An
Analysis, Critique,and Assessment of
Researchon InterlockingDirectorates
MarkS. Mizruchi
Departmentof Sociology, Universityof Michigan,Ann Arbor,Michigan48109-1382
KEY WORDS: boardsof directors,corporations,interorganizationalrelations,social networks,
corporateinterlocks
ABSTRACT
Research on interlockingdirectorateshas gained increasingprominencewithin
the field of organizations,butit has come underincreasingcriticismas well. This
chapterpresentsan in-depthexaminationof the studyof interlockingdirectorates.
I focus initially on both the determinantsand the consequences of interlocking
directorates,reviewingalternativeaccountsof bothphenomena.Specialattention
is paid to the processualformulationsimplied by variousinterlock analyses. I
then address the two primarycriticisms of interlock researchand evaluate the
tenability of these criticisms. I conclude with a discussion of futuredirections
for interlockresearch.
INTRODUCTION
An interlockingdirectorateoccurs when a person affiliatedwith one organization sits on the boardof directorsof anotherorganization. The causes and
consequences of this seemingly minor, even innocuous event, have been the
source of extensive debate since the Pujo Committeeidentifiedinterlocksas a
problemin the earlytwentiethcentury.Relativelysimple to identifyin publicly
availableinformationfrom highly reliablesources, interlockshave become the
primaryindicatorof interfirmnetworkties. Researchusing interlocksflourished
in the 1970s and 1980s, and with the explosion of researchon interorganizationalrelations,it has become even more prominentin the 1990s. But despite
its virtues, research on interlockshas always attractedits critics. Perhapsit
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MIZRUCHI
is unsurprisingthat as the prominenceof interlockresearchhas increased,the
frequencyof criticismsagainstit have also increased.
Given the swirl of controversysurroundinginterlockresearch,it is time for a
detailedassessmentof its contributions.In this paperI describeandevaluatethe
primarystrandsof work within interlockresearch. I deal with both the claims
of interlockresearchersandthe criticismsleveled againstthe approach.I argue
that,althoughthey arenot the answerto all questionsaboutinterorganizational
relations,interlocksremaina powerfulindicatorof networkties between firms.
When properlyapplied, I suggest, they continue to yield significant insights
into the behaviorof firms.
HOW AND WHY DO INTERLOCKSFORM?
All publicly traded corporationsin the United States are requiredto have a
board of directorsof at least three persons. In most small, family-controlled
firms,the boardis likely to consist of the firm'spresident,some relativesand/or
managers, and perhapsthe firm's attorneyand a few trustedfriends. Large
corporationstend to have boardswith ten or more members;the size of boards
has increasedsteadilysince the 1950s. The typicalboardof a largefirmconsists
of a range of inside and outside directors. Inside directorsare those whose
primaryaffiliationis with the firmand who usually include the firm'sCEO and
other top officers. Retiredofficers and (in some cases of long-standingfamily
interest)stockholdingfamily membersare also includedin this group. Outside
directorsareindividualswhose primaryaffiliationsarewith organizationsother
than the focal firm. Most outside directorsof large firms are officers of other
large firms, especially financialinstitutions. They include bankers,insurance
company executives, investmentbankers,attorneys,accountants,and officers
of firms in a variety of nonfinancialsectors. Many boardsof the largerfirms
include so-called public directors, who representgroups such as civil rights
organizations.Representativesof large externalstockholders,including those
involved in recent acquisitionsof the firm, are also frequentlyrepresentedon
boards.
Interlocksare createdby both inside and outside directors. A firm's inside
directors,especially its leading officers, often sit on the boardsof other firms.
A study of 456 Fortune500 manufacturingfirmsin 1981 (Mizruchiet al 1993)
revealedthatmore than70% of the firmshad at least one officerwho sat on the
boardof a financialinstitution. This does not include cases in which a firm's
officerssit on the boardsof othernonfinancialcorporations.But most interlocks
are createdby a firm'soutside directors. Any boardmemberwho is primarily
affiliatedwith anotherfirm automaticallycreatesan interlockbetween the two
organizations.The sum of the affiliationsof a firm'soutsidedirectorsconstitute
CORPORATEINTERLOCKS
273
the majorityof its interlocks,which compriseaboutthreefourthsof all ties with
financialinstitutionsamong the 456 firmsin the above-mentionedstudy.
This automaticcreation of an interlock is importantto recognize because
it means that interlocks need not be the result of conscious decisions by a
firm's managementto link the firms in question. It is thereforeworthwhileto
consider both explicit and inadvertentreasons for the formationof interlocks.
Several have been stipulated,includingcollusion, cooptationand monitoring,
legitimacy,careeradvancement,and social cohesion.
Collusion
Congressionalinvestigationsof interlocksdatingbackto the turnof the century
have been concernedprimarilywith the effect of interlockson the workingsof
the market. Priorto 1914, there were no prohibitionson who could interlock
with whom. At the turnof the century,it was common for severalfirmswithin
industriesto share directors. The National Bank of Commerce,for example,
shared directorswith virtuallyevery other majorNew York bank. Critics of
big business arguedthat interlocksbetween competitorsprovideda means of
restrictingcompetition. Section 8 of the Clayton Act of 1914 expressly prohibitedinterlocksbetween firmsdeemed to be competingin the same markets.
The numberof interlocksamong leading US firms droppedsharplyafter this
point (Mizruchi 1982).
It is legitimateto ask whetherinterlocksbetween competitorsactuallyfacilitate collusion. The electricalprice-fixingscandalsof the early 1960s occurred
long after interlockswithin the industrywere prohibited,and the Clayton Act
prohibitionon competitorties did not deter numerousother price-fixing conspiracies that have been uncovered(Baker & Faulkner1993). This raises the
questions of whether interlocks between competitors were motivatedby attemptsto collude, whetherthey were effective in facilitatingsuch collusion, or
whetherthey were ultimatelyirrelevant.
Evidence on this issue has been difficult to identify. There are virtuallyno
systematic data on firms' motives for interlocking. Instead,researchershave
examined correlates and consequences of horizontal (within-industry)interlocks. Studies of US firms by Pennings (1980) and Burt (1983) examinedthe
associationbetweenindustryconcentrationandhorizontalties. Penningsfound
a positive associationbetween the two, while Burtfound an invertedU-shaped
function,in which intraindustryinterlockswere highestin industrieswith intermediate levels of concentration.This findingis consistentwith the suggestion
that, up to a point, concentrationfacilitatesintraindustryties but that the most
highly concentratedindustries,because of their small numbersof producers,
have little need for interlockingin orderto set prices. As for whethersuch ties
improvefirmperformance,Pennings(1980:147-158) found virtuallyno asso-
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MIZRUCHI
ciation between a firm's interlockswith competitorsand its profitability.Burt
too found little association between within-industryinterlockingand industry
profitabilityonce concentrationwas controlled. Carrington(1981), however,
in a study of Canadianfirms,foundpositive associationsamong concentration,
interlocking,and profitability.
The fact thatwithin-industryinterlockscontinueto occursuggests thatsome
interlocksmay have been establishedwith the aim of restrictingcompetition.
Thereis little evidencethatsuchinterlocksareeffectivein this venture,however,
or more importantly,whetherinterlocksare necessary to reduce competition.
Perhapsfor this reason, researchon the anticompetitiveeffects of interlocks
has virtuallydisappeared.
Cooptationand Monitoring
A less sinister interpretationof interlockingis that it reflects attemptsby organizationsto coopt sourcesof environmentaluncertainty.This idea has spawned
considerableresearchand continuesto influence organizationaltheory. In his
classic study of the TennesseeValley Authority(1949), Selznick definedcooptation as the absorptionof potentially disruptiveelements into an organization's decision-makingstructure.Drawingon Selznick, Thompson& McEwen
(1959) presenteda hypotheticalexample of cooptation,in which a corporation
invites onto its boardof directorsa representativeof a bank to which the firm
is heavily indebted. This example laterbecame the subject of several studies.
Worksby Dooley (1969), Pfeffer(1972), Allen (1974), Bunting(1976), Pfeffer
& Salancik (1978), Pennings (1980), Burt (1983), Ornstein (1984), Ziegler
(1984), Galaskiewicz et al (1985), Palmer et al (1986), Mizruchi & Stearns
(1988), Lang & Lockhart(1990), and Sheard(1993) all examined the extent
to which interfirmdependencecontributedto the existence of interlocks. Although the findings have been mixed, on balance they supportthe view that
interlocksare associatedwith interfirmresourcedependence.
These studieshad at least two problems,however. First,because the authors
lacked data on direct business transactionsbetween firms, they were forced
to measure resource dependence at the industrylevel and then either restrict
themselves to industry-levelconclusions (as in Burt's work) or infer back to
the firm level from the industry-leveldata. In studies of financialdependence,
for example, researchershypothesizedthatfirmswith high levels of debt would
have higher numbersof bankerson their boards. Because of the absence of
lending data, these researcherswere unable to determinewhetherthe bankers
on the boardsrepresentedthe firms' lenders.
A second problemwith these studies was thatthey were able to account for
only a subset of a firm's existing interlocks. This problem was highlighted
by a series of studies (Koenig et al 1979, Ornstein 1980, Palmer 1983) that
CORPORATEINTERLOCKS
275
showed that the majorityof interlocksbrokenaccidentally(throughthe death
or retirementof the person creating the interlock) among US and Canadian
firms were not reconstitutedwithin four years after the break. This suggested
that,at best, resourcedependenceaccountedfor a minorityof actualinterlocks.
Does cooptationwork? Do firmsthathave coopted sources of environmental uncertaintyreporthigher levels of performancethando firmsthat have not
coopted? Studies of the relation between interlockingand profitabilityhave
yielded a wide range of findings. Pennings (1980), Carrington(1981), and
Burt(1983) found generallypositive but slight associationsbetween interlocking and profitability,althoughonly Carrington'sfindings (based on Canadian
data)were unequivocal.Meeusen & Cuyvers(1985), in a comparativeanalysis
of the Netherlandsand Belgium, found positive associations between financial interlockingand profitabilityin both countries,but negative associations
between profitabilityand severaltypes of "holding"interlocks(involving ownership)in Belgium. In a studyof 266 US firmsovera ten-yearperiod,Baysinger
& Butler(1985) founda positiveassociationbetweena firm'sproportionof outside directorsand its profitabilitycomparedto its industryaverage. Fligstein
& Brantley(1992), however,found a negative association between interlocks
and profitabilityamong a sample of large US firms.
The ambiguousnatureof these findings may be a reflection of uncertainty
association. Several studies
over the causal orderof the interlock-profitability
have found that unprofitablefirms are more likely to interlock(Dooley 1969,
Allen 1974, Richardson 1987, Mizruchi & Stearns 1988, Lang & Lockhart
1990, Boeker & Goodstein 1991). Bunting (1976) found a curvilinearrelation
betweenthe two: Up to a point,profitabilityincreasedwith increasinginterlocking; as interlockscontinuedto increase,however,profitabilitybeganto decline.
Several authorshave suggested, and interviews with bankershave confirmed
(Richardson1987), thatbankersoftenjoin a boardwhen a firmis in financialdifficulty. Thus it is precisely when profitsarelowest thatinterlockingmay occur.
This finding points to an alternativeinterpretationof the basis for interlocking: an attemptto monitor (Aldrich 1979:296, Stiglitz 1985, Eisenhardt
1989). From the formationof US Steel and InternationalHarvesterat the turn
of the century, in which every board member of both firms was personally
approvedby JP Morgan,firmshave employed boardseats as devices to monitor otherfirms. Large stockholders,bankers,and customersfrequentlyexpect
to achieve boardrepresentation.This phenomenonhas led some theorists to
suggest that interlocksare instrumentsof corporatecontrol. Researchershave
identifiedlinks between stock ownershipand boardrepresentation(Mizruchi
1982: Ch. 2; Berkowitzet al 1979, Burt 1983, Caswell 1984), and the finding
thatthe appointmentsof bankersto a firm'sboardtend to follow periodsof de-
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MIZRUCHI
dining performance(Richardson1987, Mizruchi& Stearns1988) is consistent
with a monitoringperspective. Empirically,however,it is often impossible to
distinguish monitoring,or influence-driven,interlocksfrom cooptation ones.
In both cases, the interlockfollows resourcedependenceflows. In fact, several
researchershave suggestedthatcooptationand influenceoccur simultaneously
in any resource dependence-based interlock (Pfeffer 1972:222, Allen 1974:
p. 401, Pfeffer & Salancik 1978: pp. 164-65, Pennings 1980: pp. 23-24,
Mizruchi& Stearns 1988: p. 195). Since, in the resourcedependencemodel,
control of resourcesis said to confer power on an organization,then the existence of a dependentfirmwill providean opportunityfor the exercise of power
over that firm. One form of this exercise may involve the monitoringfunction
thatboardrepresentationentails.
On the other hand, both Pennings and Meeusen & Cuyvers suggest that
outside directorspreferto join the boardsof well-performingfirms. This certainly makes sense from the perspectiveof the individualinvolved in the interlock, a point I addressbelow. It is significantto note, however, that both
an organization'spreferenceto monitorpoorly performingfirms and an individual's preferenceto sit on the boards of well-performingfirms could exist
concurrently. If so, it would explain the inverted U-shaped function identified by Bunting. What remains unresolved here is the causal direction of
association. Both of these examples suggest that
the interlocking-profitability
profitability(or lack of profitability)drives interlocking. Yet components of
the resourcedependencemodel suggestthatinterlockingpromotesprofitability.
Exactly what interlocksdo, and how they affect firm behavior,is an issue that
we addressat length below.
Legitimacy
Boards of directorsperforman importantfunctionregardingthe reputationof
a firm (Selznick 1957, Parsons1960). When investorsdecide whetherto invest
in a company,they considerthe firm's strengthand the quality of its management. By appointingindividualswith ties to otherimportantorganizations,the
firm signals to potential investors that it is a legitimate enterpriseworthy of
support. The quest for legitimacy is thus a furthersource of interlocking. In
this formulation,firms are seeking not so much an alliance with anotherfirm
as the prestige thatan associationwith such a firm may convey.
Legitimacymay also be a prerequisitefor the securingof resourcesdiscussed
in the previous section. A bank may be more willing to lend money to a firm
if it believes that the firm is directed by reputableindividuals (DiMaggio &
Powell 1983). The probabilityof the banklending money to the firmmay thus
increaseif the firm alreadyhas bankerson its board.
CORPORATE
INTERLOCKS 277
Although the concept of legitimacy has always played a prominentrole in
organizationaltheory (Scott 1992), the legitimacymodel has received little attentionfrom interlockresearchers.The model is difficultto test, andits predictions areclosely relatedto those of the resourcedependencemodel. Cooptation
itself in part involves an attemptto gain the legitimacy that may be necessary
for the acquisitionof resources. The existing literatureon boardappointments
certainlyimplies, however,thatthe questfor legitimacyunderliesthe formation
of many interlocks.
CareerAdvancement
Interlocksoccur between organizations,but they are createdby individuals. A
tie is often institutedat the behest of both organizations. Certainlythe firm
whose board an outside directorjoins is making an organizational-leveldecision to invite the person. But the outside director's decision to join may
be the decision either of the firm or of the individual, or a combination of
both.
Two studies (Stokman et al 1988, Zajac 1988) have proposed theories of
interlockformationthat treatinterlocksin termsof the individualswho create
them ratherthan from the perspective of interfirmrelations. According to
Zajac,individualsjoin boardsfor financialremuneration,prestige,andcontacts
that may prove useful in securingsubsequentemploymentopportunities.The
existence of interlocksis viewed as an inadvertentconsequence of decisions
made for reasonshaving little to do with the desire to link organizations.For a
20-yearperiodamonga sampleof largeDutchfirms,Stokmanet al show thatthe
vast majorityof new directorappointmentswere drawnfrom a relativelysmall
numberof personswith high levels of experienceand expertise. They suggest,
in line with Zajac's point, thatthese directorswere chosen for their individual
characteristicsratherthan for the organizationsthey represent. Useem, in his
study of the inner circle (1984), develops a similar theme, suggesting that
individuals who sit on multiple boards benefit from what he calls "business
scan."As one executive told Useem (1984:47-48):
You'redamnrightit's helpfulto be on severalboards. It extendsthe rangeof your network
and acquaintances,and your experience. That's why you go on a board,to get something
as well as give.... Itjust broadensyour experience,the memorybankthatyou have to test
things against.
Fromthe perspectiveof the host organization,outsidedirectorsarechosen as
individualsfor a numberof reasons(Mace 1971). First,firmswantboardmemberswho will addprestigeto theirorganization(see thediscussionof legitimacy
above). Among the largestfirms,the majorityof corporation-basedoutside directorsare CEOs of theirrespectivefirms. Second, firmswant boardmembers
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MIZRUCHI
who are capable of providing input and advice, often on issues specific to
already-identifiedcorporatestrategies. Third,firms want boardmemberswho
are "good citizens,"individualsknown by reputationto be both conscientious
and noncontroversial.Those most likely to meet the thirdcriterionare people
knownto the CEO andotherfirmleaders,includingthose who arefriendsof the
CEO. Outside directors,therefore,are often selected from within a relatively
small circle of eligible individuals. As one directorwith representativeviews
told Mace (1971:99):
Here in Baltimorethereis a relativelysmall groupof leading businessmenwho dominate
all the principalcompanyboardsin the area. They are all fine men, they are public-spirited
men, they have high standardsand are widely admired.Individuallyand collectively their
names are a credit to the boardsthey are on. They are friends of friends, and new board
vacancies are filled from theirranksand their rosters.
These findings suggest that interlocksprovide benefits to both the inviting
firm and the invited outside directorthat are independentof specific relations
between the connected organizationsbut are a function instead of the individuals involved. But this view is in no way incompatiblewith either of the
interorganizationalmodels describedabove. On the one hand, as in the cases
described by Mace, it is likely that the interlocks created by these individuals are largely independentof relationsbetween the firms themselves. On the
otherhand,specificindividualsareoften expertsbecauseof theirorganizational
affiliations.' Therefore,the fact that an individualis a bankermatters,even if
the specific bankfrom which the individualis drawndoes not. Even here, one
must ask why a particularbankeris chosen. This could be a result of a prioror
ongoing business relationbetween the invitingfirm and the bank, a friendship
relation between leaders of the firms, or the lack of availabilityof alternative
directors.All threeof these cases involvefactorsrelatedto social structuralconditions: a business transactionbetween the firms;a social tie between the firm
leaders; and a limited availabilityof suitable candidatesas a result of already
establishedobligationsinvolvingotherfirms. The careeradvancementmodels,
therefore,are as much complementsas alternativesto the interorganizational
models describedabove.
'Directors who are heavily interlockedare more likely to be chosen for new board positions
(Davis 1993). In fact, the severence of an organizationalaffiliationmay rendera given outside
directorless desirable. In an examplecited by Useem (1984:39), an outsidedirectorof an insurance
company was not renominatedto the board after the retail firm of which he had been president
was acquiredby anotherfirm. As a directorof the insurancecompanytold Useem, "Thepresident
suddenlywas withouta job; he devotedhis time to workingwith the local artmuseum,buthe didn't
keep up with the business communitybecause he hadn'tany base.... His being on the boarddoes
not add anything."
CORPORATE
INTERLOCKS 279
Social Cohesion
An alternativeto both the interorganizationaland careeradvancementmodels
is the view that interlocksrepresentsocial ties among membersof the upper
class. An early (and oft-quoted) statementof this position was presentedby
Mills (1956:123):
"InterlockingDirectorate"is no mere phrase: it points to a solid feature of the facts of
business life, and to a sociological anchorof the communityof interest,the unificationof
outlooks and policy, that prevailsamong the propertiedclass.
The model of interlocksas representingsocial ties is impliedin Mace's findings
as well. As one directortold Mace (1971:99):
Here in New Yorkit's a systems club. They are all membersof the Brook Club, the Links
Club, or the Union League Club. Everybodyis washingeverybodyelse's hands.
FollowingMills, severaltheorists,includingDomhoff (1967), Zeitlin(1974),
andUseem (1984), viewed interlocksas elementsof capitalistclass integration.
Zeitlin (1976:900) proposedthispositionas an explicit alternativeto the interorganizationalmodel:
Neither "financiers"extractinginterestat the expense of industrialprofits nor "bankers"
controlling corporations,but finance capitalists on the boards of the largest banks and
corporationspresideover banks'investmentsas creditorsand shareholdersorganizingproduction, sales, and financing, and appropriatingthe profits of their integratedactivities
(emphasisin the original).
The early analyses of interlocknetworksoperatedbroadlywithin this framework (Levine 1972, Bearden et al 1975, Mariolis 1975, Sonquist & Koenig
1975, Mintz & Schwartz 1981, Mizruchi 1982, Scott & Griff 1984, Stokman
et al 1985), although the extent to which these studies viewed interlocks as
organizational-or class-level phenomena was often unclear. The issue of
whetherinterlockswereprimarilyorganizationalor class phenomenawas at the
root of the first brokenties studies. For Koenig et al (1979), Ornstein(1980),
andPalmer(1983), the frequencywith which accidentallybrokeninterlocksbetween firmswerereconstitutedwas anindicatorof the extentto which suchinterlocks representedsignificantlinks between the firmsin question. The fact that
the majorityof brokenties were not reconstitutedwith the same firmsuggested
to these authorsthat interlockswere not primarilyorganizationalphenomena.
They inferredfromthis thatthe majorityof interlocksreflectedintraclasssocial
ties ratherthaninterorganizationalresourcedependenceor controlties.
This interpretation,althoughplausible,was difficultto sustainbecause of its
true-by-defaultcharacter.Steams & Mizruchi(1986) arguedthateven resource
dependence-basedinterlockswill not necessarilybe replacedwith a tie to the
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MIZRUCHI
same firm (see also Pfeffer 1987). Some links will involve what they term
functional,as opposed to direct,reconstitutions,in which a brokentie is filled
by a tie to a differentfirmin the same industryas the previoustie. Even when
functionalreconstitutionswere taken into account, Steams & Mizruchifound
thatmorethanhalfof thebrokenties theyexaminedwerenotreconstituted.Still,
theiranalysissuggestedthatthe incidenceof organization-basedinterlockswas
higherthanhadbeen foundin the earlierbrokenties studies. Subsequentstudies
in this areamoved from computingthe frequencyof broken-tiereconstitutions
towardattemptingto predictthe conditionsunderwhich reconstitutionsoccur
(Ornstein 1984, Palmeret al 1986). This contributedto the recognition that
interlocksreflectedboth interorganizationaland intraclassties. A synthesis of
the organizationaland class models (Mizruchi 1989, 1992: Ch. 4) suggested
thateven ties developedfor organizationalpurposescould havetheconsequence
of facilitatinginterfirmpolitical unity.
SO WHAT?:CONSEQUENCESOF INTERLOCKING
Whateverthe disputesoverthecausesof interlocks,theypale comparedto whatI
call the "So what?"question. If interlocksareto be worthstudying,it is essential
thatthey be shown to have consequencesfor the behaviorof firms. Most of the
analyses of the determinantsof interlockshave implied variousconsequences.
As collusive mechanisms,interlocksare assumedto facilitate communication
among competitors. As mechanisms of cooptation, interlocks are assumed
to pacify the resource provider'smanagement. As monitoringmechanisms,
interlocksare assumedto providethe monitoringfirmwith informationon the
receiving firm'soperationsas well as potentialinfluenceon its operations.And
as reflectionsof social cohesion, interlocksareassumedto facilitatethe political
unity necessaryfor effective political action.
One difficultyin addressingthis issue is the problemof how interlockshave
been employed by various researchers. Some have treatedinterlocks as significant phenomenasui generis. The presence of an interlock is expected to
actually affect a firm'sbehavior,even if all otherconditionsare identical. Others, however,have treatedinterlocksas representativeof a more general social
relationbetweenfirms. Forthese researchers,it is not the existence of the interlock per se thatis crucialbutthe presenceof a morebasic tie betweenfirmsthat
the interlock is likely to reflect. As we shall see, researchershave not always
been explicit aboutthe meaningsthey have assigned to interlocks.
Interlocksand CorporateControl
The most explicit earlystudiesto assumebehavioralconsequencesof interlocks
were those dealing with corporatecontrol. After the publicationof Berle &
CORPORATE
INTERLOCKS 281
Means's classic work, TheModernCorporationand Private Property([1932]
1968), managerialismbecame the dominantmodel of corporatecontrol. In
this view, which held sway among US social scientists well into the 1970s, as
corporationsbecameincreasinglylargeandstockholdingsbecame increasingly
dispersedaroundthe turnof the twentiethcentury,controlof the firmpassed by
default to the managerswho ranthe firm'sdaily operations.This separationof
ownershipfrom controlwas believed to have had a series of consequences for
corporatebehavior(less emphasis on profitmaximization)and for the society
as a whole (the dissolutionof the capitalistclass; see Mizruchi 1982:17-21 for
a discussion of this issue). Dating back to the Congressionalinvestigationsof
the early 1900s, interlockshad been viewed by some observersas a means by
which controlof corporationscould be traced. The assumptionwas thata firm
that had extensive representationof banks and other corporationson its board
was subjectto controlby those institutions.In the 1970s, sociologists rekindled
their interestin this topic.
Among the first sociological analyses to use interlocksto trace control was
a work by Mariolis (1975). Examiningthe Fortune800 from 1969, Mariolis
employed networkmethodsto examine the centralityof varioustypes of firms,
based on the assumptionthathighly centralfirmswould be the most powerful.
In a test of the hypothesisthatthe controlof corporationsin the United States
was centeredin banks,Mariolis found thatmajorcommercialbanks were disproportionatelyrepresentedamongthe most centralcorporations.Bankstended
to have the highest numbersof interlockswith otherfirmsandto be interlocked
with otherhighly interlockedfirms,the latterfeatureformingthe basis of their
high centrality.
Mariolis'sstudyraisedquestionsabouttheextentto whichinterlocksfunction
as mechanismsof control. He acknowledgedthatbanksmightbe able to control
a firm,throughsuchmechanismsas stock ownership(US banktrustdepartments
frequentlyinvestpensionfundsin nonfinancialcorporations)andcontrolof loan
capital, even in the absence of boardrepresentation.It is also true (1975:426)
thateven the presenceof two or threerepresentativeson the boardof a firmdoes
not guaranteea bank control of that firm. Nor is it clear what difference such
control would have for the firm's behavior. As with many pioneeringstudies,
this one raised more questionsthan it answered.
Whetherboardrepresentationis effective at all dependson the role of boards
of directors.Althoughit is not well known,Berle & Meanshad actuallydefined
managementas the board ([1932] 1968:196), implying that directors, rather
than officers, were the dominantforce in management-controlledfirms. By
the 1950s, however, managerialistsbegan to suggest that boards were mere
tools of top management.Certainlythereis a considerableamountof evidence
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MIZRUCHI
thatboardsof large nonfinancialcorporationsare largelypassive and typically
accede to the wishes of the CEO (Mace 1971, Herman1981, Lorsch& MacIver
1989). On the other hand, simply because officers make most of the day-today decisions does not ensure thatthey, ratherthanthe board,control the firm
(Mizruchi 1983). A boardthat has been passive for many years while a firm
performedwell may find itself pressed into service when performancedrops.
It is not uncommon for boardsto oust CEOs duringperiods of crisis (James
& Soref 1981, Mizruchi 1983). In that sense, a firm with strategicallyplaced
representativeson the boards of a range of companies might in fact exercise
considerablepower in the corporateworld, even if these board memberships
do not ensure controlover particularfirms.
Building on this conceptionof interlockcentralityas an indicatorof general
influence, Mintz & Schwartz(1985) developed a model of bankhegemony, in
which banks exercise power not by controllingfirms but by defining, through
their routine actions, limits on the discretion of corporatemanagers. Mintz
& Schwartzflesh out their model in their first five chapters,using theoretical
argumentand illustrationsfromthe businesspress. They then turnto a detailed
analysis of interlockpatternsamong US firmsduringthe 1960s.
Some interlocks,Mintz & Schwartzsuggest, fulfill one or more of the roles
attributedto them by the theoriescited above, primarilycontrol or cooptation.
But most interlocks, in their view, reflect not dyadic ties between firms but
"instrumentsof discretion within a system defined by structuralconstraints"
(1985:128). Interlocksmay be drivenby firms' informationneeds, as well as
by personal ties between firm managers. As suggested above, they may also
be driven by the directors'specific qualificationsor experiences. Importantly,
an interlockmay simultaneouslyreflecttwo or more of these characteristics.A
firm's need for informationabouta particularindustrymay lead to the appointment of a friendof the CEOfromthatindustrywho is also personallyambitious
and views the outsidedirectorshipas a valuablecareeropportunity."Themost
compelling interpretationof the overall networkcreated by the collection of
individualreasons for and responses to directorrecruitmentis a general communicationsystem"(1985:141).
The primaryfeatureof the interlocknetwork,in additionto the centralityof
banks, is the predominanceof representativesof nonfinancialcorporationson
the boards of banks. In Mintz & Schwartz'sview, this reflects the desire of
major players in the corporateworld to participatein decisions about capital
allocation (1985:151). Banks, meanwhile,by appointingdirectorsfrom a wide
range of industriesgain valuable informationabout industryconditions and
investmentopportunities.Mintz & Schwartzsuggest, then,thatbankcentrality
results from the corporateofficials' desire for influence over the allocation of
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CORPORATE
capital. The rangeof corporateofficialson bankboardsparticipatescollectively,
accordingto Mintz& Schwartz,in broaddecisions abouteconomy-widecapital
allocation. Consistentwith, althoughnot explicit in, their model is the view
that banks fulfill the function of mediatinginterfirmdisputes so that business
can approachthe state as a unifiedpolitical actor. The authorsdo not examine
business political activity,however.
Because the Mariolis and Mintz & Schwartzstudies were based primarily
on cross-sectionaldata, which thereforeprovidedno basis for comparison,it
was impossible to determinethe extent to which the networksthey identified
demonstrateda unified business community. To provide such a comparison,
Mizruchi(1982) conducteda historicalanalysis of interlocknetworksat seven
differentpoints from 1904 through 1974. Claiming that the managerialistargument implied a declining level of cohesion in the US business community,
Mizruchishowed thatthe density of the networkof interlocksamong 167 large
firms declined sharplybetween 1912 and 1935 but stabilized and actually increased slightly thereafter.He concludedthatbusiness unity was a continuing
phenomenon into the 1970s. As with the other studies, however, Mizruchi
presentedno evidence of the behavioralconsequencesof these networks. The
comparativestudies of interlocknetworksin 12 countries,compiled by Stokman et al (1985), likewise paid little attentionto behavioralconsequences of
interlocks.2
Interlocksas Indicatorsof NetworkEmbeddedness
By the early 1980s, interlock researchershad become increasingly aware of
the need to study the behavioralconsequences of interlocks. This realization
coincided with the publicationof Granovetter's(1985) importantstatementon
networkembeddedness. Granovetterarguedthat economic behavior,as with
humanbehaviorin general,is socially embedded;thatis, economic actorsareaffected by theirrelationswith otheractors. It is theserelations,morethanabstract
notions of normsor self-interest,thathave the primaryimpacton economic behavior, he argued. This suggested that a range of firm behaviors-strategies,
structures,and performance-could be affected by the firm's relations with
otherfirms. Interlockingdirectorates,as the most widely employedmeasureof
interfirmnetworks,providea logical site from which to test the embeddedness
model.3
2The study by Meeusen & Cuyversin this volume was an exception.
3Gerlach(1992) has conductedan exhaustivestudy of Japanesekeiretsu,business groupstied
togetherby a system of interlocksand otherformalrelations. Uzzi (1996) has recently completed
a study that employs detailed interfirmtransactiondata from the apparelindustryto test the embeddednessmodel. Gulati (1995) has examinedthe determinantsof a range of interfirmalliances,
includingjoint ventures,R& D agreements,and technology exchanges.
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In recent years, the emphasis on interlockshas moved increasinglytoward
their value as a communicationmechanism ratherthan as a mechanism of
control. This is reflectednot only in the work of Mintz & Schwartzbut also in
thatof Useem (1984). It is also impliedby Granovetter'sembeddednessmodel.
Much of the researchthat attemptsto identify the behavioralconsequences of
interlocks has thus treatedinterlocks as a communicationmechanism rather
than as a means of control. Nevertheless,evidence thatthe behaviorof firmsis
systematically affectedby social structureshas only recentlybegun to appear.
One reason for the earlierpaucity of behavioralevidence on interlockswas
thatit was unclearexactly whatconsequencesinterlockswere supposedto predict. Those who examinedinterlocksin termsof eithercollusion or cooptation
implied that interlocksimprovedfirm performance,including profits. As we
saw earlier, the evidence for this association has been mixed at best. Those
who examinedinterlockswithinthe corporatecontroltraditionpredictedeither
of two sets of outcomes. Interlockswere viewed as altering the behavior of
firms, as, for example,forcingfirmsto transactbusinesswith some firmsrather
than others even if the latter provided more favorableterms. Or interlocks
were viewed as indicativeof business political cohesion, which was expected
to increase corporatepolitical power. For some theorists,the behavioralconsequences of interlockswere unspecified.
Except for the few attemptsto predictprofitsfrom interlocks,only two studies priorto the mid-1980s systematicallyexaminedthe effect of interlockingon
corporatebehavior.These were Koenig's (1979) dissertationon corporatecontributionsto RichardNixon's presidentialreelection campaign,and Ratcliff's
(1980) studyof elite networksand lendingbehavioramong St. Louis banks. In
a study of Fortune800 companies,Koenig found thatfirmsthat were centrally
located in the interlocknetworkwere, ceteris paribus,more likely to contribute
to Nixon's campaign. Ratcliff found, in a study of the lending activities of
all 78 banks based in the St. Louis metropolitanarea in 1975, that a given
bank's numberof interlockswith 350 St. Louis-basedfirmswas positively associated with lending to corporationsand negativelyassociatedwith mortgage
lending.
Explicit or implicit in many of the interlockstudies of the 1970s and early
1980s was the view that interlock networks among large corporationswere
indicative of the cohesion within the capitalist class, which helped solidify
business into an effective, and dominant,political actor. Mizruchi's (1982)
studyof the evolutionof the US interlocknetworkduringthe twentiethcentury,
referredto earlier,was an example of this work. After findingthat interlocked
directorswere more likely to be active in variouspolicy planningorganizations
(1979), Useem (1984) conductedinterviews with interlockeddirectorsin the
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285
United States and Britain. Useem found a high level of political consciousness
among these directorsin both countries, suggesting that they formed a leading edge of the capitalistclass, which he termedthe "innercircle."Although
Useem's study was a majoradvance, there remaineda need for a systematic
demonstrationof the effect of interlockson corporatepolitical behavior.
By the mid-1980s, the newly availabledata on the campaigncontributions
of corporatepolitical action committees (PACs) among US firms became a
rich source of data on corporatepolitical behavior. Just as the meaning of
interlocks has been the subject of considerabledebate, so has the meaning
of PAC contributions. But most observers agree that corporatePACs take
theircontributionsvery seriously and thatthe contributionsstandas legitimate
indicatorsof a firm'spoliticalpreferences(see Mizruchi1992: Ch. 5, Clawson
et al 1992 for detailed discussions and references on this issue). PAC data
became a means to examine whetherinterlocksactually affected the political
behaviorof firms.
In one earlyformulation,Mizruchi& Koenig (1986) assumedthatfirmswith
similar PAC contributionpatternscould be viewed as politically cohesive. If
interlockingdirectoratescontributedto political cohesion, they reasoned,then
interlockedfirms should have more similar contributionpatternsthan would
noninterlockedfirms. Unfortunately,although the other results of this pilot
study were promising, the interlockingcomponentyielded null and possibly
even negative results. There was a small, negative association between the
degree of interlockingbetween industriesand the similarityof campaigncontributionsbetween them.
In a more systematic study, reportedfirst in a series of articles (Mizruchi
1989, 1990, for example) and then fleshed out in detail in a subsequentbook
(1992), Mizruchimovedfromthe interindustryto the interfirmlevel of analysis,
dealtwith a moreextensivedataset, andincorporateda widerrangeof variables.
In these works,Mizruchifound a consistentpositive associationbetween interlocking andsimilarityof contributionpatterns.Interestingly,it was not so much
direct interlockties between firms but rathertheir indirectties throughfinancial institutions(situationsin which two firms were interlockedwith the same
banksand insurancecompanies)thatwere associatedwith similarcontribution
patterns. Because firms with indirectties have severalcommon sources of information,this suggestedthe value of interlocksfor what Useem (1984) called
a firm's"businessscan,"its awarenessof its environment.Mizruchi(1992: Ch.
7) also showed that,controllingfor severalotherfactors,interlockedfirmswere
morelikely thannoninterlockedfirmsto expressthe same positions on political
issues in Congressionalhearings. These findingswere the first to demonstrate
a systematiclink between interlockingand corporatepolitical unity.
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At the same time, organizationalresearcherswere uncoveringseveral findings thatshowed thatinterlockswere associatedwith a wide rangeof corporate
strategies. Many of these did not deal explicitly with interlocksbut were concerned instead with the composition of firms' boards, especially the number
and/orproportionof outsidedirectors.Because outsidedirectorsare a primary
source of ties to other firms, however, studies showing the effects of board
composition on firm behavior are highly relevantto the interlock literature.
In one of the earliest such board composition studies, Cochranet al (1985)
found that firms with high proportionsof outside directorswere more likely
than those with high proportionsof inside directorsto provide top managers
with "golden parachute"packages (lucrativeseverance agreements). Subsequent studies of golden parachutesby Singh & Harianto(1989) and Wadeet al
(1990) revealed similar findings. The authorsof the first two studies had hypothesized that firms with insider-dominatedboardswould be more likely to
providegolden parachutesbecauseof the CEO'sgreaterinfluenceover insiderdominatedboards. Wadeet al developed a possible explanationfor this paradoxical result,noting thatthe key issue may be the extent to which the outside
directors were appointedduring the particularCEO's reign. If so, they suggested, then even an outsider-dominatedboard would not be independentof
the CEO. Unfortunately,the authorsmeasuredonly the outsiders appointed
after the appointmentof the currentCEO and ignored those appointedprior
to the appointmentof the currentCEO. They did find, however, that CEOs
with high numbersof outside board seats were more likely to receive golden
parachuteagreements,suggesting thatintegrationinto the interfirmsocial network (as describedby Useem, Zajac, and Stokmanet al) was associated with
more favorableoutcomes at the individuallevel. A study by Davis (1994) further confirmedthis interpretation.As in the previous studies, Davis found a
positive association between prevalenceof outside directorsand adoption of
golden parachuteplans. But a strongerpredictorof golden parachuteadoption
in Davis's model was whethera firmwas interlockedwith a previousadopter.4
In a related study, Kosnik (1987) found that firms with high numbers of
outside directorswere less likely to repurchasetheir own stock at an abovemarketprice (a takeover-preventiontactic known as "greenmail")than were
firmswith fewer outsidedirectors.Accordingto Kosnik,this findingsuggested
that firms with more outside directors were more effective. Kosnik (1990)
replicatedthis in a subsequentstudy with an additionalset of predictors. In a
study of hospital boards,Goodstein & Boeker (1991) found that increases in
the proportionof outsidedirectorswere associatedwith expansionsof hospital
4Westphal& Zajac (1995) found that CEO compensationtends to be higher when CEOs are
demographicallysimilarto boardmembers.
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287
services. Davis (1991) found thatfirmswere more likely to adopt"poisonpill"
takeoverdefenses (changesin bylaws explicitly preventingthe firmfrom being
acquired)when they were centrallylocated in interlocknetworksand were interlockedwith firmsthathad alreadyadoptedpoison pills. Palmeret al (1993)
found, in a study of largeUS firmsin the 1960s, thatfirmsinterlockedthrough
non-officerties with firms that had already adoptedthe multidivisionalform
were more likely to adoptthe MDF duringthatdecade thanwere firmswithout
such ties.5 D'Aveni & Kesner (1993) found that takeoverattemptsin which
the top managersof both the bidderand targetfirms sharedelite connections
(including multiple directorships)were less likely to involve resistance than
were takeoverattemptswithoutsuch characteristics.And Stearns& Mizruchi
(1993a,b, Mizruchi& Stearns1994) found a positive associationbetween bank
representationon a nonfinancialfirm'sboardandthe amountof externalfinancing the firm employed.
On some issues, the associationbetweeninterlockingandcorporatestrategies
is less clear. In a studyof campaigncontributionsduringthe 1982 election cycle
by 443 large US corporations,Burris (1987) found no association between a
firm's interlockswith 100 largeUS corporationsand its tendencyto contribute
to incumbents,Republicans,or conservatives.Clawson& Neustadtl(1989), on
the otherhand,found, in a studyof 243 US firms,thatfirmswith high numbers
of interlocks with a group of 250 large firms were more likely to contribute
to incumbentsand less likely to contributeto conservativesduring the 1980
election cycle.
In studies of mergersandtakeoversthe findingshave been similarlyambiguous. In a study of all takeoverbids of Fortune500 firms during the 1980s,
Davis & Stout (1992) found no associationbetween the presence of a banker
on a firm's board and the likelihood of the firm being a targetof a takeover
bid. Fligstein & Brantley(1992) similarlyfound no associationbetween bank
interlocksandmergeractivityamong 100 largeUS firmsduringthe 1970s. On
the otherhand,in a studyof largeUS firmsduringthe 1960s, Palmeret al (1995)
found that firms with interlockswith commercialand investmentbanks were
more likely to be acquiredin a friendly than a predatoryfashion. Haunschild
(1993), in a study of 327 firms in four US industries,found that firms whose
officerssat on the boardsof otherfirmsthathadrecentlyengagedin acquisitions
were more likely to engage in subsequentacquisitionsthemselves. And in a
study of 120 large US firms between 1979 and 1987, Fligstein & Markowitz
(1993) found that firms with bank officers on their boards were more likely
5Palmeret al also found, paradoxically,that firms with officer ties to prior MDF-adopters
were less likely than firms without such ties to adopt the MDF. (See Palmer 1993:122-23 for an
interpretationof this finding.)
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to be targetsof takeoversthan were firms without bank officers. Fligstein &
Markowitzsuggest fromthis findingthatbankersare often appointedto boards
to encouragethe sale of firmsexperiencingfinancialdifficulties.
TheProcess of Embeddedness:An Example
It is clear from the studies cited above that a substantialand rapidly growing
literaturesuggests thatinterlocksareassociatedwith a wide rangeof corporate
behavior.This evidence is not withoutsome controversy;at least a few studies
show no interlockeffects. But a much largernumberdo reveal such effects.
And all of the studies cited above could be used to supportthe argumentthat
the behaviorof firms is socially embedded.
As criticshavepointedout (Hirsch1982, Stinchcombe1990, Davis & Powell
1992, Pettigrew1992), however,verylittleis knownabouttheprocessesthrough
which interlocksmight affect corporatebehavior.The studies cited above rely
on publicly availablearchivaldata,in which authorstheoreticallydeducecausal
hypotheses about the effects of interlocksor board structuresin general and
then examine these hypotheseswith variousregressiontechniques. Still, most
of these researchershave workedhardto specify the processes impliedby their
models.
Any numberof these works could be cited to illustratethis point. The work
by Davis (1991) on adoptionof poison pill takeoverdefenses provides a good
example. Davis develops agency theory hypotheses to predict the likelihood
of adoption. Because agency theory and networkhypotheses are often similar
hypothesesthat
(Mizruchi& Steams 1994), Davis developsinterorganizational
he believes distinguish network formulationsfrom agency theory ones. In
additionto examiningtheproportionof outsidedirectors(a variablepredictedby
agency theoriststo influenceboardbehavior;see Kosnik 1987), Davis predicts
positive effects on poison pill adoptionfor two explicitly network variables:
a firm's centralityin the interlock network and the extent to which a firm is
interlocked with other firms that have already adopted. Both variables are
strong predictorsof poison pill adoption, providing powerful supportto the
networkmodel.
The logic of Davis's argumentis instructive.Networkcentrality,as reflected
in interlock ties, is a form of social capital that provides access to information that flows throughthe network(1991:592). Heavily interlockeddirectors
constitutea vanguardof the corporateelite, integratedinto the communityand
often in the forefrontof innovations.Poison pills were an innovationdesigned
to limit takeoversthatcore membersof the corporateelite viewed as dangerous.
Thus, firmscentrallylocated in the interlocknetworkwould be among the first
to employ this innovation.A secondcomponentof the embeddednessargument
is theprocessby which innovationsspread.Accordingto Davis (1991:593-94),
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289
directcontactwith an innovatorhelps clarifythe value of the innovation.Thus,
firmsinterlockedwith currentadopterswill be morelikely to adoptthemselves.
Significant for our purposes is the role of interlocks in these hypotheses.
Davis is not claimingthatinterlocksarethe only means by which the corporate
elite is integratedor by which informationspreadsamongfirms. He arguesonly
that they are a mechanismthroughwhich informationmay pass. Would the
diffusion of the poison pill have occurredas rapidly,or in the same way, in the
absence of interlockties? One way to answerthis is to consider the variables
that were controlledin Davis's model: proportionof inside directors;several
variablesrelatedto stock ownership,includingconcentrationof ownershipand
holdings by boardmembersand institutions;numberof prioradopterswithin
the firm'sindustry;incorporationin eitherNew Yorkor Delaware(to controlfor
legal idiosyncrasies);and several marketand performancevariables. Perhaps,
had the data been available,Davis could have examinedfriendshippatternsor
geographic proximity among top corporatemanagers. Both variables would
probably have been correlatedwith interlock ties, without the advantageof
capturingthe importanceof corporateaffiliation. Do the interlock patterns
actuallyreflecta deeperset of social relationsamong membersof the corporate
elite? Perhapsthey do, but no one has proposed an indicatorthat surpasses
interlocksas a measureof social relationsamongfirms. Davis's articleprovides
convincing evidence not only thatnetworksmatter,but thatinterlocknetworks
matter,and thatthey influencethe behaviorof firms.
INTERLOCKSAND LONGITUDINALANALYSES:CAUSE,
CONSEQUENCE,OR BOTH?
Most studies of the consequences of interlockinghave been cross-sectionalin
nature.Althoughfor some of these, the proposedcausal orderingis compelling
and the reverseimplausible,there are otherstudies in which it is less clear.
Consider our earlier discussion of the link between interlocks and profits,
for example, with a few exceptions (Carrington1981, Meeusen & Cuyvers
1985, Baysinger & Butler 1985), researchershave generally failed to find a
positive effect of interlockson firmprofitability.A repeatedfinding,however,
is a negative effect of profitabilityon interlocking. Low profitsseem to invite
interlocks, but interlocks do not appear typically to improve profits. Most
studies of the interlock-profitlink have been cross-sectional, however, and
researchershave failed to consider the possibility that outsiderspreferto join
the boardsof well-performingfirms(Meeusen & Cuyvers 1985, Stokmanet al
1988, Zajac 1988). There have, nevertheless,been some longitudinalstudies.
Mizruchi& Stearns(1988), in a longitudinalstudy of the creationof interlocks
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by 22 largeUS manufacturingfirms,found thatfirmswhose profitsdeclined in
a given yearwere morelikely thanthose whose profitsdid not decline to appoint
representativesof financialinstitutionsto theirboards. Lang& Lockhart(1990)
reportedsimilarfindings in a longitudinalstudy of the airline industry. Using
a cross-laggedpanel model on 204 leading Canadianfirms,Richardson(1987)
examined, simultaneously,the effect of profits in 1963 on interlocks in 1968
and the effect of interlocksin 1963 on profitsin 1968.6 He found virtuallyno
effect of interlockson subsequentprofitability.Consistentwith the literature,
however, he found that the effect of profits on interlockingwas negative, in
line with other studies that showed bankerstending to sit on the boards of
unprofitablefirms.7
AlthoughRichardson'sfindingsappearto solidify the earlierfindingson the
link between interlocksand profitability,in other areas even longitudinaldata
may not be sufficientto resolve interpretivedisputes. In a study of 22 large US
manufacturingfirms between 1955 and 1983, Stearns & Mizruchi (1993a,b,
Mizruchi & Stearns 1994) have examined the determinantsof firms' use of
external financing. One of their hypotheses, drawn from the embeddedness
model, is thatfirmswith representativesof financialinstitutionson theirboards
will be more likely than firms without such representativesto employ high
levels of externalfinancing. The findings supportthis hypothesis(Mizruchi&
Stearns 1994).
This formulationcontainsa causalorderingproblem,however. Althoughthe
presenceof a bankeron a firm'sboardmay indeedhavean independenteffect on
the firm'sdecision-making,the presenceof the bankerin the firstplace may be
a consequence of the firm's strategy.One advantageof time-seriesdata is that
they should allow the analystto avoidthis problem:It must only be ensuredthat
the presence of the bankeron the boardprecedesthe firm'sborrowing,using a
lagged dependentvariable.
Unfortunately,it is not that simple. A firm'sdecision to borrowcould have
preceded both the borrowingand the appointmentof the boardmember. For
example, a firmmay have decided in 1959 to embarkon a long-termexpansion
6The interlocksexaminedby Richardsonwere those directionalties (createdby officers of one
of the firms)accidentallybrokenin 1963 thathad been reconstitutedby 1968.
7Althoughtheirpaperwas not framedwithinthe interlockliterature,Baysinger& Butler(1985)
also used a cross-lagged panel model to examine the relationbetween "boardindependence"(the
proportionof outside directors)and performance. They found a positive association between a
firm'sproportionof outside boardmembersin 1970 and its performancerelativeto its industryin
1980, but no significantassociationbetween performancein 1970 and the proportionof outsiders
in 1980. As noted above, this is one of the few studies that showed a positive associationbetween
outside directors and profits. The ten-year time gap between the two panels in the study raises
questionsaboutthe natureof the effects, however.
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291
thatwould requirelargeamountsof externalfinancing. As partof this strategy,
the firmin 1960 or 1961 appointsone or morebankersto its board. Thenin 1961
or 1962 the firm'sborrowingincreasessharply.Did the interlockinfluencethe
borrowing,or did the borrowinginfluencethe interlock?Or did the decision to
borrowinfluencethe interlock,which then influencedthe specific characterof
the decision to borrow?
Notice thateven if interlockingwere a consequenceof an initial decision to
borrow,it is still viewed as significantby the firm's management.Notice also
thatto the extentthatan interlockimprovesa firm'saccess to financing,it plays
an importantrole even if it is part of a largerstrategy. Still, it is undeniable
that in the absence of detailed informationabout the firm's decision-making
policies, the reasons for the interlock,and the process by which the interlock
affects subsequent decision-making, the causal ordering will be difficult to
untangle. In the Mizruchi& Stearnsstudy,this was less of a problembecause
at a given point, financial representativeshad been members of the board in
question for an average of more than 12 years. This means that in the vast
majorityof cases, it is unlikelythata particulardecision to borrowwas partof a
single strategythatinvolvedthe boardappointmentas well. But the largerissue
raisedby this study remains:Whatis the causal orderingbetween interlocking
and corporatestrategies?To whatextentareinterlocksthe consequencesrather
than the causes of such strategies? After all, interlockingitself can be viewed
as a strategy (Pfeffer & Salancik 1978). The factors that predictdecisions to
expandor restructurecould affect decisions to interlockas well.
TWO CRITICISMSOF INTERLOCKRESEARCH
The basic criticismsof interlockresearchfall into two categories. The firsttype
generallyaccepts the legitimacy of the use of quantitativeindicatorsto predict
corporatebehaviorbut arguesthat interlockingdirectoratesfail to account for
these behaviors.The second type questionsthe use of quantitativeindicatorsaltogetherandsuggeststhatinterlockanalysesfail to capturenot only the richness
and complexity but even the general outlines of boarddynamics and interfirm
relations.
The first criticism,thatinterlockingdirectoratesfail to predictcorporatebehavior, has been presentedmost forcefully in a recent article by Fligstein &
Brantley (1992). Drawing on 100 large US industrialcorporationsbetween
1969 and 1979, Fligstein & Brantley hypothesize that interlocks with banks
shouldbe positively associatedwith corporateperformanceand debt/equityratios. Fligstein & Brantley'sfindings revealed a negative association between
bank interlocks and most measuresof profitability.Although this finding ran
counterto the authors'hypothesis, it is consistent with that of several studies
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MIZRUCHI
cited above and is thus not surprising.Bank interlockingdid not predictstrategic variablessuch as mergersor productstrategies(relatedversus unrelated).
Because the authorshad presentedno hypothesesfor the effect of interlocking
on these variables,the null findingsprovelittle aboutthe relevanceof interlocks
as a variable.
It is difficultto quarrelwith the authors'statementthat"Weshould abandon
our concentrationon boardsof directorsas a source of networkdata... unless
their possible relevance can be specified theoretically"(1992:304, emphasis
added). It wouldbe a mistake,however,to assumefromthis studythatinterlocks
"justdo not predictmuch that is interestingin the strategicchoices of firms"
(1992:304). This fails to accordwith the results of the numerousstudies cited
above, such as the works by Kosnik on greenmail; Cochranet al, Singh &
Harianto,andWadeet al on golden parachutes;Davis on poison pill adoptions;
Palmer et al and Haunschild on mergers; Goodstein & Boeker on hospital
strategies; and Stearns & Mizruchi on corporatefinancing-not to mention
the studies showing positive impacts of interlockingon profitabilityand those
showing effects of interlockingon corporatepolitical strategies, a topic that
Fligstein& Brantleyconcede (1992:282) is beyondtheirscope. This conclusion
is also contradictedby a study by Fligstein himself (Fligstein & Markowitz
1993) thatshowed thatthe presenceof bankinterlockswas associatedwith the
likelihood of a firm engaging in mergeractivityduringthe 1980s.
Interlocksmay not be useful in predictingevery significantformof corporate
activity, nor have they always proven to be as powerful as predictorsas early
adherentsof their study prophesiedback in the 1970s. But it is incorrectto
claim thatinterlocks"justdo not predictmuchthatis interestingin the strategic
choices of firms"(1992:304). The evidence that they do predictsuch choices
is overwhelming.
The second criticism of interlock research, that interlock analyses fail to
capturethe richnessand complexityof boarddynamicsand interfirmrelations,
has been made by severalanalysts. Among the most powerfulstatementshave
been those by Hirsch(1982), Stinchcombe(1990), Davis & Powell (1992), and
Pettigrew(1992).
Although business researcherssuch as Mace (1971) and Lorsch & MacIver
(1989) have conductedextensive interviews with corporatedirectors,Hirsch
(1982) and Useem (1984) are, to my knowledge, the only sociologists who
have systematicallyinterviewedboardmembers. Pettigrew& McNulty (1995)
have begun systematic interviews with directors in large British firms. All
three of these latterstudies have addressedthe topic of interlocks,but Hirsch
in particularwas sharply critical of interlock analysis. Hirsch asked board
members about both the role of interlocks and the positions of bankers on
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293
boards. He found in almost every case that directorsconsidered their own
power to be extremely limited, that interlocks were of limited significance
for the organizationsinvolved, and that bankerswere viewed as wielding no
particularinfluenceas outside directors.Even actions as potentiallybenign as
business transactionswith a firm'sinterlockpartnerswere assiduouslyavoided,
accordingto Hirsch,becausedirectorsfearedbeing cited by the Securitiesand
Exchange Commissionfor conflicts of interest.
Hirsch's study raises several interestingquestions. First, his finding of virtual unanimityon everyissue raises the prospectthatboardmemberswere conveying generalizednorms about appropriateboardbehaviorratherthan more
probing insights into the details of their activities. Second, even if Hirsch's
respondentswere entirely sincere, informantreportsof their own power are
notoriouslyunreliable. JP Morgandenied before the Pujo Committeethat he
held a disproportionateshare of power within the American business world.
David Rockefellerdenied to Bill Moyers that he was any more powerfulthan
the averageAmerican. It is possible to concede the difficultyof definingpower
in an objective manneryet still suggest that subjectivereportsare equally invalid. Third, results from a recent study (Mizruchiet al 1993) reveal that it
may be incorrectto accept at face value boardmembers'claims thatthey rarely
do business with the firms with which they are interlocked. Among Fortune
500 US manufacturingfirmsin 1980 (the approximateperiodof Hirsch'sinterviews), nearlyhalf (48.6%) of the cases in which representativesof a financial
institutionsat on the board of a manufacturingfirm were accompaniedby a
business transactionbetween the firms. Hirsch is correct that there are numerous reasons that outside directorsare appointedto boards and that these
reasons often have little to do with specific relationsbetween the organizations
involved. But as we have seen, interlocksmay have consequences for organizationalbehaviorregardlessof whetherthey were establishedfor primarily
organizationalpurposes.
Stinchcombe's (1990) primarycriticism involves concern about what interlock ties actually represent. Because so little is known about the actual
operationof interlocks,he suggests thatwe study "whatflows across the links,
who decides on those flows in the light of what interests,and what collective
or corporateaction flows from the organizationof links, in orderto make sense
of intercorporaterelations"(1990:381).8
This point is made more forcefully by Pettigrew(1992), whose critique is
as much a commentaryon quantitativeresearchin general as on interlockresearch in particular.Criticismsof quantitativework for failing to capturethe
8Thiscritiqueby Stinchcombewas presentedin a review of Mizruchi& Schwartz(1987). See
Mizruchi& Schwartz(1991) for a reply to Stinchcombe'sreview.
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complexity of human behavior have been around for decades, and it is not
surprisingthat interlockresearchwould be subjectedto them. Pettigrewunderstatesthe extent to which interlockstudies have addressedthe "So what?"
question, in part because he draws a distinction between board composition
studies, which include several of those cited above, and interlock research:
Despite their differing orientationsand rhetoric, the two bodies of literature
touch on many of the same issues. He also understatesthe findings on the
consequences of ties even within explicit interlock analyses. But Pettigrew
goes beyond mere restatementof these time-worn criticisms. In proposing
detailedstudy of the selection andbehaviorof directorsandtop managers,Pettigrewsuggests an emphasison severallevels of analysis,includingthe internal
firm, interfirm,and societal levels, and a focus on the historicalcontexts that
frame organizationaldecision-making(see Pettigrew 1990 for an illustration
of how to conduct such an analysis and Pettigrew & McNulty 1995 for an
example).
In making this argument,Pettigrewis treadingon much the same groundas
contemporaryhistoricalsociologists (Abbott 1992, Griffin1993, for example)
who are advocatingthe abandonmentof a focus on variablesfor a refocus on
historicalnarratives.Sociologists andorganizationalresearchershave operated
for severaldecadesprimarilywithina mode of analysisthatassumesthatsocial
behaviorcan be capturedin termsof codifications(variables)that capturepatterns of activities. Interlocks,one such codification,can be used to "explain"
a firm's participationin mergersor the extent to which firms contributeto the
same political candidates. Critics of variableanalyses acknowledgethat there
are implicit narrativesbehindvariable-basedaccounts(Abbott 1992:54-58). In
fact, when one examinesthe developmentof variable-basedhypothesesin academic journals, one sees descriptionsof the social processes thatthe variables
aredesigned to represent.Claims thatthese variablestend to be "decontextualized" in much sociological researchmay be true,butestimationapproachesare
increasinglyavailableto capturethe changingsocial context. Employingtimedependentcovariates,it is possible to identify the changingnatureof "effects,"
or processes, overtime (Isaac& Griffin1989). And an increasingnumberof approachesare availableto handlestatisticallythe fact thatobservationsin social
groups are often not independent(Krackhardt1988, Mizruchi 1992: Ch. 5).
WhatAbbottandothersarecalling for is not only more attentionto narrative,
a detailed descriptionof the processes that variablesare presumedto capture,
but also to systematic means of coding patternsin the narrativesto permit
generalization. Interlockresearchis ready for this kind of analysis. In fact, it
ultimatelywill requireit. The problemup to this point has been access to data
on the operationof corporateboards. A small but growing numberof scholars
CORPORATEINTERLOCKS
295
in both the United Kingdomand the United States have conductedinterviews
with boardmembers. It will be necessaryfor researchersin a varietyof national
settingsto gain similaraccess to a wide rangeof organizationsif we areto build
a systematicprocessmodel of interlocks.In the meantime,researchersworking
within traditionalparadigmswill continueto assembleevidence thatinterlocks
predict importantorganizationalphenomena. One can ask for more, but one
cannot fail to be impressedwith what has been achieved.
ACKNOWLEDGMENTS
This researchwas supportedby two grants from the National Science Foundation (a PresidentialYoung InvestigatorAward,SES-9196148, and research
grant SBR-9320930) as well as grantsfrom the Dean's Office of the Horace
H. Rackham School of GraduateStudies, the Office of the Vice President
for Research, and the Dean's Office of the College of Literature,Science,
and the Arts, all at the University of Michigan. I would like to thank Don
Palmerand BarryStaw for their detailed comments on an earlierdraftof this
chapter.
Any Annual Review chapter, as well as any article cited in an Annual Review chapter,
may be purchased from the Annual Reviews Preprints and Reprints service.
1-800-347-8007; 415-259-5017; email: [email protected]
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