Partes de la flauta

The phenomenon of directors holding multiple board seats has been widely investi- gated. Multiple board appointments can be considered as a special branch of the board

-178-

of director’s literature.1 I refer to a director as any individual that serves on a board of directors. Particularly, I do not distinguish between one-tier and two-tier boards, inside and outside directors or executive and non-executive directors within this section. The German two-tier system is highlighted in the subsequent section.

A director holding multiple appointments is called an interlock. Because holding multi- ple board seats connects boards with each other, the term interlocking directorate is also commonly used. This is different from the occurrence of two directors serving on the boards of the same two firms who are called mutual, double or dual interlocks (Fich and White, 2003). Fearing the danger of arrangements between competitors, Section 8 of the Clayton Act of 1914 prohibited interlocking directorates between competing firms in the United States. Dooley (1969) is among the early studies that investigate director interlocks. The academic interest in interlocking can be explained by the vast variety of possible reasons that can lead to interlocked companies. At the same time, this is the reason why the interlock literature offers several competing models to explain the exis- tence of interlocking and why it is not possible to detach the competing models in a clear cut way. Mizruchi (1996) provides an extensive summary of issues and literature related to interlocks. Roughly, it is possible to distinguish between three perspectives: inter-organizational, integrative and individual.

The inter-organizational perspective assumes the existence of a resource dependence between organizations (e.g. Burt, 1980). Interlocks are considered to allow an exchange of information or resources between organizations. Models of this perspective empha- size the importance of capital, which is constantly demanded by non-financial organiza-

1 _{Zahra and Pearce (1989), Johnson, Daily and Ellstrand (1996) and Adams, Hermalin and Weis-} bach (2010) give a general overview of extant research related to boards of directors.

-179-

tions. As a consequence, a firm wants to access some sort of financial service from a financial corporation. This creates a dependency of the non-financial firm, giving the financial corporation the opportunity to place an interlock to monitor the dependent firm. Co-opting models (e.g. Koenig, Gogel and Sonquist, 1979) emphasize that consti- tuting interlocks among firms reduces environmental uncertainty e.g. by squeezing out competitors or fixing prices. Accordingly, interlocks are considered as parts of partial alliances that facilitate cooperation among firms.

The integrative perspective stresses to think in classes and elites (e.g. Mintz and Schwartz, 1981; Palmer, 1983). In the context of the Finance Capital Model, financial and non-financial corporations are assumed to be equally powerful. The presence of interlocks helps to interconnect these corporations by means of ownership and relation- ships among the corporations. As a consequence, not single pairs of corporations are connected but entire economic groups. Similar, the Class Hegemony Model (e.g. Koenig, Gogel and Sonquist, 1979) assumes the existence of upper and lower classes. Members of the same classes are thought to share the same views and beliefs, forming a common code. Regarding the board as a place where members of higher classes meet, interlocks are considered to allow influential occupations with the objective to support and achieve mutual goals (comparable to social cohesion as in Mizruchi (1996)). The Management Control Model stresses that the power lies within the hands of the man- agement. Directors are considered to be a source of advice or criticism for the manage- ment, but do not take an active part in directing a firm’s daily business. Consequently, interlocks are especially attributed for their characteristics.

The individual perspective puts the focus on individual goals and benefits. In the Le- gitimacy Model, the interlock is perceived to signal investors the firm’s ties to other

-180-

important organizations. The focus does not lie on material resources but on how the association is publicly perceived. Zajac (1988) proposes another approach, also labeled Career Advancement Model. Accordingly, a director’s benefits from sitting on a board are prestige, power and additional income (Bazerman and Schoorman, 1983). This view puts more emphasis on the individual who chooses to accept additional appointments and expects companies to select potential directors by their individual characteristics and not by their contribution to link companies.

2.2 Literature review

This paper builds on prior literature dealing with directors holding multiple board ap- pointments and their effect on firm performance. The amount of relevant studies in this area prohibits a complete overview of extant international research. Rather, this section aims at giving an overview of the topic’s broadness and the underlying complexity of research in this area; an extensive survey is provided by Mizruchi (1996). The section on empirical evidence concerning multiple board appointments in Germany aims at be- ing as complete as possible.

Findings in prior literature suggest a positive (e.g. Pennings, 1980) as well as a negative (Fligstein and Brantley, 1992) association between interlocking and firm performance. Dalton et al. (1998) acknowledge that this might be partly attributable to the nature of the performance measure since the academic literature is discordant with respect to board decisions and their impact on accounting and market-based measures of perform- ance. Mizruchi (1996) points out that the ambiguous results might reflect the uncer- tainty of the causal order between interlocking and performance. Firms might exhibit a low performance because directors holding multiple appointments are too busy with the result that their duties for the firms are compromised. However, it is also conceivable

-181-

that firms exhibiting low performance try to attract directors with a wide network. Prior results suggest that unprofitable firms feature more interlocks (Mizruchi and Stearns, 1988). Also, financial distress might increase the necessity to monitor capital (Richard- son, 1987).

Results of more recent work on the topic are similarly mixed. Ferris, Jagannathan and Pritchard (2003) do not find a negative association between the number of board mem- berships of a director and subsequent firm performance or a negative market reaction to the appointment of a director with multiple appointments. On the other hand, they show a significant positive association between prior performance and the number of director- ships. Fich and Shivdasani (2006) show a significant negative relationship between out- side directors with multiple board appointments and market-to-book ratios as well as with measures of operating performance. Results from Perry and Peyer (2005) suggest that the effect of accepting an additional directorship on firm value depends on whether the sending firm has higher agency problems, and also, on what kind of firm the ap- pointment is accepted. Core, Holthausen and Larcker (1999) find that CEO compensa- tion is higher for firms where outside directors serve on multiple boards. Their results also suggest that this is part of contracting inefficiencies, which negatively affect firm performance.

Several studies look on certain director characteristics and how these directors affect firm performance. For example, Hillman (2005) investigates the presence of politicians on boards and finds a positive association with market-based performance. Results of Adams and Ferreira (2009) suggest that gender diversity can have a positive effect on board effectiveness and firm performance. In a concurrent study, Masulis, Wang and Xie (2010) put their focus on U.S. directors that have their residence in foreign coun-

-182-

tries. Their findings suggest that these directors can bring valuable expertise with regard to corporate decisions that involve their home country but are also associated with monitoring deficiencies. Overall, their findings suggest that firms with these type of directors have a poorer performance.

Although the occurrence of interlocking in the German institutional setting has been discussed in numerous studies (Ziegler, 1984; Albach and Kless, 1982; Biehler and Ortmann, 1985; Heinze, 2002), empirical evidence on the relationship between inter- locks and firm performance is scarce. Pfannschmidt (1995) finds positive but mostly insignificant correlations between accounting based performance measures and inter- locking directorates. Beyer (1996) uses a sample of 694 firms and finds no evidence that interlocked and not interlocked firms are significantly different from each other with regard to firm profitability. Balsmeier, Buchwald and Peters (2009) investigate the rela- tionship between multiple board appointments held by the CEO and the chairman of the supervisory board and firm performance using panel data of 57 firms for the period 1996-2006 (where data is available for every even year). Their findings suggest a con- cave relationship between the number of appointments held by the CEO and firm per- formance. Specifically, they find that more than two additional appointments are nega- tively associated with firm performance. They also find that chairmen of supervisory boards who serve on other management boards monitor firms with higher performance. This finding does not hold for appointments held in other supervisory boards. Miczaika and Witt (2004) show significant negative correlations between multiple board ap- pointments and shareholder return. Schreyögg and Papenheim-Tockhorn (1995) investi- gate whether the supervisory board is an instrument to create inter-organizational ties. They take the results of their broken-tie analysis as indication that certain ties between firms are deliberately used in order to facilitate long-term cooperation opportunities.

-183-

Dittmann, Maug and Schneider (2010) put their focus on bankers on German boards. Their findings between bank representation and firm performance is mixed. They sug- gest that bankers promote their own business and provide financial expertise. Fauver and Fuerst (2006) investigate employee representation on German boards. Their find- ings indicate that employee representation is beneficial as it improves monitoring and reduces agency costs. Balsmeier and Peters (2009) analyze the relationship between multiple board appointments and management compensation. They conclude that man- agement compensation is higher in firms where the management features more personal ties. Not directly related to interlocking, Bresser and Thiele (2008) investigate executive continuity, i.e. a CEO’s appointment to be chairman of the supervisory board. They find no evidence that this affects firm performance.