I'm working on a project on interlocking directorates and ownership networks and collusion. I would like to know business cases in which interlocking directorates or share ownership are used to collude. Also, please let me know about papers or any other document related to this subject.
Dear Erica:
It seems interlocking directorates rarely facilitate collusive activities! In many cases, the ownership-control structure affects performance both directly and in interaction with social ties. Please take a look at the following recent research study:
In this study,Buch-Hansen (2014) suggested that interlocking directorates are mechanisms that have the potential to facilitate collusion! Taking a European perspective, and focusing on four different time periods, the author investigated the extent to which companies that are directly and indirectly connected via interlocking directorships simultaneously or subsequently collude.
Utilizing network analysis software, Buch-Hansen provided a new method for identifying the two forms of business ties and possible overlaps between them. analysis is based on an original dataset of European Community cartel cases and data on interlocking directorates developed by others. The author concludes that very few examples are found of colluding companies that were previously directly or indirectly connected via interlocking directorates!
- Buch-Hansen, H. (2014). Interlocking directorates and collusion: An empirical analysis. International Sociology, 29(3), 249-267.
Hope this helps!
Nadeem
Where I have found intertwined directorships and ownerships have the potential to create collusion problems is where the separate entities have different ownership proportions. This kind of complexity can be fairly typical in public finance initiatives and public private partnerships where private sector consortia contract to provide government services.
A case study on this in the UK is attached where the main company had five equal shareholders who were also directors, but four of those shareholders were also directors and owners of a supply chain consortium providing a material construction programme to the head company. This allowed the supply chain shareholder sub-group to outsmart the fifth shareholder on the main board. How did they do that? By overcharging as suppliers and causing a loss at corporate level. Their gains in the supply chain outweighed their corporate loss, except for the fifth shareholder. It was slightly more complex than that as each of the shareholders had unequal participation in the supply chain, so the only way to analyse it was to assess each individual shareholder's equity participation and supply chain participation.
http://www.theguardian.com/society/2007/jul/22/localgovernment.business
I am assuming that you are familiar with this original study of collusion in networks by Baker and Faulkner...
http://dlib.net.pku.edu.cn/qmeiCourse/files/Baker.pdf
I believe this is the most cited paper in the networked collusion space...
Thanks for your answers. For those who are interested in ownership ties and interlocking directorates among competitors I attach a paper of the Fiscalia Nacional Economica (The Chilean anti trust division) summarizing the international experience about this topic and the most renowed Chilean cases of collusion. The paper is in Spanish.
Erica
interlocking directors seems to have a spillover effect on governance practices . but it may have also consequences on earnings managemlent contagion ( see Chiu Teoh Tian (2013) The Accountingt Review. Yes a collusion effect may take place in case of common ownership..
Patrick, thanks a lot for your comment. I´ll carefully read the paper that you mentioned
Best
Erica
Dear Erica,
I am wondering whether collusion between companies with interlocking directorates would be a too obvious approach. Although on the surface it seems logical for the executives to collude if they know that they control their respective boards via interlocking directorates. But in my view the idea of interlocking directorates is exactly this - to control the boards due to these social ties, but not necessarily to align the companies' transactions. You do not need interlocking directorates if you want to collude in the first place. However, my comment is based on corporate governance literature where I did not come across collusion when interlocking directorates were discussed. There may be empirical evidence pointing in the opposite direction that I am not aware of.
Paul
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