A director’s social and professional network contributes many positive benefits that increase shareholder value. Why isn’t more attention paid to the relation between personal networks and governance quality?
Director Networks: Good for the Director, Good for Shareholders
1. Topics, Issues, and Controversies in Corporate Governance and Leadership
S T A N F O R D C L O S E R L O O K S E R I E S
stanford closer look series 1
Director Networks: Good for the
Director, Good for Shareholders
Board Networks
A director’s social and professional network contrib-
utes to his or her qualifications as a board member.
Networks are important in that they create links be-
tween individuals and organizations through which
support, influence, and information are shared. For
this reason, executives with a broad network tend to
be highly valued as director nominees.1
Google is an example of a company with a well-
connected board. At the time of the company’s
initial public offering in 2004, it shared director
affiliations with many successful institutions in Sili-
con Valley, including Apple, Cisco, eBay, Intel, and
Yahoo! It was also connected to firms outside of the
area, including Amazon and Wal-Mart. It is not in-
conceivable that these connections contributed to
the company’s success as both a start-up and a pub-
licly traded corporation (see Exhibit 1).
In recent years, however, much attention has
been paid to the negative aspects of inter-board con-
nections. This is because network connections have
the potential to cause negative outcomes that im-
pair economic value and reduce governance quality.
For example, director networks may lead to the fol-
lowing:
• The spread of bad practices. There is consider-
able evidence (and informed speculation) that
bad practices such as stock option backdat-
ing are transferred across companies through
boardroom connections.2
Directors observing a
practice at one firm may bring it to others with
which they are affiliated.
• The spread of bad information. Incorrect in-
formation may also be shared across companies
through board networks. False rumors—such as
By David F. Larcker and Brian Tayan
August 5, 2010
those of a new product launch, marketing strat-
egy, price increase, or pending acquisition—can
cause companies to make ill-informed decisions,
which destroy economic value.
• A reduction of director effort and attention. A
well-connected director will sit on more than one
board, each requiring a certain amount of time
and attention. Academic research has shown that
directors that sit on multiple boards (“busy di-
rectors”) tend to provide worse oversight. Busy
boards are correlated with higher executive com-
pensation, reduced likelihood of terminating a
CEO for poor performance, and a higher likeli-
hood of earnings manipulation.3
• Collusion. Board networks may be a conduit
through which firms engage in collusive activity,
such as price fixing, illegal division of sales terri-
tories, and other anti-competitive behaviors. For
these reasons, the Clayton Antitrust Act of 1914
prohibits shared directorships among companies
that are in direct competition.
At the same, not enough attention has been paid
to the positive effects of board networks. Board
interconnections allow for the flow of valuable in-
formation that can enhance decision making and
improve economic performance. Examples include:
• Sharing of market information. Directors with
deep networks possess considerable knowledge
of industry trends, market condition, and regu-
latory changes. Directors that represent impor-
tant affiliates—such as customers, suppliers, or
providers of capital—can facilitate the flow of
information along the supply chain, thereby im-
proving efficiency.
• Sharing of management practices. Directors can
3. stanford closer look series 3
Director Networks: Good for the Director, Good for Shareholders
Google
Apple
Yahoo!
eBay Pixar
Wal-Mart Cisco
Arthur Levinson
CEO, Genentech
John Doerr
Kleiner Perkins (VC)
Amazon
John Hennessey
President, Stanford U.
Paul Otellini
CEO, Intel
Intel
Fred D. Anderson
Elevation Partners (PE)
Steve Jobs
CEO, Apple
Jerry Yang
Founder, Yahoo!
Michelle Burns
CFO, Mirant
Intuit
William Campbell
Chairman, Intuit
Dennis Powell
CFO, Cisco
Exhibit 1 — Network Connections: Google Directors (2005)
A subset of Google’s board network in 2005, the year after its successful IPO.