Director interlocks and cross-cultural impact on strategies affecting shareholder–creditor conflicts: A conceptual analysis

Abstract

Purpose

Director interlocks, with their extended resources and shared experiences, have the potential power to go beyond the basic role of providing advice and monitoring the activities of an organization. Interlocked directors can have a cross-cultural role in manipulating corporate choices and strategies in several areas, including capital structure, based on learned behavior in their internal company. Shareholders and creditors are the two main capital providers for a company. However, their risk return horizons are very different, and policies that benefit one group may not be optimal to the other. Interlocks can act as carriers of sub-par practices that affect the behavior of several organizations. Such transactional and relational activities may increase short-term value for equity shareholders, but increase the risk for the creditors. The purpose of this paper is to examine cross-cultural effects of interlocks on corporate strategies that affect this essential agency relationship.

Design/methodology/approach

This paper surveys the extant literature on board interlocks, board practices, equity valuation and credit risk to develop a link between such interlocks and creditor protection. Based on a brief survey of the central concepts of governance and the role of directors, this paper then provides various propositions on the role of interlocking directorships and their effect on the shareholder–creditor agency problem.

Findings

Director interlocks, through their linked common practices, have the potential to increase or worsen shareholder–creditor conflicts by magnifying strategic practices like short-termism, earnings management or through its effects on chief executive officer compensation. Such cross-cultural effects persist across ownership structures and cultural differences in governance.

Research limitations/implications

The paper is not an empirical study of the conflict. This paper uses a literature review to arrive at propositions that may impact shareholder–creditor conflicts.

Practical implications

Several studies have shown cronyism and the dense corporate network has been a large factor in the financial crisis that affected both shareholders and creditors. As the influence of creditors grows with the current availability, and therefore increase in debt levels, this conflict can be magnified through homophily inherent in interlocks. For an organization to be successful in its role of protecting all stakeholders, especially the two major providers of equity capital, factors that cause conflicts must be taken into account while developing the tenets of governance policies and, on a regular basis, during the strategic planning process within the organization. Regulations affecting interlocks, including governance policies, must therefore take into account such influences.

Social implications

Board interlocks act as channels of information between companies, creating a social network where processes and polices are shared and implemented as defined by the concept of homophily. Such management actions reduce both the quality of information available to creditors and their monitoring capabilities. This juxtaposition of shareholder and creditor interest can, therefore, be worsened by director interlocks.

Originality/value

Prior literature has not specifically linked director interlocks and their mutual impact on the culture and strategy of linked corporations to the shareholder–creditor conflict.

Citation

Ramaswamy, V. (2019), "Director interlocks and cross-cultural impact on strategies affecting shareholder–creditor conflicts: A conceptual analysis", Management Decision, Vol. 57 No. 10, pp. 2693-2713. https://doi.org/10.1108/MD-10-2017-0956