Board Interlocks and Their Impact on Corporate Governance: The Indian Experience


Board interlocks occur when a director of one organization sits on the board of directors of another organization. The causes and consequences of these interlocks have been much debated in the western literature but comparatively little is known about interlocks in Indian corporate boards. Board interlocks are essentially analogous to cholesterol. Both are facts of life. Like good cholesterol, there are aspects of interlocking directorates that are beneficial and there are others that are detrimental to the corporation and its stakeholders and their respective interests.

In this study, we find that board interlocks are quite widespread in India. Taking a (numerically) small but nevertheless (in terms of market capitalization) an important slice of available corporate data, we observed that in 2010, “highly boarded" directors (defined as those on the board of 5 or more listed NSE companies) who constitute just 6 percent of the overall pool of directors among NSE100 companies are associated with 486 NSE listed companies which account for a whopping 66 percent of the total market capitalization of all NSE listed companies. Interestingly, there appears to be a marked increase in market capitalization of these "highly boarded" companies, which these “highly boarded" directors are linked to over the last several years. For instance, for the 3 years from 2001 to 2003, the market capitalization of "highly boarded" companies ranged between 33 percent to 43 percent; it moved up to peak of 70 percent in 2007 and was at 66 percent in 2010 (the latest year in the study period). The substantive rise in market capitalization of these "highly boarded" companies has coincided with only a marginal increase (from 5% to 6%) in the proportion of "highly boarded" directorships. These trends suggest that despite the well-intentioned regulatory reforms (a) the extent of over-boarding/interlocking among directors has not come down (there is actually a marginal increase) and (b) there appears to be increasing concentration of power among key individuals. Given the general view that concentration of power in a few individuals or entities is not desirable in the larger interests of society, it would appear that the observed trends in the concentration of power among a handful of the country's corporate elite is a matter for substantive public policy concern.

Finally, the regression analysis indicates a positive impact on Return on Assets (ROA) for "highly boarded" directors signifying a negation of the agency centric conceptualization on the role of multiple directors. Instead, connectedness variables (Eigen vector) which proxy for the Resource dependency hypothesis are quite strongly supported. In a nutshell, from public policy perspective, the analysis potentially reflects the "bad cholesterol" elements of multiple directorships in terms of a tiny segment of "highly boarded" directors controlling a significant portion of the country’s economic prowess, whereas the positive influences on company performance provide some evidence of the “good cholesterol".

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The Executive Director
National Foundation for Corporate Governance
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Shalini Budathoki
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