Interlocking Directorates: Looking For Signs Of Collusion, Conflict Of Interest And Overboarding

Conflicts of interest, collusion and the overboarding of directors on publicly listed companies have been known to grab the attention of the biggest media outlets.

As many companies are unfortunately aware, this unwanted attention raises questions, creates risk to a company's reputation and can ultimately affect the value of company shares. However, there is a way that all of this can be avoided right from the start. Interlocking directorates are nothing new. It occurs when two firms share a common director, and the tie or connections that he/she creates is also referred to as a board interlock.

Although lawful and not illegal, it does raise questions about the independence of decisions made in the boardroom and can be seen by the U.S. Federal Trade Commission (FTC) as an anti-competitive practice prompting an investigation.

As stated by the FTC it is their responsibility to "take(s) action to stop and prevent unfair business practices that are likely to reduce competition and lead to higher prices, reduced quality or levels of service, or less innovation".

An example of where interlocks became a concern for the FTC was during 2009. During this year Apple's director Arthur Levinson abruptly resigned his seat on Google board following pressure from regulators. Following the announcement FTC's chairman praised Google and Levinson "for their willingness to resolve our concerns without the need for litigation".

That same year also saw Google's Eric Schmidt resign from Apple's board, three years after accepting a seat.

It's important to mention that prior to these resignations, the FTC had been looking into whether interlocking directorates between Google and Apple raised competitive issues. These competitive issues may have violated U.S. antitrust laws.

The only safe way for companies to avoid situations of interlocking directorates that prompt investigation is by having oversight of every board members' seats on other companies. By gaining this oversight companies can instantly see any risks or red flags, which are likely already on the radar of investors with governance issues coming under greater scrutiny of late.

This is also hugely important when a company makes new appointments to their board, or an existing director takes on additional responsibilities. Without oversight, companies might be opening themselves up to governance risk and wider liability.

CGLytics online solution provides instant information about a company's board...