Antitrust Crackdowns May Reduce Corporate Know-How

Tougher regulation of interlocking directorates drives out experienced directors — especially at small companies

Based on the research of Christian Hutzler

Interlocking directorates — the practice of the same director sitting on the boards of competing companies — have long been identified with backroom deals and corporate collusion. In 1914, when antitrust laws began cracking down on the practice, future Supreme Court Justice Louis Brandeis called them “the root of many evils.”

Starting in 2022, the U.S. Department of Justice and the Federal Trade Commission staged renewed crackdowns, leading to at least 21 board resignations.

But new research from Texas McCombs suggests efforts to reduce collusion and protect consumers may come with unintended consequences: worse corporate governance through loss of industry experience.

Christian Hutzler, assistant professor of accounting, finds that after the recent crackdowns, the most experienced directors were the most likely to leave boards. Smaller companies were hit hardest, losing directors with deep industry knowledge and decades of experience.

The effect stretched to companies that weren’t part of the crackdown, Hutzler adds. “Enforcement does appear to have had an effect, not only on the firms that the government was directly targeting, but also on other firms that observed this enforcement, and then made changes to their own boards.”

Departures Drain Boards

Hutzler, along with Dain Donelson of the University of Wisconsin-Madison and Adrienne Rhodes of the University of Iowa, analyzed director departures and appointments using a sample of 1.6 million observations by director, company, and month.

From 2004 to 2022, they found, the share of directors who were interlocked increased, from 6.2% to 9.7%.

That trend reversed sharply in late 2022. After the DOJ and FTC crackdowns began, the share of interlocked directors fell by 0.8 percentage points in a single quarter — the largest quarterly decline on record. The departures created a variety of problems.

• Experience gaps. Interlocked directors who left had an average 47 years of industry board experience. Their replacements averaged just three years — when replacements could be found. Vacated seats were more likely to remain empty for at least six months.
• Small companies suffer. Interlocked directors were 50% more likely to leave the smaller company in a pair of competing companies, suggesting those firms bore the brunt of the regulatory shift.
• Fewer new interlocks. Newly appointed directors became 8.6% less likely to create new interlocks.

Although regulators were concerned about widespread collusion, the study finds little evidence for it. Instead, interlocked directors appear to strengthen corporate governance.

• They were more likely to push out underperforming CEOs, particularly after financial restatements or revenue declines.
• Their companies generated higher returns on research and development spending without taking on additional risk.

By forcing out some of companies’ most valuable board members, the government’s broad crackdown may also make it more difficult to replace them in the future, Hutzler warns.

“I think firms are going to have a harder time finding qualified directors,” he says. While the shift may open doors for candidates who were previously overlooked, “One of the big criterions firms care about is industry experience, and that’s going to be harder to come by.”

“Does Antitrust Enforcement Against Interlocking Directorates Impair Corporate Governance?” is published online in Journal of Accounting and Economics.

Story by Deborah Lynn Blumberg