Interlocking Directorates

MAJOR COMPANIES operate under the control of steep hierarchies, with ultimate vested power, in principle, in the board of directors. Interlocking directorates occur in situations where a particular person sits on the board or is in the top management of two or more companies. An interlock occurs when an individual serves on the board of directors of two companies (a direct interlock) or when two board members of competing companies serve in the board of a third company (indirect interlock). This concept, in the way it is often used, is considered by some as a cornerstone of western capitalism.

When interlocks occur, there is the potential for cohesiveness, common action, and unified power. This is one of the mechanisms that promotes everincreasing concentration of the size and power of large corporations. Through interlocking directorates, not only can corporations exert a tremendous amount of power individually, but there is also a potential for coordinated efforts between several corporations since the same individual will sit on several boards representing different corporations. This was common practice as early as the late 1800s and early 1900s.

The use of interlocking directorates is a means of monopolizing the market by giving control over competing companies to the same group of people. This is a collusive practice that strengthens the cohesiveness among well-connected organizations. Compared with cartels, trusts, joint-venture and licensing agreements, interlocking directorates are highly influential, fluid, relatively invisible and hence less open to public scrutiny.

The apparent frequency of these relationships is hardly surprising given the logic of choosing directors with knowledge and experience. The problem arises when an individual simultaneously serves as an officer or director of two competing companies and he/she stumbles across a prime opportunity for collusion, for example, coordination of pricing, marketing, or production plans of the two companies. If such coordination occurs, both the competing corporations and the interlocking director (or officer) could face serious criminal and treble-damage civil liability for price fixing or similar offenses under the Sherman Antitrust Act.

Studies of interlocking directorships go as far back as the Pujo Report (U.S. Congress, 1913), a Congressional investigation into corporate concentration. Control through interlocking directorships is a practice widely recognized by historians of the early 1900s. Investment bankers put representatives[Page 438] on the corporate boards of corporations they controlled. President Woodrow Wilson campaigned against these “trusts” during 1912 and asked Congress to ban interlocks. The Clayton Act in 1914 prohibited interlocking directorates under all circumstances, regardless of their effect on competition and since then it has been the primary enforcement tool to prevent anti-competitive collusion resulting from interlocking directorates.

Although the Clayton Act filled holes in existing legislation, it too had some loopholes. The prohibition of interlocking directorates specifically dealt with obtaining director positions through stock acquisitions. Unfortunately, this left the possibility of gaining director positions through asset acquisitions for the trusts. While largely unchanged since 1914, the law was updated in 1990 to plug some loopholes and create some safe-harbors.

For example, G. William Domhoff, by analyzing the socio-economic characteristics of leading members of influential institutions from 1932 to 1964, documents interlocking directorships in extensive detail, showing that major banks, corporations, foundations, and insurance companies have boards that share not only clubs and universities, but. in many important cases, are actually made up of many of the same people.

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