Corporate governance in the shipping industry: board interlocks and agency conflicts

• DOI: https://doi.org/10.1108/CG-07-2018-0224
• Pages: 613-630
• Date: 11 July 2019
• Published date: 11 July 2019
• Author: Andreas Andrikopoulos,Andreas Georgakopoulos,Anna Merika,Andreas Merikas
• Subject Matter: Corporate governance,Strategy

Corporate governance in the shipping

industry: board interlocks and agency

conf‌licts

Andreas Andrikopoulos, Andreas Georgakopoulos, Anna Merika and Andreas Merikas

Abstract

Purpose –This paper aims to explore the effect of interlocking directorates on agency conflicts and

corporateperformance in the shipping industry.

Design/methodology/approach –The authors usesocial network analysis to discover centralnodes in

the network of personal and corporate connections in an international sample of 110 listed shipping

companies.

Findings –Assessing networkstructure, the authors find that the network of corporateleaders is denser

than the network of shipping companies. The network of shipping companies is populated with many

isolated nodes; the network of shipping executives and directors is populated with many cohesive

groups in which the longestdistance between two corporate leadersis two companies. The authors find

that interlockingcorporate leadership can help resolveagency conflicts in the shipping industry, bearing

a negative effecton the magnitude of agency costs. The extent of leadershipoverlaps is associated with

board size, financial leverage and profitability. The relationship between profits and interlocks is

bidirectional,implying that interlockingdirectorates bear a positive effect on assetreturns.

Originality/value –The authors map the relational structures in the social networks of companies and

company leaders in the shippingindustry and discover the cross-sectional determinantsof interlocks in

the shipping industry. The finding about the effect of interlocks on profitability and agencycosts bears

policy implicationsfor the design of corporate governancein the shipping industry.

Keywords Social networks, Corporate governance, Interlocking directorates, Shipping industry

Paper type Research paper

1. Introduction

Boards of directors are interlocked when one director is sitting in the board of two

companies; such configurations are also called interlocking directorates. Board interlocks

constitute interconnections not only of personal career paths but also of organizational

objectives and choices. Interlocking directorates characterize strategic interdependence

between companies in all major capitalist economies (Jonnergrad and Stafsudd, 2011;

Bellenzier and Grassi, 2014;Cannella et al.,2015). Moreover, they affect corporate strategic

choices such as alliances, the design of executive compensation, mergers and acquisitions

and initial public offerings (Gulati and Westphal, 1999;Wong et al.,2015;Kramarz and

Thesmar, 2013;Rousseau and Stroup, 2015;Moore et al.,2012); there has also been a

documented effect of interlocking directorates on auditor choice and accounting practices

like expensingor backdating Employee Stock Options(Riise Johansen and Petersson, 2013;

Kang and Tan, 2008;Bizjak et al.,2009).

On the individual level, interlocks may be driven by concerns of career advancement,

prestige and economic incentives such as the increase in one’s financial (as well as

nonfinancial) remuneration. The pursuit of such benefits needs to be weighed against the

Andreas Andrikopoulos is

based at the Department of

Business Administration,

School of Business,

University of the Aegean

School of Business, Chios,

Greece.

Andreas Georgakopoulos

and Anna Merika bothe are

based at the American

College of Greece, Athens,

Greece. Andreas Merikas is

based at the University of

Pireaus, Piraeus, Greece.

Received 8 July 2018

Revised 21 November 2018

Accepted 7 January 2019

Andreas Georgakopoulos was a

brilliant, talented and kindyoung

scientist. His tragic death on

February 26, 2017 deprived us

from an irreplaceable friend,

scholar and collaborator. His

spirit is immortal.

DOI 10.1108/CG-07-2018-0224 VOL. 19 NO. 4 2019, pp. 613-630, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 613

costs of maintaining and developing a personal network. In this context, professional

success may be both a prerequisite and a consequence of occupying network positions of

increased centrality and brokerage power (Horton et al.,2012;Engelberg et al.,2012;

Zhu and Chen, 2015). However, interlocksmay also be due to the desire of major players to

be part of the capital asset allocation process. This motive can be associated with

processes which reinforce cohesion in an upper social class which is populated by, among

other individuals, members of corporate elite who act as directors of major corporations. In

this respect, interlocks may assist the hegemony of the corporate world (over the rest of

social groups) as opposed to assisting the hegemony of one company. This argument is

supported by the fact that broken ties (in longitudinal studies) are not replaced with new

appointments from the same organization (such as a bank) which means that the ties were

personal rather than organizational (Mizruchi, 1996). Class cohesion may be associated

with the fact that members of the elite pursue common goals, are behaviorally similar,

engage in social interaction and may play similar roles in structurally equivalent networks

such as interlocking directorates. Such class cohesion may also have political ends,

leading to the concentration of politicalpower (Galaskiewicz et al.,1985;Heemskerk, 2013;

Allen, 1974). Evidence of concentrated political power in interlocking directorates has been

found in corporate networks in post-communist Hungary, corporate and social networks in

political campaigns in Nebraska,corporate alliances in US trade policies and congressional

testimonies (Stark and Vedres,2012;Hayden et al., 2013;Dreiling and Darves, 2011).

Apart from political gains and professional advancement, centrality in cohesive networks

fosters an individual’s relational embeddedness and, therefore, the choices that individuals

make about their connections (interpersonal networks) may change or reproduce

interorganizational networks. Corporate organizations connect, in the form of interlocking

directorates, for a plethora of reasons. First, the scarcity of resources such as information

and capital fosters corporate alliances which are articulated in interlocking boards of

directors. Access to scarce resources can help a company reduce organizational

uncertainty, improve its performance and increase its chances for survival in a changing

economic environment. This is the argument of the resource-dependence theory, which

suggests that organizations can be interdependent an operated in the context of power

relations to the extent that they need to interact to get access to resources that are available

in their environment (Pfeffer and Salancik, 1978). With respect to the flow of trustworthy

information, outside directors may support knowledge spillovers across organizations, and

they are often chosen for their professional expertise as well as their professionaland social

status (Mizruchi, 1996;Brass et al.,2004). With respect to interlocks as evidence of access

to scarce financial capital, corporate loans can help us explain the extensive presence of

financial companies in the boards of directors of nonfinancial companies. Creditors may

provide scarce financial resources, but they also need to ensure that these resources will

be used to their best interest (Jensen and Meckling, 1976). In this context, interlocking

directorates with banks may be viewed as either evidence of collaboration between

providers and users of capital or a costly mechanism of monitoring and corporate control

which is employed to reduce agency costs of debt (Dooley, 1969;Mizruchi and Stearns,

1988;Galaskiewicz and Wasserman, 1981;Ong et al.,2003). Therefore, such interlocks

reflect corporate control which is exerted by the banks over the organizations that they

finance and, therefore, they may increase the influence which is exerted by financial

organizations upon society (Richardson, 1987). However, such control is far from complete

as –among other reasons –directors are functionally distinct from managers who run major

corporations in the interest of (orat the expense of) capital providers. Moreover, interlocking

directorates may foster collaboration between competitors and imitation of business

practices, thereby leading to concentration of market power and limiting the disciplining

potential of interlocks in the market for corporate control (Devos et al.,2009). Nevertheless,

the ability of interlocks to foster value creation, grant access to scarce resources and

contribute to the diffusion of organizational practices is neither omnipresent nor

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