Interlocking Directorates and Their Changes in Polish Companies

By Pawlak, Marek | Indian Journal of Economics and Business, March 2012 | Go to article overview

Interlocking Directorates and Their Changes in Polish Companies


Pawlak, Marek, Indian Journal of Economics and Business


Abstract

The subject of the study was interlocking directorates in Polish joint-stock companies. In order to explore this area, a monitoring system has been developed which consists of a database and query system. The phenomenon of interlocking directorates in Polish joint-stock companies is comparable with that of other countries. Although board members in Poland are significantly younger than, for example, in the USA. Women constitute an important group of board members. Insurance companies, investment funds and banks are closely connected with other companies.

Keywords: Interlocking directorates, board of directors, supervisory board.

I. THE NOTION OF INTERLOCKING DIRECTORSHIPS

Generally, there are two models of board organisation. The first is the one-board model in which there is a management board and a board of directors. Managers are allowed to be members of the boards of directors, and then they are called insiders. If board members do not have positions in the company they are called outsiders. Usually, the CEO and other officers are members of boards of directors as insiders. This model is used, for example, in such countries as the USA, Britain and Ireland. The second model is the two-board model, in which there is a management board and a supervisory board. The members of the management board are not allowed to be members of the supervisory board. In some countries, such as Germany and Poland, workers' representatives are allowed to be members of the supervisory board. This model is used in other countries as well, such as Austria, the Netherlands and Switzerland. The most important distinction between these two models seems to be the fact that, in the one-board model, managers are allowed to be members of the board of directors. In the two-board model, managers are not allowed to be members of the supervisory board. Sometimes, when international comparisons are made, the supervisory board is treated as the equivalent of the board of directors. Thanks to this assumption, some international comparisons can be made (Stokman, Wasseur, 1985), (Mac Canna, Brennan, O' Higgins, 1998).

Many executive (inside) directors and non-executive (outside) directors hold only one directorship, but others, particularly outside directors, hold more than one directorship. The situation in which one inside or outside director serves at the same time in two corporations is called an 'interlocking directorship', and this director is called an 'interlocking director'. Interlocking directorships (directorates) are more common in groups of outside directors, as they include a number of public and political figures who are recruited from other companies, and especially from the banking, insurance, and investment sectors (Scott, 1991).

An additional, and more specific, phenomenon is the so-called 'reciprocal interlock', particularly the CEO reciprocal interlock. This occurs when the CEO of firm x serves as a director of firm y, and the CEO of firm y serves as a director of firm x (Fish, White, 2005).

Studies concerning interlocking directorates have been carried out over many years, and during this time some theories have been proposed to explain the reasons for this phenomenon.

The Theories that Explain the Existence of Interlocking Directorates

The Management Control Theory

This paradigm was common in the USA until the 1970s. It assumes that a board of directors is appointed by the management to act merely as a "passive rubberstamp" (O'Hagan, Green, 2004). Management control theory argues "that the modern firm has little incentive to create interorganizational ties and is unlikely to be dramatically influenced by outside forces" (Mintz Schwartz, 1981). This model does not view interlocking directorates as a strategy to manage environmental uncertainty (Bazerman, Schoorman, 1983); therefore, this theory does not explain why interlocking directorates exist, but rather why they do not exist. …

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