The board of directors has increasingly become the focus of corporate governance research and policy making in emerging economies following the Mexican Peso crisis in 1990, the Asian economic crisis in 1997, the Russian Ruble collapse in 1998, the Brazilian Real crisis in 1998, and the Argentine Peso collapse in 2002, among other financial crises. Observers have noted that the lack of corporate governance standards and the weak enforcement of existing laws in emerging economies are partly responsible for such crises and for the inability of companies to recover from them.
At issue are some unique features of corporate governance in emerging economies. The lack of dear and strongly enforced property rights attenuate the depth of public capital markets, forcing many firms into private equity arrangements for financing. Private equity from friends and family, coupled with family control, engender opaque boardroom practices between related companies. Emerging economies are also characterized by extensive governmental involvement in private enterprises, ostensibly to encourage economic development and risk-taking, but instead discourage the accumulation of private capital in favor of de facto taxed-based public financing. One result of these features is the pervasiveness of interlocking directorates between corporations and the government in emerging economies.
In its most basic form, an interlocking directorate occurs when a person from one organization sits on the board of directors of another company (Mizruchi, 1996). Hence, an interlock may take several forms. It occurs when an individual from a focal organization sits on the board of another or when an individual from another organization sits on the board of the focal company. Interlocks also occur when there is a simultaneous exchange of individuals on the boards between two companies. They also occur when two individuals, A and B, from two different companies sit on the board of a third company, X. The companies of A and B have an indirect interlock while company X is interlocked with the companies of A and B. For the purposes of this study, we chose the most stringent definition of interlock which occurs when current senior managers and/or directors of two companies simultaneously serve on each others' boards. Since it is unclear if existing theories of interlocking directorates are generalizable outside of the non-Anglo-American context, this study seeks to understand the phenomenon of board interlocks and their relationship to firm performance in an emerging Asian economy, namely Singapore.
In the next section, theories of board interlocks are reviewed, followed by the development of research hypotheses. Next, the methodology for this study is described, followed by a presentation of the results and a discussion of the implications.
THEORIES OF INTERLOCKING DIRECTORATES
Interlocking Directorates for Class Integration
One theory of board interlocks proposes that they exist for class integration, defined as the mutual protection of the interests of a social class by its members (Koenig and Gogel, 1981; Useem, 1982). This process is driven by the identification and appointment of director candidates with similar backgrounds, characteristics, and political beliefs from within the personal networks of incumbent board members. The result of this "class hegemony" is an elite class of directors whose primary interactions in the boardroom serve the purpose of protecting class welfare (1) and, by extension, the welfare of the individual who belongs to the class (Koenig and Gogel, 1981; Koenig a al, 1979; Useem, 1982). For example, Useem's (1982) interviews with 1,307 U.S. and British executives and directors uncovered an elite network of directors in private and public corporations, financial institutions, and government agencies, loosely held together by the common goal of preserving their individual and collective positions in society. …