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Jessica Donohue
Senior Specialist

Interlocking directorates: Definition, issues and examples

March 10, 2023
0 min read
Board members discussing interlocking directorates.

By nature of their positions, all board directors have fiduciary duties. Despite the duty of care being a staple of corporate governance, board directors continue to serve on multiple boards in the same or related industries. Board directors who do are called interlocking directorates.

Service on more than one board could constitute a conflict of interest, violating basic principles of good governance. The best interests of one company are also at odds with another competing company. To help you understand what interlocking directorates are and how to prevent them, this article will explain:

  • What interlocking directorates are
  • Regulations that govern them
  • Examples of interlocking directorates
  • How nominating and governance committees can avoid them

What Are Interlocking Directorates?

In simple terms, board directors who accept positions on the boards of two or more companies are called interlocking directorates. Interlocking directorates are usually undesirable for both companies and the director because it can complicate board members’ fiduciary duties. Board members must act as a prudent person would and work in the company’s best interest. But that’s easier said than done when a board member’s loyalties are divided.

The Institutional Shareholder Services (ISS) recommends that boards and shareholders vote against board directors who serve on five or more boards, which is down by one as recently as 2017. Glass Lewis also closely monitors board directors who serve on multiple boards. Glass Lewis supports executive directors who serve on no more than two boards.

Are Interlocking Directorates Legal?

Under most circumstances, interlocking directorates are legal and perfectly acceptable. However, when the firms that a board director serves are mutual competitors, the waters become murky. A board director who accepts a board seat for a competing company will likely gain access to privileged information, which sets the stage for unfair competition.

Interlocking directors come with anti-trust issues and strict regulations, both of which nominating and governance committees should be aware of before recruiting a board candidate already serving on another board.

Anti-Trust Issues With Interlocking Directorates

The issue of interlocking directorates is an anti-trust matter. The Federal Trade Commission (FTC) is the federal regulating agency for anti-trust laws. As part of the Clayton Act, U.S. anti-trust laws disallow interlocking directorates. The general intent of the provision is to prevent anti-competitive coordination between corporations that would upset the stability of the financial marketplace.

The Clayton Act

Specifically, the Clayton Act prohibits board directors acting as interlocking directorates from serving on more than one board within the same industry in situations where, if the two companies were combined, it would set up a situation that violates anti-trust laws. The Clayton Act was passed in 1914 to curtail anti-competitive practices. Despite this century-old law, researchers have indicated that one in eight interlocks in the U.S. exist between competing corporations.

When Does the Clayton Act Apply to Corporate Directors?

According to the Clayton Act, the interlocking directorate rule refers to a situation where either:

  • Each company competes on at least 2% of its sales, and one of the companies competes on at least 4% of one of the company’s sales.
  • Both companies are over a specific size, and the overlapping sales hit a particular threshold for at least one of the companies.

The amounts typically increase annually. Currently, the threshold is $26.161 million in aggregate capital, surplus and undivided profits for individual corporations. In addition, the threshold for at least one corporation is $2,616,100 for the Act to apply.

Problems With Interlocking Directorates

Research by GMI Ratings reports three distinct problems with interlocking directorates. They include:

1. Extraordinary Compensation Packages

Jack Welch, CEO and chair of General Electric from 1981 to 2001, made headlines when the media reported the financial details of his divorce. The media reported that Welch had received one of the most extraordinary director remuneration packages, which afforded him lifetime access to the company’s facilities and services and a $417 million retirement package — the largest payment in our history.

Welch himself didn’t serve any company other than GE. Yet, further investigation revealed that many companies with similarly extraordinary compensation packages had boards with interlocking directorates.

2. Excessive Board Director Pay Despite Performance

Similarities between boards can often come down to interlocks. This includes board compensation, which explains why the aforementioned extraordinary compensation packages don’t necessarily align with performance.

Many of the highest-paid board directors have served on the board the longest. Because these board directors tend to have extensive networks, it’s also possible for them to have interlocks with multiple competing companies.

3. Option Backdating

When companies backdate stock options, they list an earlier issue date than when a director actually joined the board so that the stock options have more value. A backdating scandal broke in 2006, and many of the implicated companies also had interlocking directorates.

This is in part because practices like backdating can pass through the interlock from one company to the next, making these issues more widespread.

Interlocking Directorates Examples

Interlocking directorates aren’t new. One infamous example of interlocking directorates is the time Google and Apple shared two board directors in 2002, both of whom resigned from Google’s board of directors after the FTC investigated.

In April 2022, the Department of Justice (DOJ) renewed its focus on interlocking directorates as part of the Biden administration’s emphasis on anti-trust. The following interlocking-directorates example illustrates this emphasis by the DOJ:

The Issue

The DOJ announced that they wanted to better enforce Section 8 of the Clayton Act to, as Assistant Attorney General Jonathan Kanter says, “prevent collusion before it can occur.”

The Approach

Kanter and the DOJ investigated a wide variety of different companies “across the broader economy” that had interlocking directorates. These are all companies whose interlocking directorates could contribute to anti-competitive activities.

The Results

In October 2022, the DOJ announced that seven directors had resigned from the corporate boards of five different companies. It’s important to note that these directors stepped down in the face of potential violations— the DOJ took no legal action against them.

The five companies are:

  • Definitive Healthcare Corp. and ZoomInfo Technologies Inc.: Both companies provide go-to-market and intelligence services. They also shared a director, who has since resigned from Definitive’s board.
  • Maxar Technologies Inc. and Redwire Corp.: A director served on the board for both of these space infrastructure and communications companies. They resigned from Redwire’s board.
  • Littelfuse Inc. and CTS Corp.: A director resigned from CTS’s board following an investigation into the two companies, both of which offer transportation components and technology.
  • Skillsoft Corp. and Udemy Inc.: The board director in question here served on the board for both of these corporate education companies before resigning from Udemy’s board. He also headed the education segment of Prosus investment firm.
  • Solarwinds Corp. and Dynatrace, Inc.: Both companies sell application performance monitoring software. One director served on both boards, and also served on the board of investment company Thoma Bravo. Two additional directors served on the boards of Thoma Bravo and Solarwinds. All three directors resigned.

Boost Board Performance Without Interlocks

Interlocking directorates seem like a competitive advantage. Passing insider intel from one competitor to another is a quick ticket to success. But not only can it potentially violate regulations, but it’s also not the best way to increase board performance.

Board management software from Diligent drives better decision-making and helps prevent potentially harmful situations for your organization, such as interlocking directorates. Boards can collaborate securely, communicate effectively and tackle any potential conflicts with our best-in-class board management solution.


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