Connected directors – good for business?

One of the disconcerting factors in corporate governance is this: every time you find something to blame for the problem, you discover it has beneficial properties, too. "Discover" may not quite be the right word – at least not in the abstract. When a board tries to rid itself of some offending structure or practice it soon comes to see the good side it has lost. Two academics from Stanford University in California have pulled together a short analysis – perhaps just a thought experiment – about the reasons why having directors who are deeply connected isn't all that bad. A lot of academic studies as well as statements by governance experts consider the negative effects of board inter-connections, how they reduce independence, create a culture of back scratching, and leave us with an "old boy network" and all the nods and winks that go with it. "At the same time, it is important to understand that these connections can deliver tangible, positive value that benefits the organization and its stakeholders," they write. "Rather than evaluate boards based on independence standards and other superficial structural attributes, more attention should be paid to how board members' professional backgrounds and network of connections contribute to governance quality and shareholder value creation. Why is it so difficult for commercial governance ratings firms to incorporate this information into their analyses?"

Source document: The article "Director Networks: Good for the Director, Good for Shareholders," by David Larcker and Brian Tayan of the Stanford University Graduate School of Business, is a four-page pdf file.