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Board of Directors and Corporate Networks

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Individual Behaviors and Technologies for Financial Innovations

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Abstract

Social network analysis (SNA) is an emerging research field in finance. This chapter references SNA and knowledge of corporate governance, to deal with a similarly emerging topic in finance, board interlocking, and shall examine the validity of the small-world model in a relevant emerging market and the existence of associations between the firm’s worth and its network of corporate relationships. This study references official data relating to more than 400 listed companies. The main results suggest that the network configuration of the relationships between board members and companies reflects the small-world model. Furthermore, there seems to be a significant relationship between the firm’s worth and its network centrality, described according to an “inverted U” type curve, which suggests optimum values exist for social prominence in the corporate network.

Portions of this chapter appeared in the 2011 paper “Small Worlds and Board Interlocking in Brazil: A Longitudinal Study of Corporate Networks 1997–2007”, Brazilian Review of Finance, vol 9, pp521–548.

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Notes

  1. 1.

    Along this line of thinking, Fracassi and Tate (2012), based on data relating to North American companies for the 2000–2007 period, deal with the firm’s external ties, as constituted between board directors and executives. In this study the conclusion is that (i) firms whose CEOs are more powerful tend to elect directors linked to the CEO; (ii) CEO-director ties reduce the firm’s worth; and (iii) firms in which there are CEO-director ties have a greater tendency to become involved with acquisitions that have a negative net present value.

  2. 2.

    The main component is the largest cluster of interconnected nodes. By way of illustration, in Panel A in Table 14.2, it can be seen that of the 1941 directors in the network in 2007, 1191(∼61.4% of the directors belonged to the same cluster) were interconnected (see Fig. 14.4).

  3. 3.

    In the study of Stafsudd (2009:72), small-world statistics are shown for company networks connected by their shareholders. In this research the author presents QSW statistics for Denmark, Germany, Sweden, the United Kingdom, and the United States. Because the tie between companies was through their shareholders and not board interlocking, here it was decided not to report such values comparatively. However, by way of illustration, the values computed by Stafsudd (2009:72) are in the interval [1.04;5.65], with the exception of Germany, which according to this author has a network of companies linked by its shareholders with QSW ≈ 87.96, which suggests the validity of the small-world model for that market. According to this result, in the opinion of Stafsudd (2009:72), Germany, which has limited investor protection and considerable small-world strength, may not generate sufficient control to complete/substitute the formal mechanisms for protecting the interests of minority shareholders. A recent illustration of this in Brazil was made by Lazzarini (2007).

  4. 4.

    No indications were found of the correlation between regressors and regression error, which suggests the nonexistence of problems of endogeneity.

  5. 5.

    These arguments are supported by the assumptions assumed by Jackson (2008:434–58).

  6. 6.

    Bearing in mind the transversal character of this research and the growth in corporate networks over the period studied, it was decided to use centrality in its normalized form.

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Authors and Affiliations

  1. Sao Paulo School of Business Administration (FGV/EAESP), Sao Paulo, SP, Brazil

    Wesley Mendes-Da-Silva

  2. University of Texas at Austin, Austin, TX, USA

    Wesley Mendes-Da-Silva

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  1. Wesley Mendes-Da-Silva
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Editors and Affiliations

  1. Sao Paulo School of Business Administration (FGV/EAESP), Sao Paulo, SP, Brazil

    Wesley Mendes-Da-Silva

  2. University of Texas at Austin, Austin, TX, USA

    Wesley Mendes-Da-Silva

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Mendes-Da-Silva, W. (2019). Board of Directors and Corporate Networks. In: Mendes-Da-Silva, W. (eds) Individual Behaviors and Technologies for Financial Innovations. Springer, Cham. https://doi.org/10.1007/978-3-319-91911-9_14

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