Interlocking directorates

What Is Interlocking Directorates?

Interlocking directorates refer to a situation where the same individual serves on the board of directors of two or more competing companies. This practice falls under the broader category of corporate governance and is a key area of antitrust law and competition policy. While sometimes viewed as a way to share expertise, interlocking directorates can raise concerns about reduced competition and potential collusion between rival firms.

History and Origin

The concept of interlocking directorates gained prominence in the early 20th century as industrial trusts and large corporations began to dominate the American economy. A notable critic of this practice was Louis Brandeis, an Associate Justice of the U.S. Supreme Court and an economic advisor to President Woodrow Wilson. Brandeis argued that interlocking directorates could suppress competition and violate existing antitrust laws, such as the Sherman Antitrust Act.¹⁶, ¹⁷

His concerns directly influenced the Federal Trade Commission Act of 1914 and, more significantly, Section 8 of the Clayton Antitrust Act of 1914. This legislation explicitly prohibited interlocking directorates between competing corporations, aiming to prevent anticompetitive behavior before it could manifest as explicit price-fixing or market allocation. The Federal Trade Commission (FTC) and the Department of Justice (DOJ) are the primary agencies responsible for enforcing these prohibitions.¹⁴, ¹⁵

Key Takeaways

• Interlocking directorates occur when an individual serves on the boards of two or more competing companies.
• The practice is primarily regulated by Section 8 of the Clayton Antitrust Act in the United States.
• Regulators like the FTC and DOJ actively monitor and enforce prohibitions against interlocking directorates to maintain market competition.
• While sometimes beneficial for sharing expertise, the primary concern is the potential for reduced competition and coordinated behavior among rivals.
• Exceptions and thresholds exist within the law, based on the size and competitive sales of the corporations involved.

Interpreting Interlocking Directorates

The existence of interlocking directorates is interpreted primarily through the lens of antitrust law and competition. Regulators evaluate such arrangements to determine if they pose a risk to fair competition within a market. The core concern is that an individual serving on the boards of two rival companies could facilitate the exchange of competitively sensitive information, potentially leading to coordinated strategies, reduced innovation, or higher prices for consumers.

The interpretation also considers the nature of the "competition" between the firms. For instance, if the companies operate in entirely different geographic markets or offer products that are not truly substitutes, an interlock may be less problematic. However, even indirect influence or access to strategic discussions can raise red flags for antitrust authorities. This scrutiny extends to both publicly traded and privately held companies.¹³

Hypothetical Example

Consider two hypothetical technology companies, "InnovateTech Inc." and "FutureGadgets Corp.," both primarily engaged in developing and selling virtual reality headsets. Ms. Eleanor Vance, a highly respected industry veteran, is invited to join the board of directors of InnovateTech Inc. She already serves on the board of FutureGadgets Corp.

This situation would constitute an interlocking directorate because InnovateTech Inc. and FutureGadgets Corp. are direct competitors in the virtual reality headset market. Regulators would likely view this as a potential violation of antitrust laws, as Ms. Vance could gain access to confidential strategic plans, pricing strategies, or product development roadmaps of both companies. This access might inadvertently or intentionally lead to a reduction in competitive intensity between the two firms, ultimately harming consumers through less choice or higher prices. To resolve this, Ms. Vance would typically be required to resign from one of the boards to eliminate the interlock and ensure fair market competition.

Practical Applications

Interlocking directorates appear in various practical contexts, particularly in the realm of corporate governance, mergers and acquisitions, and antitrust enforcement.

• Antitrust Enforcement: The U.S. Department of Justice and the Federal Trade Commission actively enforce Section 8 of the Clayton Act. They regularly identify and challenge illegal interlocking directorates, sometimes resulting in directors resigning from boards to avoid legal action. This proactive enforcement aims to prevent anticompetitive outcomes such as price fixing or market allocation.¹¹, ¹²
• Mergers and Acquisitions: During merger reviews, regulators scrutinize existing or potential interlocking directorates that might arise from the combination of companies. If the acquiring and target companies have common directors who also serve on the boards of direct competitors, this can be a point of concern for regulatory approval.
• Corporate Compliance: Companies must establish robust internal compliance programs to identify and prevent interlocking directorates, especially when appointing new board members or engaging in strategic partnerships. This often involves reviewing the competitive landscape and the roles of prospective directors on other corporate boards.
• Investment Firms: Investment firms, particularly private equity firms or large asset managers, often hold stakes in multiple companies within the same industry. If their representatives sit on the boards of these competing portfolio companies, this can create an interlocking directorate, even if the primary intent is portfolio diversification.¹⁰

Limitations and Criticisms

While the prohibition against interlocking directorates aims to safeguard competition, the enforcement and scope of these regulations have faced certain limitations and criticisms.

One criticism is that the strict "per se" illegality of interlocking directorates under Section 8 of the Clayton Act may not always align with economic realities. Some argue that not all interlocks necessarily lead to anticompetitive behavior. For example, a shared director might primarily bring valuable industry expertise or foster beneficial collaborations, such as the sharing of best practices that improve corporate efficiency across different entities without undermining competition.

Another limitation stems from the evolving nature of markets and corporate structures. The definition of "competitor" can be complex, especially in rapidly changing industries or those with diverse product lines. Companies may compete in some areas but not others, making it challenging to draw clear lines. Additionally, the increasing prevalence of common ownership, where institutional investors hold stakes in multiple competing companies, presents a more nuanced challenge that the interlocking directorate statutes may not fully address.⁹

Furthermore, the statutory thresholds for what constitutes an illegal interlock are updated annually based on economic indicators. For example, in 2025, the thresholds under Section 8 of the Clayton Act were set at $51,380,000 for Section 8(a)(l) and $5,138,000 for Section 8(a)(2)(A), reflecting changes in the gross national product.⁶, ⁷, ⁸ While these adjustments attempt to keep the law relevant, they can still be seen as somewhat arbitrary in their application to diverse market conditions.

Some scholars and practitioners argue for a more nuanced, "rule of reason" approach to certain interlocks, where the potential anticompetitive effects are weighed against potential pro-competitive benefits. However, the current legal framework largely maintains a strict prohibition to prevent even the appearance of collusion or undue influence.⁵

Interlocking Directorates vs. Common Ownership

Interlocking directorates and common ownership are distinct but related concepts in corporate finance and antitrust.

While interlocking directorates involve a direct personal link, common ownership pertains to shared financial interests. Common ownership can sometimes lead to interlocking directorates if a large investor appoints their representatives to the boards of multiple competing companies within their portfolio. Both scenarios raise concerns for antitrust regulators regarding the potential for reduced market competition and the integrity of capital markets.

FAQs

What is the primary law that prohibits interlocking directorates?

The primary law that prohibits interlocking directorates in the United States is Section 8 of the Clayton Antitrust Act of 1914. This act aims to prevent anticompetitive practices by making it illegal for the same person to serve as a director or officer for two competing corporations above certain financial thresholds.⁴

Why are interlocking directorates considered problematic?

Interlocking directorates are problematic because they can reduce competition between rival companies. A shared director might facilitate the exchange of confidential business information, potentially leading to coordinated pricing, market allocation, or other anti-competitive behaviors that harm consumers and stifle economic growth.³

Are all interlocking directorates illegal?

No, not all interlocking directorates are illegal. Section 8 of the Clayton Act includes certain exceptions and thresholds based on the size of the corporations involved and the competitive sales generated between them. If the competitive sales between the companies are below a de minimis level or if the companies are not considered direct competitors under the law, an interlock may be permissible.²

How do regulatory bodies enforce the prohibition on interlocking directorates?

The Federal Trade Commission (FTC) and the Department of Justice (DOJ) enforce the prohibition on interlocking directorates. They monitor corporate board compositions, investigate potential violations, and can compel directors to resign from positions that create illegal interlocks. These enforcement actions are part of broader efforts to maintain fair market structure and prevent collusion.¹

What is the difference between an interlocking directorate and a conflict of interest?

An interlocking directorate specifically refers to an individual serving on the boards of two or more competing companies, with the primary concern being its impact on market competition. A conflict of interest is a broader term where an individual's personal interests or duties to one entity could potentially bias their decisions or actions concerning another entity. While an interlocking directorate can create a conflict of interest, not all conflicts of interest are interlocking directorates.

Can investment firms create interlocking directorates?

Yes, investment firms can create interlocking directorates, particularly if they have representatives who sit on the boards of multiple competing portfolio companies. Regulators are increasingly scrutinizing such arrangements to ensure that the practice does not lead to a reduction in competition or coordinated behavior among the firms. This often requires careful consideration of regulatory compliance within investment strategies.