Defining interconnected addresses


What are interlaced addresses?

Address interconnection is a business practice in which a member of the board of directors of one company also sits on the board of another company or the management of another company. Under antitrust law, interlocking addresses are not illegal as long as the corporations involved do not compete with each other.

Interlocking boards were banned in specific cases where they gave some board members outsized control over an industry. In some cases, this opened the door for them to synchronize price changes, labor negotiations, and more. Board interconnection does not preclude a board director from serving on a client’s board.

Although there are still many opportunities for collusion through interlocking boards, recent trends in corporate governance have transferred more power to the CEO. Because of this, many CEOs have been able to appoint and fire board members as they please, without giving them enormous influence.

Key takeaways

  • Interconnected directions refer to when a member of a company’s board of directors also serves on the board of another company or within the company’s management.
  • Under antitrust law, interlocking addresses are not illegal as long as the corporations involved do not compete with each other.
  • Interlocking boards were banned in specific cases where they gave some board members outsized control over an industry.
  • Board interconnection does not preclude a board director from serving on a client’s board.

Understanding interlocking directions

Interlocking boards are legal and generally occur when an individual serves as an officer or director of two corporations. However, if those two corporations compete with each other, the intertwined directorates can violate antitrust laws. For example, if a company purchases another company and a director or executive serves as a director or a member of the board of directors of both companies, it can cause an interrelated management problem.

Shareholders generally elect the members of the board of directors, or other members of the board will appoint them. The board makes a variety of critical decisions, such as executive compensation and dividend policy. Dividends are cash payments given to shareholders as a reward for owning shares in a company.

The boards contain internal and independent (external) members. Insiders are the major shareholders, founders, and executives, while outside directors are more objective forces. They generally have significant experience in the management or direction of other large companies and bring a new dimension to the decision-making process. Independents can also dilute the concentration of power and help align the interests of shareholders with those of insiders. Generally, companies can try to avoid an interconnection problem before it occurs, such as during a merger or acquisition.

Interrelated directions and corporate governance

The board of directors is important in shaping corporate governance. Corporate governance is the system of rules, practices and processes that direct and control a company. Corporate governance essentially involves balancing the interests of a company’s many stakeholders (eg, shareholders, management, customers, suppliers, financiers, government, and the community). Corporate governance also provides the framework for achieving a company’s objectives, covering action plans and internal controls, along with performance measurement and even corporate disclosure.

Poor corporate governance can call into question the reliability, integrity, or commitment of a company to its shareholders, which can negatively affect the financial health of the company. On the other hand, strong corporate governance can help with environmental, social and governance (ESG) issues by attracting social impact investors who value transparency and accountability.

Address interconnection can be helpful as it can prevent a director or board member from having a conflict of interest between two companies or competitors. As a result, the laws surrounding interlocking addresses help prevent a board member from gaining knowledge of a business that could be used to benefit a competitor.

A near-violation of the interlocking rule occurred in 2009 when Google announced that its board member, Arthur D. Levinson, would be stepping down as he also served on Apple’s board. Earlier this year, Apple announced that Google CEO Eric E. Schmidt would be leaving Apple’s board. Since the two companies are competitors, they would have violated antitrust laws if they had not taken steps to separate their boards.

www.investopedia.com

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Mark Holland

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