Irish company boards remain a cosy club
Interlocking directorships can have a bad effect on performance through group-think
Groupthink: at the time of the banking collapse commentators suggested the presence of the same individuals on multiple boards may have led to a groupthink that stifled critical analysis of economic realities.
Since the banking crisis of 2008 and the subsequent economic collapse, Ireland has done a lot of soul-searching. The blame has been directed at government, foreign investors, Irish banking , developers and ordinary citizens.
One of the potential aggravators of the banking crisis was the amount of overlap between the board memberships of companies. These are known as “company interlocks”, and around the time of the banking collapse commentators suggested that the presence of the same individuals on multiple boards may have led to a groupthink that stifled critical analysis of economic realities. In 2010, the economic think tank Tasc produced a report, Mapping the Golden Circle, that flagged this trend.
Unlike many ingredients of the crash, this is a pattern we can measure. Researchers at the Insight Centre for Data Analytics at UCD, Trinity College Dublin and the University of Washington have developed a statistical model to map the networks of corporate boards in Ireland in the decade between 2003 and 2013. The results are clear: corporate boards in Ireland were at their most “‘interlocked” just before the banking collapse.
International research on the subject has identified a number of potential negative outcomes.
Interlocking directorships may be associated with poorer performance and lower value of companies, social embeddedness that limits effectiveness, excessive remuneration and conflicts of interest, lack of commitment by directors and lack of diversity.
The key ingredient of our research into the Irish corporate board system was the development of a statistical model to describe the process of company-director networks over time. This analysis allowed us to infer whether the level of director interlocking has changed significantly. By contrast, the conclusions from Tasc’s report was somewhat limited in that it could not say, for example, whether the apparent high level of interlocking had significantly changed over time.
Additionally, our model provides many insights, including an intuitive visualisation of the company-director networks.
As data analysts we do not draw conclusions from this research – we’ll leave that to economists. However, the pattern we have uncovered is notable when set against the cycle of banking boom and bust over the last 10 years. This feature of our corporate governance structure is worth the attention of economists and policymakers.
There is evidence the level of interlocking has decreased slightly over the last year. Should it rise again, decision-makers need to take note.
With so much at stake for companies and for the economy, is it time to look at these models afresh and introduce mechanisms to guard against hegemony on our boards? This could be achieved in a range of ways from legislation to best-practice charters.
One thing we can say on foot of this research: the patterns are unmistakable, and the cost of ignoring them is one we cannot afford again. We can barely afford it now. Prof Nial Friel is a professor of mathematics and statistics at the Insight Centre for Data Analytics, insight-centre.org. To read the report visit pnas.org/content/early/2016/05/25/1606295113.full.pdf