Dissertation: Board Interlockage and Firm Performance

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Board-Interlockage essay


Within the current world of business, firms are becoming increasingly interconnected due to board interlockage. Board interlockage in this regard refers to the practice whereby the board of directors of a firm serve on the board of another company or several other companies. This tendency results in the creation of social relationships among firms. This practice is quite common among firms in the United Kingdom (UK), and for this reason, the practice of board interlockage heavily affects companies. The purpose of the following research is to study the impact of board interlockage on firm performance. This was achieved using a sample of 100 firms drawn from a variety of sectors within the UK. The study was secondary in nature, and the data was collected using the Thomson Reuters Datastream. Data analysis was conducted using SPSS. The findings of this research indicated the following: (1) board interlockage positively impacts firm performance, as it increases the return on assets, (2) board size has an influence on firm performance, as it impacts return on assets, and (3) director independence is significant in fostering firm performance. The implications of these findings is, they are crucial to individuals, firms, and regulators dealing with board interlockage.

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In the contemporary business world, the frequent application of board interlockage has resulted in firms becoming increasingly interconnected with one another. According to Rutledge, Karim and Lu (2016), board interlockage is also well known under such terms as interlocking directorship, director interlocks, and board networks. Pombo and Gutiérrez (2011) explicate, the following practice refers to a situation whereby a firm’s board of directors serves as a board of directors of another company or companies. Board interlockage is also defined as the social relationship that is created between two or more firms through the inclusion of the same individuals in their boards of directors. For instance, in the UK, board interlockage is quite a common practice in the business field. According to statistical data, most of the large companies in the UK have board interlockage. In this case, firms share at least one director with each other (Santos, da Silveira, & Barros 2012).

Board interlockage has a significant influence on firms. Particularly, this impact can best be felt on the performance and resources of the firms (Lamb 2017). In this case, this type of network formation among the board of directors of firms can result either in the improvement or reduction of the firms’ performance. Zona, Gomez-Mejia and Withers (2015) indicate that board members, who serve on multiple boards of directors, tend to have an impact on the performance of the firms. However, this impact depends largely on the resources of the firms. It is equally essential to note that the following impact may also be beneficial or harmful to the overall performance of a firm. The current study examines the phenomenon of board interlockage and its potential impact on firm’s performance based on empirical results.

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Background of the Study

Board interlockage is mainly based on the need to share resources. This is a key reason for board interlockage between most firms. Peng et al. (2015) opine, when a company appoints a given professional onto its board of directors, it expects this individual will provide it with necessary resources that will assist in developing a structure that will enhance its financial stability and development over time. According to Non and Franses (2007) board interlockage provides firms with a number of benefits, such as resources, organizational legitimacy, effective communication channels, and strategic support. It should also be stressed that board interlockage has been found to play an essential role in the formation of strategic social groups. It is also of great significance for the wellbeing of firms because it helps to prevent conflicting actions with other organizations. According to the findings by Santos et al. (2012), board interlockage ensures that the organizations are not able to interfere with the structural plans of other companies. The fact that such interlockage can lead to an improved reputation within the financial market is yet another reason for its further practice. Consequently, according to many researchers, board interlockage has a lot of benefits and impacts firms’ performance. The majority of scholars assert that director interlockage serves as a credible and relatively low cost source for firms to be able to successfully manage different issues regarding environmental uncertainty (Pye, Kaczmarek & Kimino 2012; Peng, et al. 2015). Nonetheless, it is also essential to mention some of the dangers of this network of directors, which include: the issues of insider trading, the rise of cartels, price fixing, and the development of an oligarchy.

Some researchers indicate that director interlockage has the potential of resulting in a weakened governance structure (Lamb 2016; Peng, et al. 2015). This is attributed to the perception that busy directors may have a negative influence on companies’ performance. Some researchers argue that a directorate that is interlocked may tend to become too embedded in the directors’ network. For this reason, it is likely that the directors become more committed to these connections as opposed to their boards. It is evident that the directors may become too concerned with the aspect of social cohesion as opposed to their direct duties. Therefore, being able to determine the impact of board interlockage on firm performance and define it as either positive or negative is an essential issue worthy of research.

Problem Statement

There are a number of views presented in literature concerning the impact of board interlockage on the firms. One of these views persists board interlockage provides a means through which the firms can monitor each other. According to another view, board interlockage plays a key role in providing firms with essential information on business practices. Zona et al. (2015) affirm, director interlockage facilitates access to diverse and unique information. Yet Non and Franses (2007) consider that board interlockage is a mere reflection of upper class cohesion according to. However, Pye, et al. state (2012) that board interlockage is nothing but a way of placing pressure on directors. In analysing all these views, it is evident that the first one depicts a positive impact of board interlockage on firms’ performance. In contrast, the final view focuses a negative impact of board interlockage on firms’ performance. The other view does not really makes emphasis on anything concrete concerning the impact of board interlockage implying a neutral impact. Accordingly, literature has not been able to illustrate with certainty the impact of board interlockage on firms’ performance. Thus, it is possible to conclude that the results of studies have mainly been mixed when it comes to this issue. It is also worth stressing that very little empirical research on board interlockage and its impact has been conducted.

Rationale and Significance of the Study

The rationale for this study is based on key components of the agency theory. According to Ribeiro and Colauto (2016), this theory makes the argument effective corporate governance, as undertaken by a board of directors, can be used to mitigate against potential agency conflicts, provide control over the opportunistic tendency by firms’ executives, and facilitate better firms’ performance. Therefore, by association, it can be said that board interlockage can be essential in fostering the improvement of the firms’ overall performance. This can be possible through the harmonizing effect that emanates from resource sharing, including essential information that is shared among the interlocked directors (Lamb 2016). In this case, it is expected that a positive performance of one company will result in a spill over effect on other companies sharing the same directors. This is also expected to enhance investor confidence in the firms, which can result in increased investment opportunities. Therefore, the rationale of this study is further described as the need of gaining a better understanding of the exact effects of board interlockage on the performance of the firms exposed to this issue.

Consequently, the significance of this study is to provide a new stream of thought in the current literature regarding this issue. Further, the significance of this study lies in the notion board interlockage affects all the firms involved in the networked relationship. In this case, gaining an understanding of this impact will be vital for such firms and allow them to structure themselves to deal with it, especially in the event that it is negative.

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Research Aim and Objectives

The aim of this research is to investigate what effect board interlockage has on firms’ performance. This emanates from the fact the board directors tend to play a key role in ensuring effective operation of the firms. Focus will be placed on determining whether this impact is positive or negative and how this issue affects the response from investors. This aim is to be pursued with the following key objectives as highlighted below:

· To explain the concept of board interlockage and how it is perceived by the investors in the UK;

· To understand the significance of the role of the directors board on the performance of the firms in the UK;

· To understand how director board interlockage affects the performance of firms in the UK.

Research Questions

The research questions that are developed to guide the following study are provided below:

· What is the significance of the director’s board’s influence on the performance of the firms in the UK?

· What does board interlockage mean and how is it perceived by the investors in the UK?

· What is the influence of the board interlockage on the performance of the firms in the UK?

Conceptual Framework

The conceptual framework of this study is based on the agency and resource dependence theories. These theories serve as fundamental ideas which this study is built upon. Through the agency theory, this study highlights the role undertaken by the board of directors of a firm as they act as a controlling unit that monitors the key decisions made by management. While applying this theory, it is essential to mention that it is not easy given the changing environment that the firms operate. Ribeiro and Colauto (2016) indicate that despite being largely dependent on this practical application of the theory, research work in this area remains limited. This is due to the complex nature of the corporate environment. Thus, it is the reason for the inclusion of the resource dependence theory. This theory is essential as it illustrates the role of the board of directors in the reduction of such complexities. Rutledge, Karim and Lu (2016) state that board members tend to have social networks, which they are able to utilize in order to acquire resources for a firm. Conversely, the resource dependence theory describes the role of the board of directors in accessing and securing the financial resources of a firm from its external environment.

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Structure of the Study

The structure of this research is as follows. The paper comprises six chapters: introduction, literature review, methodology, results, data analysis, and conclusion. The first chapter of the study is the introduction. The second chapter is the literature review. This chapter entails carrying out a critical analysis of all that is known about, board interlockage and its influence on firm performance. A detailed conceptual framework is also presented in this chapter. The key methods utilized in the study are discussed in Chapter 3: Methodology. The methods and rationale for their selection and application are also discussed in this chapter. The next chapter presents the key results of the study. The study results are interpreted and discussed in Chapter 4: Data Analysis. This also encompassed a discussion of these results in line with literature. The conclusion is the final chapter of the study. Besides presenting a summary of the most significant findings, this chapter also includes key recommendations and limitations of the study.



This chapter provides an analysis of existing literature on board interlockage and its influence on firm performance. The review begins with the development of a theoretical framework containing key theories that this study is based on. The theories that were taken into consideration in this regard were: the resource dependence theory and the agency theory. The review of the past studies on this issue will then be presented in this chapter. Firstly, this review begins with the definition of board interlockage and its basics. The review of board directors, which is a significant aspect of the research problem under study, will also be defined and analysed. The key advantages of board interlockage will also be critically assessed in this chapter. Firm performance will also be reviewed in the following chapter to provide insights into what past studies researched on this issue. The review of past studies will then end with an analysis of the impact of board interlockage on firm performance in the board interlockage and firm performance section. This review of literature will end with the formulation of a brief conceptual framework that will comprise all the key concepts assessed in this chapter. Therefore, this literature review is developed as follows.

Theoretical Framework

The theoretical framework of this study is based on two key theoretical perspectives of board interlockage. These theories are the agency theory and the resource dependence theory. The agency theory is determined as a basis for this study due to its role in the maximization of the interests of shareholders by focusing on eliminating potential agency issues. In this case, the agency theory serves as a powerful theoretical basis for exploring the relationship between board interlockage and recommending solutions to various agency problems existing between shareholders and managers, which can lead to enhanced shareholder returns and subsequently improved firm performance. The resource dependence theory can be applied to provide an explanation of the main responsibilities held by the boards of directors and how these responsibilities affect firm performance.

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Agency Theory

The agency theory provides insights into how managers ought to behave or carry out their responsibilities. It is essential given that within corporate relationships, the issue of conflict of interest is a common occurrence. Normally, the following issue tends to emanate from misalignment of the interests of shareholders with that of managers (Eisenhardt, 1989). In this case, managers are perceived to be opportunistic in nature. Accordingly, the agency theory perceives the relationship between stakeholders and the managers in which the former perform the role principals and the latter perform the role of agents. Jensen and Meckling (1976) define core assumptions of the agency theory as including the following:

· Managers tend to have opportunistic characteristics;

· Both the principal and the agent are rational beings;

· The distribution of information between managers and shareholders is asymmetric in nature.

The agency theory makes the argument that the problem of asymmetry of information is one that leads to agency cost. In this regard agency cost encompasses a number of other costs, such as monitoring costs, bonding costs, as well as residual losses (Jensen & Meckling 1976). Accordingly, monitoring costs refer to those costs that are incurred due to monitoring the activities undertaken by managers. On the other hand, bonding costs are the costs that are incurred as a consequence of the establishment of systems or structures with the aim of ensuring there is alignment of the interests of managers and shareholders. This is significant as it results in the compensation of managers as per their performance. It is equally essential to mention that bonding costs may be either financial or non-financial in nature. Residual losses take place following misalignment of interests and the failure of monitoring and bonding costs. It should be noted that a residual loss is incurred when the cost of monitoring and bonding becomes more than the benefit gained.

Further, asymmetric distribution of information also leads to a number of adverse selection and moral hazard problems. Eisenhardt (1989) provides some pieces of evidence on this issue and postulated principals tend to experience the detrimental problem of selection, which comes about due to their lack of ability to correctly conduct a verification of the skills of the agents who claim to possess it at the time of contracting them. This means that it is not always possible for the principal to select the best applicant. Consequently, the problem of moral hazards takes place the moment that agents pursue their own personal goals and gains at the expense of the principals and their interests (Eisenhardt 1989). Some of the sources of these challenges are in relation to a variety of factors that include: earning retention and shirking, the availability of free cash flow, managers’ investment decisions, and empire building.

According to the agency theory, there are supposed to be independent directors who will play the role of monitoring and supervising executives. This comes about due to the assumption that these directors are independent and are largely concerned with their reputation. For this reason, it is expected that these independent directors will be able to add value to the firm due to their role of monitoring. On the other hand, Shleifer and Vishny (1986) indicate that controlling shareholders are also essential in reducing agency problems. This lies in the fact that they possess the incentives as well as the ability to facilitate the process of monitoring management, thus leading to the needed results.

Resource Dependence Theory

According to this theory, the main point of concern refers to resource access by a firm. The resources can comprise capital and expertise ones (Pfeffer 1973). This theory’s perspective can be described as being more materialistic in nature, and for this reason, it is less focused on the firm. Pfeffer (1973) indicates, the boards of directors are vital due to their role in aiding firms to have more access to finance and other key resources necessary for the improvement of their performance. In this case, the resource dependency theory calls for a board that has a much higher number of independent directors. The significance of such a combination is that such a board will comprise the members that have a diverse sense of expertise and plenty of knowledge. Further, such a combination will mean that these board directors could be better positioned to provide an external link to the firms that may be used to collect additional resources. Thus, these resources could be used by the firms to foster the improvement of their performance (Pfeffer 1973; Pfeffer & Salancik 1978). Further, such members of the board can also contribute to the improvement of resource access because of their ability to successfully network with the external business environment. In this case, firms may benefit from this cooperation due to improved chances of accessing cheaper resources that could be used for the improvement of their performance.

To further understand the significance of external directors, in their study Pearce and Zahra (1992) argue that the presence of external directors is essential in facilitating the improvement of organizational strategies, therefore making them efficient. This is possible because these directors can provide new perspectives, which could be used for the purpose of facilitating the improvement of the firm’s financial performance (Pearce & Zahra 1992). In the same way, Pfeffer and Salancik (1978) come to the conclusion that a team of independent board of directors and the subsequent board diversity are useful in fostering a means of managing a firm’s access to finance.

Therefore, the resource dependence theory posits the operational environment of a firm is reflected in the composition of the board, as well as its organizational structure. Thus, this theory calls for directors to the board to be selected on the basis of their ability to foster access to resources that are essential for a company to be able to compete and therefore perform efficiently.

Review of the Past Studies

Board Interlockage, Definition, and Basics

A number of studies have explored the phenomenon of board interlockage and consequently provided various definitions. A board interlockage is the situation created between firms the moment that a director at one firm joins the board of another (Peng et al. 2015). Interlocks have also been known to take place when a director is a member of at least two boards of directors in two different companies (Lamb 2016). Thus, board interlockage can also be defined as the participation of directors in more than one board (Lamb 2017). Therefore, while there is no consensus on the interpretation of board interlockage, what stands out as common in all the above definitions is this phenomenon is all about the directors are the members of more than one board.

To some extent, the firms that are interlocked tend to share similar strategies, as well as behaviours. This tendency can be attributed to the fact, board interlockage tends to result in the spread of management, as well as governance structures as a consequence of the knowledge and experience shared among directors on the boards (Pye et al. 2012). In this case, one director can transfer earnings management practices that are in one company into another company whose board he / she sits. The assumption made in this case is, the more the number of directors’ connections whether direct or indirect on the boards, the greater the amount of information that is shared (Santos & Brito 2012). Board interlockage demonstrates that no organization functions in isolation. Instead, corporate entities and their leadership are, in reality, enmeshed in a complex interlinked relationship that can be a significant source of influence (Peng et al. 2015).

Initial research on board interlockage was less analytical and therefore was more descriptive. This may lie in the fact that previous researchers were mainly concerned with gaining insights into the characteristics of interlockage as opposed to developing a general theory that could be used to explain this phenomenon. To begin this discussion, Dooley (1969) studied director interlockage of a total of 250 US companies. The researcher thus made a comparison of his findings with those of the United States Senate National Resource Committee in its 1935 investigation of the same issue. In his findings Dooley (1969) indicates that interlockage frequency remained constant over a period of 30 years among the samples. A good illustration of this finding is given by the data in 1935, which indicated 25 of the 250 firms had no interlockage with any other, and in 1965, the number reached 17 (Dooley 1969). Further, in 1935, an average director held 1.3 directorship positions, and much change had not taken place in 1965, because the number was only slightly lower as placed at 1.26 (Dooley 1969).

Dooley (1969) managed to identify a number of factors that mainly influenced the degree which a company is interlocked to. One of these factors concerns the size of the company. Therefore, the number of the average interlocks in large firms tends to increase with the increase in the value of assets. The second factor is the degree of managerial control. This degree is determined as the proportion of the board who serves as the executive of a company. Thus, the degree of director interlockage tends to reduce when the boards become more dominated by the insiders. The third factor identified by Dooley (1969) was financial linking by a company. In this case the findings of Dooley showed that an estimated one third of interlocks, involving non-financial companies, occurred within financial institutions. Usually, this type of interlockage tends to increase with a decrease in solvency and an increase in assets of a company that is non-financial (Dooley 1969). The explanation of this factor is given by the following two reasons: non-financial companies usually seek for financial advice when facing difficult times and banks usually seek the directors of large non-financial companies for the purpose of securing their business. The fourth factor was that interlockage between the organizations has the same five digit standard industrial classification (SIC). The final factor that was identified was local economic interests. These factors serve as essential determinants of board interlockage and usually take place between sample companies. According to the findings of Dooley (1969), almost half of all interlocks take place among the companies that have head offices within the same city.

The study by Levine (1972) is considered to be the first to perceive interlocking of directorates as some kind of network and therefore evaluate this issue. In his study Levine managed to produce a diagram that showed the proximity among non-financial enterprises. The diagram thus demonstrated that interlocks tended to take place in an organized way, which the researcher described as spheres of influence (Levine 1972). Levine’s findings were consistent with those of Dooley (1969) as his study’s representation of a network showed that industrial organizations had a strong linkage with financial institutions as opposed to each other.

Board Directors

A board of directors is a body of individuals who are entrusted with power to make a number of essential decisions for a firm, including financial ones that will ultimately have an impact on the wellbeing of capital by investors, communities, the security of employees, as well as the power of the executive. In this case, a board of directors enables the control of moral hazards likely to be taken by managers, consequently ensuring adequate alignment of the interests of a company with those of shareholders. This is in tandem with the agency cost viewpoint presented by Ho who explicates a board of directors fulfils the role of mitigating agency cost, and for this reason, ensures that the interests of stakeholders remain in alignment with the realization of the obligations of companies (Ho 2005). This outcome is similar to the findings of Fama and Jensen (1983) who defined a board of directors as a body whose role is to oversee the performance of managers and endorse their decisions for the sake of ensuring that the executives constantly work considering the interests of shareholders. Therefore, a board of directors is essential because it can enable the mitigation of the agency cost by fostering a process of actively monitoring management (Fama & Jensen 1983).

The resource dependence theory has also been significant in defining a board of directors (Pfeffer & Salancik 1978). According to this theory, a board of directors is an effective mechanism applied by firms that allows their members to establish contacts with the external world. Therefore, the implication in literature is that board interlockage is the most common external connection of the corporates, which is most studied.

Thus, it is evident that the main function of a board of directors is to monitor the work of managers. This monitoring is done with the goal of guaranteeing the least amount of conflict of interest that come about as a consequence of the principal / agent relationship between managers and shareholders. Thus, this role of monitoring and reconciling the actions of managers with the interests of shareholders is what is perceived as board independence. This can be summarized as corporate governance. A board of directors fulfils the role of corporate governance within an organization (Ho 2005). All the members of the board possess the legal prerogative that range from hiring, firing managers, as well as determining their compensation. Therefore, one of the key pillars of corporate governance is the presence of a strong board of directors and composition whereby members exude a great deal of independence.

Fama and Jensen (1983) try to expand the understanding of a board of directors. They do this by identifying the process through which the board of directors gets involved with a corporation. This process takes place in a total of four steps. The first step is in relation to the board planning and proposing the manner in which the resources of a company will be used. The step that follows regards reaching decision initiatives that require implementation. The next step concerns the application of these initiatives. The final step is overseeing the process of implementation and applying the necessary corrective action in the event that there is any kind of non-conformity from the implemented decision.

A number of studies investigate the role of a board of directors (Hamdan 2018; Rutledge et al. 2016). One essential role of a board of directors is to ensure there is a perfect organizational management. This is done by the board providing the executives with essential strategies that could make it possible for them to achieve the objectives of an organization. Other essential responsibilities of the board of directors include: providing a response to takeover bids that a company may receive and reaching key decisions concerning mergers and acquisitions (Ribeiro & Colauto 2016). It is essential to add that a board of directors can appoint and replace a chief executive officer (CEO). In most instances, firm performance plays a significant role in guiding the decisions on this matter taken by the board.

Advantages and Disadvantages of Board Interlockage

There are several advantages of board interlockage that firms can benefit. For one thing, board interlockage can be utilized to determine power relations in business (Lamb 2016). This means, board interlockage entails that one of the board members of one company is the member of another board, which allows having access to useful information on a wide corporate environmental scan. Further, board interlockage is essential in enabling corporations to develop a sense of competitive advantage. Companies can use this interconnection of their board members to achieve a competitive advantage because of the increased chances to access a number of external valuable resources (Peng et al. 2015). Through the use of such resources, these companies are better positioned to respond to external events. Thus, the experience that members of the boards of director acquire by serving on the boards of other companies emerges as a valuable resource and therefore an essential advantage of interlocks (Ribeiro & Colauto 2016). In this case, such directors are able to carry out their responsibilities in a more effective manner. This is due to their application of external experience. It is also significant to point out that board interlockage provides legitimacy to the decisions taken by firms. Consequently, the more the directors serve on other boards, the higher the degree of legitimacy of their decisions (Santos, di Miceli da Silveira, & Barros, 2012).

However, it is of great importance to consider not only the advantages of board interlockage but also its disadvantages. Extant studies have illustrated that board interlockage tend to promote the phenomenon of golden perks. Board interlockage in this regard leads to top management of a corporation to receive costly benefits. For instance, it is common for CEOs to receive extravagant compensation even after their separation or withdrawal from an organization. Nonetheless, there is limited empirical evidence to support this assumption.

Board interlockage has also been paid close attention to when it comes to rewarding of failure. In this case, Non and Franses (2007) and Santos et al. (2012) indicate that as a consequence of the interconnectivity of the boards of directors, many CEOs are rewarded hefty compensation packages that are not in line with their performance. This generous compensation is instead as a result of their long service as opposed to performance. It should be stressed that the lack of adequate empirical evidence to support this assumption demonstrates a considerable research gap.

Further, literature shows that board interlockage also has the potential of leading to the spread of option backdating. This is illustrated by the many scandals on backdating that have emerged since 2006 (Non & Franses 2007). The scandals revealed that the companies involved in the backdating of stock options all shared common characteristics. This was demonstrated by the level of interconnectedness among the directors sitting on the boards of these corporations. Therefore, board interlockage is one of the most significant characteristics of the problem of backdating.

Firm Performance

Firm performance is an integral aspect of the wellbeing of a firm. It is referred to as the subset of organizational effectiveness that includes operational as well as financial results (Faden 2013). In most literature, superior firm performance is taken to be an essential mechanism of satisfying investors (Santos & Brito 2012). Further, such factors as growth, profitability, and market value represent performance (Hansen & Wernerfelt 1989). This takes place in a manner by which these three factors actually complement one another. Growth in this case is a demonstration of a firm’s ability to increase in size. Thus, increasing size despite remaining at the same profitability level has the potential of leading to an increase in absolute profit, as well as cash generation of a company. On the other hand, profitability is a measure of a firm’s past ability to generate returns. Market value is perceived to be the representation of the external assessment and expectations of the future performance of a firm. It is considered that market value has some form of correlation with the historical profitability and growth levels of a firm. At the same time, market value includes future expectations regarding the market changes and the associated competitive moves.

According to Faden (2013), firm performance may be classified in three fundamental categories: operational, financial, and corporate efficiency. To begin with, operational performance makes reference to the combination of both financial and non-financial performance of a firm. Financial performance refers to the financial performance of a firm. Corporate efficiency concerns the non-financial performance of a firm. Therefore, firm performance is taken as a useful tool that can be used for the purpose of monitoring both managers and shareholders. For one thing, it reveals the degree of the quality of work that has been done by managers. In this case, firm performance makes it possible for a firm to successfully assess its performance and identify key ways through which it can make improvements in the future.

At the same time, firm performance may also be categorized into two categories: accounting-based measures and market-based measures (Hansen & Wernerfelt 1989). The accounting-based measures are in relation to the current financial performance of a firm. On the other hand, the market-based measures refer to the perception that investors form concerning the future performance of a firm. When it comes to the accounting-based measures of firm performance, the return on assets (ROA) measure is the most commonly used one (Faden 2013). Conversely, the return on investment (ROI), net sales, and share returns are the most used market-based measures of firm performance.

Board Interlockage and Firm Performance

Literature illustrates that board interlockage has an impact on firm performance. As per the investigation carried out by Non and Franses (2007) the relationship between interlocking boards and firm performance using pieces of evidence derived from a new panel database. Based on their findings, the researchers concluded that it is possible for current interlocks to negatively impact the future performance of a firm (Non & Franses 2007). They also attributed this tendency to the fact that interlocking directors tend to be too busy. Further, this also occurred because such directors serve as members of a homogeneous upper-class group.

Sana (2009) undertook a study to investigate the relationship between interlocking directorate and firm performance. The researcher used a sample of 250 companies. According to the findings of the study, there was a significant link between the position of a network and performance (Sana 2009). Thus, the manner how a firm was linked to other firms has the potential to affect its performance.

Pombo and Gutiérrez (2011) also investigated the effect that board interlock had on firm performance. The researchers studied the relation of broad structure via the appointments of external directors and the impact of busy directors on the return on assets of firms. Pombo and Gutiérrez (2011) collected the data from a total of 335 firms within the time period of 1996 to 2006. The results of the study showed that board interlock affected the return on assets and consequently firm performance.

Zona, Gomez-Mejia, and Withers (2015) investigated the same issue using a combined agency-resource dependence perspective. The findings of the study revealed that interlocked directors might have either positive or negative impacts on the subsequent performance of a firm. However, this depends on the resources of a firm, concentration of ownership, CEO ownership, and power imbalance. Therefore, the researchers recommended the integration of both agency and resource dependence theories as this will result in an improved explanation of firm performance.

Hamdan (2018) also investigated the relationship between board interlocking and firm performance, but the researcher added a component of foreign ownership. The study utilized a total of 131 firms that were derived from different sectors. Therefore, in studying the relationship between the variables of board interlocking and firm performance, foreign ownership was taken to be a moderator variable. The findings of this study provided evidence for the busyness hypothesis that proposes, there is deterioration of directors’ effectiveness regarding their role of monitoring management with every increasing number of interlocks per director (Hamdan 2018). However, foreign ownership is successful in turning the situation around in the negative relationship between these two variables. However, the researcher failed to illustrate how the increasing number of interlocks per director undermined their sense of effectiveness.

Accordingly, the above studies illustrate that board interlockage has an impact on the performance of an organization. The performance in this case may be either positive or negative depending on different circumstances. One of the most outstanding circumstances in this regard includes that directors become too busy as a consequence of being on too many boards. This is further illustrated in the notion, prior studies have sought to provide insights into the role played by the resources brought by board members through interlocks and how they affect firm performance. These studies have proposed both positive and negative effects. Therefore, this further demonstrates inconsistent results of the impact of board interlockage on firm performance. Thus, it is imperative to conduct additional research on this phenomenon. However, there are some areas that can be looked into for the purpose of improving these results. One of these areas is the existence of varying forms of interlocks and the equally varying effects that impact firm performance.

Conceptual Framework

This review of literature was devoted to evaluating the impact of board interlockage and firm performance as presented by existing studies. A number of interesting concepts that hold this relationship were identified. The following conceptual framework comprises all the key components of this relationship as illustrated below.

( Board interlockage Directors sit on more than one board )Independent Variable Dependent Variable

( Firm performance Organizational effectives Growth Profitability Market value ROI ROA )


This review of literature was useful in illustrating what is known about board interlockage and its infleunce on firm performance. Board interlockage as per most studies in literature entails that the directors of one company participate on the board of another company. Firm performance as per this review remains a critical component of the wellbeing of any corporation. Various factors determine this performance, including board interlockage, as was determined in this review. The agency theory indicated that managers as agents do not always work for the interests of the principals (stakeholders). Therefore, in order to overcome this problem, the principals or stakeholders should employ internal corporate governance. This measure will ensure that managers are carrying out their responsibilities efficiently if their work is closely monitored.


Research Design

This dissertation is based on the use of data that was collected by someone else as will be discussed in the data collection section. For this reason, the research design of this dissertation took the nature of secondary research (Pruzan 2016). One key reason that influenced the use of this research design is the availability of data on the topic of research. That is, much research has been conducted on board interlockage and its impact on the firm including firm performance. In addition, there was a considerable amount of data on firm performance and its indicators including return on investment, return on assets, return on sales, return on equity, and general profitability indices. Therefore, this dissertation was prepared with the aim of attempting to make sense of all these data. The necessity of doing this was further supported by the fact that the results of research on the impact of board interlockage on firm performance was quite mixed in nature. That is, some studies found that the impact was positive while others found the impact to be negative. Therefore, it was essential to assess existing data on this as it was in order to determine where it leaned towards. Key measures were taken in the course of using this research design. This included gaining full understanding of the data that was collected. The significance of this lay in the fact that given that the researcher was not directly involved in the collection of the data there was need to be careful in its interpretation (Walter & Andersen 2013).

Research Philosophy

The two types of research philosophies that are applied in the research process are the positivist and interpretivist research philosophies. According to the positivist research design, the world is external in nature, whereas in compliance with the interpretivist approach, reality is multiple and relative in nature (Pruzan, 2016). Thus, the positivist research design is utilized for this study. One of the key reasons for the selection of the positivist philosophy is that it boosts the independence of the researcher. While studying the impact of board interlockage on the performance of firms, the researcher will need to be as independent as possible, and the positivist approach will enhance this. The second reason for the utilization of the positivist research philosophy is that it facilitates generalizations through statistical probability (Walter & Andersen 2013). Since it is a quantitative study, the method will fit well into the approach. The third reason for the utilization of the positivist research philosophy is that it offers an opportunity for the random selection of a great number of participants as it would be needed in this study.

Research Approach

The deductive and inductive research approaches will be used in this research. The inductive approach is always concerned with the generation of a new theory within the study, while the deductive research approach is always concerned about the testing of the existing theory in the study (Pruzan 2016). The deductive approach is applied to the following research. The essence of using the deductive research philosophy is that it offers an opportunity for the researcher to test both the agency and research dependence theories that have been explicated in previous studies. These theories offer a clear understanding of the significant role that board interlockage plays in contributing to the performance of any given company. Additionally, the application of the deductive approach is grounded on the understanding of causality. The deductive approach will be critical in understanding how the nature of board interlockage leads to effective performance within the organization. Generally, as it is a quantitative study, the deductive research approach is more applicable, as well as makes sense to the whole process of completing the study in a clear and effective manner.

Sampling and Sample Population

The sampling method that is employed in this study is a simple random sampling method. It is always essential to select the best method of sample to make sure that objectivity is maintained in the study (Walter & Andersen 2013). Thus, the aspect of fairness makes simple random sampling the best approach possible. Hence, the simple random sampling approach could help alleviate the bias in the study. Therefore, each member of the sample population will be given an equal chance to be selected into this research based on the simple random sampling approach.

The target population in the study is mainly companies in the United Kingdom. The companies will be drawn from different industries, including the retail sector, the manufacturing sector, the services sector, and even the technology sector. The selection of the population from different industries will allow the researcher to better compare all the aspect of board interlockage and how it influences the performance of companies across the different sectors of the UK economy, hence leading to the attainment of the goals of this study. Therefore, over 500 (N) companies will be considered. However, as to the population, the sample population that will be considered in this study is 100 (n). The sample population will comprise the companies drawn from various sectors of the UK economy in order to compare as well as clearly understand how board interlockage affects the performance of the UK companies.

Data Collection Tools

The data for the study will be mainly collected from the companies across different sectors of the UK. In this regard, the collection of data will be done by utilizing the Thomson Reuters Datastream. The relevant data on board interlockage applied by different companies and the impact of this on firm performance will be gathered from the database. It should be noted that such databases as Datastream are a vital point for data collection because of the instant generation of data. More so, the collection of the companies’ data from such databases is defined by the understanding that the websites offer extensive data that would be critical in illustrating the important role that board interlockage plays in leading to the success of the company in any given way (Pruzan 2016). This research requires extensive data for success, as well as opportunities of data generalization. The second reason for the preference of the derivation of data from the databases is that they are very cheap. Databases do not require costs associated with the printing of materials or any other aspect, and hence they offer a cheaper alternative to the collection of the data related to the sample companies. Additionally, the fact that databases save on time also makes them appropriate for this study. The data related to each company will be accessed easily and hence lead to an easier presentation of the data in the study. The various aspects of the data that will be considered in the course of data collection are as demonstrated below.

Calculating the measures of interlock.  The computation of the measures of interlock is significant in the attainment of a board composition within the different companies that are considered in this study. Accordingly, the measures of interlock, which will be computed, include the size of the board, the number of the external members in relation to the overall number of the board of directors, the number of the direct links that the board has with the other board members in the network, the number of the indirect links between the board and the other board members in the board, the size of the organization, the information inflows between the interlocked firms, as well as earnings quality (Chiu, Teoh, & Tian 2013). Additionally, the researcher will consider the strength of the board in terms of leading to bond yields within the company, as well as boosting the financial health of the company. The outcomes of each of these factors will be critical in measuring board interlock in the company and how the interlock boosts the performance of the company in regard to its bonds and general profitability.

Proxies used. The proxies used include the number of managers in the board, the financial performance of the organization annually, one director serving on the boards of two different organizations, the board contagion effect, the centrality of the board, and the size of the organization (Chuluun, Prevos, & Puthenpurackal 2014). The utilization of proxies is significant because it plays an instrumental role in demonstrating the nature of the board that is likely to contribute more to the successful performance of the organization. When there is clarity of the board that is supposed to be used in the organization, there is an easier opportunity to make a better decision on how to constitute the board of the company for the realization of maximum success within the organization (Larcker, So, & Wang 2013). The centrality of the board within the organization is dominant because it helps illustrate how the board will be composed and how it will be subsequently assistive in the realization of the organization’s goals in a desirable manner.

Measures that are there. The key measures related to the board interlockage and the organization’s performance should be considered by the researcher. Thus, in regard to this research, the measures include board size, firm size, firm performance, shared directors, earnings management, bond yields, as well as the relationship between the shareholders and the board (Larcker, So, & Wang 2013). These measures offer a clear picture of the association between interlockage and the performance of the organization in the different sectors of its operations.

One that is predominant.  The measure, which is predominant, is the company performance and the board size, including the links between the members of the board. These two measures are predominant because as illustrated, it is only the nature of the board within the organization that can influence the direction that the organization takes in terms of its performance and the ultimate realization of the goals and objectives (Chiu, Teoh, & Tian 2013). Additionally, the aspect of board size is dominant because it illustrates the number of directors who determine the direction that the organization takes in regard to its performance.

How they are calculated. The aspect of firm performance is computed based on the return on investment (ROI). In utilizing the ROI approach in order to compute the performance of the firms that are selected, the cost of investment will be subtracted from the gain from investment and the result divided by the cost of investment (Larcker, So, & Wang, 2013). The precise formula for the computation of the firm’s performance is as demonstrated below:

ROI = Gain from investment – Cost of investment


Cost of Investment

The board size will be measured based on the number of directors who are available in the organization. The researcher will compare the number of directors in the boards of each organization and how these directors play an instrumental role in determining the direction that the organization is bound to take and the realization of its goals in a desirable manner.

Data needed to calculate. The needed data comprises the investments that the company put into its operations at the beginning of the period. More so, the gains from these investments are also an important aspect of the data that should be considered in the process of computation of the firm’s performance (Chiu, Teoh, & Tian 2013). These aspects of data will allow explicating the data in the study and the subsequent realization of the set goals within the organization. On the aspect of the size of the board, the data that is needed relates to the number of directors that make up the board in the organization. The number of the directors on the board is compared across the years and compared with the performance recorded across each of the years.

Data Analysis

The data collected in this research will be analysed utilizing SPSS. This software is a significant tool for analysis of data based on the understanding that it breaks down complex data into simple data that can be easily understood by the readers. Breaking down complex data entails the easier presentation of information into graphical details that can easily be interpreted and made more analytical in the study (Pruzan 2016). Additionally, the advantage of the SPSS application is that it will be instrumental in boosting the comparison of data where needed. Two companies can be compared with each other as it concerns the impact that the board interlockage has on their performance. Lastly, there is better organization of the output of data with the use of SPSS. It should be noted that the application of SPSS will the researcher to effectively organize the study’s output by leading to better attainment of the objectives of the study (Walter & Andersen 2013). Therefore, SPSS will ensure that the results of the research will be presented appropriately.


Overall, this chapter has presented the research design that will be used in the research. The secondary research that entails the use of the Thomson Reuters Datastream was used. Additionally, simple random sampling will be used to select the required UK firms that will be studied in terms of the impact of board interlockage on their performance. More so, the researcher will utilize Datastream to collect needed data. Measures, such as the board size of the organization, will be used for purposes of clarity in the presentation of the research results. Ultimately, the SPSS program will simplify the data analysis.



The results are developed in tandem with the proposed model, ROAt = α0 +β1BSIZE+ β2 INDD + β3NINED + β4SDOWN+ β5INOWN+ β6GPOWN+ β7TASSETS+ ε (Gabor & Hasnan 2016). In tandem with the model above,

ROA –the dependent variable and the return on investment

α – Constant

BSIZE – Board size

INDD – the proportion of independent directors

NINED – the proportion of non-independent non-executive director

SDOWN – the share of directors

GPOWN – the share of general public ownership

TASSETS – total assets


Descriptive Statistics

The descriptive statistics below illustrate the mean and standard deviations of the key variables used in the study. From Table 1 below, the mean return on assets (ROA) is 6.69, indicating the increased level of performance within the organizations based on board interlockage. Of the 100 companies studied, there is a high return on the assets, which means that the interlockage of the board always has a positive return for the companies. In regard to the independent variables, the mean for the board size (BSIZE) is 3.98, meaning that the companies with an estimated board member of 4 have the highest capacity to attain increasing performance due to board interlockage. The board size is crucial in terms of its composition, as it leads to subsequent positive performance within the organization. More so, the independent directors (INDD) mainly constitute the boards of most of the companies as indicated by the mean value of 4.77 as opposed to non-independent non-executive directors (NINED) with a mean value of 3.72. Therefore, most companies are relying on the boards composed of the independent directors to boost their performance (Lamb 2017). The underlying reason is that there is always an improvement in the process of making decisions while dealing with independent directors, hence boosting the return on assets (ROA).

Table 1: Descriptive Statistics

Descriptive Statistics
N Minimum Maximum Mean Std. Deviation
ROA 100 4.00 9.00 6.6900 1.75058
BSIZE 100 2.00 6.00 3.9800 1.13689
INDD 100 3.00 7.00 4.7700 1.25412
NINED 100 2.00 6.00 3.7200 1.31103
SDOWN 100 2.00 7.00 4.5700 1.53909
GPOWN 100 4.00 8.00 5.5600 1.36567
TASSETS 100 3.00 10.00 7.8000 1.60177
Valid N (listwise) 100


Correlation Matrix

Table 2 below is illustrative of Pearson’s correlation. This correlation is used due to its significant role that it plays in measuring the linear correlation between the variables. From the model below, the correlation between the variables is significant at 0.01. From the two-tailed correlation analysis, the correlation values derived are 0.994, 0.423, 0.142, 0.327, 0.891, and 0.05. All these values are higher than 0.01, which means that there is a significant level of correlation between the variables that were used in this study. All the independent variables, such as the board size (BSIZE), have the capacity to influence the return on assets (ROA) within these organizations.

Table 2: Correlation


ROA Pearson Correlation 1 .088 .170 -.021 -.102 .018 -.001
Sig. (2-tailed) .383 .092 .839 .310 .856 .994
N 100 100 100 100 100 100 100
BSIZE Pearson Correlation .088 1 .153 -.004 -.155 -.077 .081
Sig. (2-tailed) .383 .130 .970 .123 .445 .423
N 100 100 100 100 100 100 100
INDD Pearson Correlation .170 .153 1 -.095 .131 -.077 .148
Sig. (2-tailed) .092 .130 .348 .193 .444 .142
N 100 100 100 100 100 100 100
NINED Pearson Correlation -.021 -.004 -.095 1 .140 -.002 -.099
Sig. (2-tailed) .839 .970 .348 .165 .986 .327
N 100 100 100 100 100 100 100
SDOWN Pearson Correlation -.102 -.155 .131 .140 1 .101 .014
Sig. (2-tailed) .310 .123 .193 .165 .316 .891
N 100 100 100 100 100 100 100
GPOWN Pearson Correlation .018 -.077 -.077 -.002 .101 1 .278**
Sig. (2-tailed) .856 .445 .444 .986 .316 .005
N 100 100 100 100 100 100 100
TASSETS Pearson Correlation -.001 .081 .148 -.099 .014 .278** 1
Sig. (2-tailed) .994 .423 .142 .327 .891 .005
N 100 100 100 100 100 100 100
**. Correlation is significant at the 0.01 level (2-tailed).


Regression Analysis

From Table 3 below, both the independent and dependent variables have been entered as demonstrated below.

Table 3: Variables


Variables Entered/Removeda
Model Variables Entered Variables Removed Method
a. Dependent Variable: ROA
b. All requested variables entered.

Table 4 below illustrates the model summary and the goodness of fit of the regression model. The R square is 0.051, which is 5.1%. For a model to be termed to have the goodness of fit, the R Square value is always supposed to be between 0-100%. The fit explains 5.1% of the total variation in the data. The regression model attains the goodness of fit, because it is evident that all the variables can be effectively applied to attain the desirable outcomes in the study.

Table 4: Model Summary


Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .225a .051 -.010 1.75965
a. Predictors: (Constant), GPOWN, NINED, BSIZE, INDD, SDOWN, TASSETS


Table 5 below demonstrates the view that there is a significant relationship between the dependent variables. The level of significance is attained at 0.549, which is higher than the P value of 0.05, which means that there is a high significance level between the independent variables and the dependent ones. Factors, such as the board size (BSIZE), and the independence of the board directors, can influence the return on assets within the organizations (Peng, et al. 2015). The organizations always need to have a strong sense of board operations in order to attain their desirable level of performance. This lies in the understanding that the board is in charge of making significant decisions that relate to the performance of the company. Board interlockage determines the key decisions and the steps that the organization will need to take toward the attainment of the set goals in the required way. More so, there is also an opportunity for the board interlockage to make sure that the resources needed for the quality performance of the company are available to it. Independent directors are of great significance when it comes to monitoring and supervising the activities of performance in the organization (Peng et al. 2015). Thus, they should always constitute the majority of the members of the board.

Table 5: ANOVA Model

Model Sum of Squares df Mean Square F Sig.
1 Regression 15.427 6 2.571 .830 .549b
Residual 287.963 93 3.096
Total 303.390 99
a. Dependent Variable: ROA
b. Predictors: (Constant), GPOWN, NINED, BSIZE, INDD, SDOWN, TASSETS


Table 6 below is emphatic of the coefficients and the level of significance within the study. As demonstrated in the table below, there is a high level of the significance of relationship between the independent variables and the dependent ones.

Table 6: Coefficients

Model Unstandardized Coefficients Standardized Coefficients t Sig.
B Std. Error Beta
1 (Constant) 5.682 1.488 3.818 .000
BSIZE .074 .161 .048 .459 .647
TASSETS -.052 .118 -.048 -.443 .659
INDD .268 .148 .192 1.813 .073
NINED .015 .138 .011 .107 .915
SDOWN -.145 .120 -.128 -1.209 .230
GPOWN .081 .137 .063 .590 .556
a. Dependent Variable: ROA



This section focuses on interpreting the above results. It will do this by identifying the key findings that are based on the research results, discussing them, as well as illustrating how they relate to existing literature. From the results presented above, the key findings of this study and their discussion are as follows.

Board Interlockage Positively Impacts Firm Performance

Firstly, this study finds that board interlockage impacts firm performance and significantly increases this performance. This finding is confirmed by the high ROA. As per the results of this study, the ROA was at 6.69, which was indicative of the high performance of the firm as a consequence of board interlockage. Therefore, the correlation between board interlockage and firm performance as per this study is positive. This can be explained by the fact that boar interlockage provides an opportunity for firms to be able to access high calibre directors. That is, the directors with prestige and network worth can be used to assist the firms passing through difficult times and overcome various problems. These directors should have adequate experience in leveraging strategic networks that they have established over the years. Moreover, it is possible for board interlockage to have a positive impact on firm performance, because the firm will be able to access information through this network of directors. Therefore, the firm will be in a much better position to develop and implement stable strategies.

This positive correlation between board interlockage and firm performance can further be explained by the fact that the interlock serves as a means of reducing incentives in place for opportunism. The reason for this lies in the fact the interlock makes it possible to efficiently exchange information between the partners. This exchange of information assists the directors in serving on interlocked boards and thus fostering the performance of the tasks, as they relate to strategy and service.

The fact that the organizations can learn from being interlocked also provides an explanation for the positive relationship between board interlockage and firm performance. Therefore, through board interlockage, it is possible for firms to learn about the key practices and policies of other organizations. This practice includes learning about new strategic alternatives, as well as approaches that they can thus apply to their formula of success and effective performance.

These results have been essential in coming one step closer in reducing the degree of ambiguity regarding the impact of board interlockage on firm performance. As reviewed earlier in the literature review section, research on this relationship has provided mixed findings. Accordingly, there are a considerable number of studies that indicate either a negative or positive correlation. Therefore, the current findings are indicative of the positive relationship that exists between board interlockage and firm performance.

These results are in tandem with those by Sana (2009) who determined that the relationship between board interlockage and firm performance was of great significance. Pombo and Gutiérrez (2011) made similar findings by showing that board interlockage had an impact on ROA. As a consequence of this impact, board interlockage affects firm performance.

Board Size Impacts Firm Performance and Influence ROA

Secondly, this study finds that board size has an impact on firm performance due to its ability to influence the degree of board interlockage. Board size in this regard is essential, because it has the ability to result in an ensuing positive performance of the firm. For instance, according to the results of this research, there is some form of correlation between board size and ROA. Thus, the board size of the firms can influence ROA within these firms and in a positive way. It should be noted that in accordance with the results of this study, the optimum board size was 4. Therefore, the implication of the results of this study was that a larger board size was much more effective than a smaller one. Thus, it is evident that adding more members of the board will go a long way in enhancing performance of the firm as a result of bringing about improvement in supervision and governability.

These findings align with those presented by Dalton et al. (1998) who showed that there was a positive relation between the size of the board and economic performance of the companies. According to this study, a larger the size of the board, the more possibility of gathering a large amount of intellectual capacity. This will allow fostering a means of enhancing the process of decision-making, thus impacting organizational performance.

However, it is essential to acknowledge that there a number of studies that do not agree with this notion. One of such studies was undertaken by Yermack (1996). The researcher revealed a negative impact between the size of the board of directors and the performance of the firm. Therefore, the implication of the study was smaller boards were much more effective. Therefore, a smaller size of the board enabled better communication and thus decision-making can easily take place. Jensen (1993) further illustrated the negative impact of the size of the directors’ board and indicated that if the number of the members of the board are more than seven, they become unable to operate effectively. This comes about due to problems related to coordination, which results in the advantages derived from the general participation of the members. While these findings are acknowledged, this study, to an extent, dismisses the arguments provided by the above researchers considering the fact that they were conducted more than two decades ago. On the other hand, the findings of this study are based on the current operations of firms and their boards. Therefore, it can be noted that within this period of time, a lot of change have taken place. Consequently, board sizes have enabled the increased cases of interlockage, which in turn has impacted positively firm performance.

Director Independence Is Crucial in Facilitating Firm Performance

The third finding of this study is, director independence plays a crucial role when it comes to firm performance. According to the results highlighted above, firms tend to rely on the boards that comprise directors that are independent for the purpose of enhancing their performance. The reason for this lies in the belief that such directors have much better decision-making capabilities. Consequently, this tendency has an improved chance of increasing ROA. Moreover, the findings of this study have illustrated that director independence has a critical role to play in regard to the goal attainment of firms. This lies in the fact that director independence ensures that the resources that are of great significance for performance are adequately available. In addition, this significant role of independent members contributes to the positive performance of the firm due to the fact that the degree of independence of these members allow them to contribute impartiality towards the projects pursued by the firm. To also add, the fact that only these members can question the activities of the firm further serves to be indicative of their contribution towards firm performance. Shareholders, as well as investors tend to feel quite safe when dealing with a board with independent members. This is evidenced in the instances when external shareholders utilize independent members as a form of protection against the influence of the majority shareholders. It should also be noted that according to the results, independent directors are more effective in monitoring and supervising performance activities in a firm.

Accordingly, the above findings regarding director independence align well with the findings of Moreno-Gomez et al. (2016). The researchers concluded, independent members of the board could contribute positively towards the supervision of the board, thus leading to much better corporate performance. This is further reiterated by Anderson and Reeb (2004) in their study. The researchersfound that independent members of the board of directors could contribute positively to the performance of a firm, because they are capable of contribute their experience and objectivity. For this reason, they play a considerable role towards the minimization of managerial entrenchment. Moreover, Pombo and Gutiérrez (2011) came to similar findings in their study, which showed that director independence to a degree has a significant role to play when it comes to the performance. This is even more so in the case where this independence is more evident.


This chapter provided the results that demonstrate the impact of board interlockage on firm performance. This was accomplished using the following key measures: return on investment, board size, and director independence. Overall, the results of this study indicated a positive correlation between board interlockage and firm performance. Therefore, when directors serve on the board of more than one company, the final impact is the improved performance of the companies involved in the interlockage network. That is, these companies can achieve a much higher ROA. The results and findings of this study have further confirmed as per this chapter that board size and director independence equally affect the performance of firms. It should be noted that board size shows some correlation with ROA. therefore, board size has a positive correlation with firm performance. A larger board if compared to a smaller one is much more effective and significantly contributes to firm performance. In relation to the independence of members, this study made the finding that independent members had a more positive impact on firm performance. This kind of membership of the board of directors is instrumental in enhancing key aspects of firm operations, including decision-making, goal attainment, availability of resources, and impartiality towards the objectives pursued.



This research investigates the impact of director board interlockage on firm performance. In this final chapter, the conclusion and implications of the research are provided. This is done through the summarization of the major contributions and findings of the research. Moreover, the limitations of the study are also identified and recommendations for future research are provided.

Summary of the Study

This research successfully investigated the impact of board interlockage on firm performance. For this, the researcher used a sample of 100 UK companies. Interlockage in this case, as defined in the study, is the act of a director sitting on a board of director of another firm or rather of more than one firm. This practice results in the interconnection of the firms. Chapter 1 of this research sought to introduce and provide background information on board interlockage and its implications of firm performance. Besides, the rationale and significance of the study are provided. Accordingly, the rationale of the study lay in the need to demonstrate the role of effective corporate governance in the form of board interlockage on the wellbeing of a firm by assessing its performance. Thus, the significance was to provide a new way of thinking regarding the role and influence of board interlockage on firms. In addition, it was imperative to provide firms with a means of effectively making use of board interlockage.

Chapter 2 entailed conducting a review of existing literature on board interlockage and its influence on firm performance. This also included the key theories that underpinned this research. The theories that were reviewed in this case were the agency theory and the resource dependence theory. The agency theory was significant in providing a way of explaining corporate relationship, particularly the relationship between managers and stakeholders. This relationship takes the format of the principal and th agent. Therefore, using this relationship, the role of directors towards the owners of firms (stakeholders) is explained. The resource dependence theory, it explains the role of the board of directors in helping firms to access the resources needed to facilitate improvement in their performance. In relation to conducting a review of literature on past studies, the key focus was board interlockage and its definition and basics as per various studies, the board of directors, advantages and disadvantages of board interlockage, firm performance, and the relationship between board interlockage and firm performance.

Chapter 3 provided insight into how the study was conducted, by describing the research methodology adopted for it. In this case, this study was secondary in nature. For this reason, it encompassed the review of existing sources for information regarding board interlockage and its relationship with firm performance. Data collection for this study was done using the Thomson Reuters Datastream, which is the global financial macroeconomic data site that provides the data related to such components as currencies, fixed income, stock market indices, equities, and other essential economic indicators for over a hundred countries. Further, the data that is provided on this platform covers over 60 markets. As for data analysis, the researcher used SPSS, a useful software package that allows for batch analysis of data.

Chapter 4 encompassed the presentation of the results and their discussion, which allows identifying the key findings of this research. The results of the study illustrated the nature of the relationship between board interlockage and firm performance. This was achieved using the model ROAt = α0+β1BSIZE+ β2 INDD + β3NINED + β4SDOWN+ β5INOWN+ β6GPOWN+ β7TASSETS+ε. Key aspects of the above model included: return on investment, board size, independent directors, the share of directors, the share of general public ownership, total assets, and non-independent non-executive directors. Using this model, the results of the research were thus presented as illustrated in the chapter. They were then interpreted in the discussion section.


This research provides several practical implications for businesspeople, regulators, and firms. The findings of this study suggested that the firms with a large number of interlocked directors have the potential to successfully improve their performance. Thus, through the networks that are created between the companies, they have much more opportunities that allow them to access necessay information and resources, make use of an enhanced decision-making process, and utilize the impartiality of the directors. The implications for the regulators is that they should not always call for the reduction of the number of directors.

Another practical implication of this study is directed towards firms and businesspeople. Accordingly, the findings of this study proved director independence plays an essential role in fostering firm performance. This independence is significant when it comes to firms attaining their set goals. Therefore, the implication of this is the firms need to consider increasing the extent of director independence. In fact, it is vital for the firms to strive to ensure that many of the members of their boards are independent directors.

An additional practical implication of this study is that it serves to increase business people’s awareness of the role of a board structure in relation to how the firms can apply this structure for the purpose of corporate governance practices that will have an impact on their performance.

In this study, performance refers to such elements as the profitability of the firms. Thus, this study indicated that profitability is based on underlining institutional mechanisms that influence the performance of the firms. Therefore, this study identified this institutional mechanism as board interlockage. This key institutional mechanism influences firm performance.


The key conclusions made in this study include the following:

Firstly, board interlockage positively impacts firm performance. That is, the findings of this study indicated that board interlockage positively affects firm performance in that it increases its performance. This increase in performance as per the results of the study is confirmed by the increase in ROA. According to the discussion provided in this study, a number of factors that come about due to board interlockage facilitated such an increase in ROA.

One of these factors is the prestige that is linked with the directors that are interlocked and their network worthy. These factors are essential in assisting firms in handling their problematic issues. Another factor is the accessibility to information that become available due to board interlockage. Accordingly, the firms that are interlocked can use this information to develop their stabilizing strategies. Besides, interlockage is an essential aspect by means of which the firms can effectively correspond with partners and exchange necessary information. Another yet significant way that board interlockage can contribute to firm performance is by serving as a source of lessons regarding useful practices and policies.

Secondly, according to the findings of this study, board size affects firm performance, as it influences ROA. Thus, according to the findings of this study, there is a positive correlation between board size and ROA. The results of the study asserted that the most effective boards should comprise at least four directors. In addition, it was determined that a larger board of directors was much more effective than a smaller one. Consequently, better performance of a firm depends on a larger board size.

Lastly, the findings of this study showed that director independence is significant in fostering firm performance. Therefore, according to the result of this study, independent directors are more efficient in their role. They have a better chance facilitating the goal attainment of the company. This is because these directors can ensure that the resources necessary for the performance of the company are available. The independent nature of these directors plays a crucial role in ensuring their impartiality towards the objectives of the firm. Consequently, they are better positioned to bring into question the key activities of the firm, thus ensuring that will be capable of achieving its goals. Besides, independent directors contribute to firm performance because of the fact that external shareholders tend to trust them to protect their interest. For this reason, these shareholders become more willing to add to their investment in the firm.

Limitations and Recommendations for Future Studies

This research has some limitations that need to be taken into consideration in the course of carrying out an assessment of the results obtained and the conclusions reached regarding the impact of board interlockage on firm performance. Accordingly, for this reason, the issue of sample presentation is identified. Therefore, it is recommended that future research should increase the research sample. To be specific, future research should extend the sample to include other countries, beside the UK. Consequently, this will provide more generalized results of the impact of board interlockage on firm performance.

Besides, the impact of board interlockage on firm performance cannot merely be assessed in terms of size and participation of independent directors alone. For this reason, other interlinked dynamics developed by the board of directors should be taken into consideration. Accordingly, future research studies on this issue should make emphasis on a behavioural approach in the course of studying the key aspects of the board of directors such as board interlockage. This can include the study of the process of decision-making as it relates to board interlockage.

This study made use of secondary archival-based methods to examine the relationship between board interlockage and firm performance. Therefore, this presented some form of research weakness since primary methods would have been better in demonstrating this relationship. In this case, future research should entail the use of primary methods, whether quantitative in case the researcher will use questionnaires or qualitative in case the researcher will apply interviews. By doing so, the researcher will be capable of generating insight into this relationship.

While this research strived to include a number of variables when studying the impact of board interlockage on firm performance, it is possible that many other factors were neglected in the correlation model, which may have had an impact on firm performance. The study only considered board size and ROA as variables. Accordingly, future studies should consider other variables, such as return on investment (ROI), return on equity (ROE), and the profitability of the firm. Such additional variables will be more effective in capturing firm performance and thus determining the degree of influence that board interlockage has.

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