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E-MailMark A. Lemley is the William H. Neukom Professor of Law at Stanford Law School, and Rory Van Loo is a Professor of Law at Boston University School of Law. This post is based on a recent paper by Professor Lemley, Professor Van Loo, and Lane Miles.
Antitrust law prohibits competing corporations from sharing board members—called “interlocking directorates”—and has for more than a century. Violating it is one of the few things antitrust declares illegal per se, with no opportunity to explain or justify the interlock. Yet our new empirical evidence suggests that the rule is routinely broken. Using proprietary data, we contribute a comprehensive assessment of interlocks in both public and private firms, finding over two thousand instances of individuals sitting on the boards of two companies that are direct competitors. Among companies where we know at least five directors, 8.1 percent (2,309) had an individual interlock.
But the same individual sitting on two competing boards, despite being the focus of the interlock literature and most of the case law, isn’t the only problem. We also demonstrate the prevalence across public and private companies of a related problem—two different individuals sitting on competitors’ boards while simultaneously working at the same private equity, venture capital, or other firm that also invests in the competitors on whose boards the director sits. These investment funds can thereby influence boards through a hidden mechanism—installing two of their employees on competitors’ boards. Such investor-level interlocks are even more common than individual interlocks, reaching 2,927 different companies and 9.9 percent of the companies with at least five board members in our data set. Yet their prevalence was until now unknown.
Combined, individual and investor-level interlocks reach 13.4 percent of all companies—including 30.1 percent of life-sciences companies and 18.9 percent of all IT and software companies. Moreover, in 56.8 percent of the investor-level interlocks the investor invested in both of them. Consequently, the two board members share an institutional identity that creates strong financial incentives for the competing companies to collude and the organizational touchpoints and close relationships to make it happen.
Our data on fund employment also enables us to shed light on the identity of the individual interlocking directors. About 65 percent of those we identified hold leadership positions in private-equity, venture-capital, and other investment funds that invest in the very companies on whose boards these directors sit. The interlocking directors are often partners of investment firms, which means they receive a share of the fund’s investment profits, giving them additional personal financial incentives to promote anticompetitive conduct.
The competitive implications are potentially significant. Studies have found that board interlocks are linked to higher prices, fewer new product offerings, and—at least for other kinds of organizational-level interlocks—companies staying away from competitors’ markets. Even without explicit collusion, the overlap between board members may dampen incentives to compete vigorously.
Enforcement has lagged. The rule against interlocking directorates has received little attention from antitrust scholars or (until very recently, and only mildly) from antitrust enforcers. Most reported cases are decades old, and typical remedies merely dismiss the compromised director—leaving past profits intact.
One possible reason for this inattention, besides simply the lack of evidence focused on competition, is that well-networked and busy directors add value to companies. Much of the literature, however, studies such directors not from a competition standpoint, but from the standpoint of adding value to the company. Without knowing how much of that value added comes from anticompetitive rather than procompetitive sources, it is difficult to know the full societal implications of allowing so many interlocks.
More direct study is needed of the procompetitive and anticompetitive implications of interlocking directors. In the meantime, the indirect evidence of anticompetitive implications, combined with the importance of enforcing existing laws, justifies greater attention to interlocking directors. Possible responses include the following:
- Treat investor-level interlocks as agency relationships. We argue that a case can be made for seeing “investor-level interlocks”—two of an investor’s employees sitting on competitors’ boards—as acting as agents under control of the investor. That approach would make many overlaps illegal today.
- Move from ex-post responses to ex-ante opportunities. We propose giving antitrust enforcers the option of pre-approval for any potentially interlocking appointment, modeled on the Hart-Scott-Rodino merger process.
- Expand the statute to cover nascent rivals. In biotech, companies plan business strategy not only with respect to current competitors but vis-à-vis companies they can see have filed for approval of a new drug; extending Section 8 to such pre-revenue companies with a realistic possibility of future competition would match modern innovation cycles.
- Recognize interlocks as red-flag evidence of collusion. Two employees working for a profit-maximizing investor have the opportunity and motivation to collude; their presence on competing boards should add evidence of collusion when there are signs of anticompetitive outcomes.
- Revisit the per-se rule—but with caution. In areas in which there are simply too few real experts, the benefits of board expertise for early-stage companies may outweigh the risks of anticompetitive influence. A calibrated regime could allow limited overlaps in unconcentrated, expertise-scarce markets while coming down hard where incentives to collude are strongest.
