A Mostly Failed Attempt to Cut Interlocking Directorships: A Tale from an Italian Reform


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The Italian corporate governance system features high ownership concentration, and the presence of control-enhancing mechanisms that are conducive to controlling shareholders’ dominance at the expense of minority shareholders. At director level, the Italian corporate governance system is characterized by widespread recourse to interlocking directorships (‘ID’), ie directors sitting on more than one board at the same time. A number of reforms have been implemented over the last 15 years to try to open up the market for corporate control and to protect minorities. The latest addition to this wave of reforms was a new provision in 2011: article 36 of the ‘Save Italy’ Law ruled out interlocking directorships within the financial industry, effective from 2012.

During the past decades, many scholars have provided theories to explain the presence of ID on boards of directors. From an economic point of view, ID is important because it can increase collusion among different companies whose directors sit on their respective boards, reducing welfare for consumers. However, ID may also reduce the effectiveness of ‘busy’ board members who sit on several boards, therefore diminishing their ability to check the chief executive officer’s decisions, and exposing the companies to higher risks.

In our paper ‘Communities detection as a tool to assess a reform of the Italian interlocking directorship network’, forthcoming on Physica A, we assess the effects that the 2011 reform has had on ID. According to article 36 of the ‘Save Italy’ decree, a director of a bank or insurance company who had incompatible board appointments was required to choose between those board positions by 27 April 2012, or would lose all of the appointments.

Using the instruments of network analysis, we compare the network before (2009) and after (2012) this reform, which outlawed ID in the financial sector. Besides the analysis of structural aspects of the network, we applied the tool of community detection to highlight the changes (and the continuity) of the network after this reform. A community is defined as a group of companies with strong links among themselves and weak (or non-existent) links with other similar groups of companies. Communities’ detection techniques involve the use of algorithms (in our case the Newman-Girvan algorithm) that identify such groups and their membership. In particular, we considered the community detection for 2009 and 2012 and then we compared the membership of each community detected between the two years.

We found that there were some changes in the network structure over this period, as the density and the connectedness decreased, and the isolates increased in number. This means that there are fewer connections among companies, and more of them have no connections at all. This is evidence of some changes in the network functioning: there is a bit less cohesion in the network. However, the community of financial companies, to which the reform was addressed and which represents the most important component of the network, tended to remain closely connected in spite of the reform. Specifically, most of the financial companies moved from their initial community to another. In doing so, they kept their links among themselves, when we would expect them to mix with other companies in several communities, according to the links between board directors in financial and (for example) industrial sectors. It thus appears that the reform has failed to deliver its expected results.

Carlo Drago is Assistant Professor of Probability and Statistical Mathematics at Niccolò Cusano University, Rome, and Roberto Ricciuti is Associate Professor of Economic Policy at the University of Verona and currently Visiting fellow at Clare Hall, University of Cambridge.


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