America's Corporate Boards Separated by Just Four Handshakes
ANN ARBOR, Mich.—Much like the Hollywood association game, Six Degrees of Kevin Bacon, corporate America is an interlocking network of company board directorships separated by just a few handshakes, say researchers at the University of Michigan Business School.
In a study of the connectedness of nearly 7,700 board directors at Fortune 1,000 companies, the U-M researchers found that each director, on average, can reach every other director through 4.6 intermediaries and that each board can contact every other board in 3.7 steps.
“What our findings reveal is that at the apex of the corporate economy is a group of highly influential people who often either know each other or have acquaintances in common,” said Gerald F. Davis, professor of organizational behavior and human resource management at the U-M Business School. “The Bush Cabinet, whose members have served on the boards of leading corporations, including Alcoa, Halliburton and Reader’s Digest, is a good example of how these powerful connections can work in high places.”
In their study forthcoming in the journal Strategic Organization, Davis and U-M Business School colleagues Wayne E. Baker and Mina Yoo found that the “neighborhood” of the corporate elite is an interlocking network created when boards are connected to each other by sharing one or more directors, who, in turn, are connected to other directors by serving on one or more boards together.
Board members may have face-to-face contact several times a year, or even monthly, contributing to an intricate, ever-growing grapevine where information and innovation travel rapidly, the researchers say.
“Small worldliness,” according to the study, is not limited just to the business sector, however. It is actually part and parcel of all networks, whether the members belong to an alumni association, civic organization or country club.
However, the researchers say, the influence wielded by corporate boards is far greater and more likely to impact high-level policies, such as corporate governance, financial disclosure and shareholder rights.
“With a small-world elite running corporate America, new ideas, norms and even rumors spread as quickly as stomach flu in a day care center,” Davis said. “The upside is that positive actions benefiting shareholders, such as corporate-board reform and the discontinuation of directors’ pensions and options, can be communicated from one board to another in a short period of time. The downside is that negative actions, such as the poison-pill, a takeover defense that shareholders generally hate, also can prove to be highly contagious among boards.
“In all, we cannot argue that the small-world configuration of corporate boards and directors is sufficient to forge a common world view among directors or to generate substantial homogeneity in corporate practices, but it is highly conducive to the spread of information and ideas—whether or not these are acted on in practice.”
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