There may be too many of the same people wandering the halls of corporate America. Last month, the US Department of Justice announced that seven directors of American companies resigned their corporate board positions. This followed agency investigations into “interlocking directorates”, when the same person holds a board position at two or more competitors.
Usually companies do not want to let rivals into the tent. For example, Disney chief executive Bob Iger resigned from the Apple board in 2019 after the iPhone maker started getting into entertainment programming.
The interlocking directorate violation has rarely been a DoJ priority, but the Biden administration aggressively wants to promote competition. The worry is that rivals could end up colluding to raise prices or stifle innovation.
Among the targets of the DoJ have been the portfolio companies of private equity firms. These often share directors who are executives at the investment firms themselves. Lawyers now warn them about the vetting of board appointees.
Concentration of holdings is also an issue. With the rise of passive investing funds, the likes of Vanguard, BlackRock and State Street together often own more than a fifth of many public companies. They all help elect directors. A recent academic paper argues that so-called common ownership has helped to limit worker wage growth and reduce the incentive for capital investment. Also, shareholders when less diffuse exercise disproportionate power.
One group of academics even argued recently that BlackRock — which manages roughly $10tn — should be broken up like AT&T, limiting the progeny to just $500bn in assets under management. Given that passive investing is viewed as a social victory due to its modest fees, a break-up is unlikely.
Yet the governance question over concentration has weight. Influence over important business and social policy such as climate action has been vested in a few big investors such as BlackRock’s Larry Fink. More careful scrutiny of how directors are elected should be a priority.
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