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Big Fish in a Small Pond?

While the European Union is striving towards harmonization among the member countries, interlocks (connections) are a social phenomenon that has an implication on the Corporate Code but it is more implicitly pointed out with words like “other relevant information” or ”other significant board positions” that might affect the individual board member’s independence and ability to fully commit to the company.

Although the board often is referred to as one single entity, it consists of many board members that individually can have an agenda that might deviate from all stakeholders’ goal. Every single director has a business network of social contacts, especially if they are elected to more than one company’s board.

These individual directors create interlocks (links) between the firms they work for, and form a social network on company level, while the Code only recommends the companies to provide independence information and other significant assignments one by one as if they operate in solitude.

This exploratory study captures the corporate governance perspective about independence and the social networks of directors on supervisory corporate boards in Denmark, Finland and Sweden by investigating the interconnectedness of the directors and companies, and combines this data with the independence disclosure by companies.

We employed deductive approach and a quantitative archival research strategy based on secondary data from annual reports and corporate governance documents in a total of 150 companies to gather a sufficient database about the independence disclosure and the corporate networks.

We identified the most central companies and individuals in corporate framework, and found concentration of power to be evident. Identifying the director networks enabled us to focus on the structural aspects of the networks and what implications this has on the independence of the boards.

Furthermore, this research analysed the disclosure independence by the companies and assessed, whether the current requirements on disclosure are adequate for their purpose. We also found, contrary to our expectations, that the independence disclosure is not harmonized between the studied countries and therefore we assessed the disclosure by using insider-outsider theory.

This showed that the current corporate codes do not capture the independence very accurately, and that harmonization of the codes in addition to insider-outsider theory would help the relevant stakeholders to get a “truer and fairer view” of the directors’ independence. This study has been written especially the legislators in mind and suggests the use of insider-outsider -theory approach to the legislators for providing a more comprehensive and accurate view of the independence.
Source: Umeå University
Author: Bergmark, Jessica | Soidinmäki, Atte

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