Interlocking directorships and firm performance: the role of board diversity

Abstract

Purpose

This study aims to examine the impact of interlocking directorships on firm performance in Turkey, with a specific focus on the moderating role of board diversity.

Design/methodology/approach

Using a panel dataset comprising the top 100 firms listed on Borsa Istanbul from 2014 to 2018, this study employs regression analysis to investigate the relationship between interlocking directorships, board diversity, and firm performance. It firm-level financial data and directorship information to assess the effects of interlocking directorships on firm performance while also considering the moderating influence of board diversity.

Findings

The findings of this study reveal several important insights. First, the results confirm the “busyness hypothesis” as an increase in the number of interlocks per director negatively impacts firm performance, indicating reduced monitoring effectiveness. However, the study also demonstrates that board diversity plays a significant moderating role. Specifically, board diversity positively influences the relationship between interlocking directorships and firm performance, suggesting that a diverse board can mitigate the negative effects of interlocks and enhance overall firm performance.

Originality/value

This study contributes to the existing literature in several ways. First, this study extends our understanding of the relationship between interlocking directorships and firm performance, considering contingency factors in the Turkish market. Second, our findings imply that board diversity mitigates the negative impact of busy interlocking directorates and improves firm performance, which provides invaluable directions to firms in setting their boards. Moreover, this research enhances corporate governance practices in Turkey and beyond in other emerging markets with similar corporate governance mechanisms by identifying the importance of board diversity and its moderating influence.

Citation

Khan, A. and Baker, K.H. (2024), "Interlocking directorships and firm performance: the role of board diversity", Management Decision, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/MD-07-2023-1174