Board Interlocks and Outside Directors' Protection

Michal Barzuza and Quinn Curtis

The Journal of Legal Studies, 2017, vol. 46, issue 1, 129 - 160

Abstract: We examine the role of outside directors' interlocks in restoring directors' indemnification protection in response to Delaware's Schoon v. Troy Corp. The case, which permitted a board to retroactively alter indemnification and advancement-of-expenses arrangements for a former director, left directors vulnerable unless their firm acted to restore protection. Using a hand-collected data set, we find that a firm became more than twice as likely to adopt enhanced indemnification protection once a firm with which it shared an outside director adopted protection. Our results suggest that interlocks contribute to outside directors' knowledge and bargaining power in the boardroom. Consistent with the bargaining-power hypothesis, we find that several measures of outside directors' power are associated with a higher probability of responding: a large proportion of outside directors, a designated independent lead director, and, with marginal significance, more board meetings in executive session. These results have legal and practical implications for corporate governance.

Date: 2017
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