DETERMINANTS AND EFFECTS OF MUTUAL INTERLOCKS IN SINGAPORE

Abstract

The mutual interlocking of directors is a non-trivial phenomenon: among 668 Singaporelisted firms in 2006, one in three had at least one mutual interlock whereby at least two directors on the board of one company simultaneously serve on the board of another company. I develop hypotheses to ascertain whether mutual interlocks further the interests of shareholders or the private interests of the top-level management. Using a sample of 663 Singapore-listed firms, I employ a probit model to test the hypotheses of the determinants of mutual interlocks and an ordinary least squares (OLS) model to test the hypothesis of the effect of mutual interlocks on firm value. My empirical findings show that the presence of mutual interlocks is positively related to the majority of outsiders on the board, board reputation and the interaction between the CEO ownership stake and the CEO’s presence on the nominating committee while the presence of mutual interlocks is negatively related to the proportion of busy outside directors, CEO’s equity ownership stake and the CEO’s tenure with the firm. While there is no significant relationship between the presence of mutual interlocks and firm value, the findings suggest that mutual interlocks may concurrently be both value-eroding and value-enhancing.