Cooperative or Controlling? The Effects of CEO-board Relations and the Content of Interlocks on the Formation of Joint Ventures - Statistical Data Included

Administrative Science Quarterly,  Sept, 1999  by Ranjay Gulati,  James D. Westphal

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The board interlock network has been viewed as an ideal arena in which to develop and test the embeddedness perspective on interorganizational relations. The board of directors is a unique formal mechanism linking top managers of large corporations; it provides an opportunity for leaders to exchange information, observe the leadership practices and style of their peers, and witness firsthand the consequences of those practices. Thus, from this perspective, board ties to other firms should have a strong influence over corporate policy and strategy decisions. The empirical literature on board interlocks has extended research on the diffusion of innovations by specifying the social networks through which a variety of policies and practices are spread across firms (e.g., Mizruchi, 1992; Haunschild, 1993; Palmer, Jennings, and Zhou, 1993; Westphal and Zajac, 1997).

While interlock research has advanced our understanding of the consequences of interlocks for firms, significant concerns have also been raised that reflect more general concerns about the application of network theory to interorganizational relations (Mizruchi, 1996). Several authors have expressed concern about the consistency and magnitude of network effects (Stinchcombe, 1990; Fligstein, 1995). Weak or inconsistent findings may result from two limitations common to most prior studies. First, prior interlock research has not adequately specified the content of network ties (Hirsch, 1982; Pettigrew, 1992; Mizruchi, 1996: 288). Content here implies a specification of the nature of the relationship and behavioral processes underlying a connection between two actors. Although recent research in the governance literature suggests that relationships between top managers on corporate boards may be characterized by independence and distrust in some cases (Westphal, 1999), in the interlock literature all ties are generally treated as equally positive connections that facilitate social cohesion and the exchange of information between firms. This ignores heterogeneity that may exist among interlocks in the extent to which they channel information and engender trusting relations between board members.

Another concern with interlock research is its primary focus on the effect of direct ties or relational embeddedness on firm behavior to the exclusion of more distant network ties or structural embeddedness (Granovetter, 1992). While there is ample evidence in network research that both relational and structural embeddedness can influence behavior (e.g., Burt, 1987; Gulati and Gargiulo, 1999), this has had limited application in interlocks research. Studies in the larger network literature have shown that indirect network ties between actors can strongly condition the effects of direct ties between them (Gulati, 1995b). Moreover, recent research also suggests that indirect network ties can amplify differences in the magnitude of the effect of direct ties, such that distrust between actors is exacerbated in the presence of indirect ties between them (Burt and Knez, 1995). Thus, it may be possible to uncover stronger interlock effects by modeling variation in the content of direct ties and examining how such ties are conditioned by the larger social structure.

The present study examines the influence of heterogeneous social processes that underlie interlock ties, and the moderating effects of indirect network ties, on the creation of strategic alliances between firms. Some ties may promote the creation of a new alliance, while others could actually reduce its likelihood, depending on the behavioral content of the tie. As a result, there may be both bright and dark sides to embeddedness in interorganizational relationships. Although recent studies have focused on how the network of prior alliances provides valuable information to potential partners about each other's reliability, capabilities, and needs (Kogut, Shan, and Walker, 1992; Gulati, 1995b; Powell, Koput, and Smith-Doerr, 1996), this literature has not considered the role of alternative networks such as board interlocks in guiding the formation of new alliances or in strategic cooperation between firms. In this paper, we examine the role of board interlocks, focusing on a subset of alliances known as joint ventures, which entail the creation of a separate legal entity in which the parent firms take equity, and use the term alliance to refer specifically to joint ventures. Such alliances typically entail a considerable outlay of resources and create enduring and irreversible commitments between partners, which can make the influence of the board interlock network on their formation even more important. Such a network can be an important source of information for top managers about the reliability and capabilities of potential venture partners.

CONTENT OF INTERLOCK TIES AND EFFECTS ON ALLIANCES

Empirical studies examining the consequences of interlocking directorates for the diffusion of innovations and the likelihood of strategic change have typically viewed interlock ties in broad terms as a mechanism for resolving uncertainty for top management decision makers (Galaskiewicz, 1985a). In discussing how interlock ties may facilitate the diffusion of an innovation, scholars have emphasized the value of direct communication between managers and directors in reducing ambiguity about the implications of adoption. From this perspective, information from fellow corporate leaders is particularly influential because it comes from a trusted source (Davis, 1991; Haunschild, 1993). Research on the consequences of interlocking directorates would also suggest that interlock ties could help resolve uncertainty for top management decision makers about the implications of forming strategic alliances with another firm. Moreover, the question here relates not only to the adoption of strategic alliances in general, but also to the choice of a specific partner. While prior research has typically described interlocks as conduits of information about administrative innovations, it is reasonable to expect that board members also communicate information about their respective parent organizations. The social embeddedness created by interlock ties should help resolve uncertainty for top managers about the motives and management capabilities of other organizations as potential alliance partners.