Interlocking Directorships: Evidence from a Natural Experiment by Israeli Competition Law

This chapter empirically examines the market’s reaction to increased corporate governance regulatory provisions which were applied to pyramid-structured corporations. Specifically, it examines the influence of legal provisions dealing with the composition of boards of directors on the intensity of board connectivity. For this purpose, two databases have been specially constructed. One reflects the situation prior to the entry of the regulatory changes into force, and the other reflects the situation afterwards. These databases have been analyzed using social network analysis methodologies. The findings show that following the entry into force of these legal provisions, the average number of directors per board dropped, as did the average number of board seats held by each director. In addition, the level of connectivity of the board interlocks within the large public corporations dropped. The intensity of the decline was lower than what could be expected under complete adherence to the minimal standard required in primary and secondary legislation. By discovering that, this chapter aims to contribute to the ongoing dialogue on how best to balance the potential benefits of board interlocks with the need to protect shareholder interests and maintain competitive markets.