Good morning,
An anti-ESG activist group recently complained that large U.S. companies are controlled by a “liberal cartel” of powerful corporate directors who sit on several boards simultaneously and “instill woke ideology that goes against their fiduciary duties.”
Even without the hyperbolic language, the line of attack is laughable. Consider recent and persistent accusations of woke-washing, greenwashing, union-busting, and greedflation at U.S. firms; if an organized gang of leftists is manipulating organizations, it doesn’t show. Not to mention that data on company directors’ political affiliations indicate Republicans, not Democrats, are overrepresented on corporate boards.
However, board members do tend to sit on several boards at once, and the prevalence of “interlocked” and overboarded directors has worrisome implications worth unpacking.
Governance experts say tight board networks enable mutual back-scratching (if not outright conflicts of interest) and industry-level groupthink. Some studies suggest that interconnected boards help to inflate director compensation. Diversity advocates believe that allowing people to hoard director seats and serve long tenures contributes to the snail’s pace of progress toward gender and racial representation on boards. But the biggest problem with having too few board members is that the people who are supposed to provide oversight are exhausted and spread too thin, leaving firms vulnerable.
For that reason, a consensus is forming that says directors shouldn’t sit on more than three boards at the same time, Fortune reports, though companies don’t seem particularly motivated to enforce such a rule.
Plenty of research has also revealed that business practices can and do become contagious, traveling across networks of interlocked board members. But Nai Lamb, associate professor at the University of Tennessee at Chattanooga, doesn’t see it as problematic. “We all have close groups that we hang out with, we have our little groups of friends, and we all influence each other,” she says. "That's what's happening in interlocking boards. The same people are on different boards, and they start to talk about their lifestyle and their values, and they affect each other.” Her most recent study (not yet published) suggests that when directors who serve many firms join a company with a high corporate social responsibility (CSR) score, they are likely to encourage their other boards to do better.
Does that mean extremists who have politicized ESG issues have a point? Not necessarily.
Lamb notes that her studies have not examined whether the CSR effect she detected works both ways. That’s worth remembering as we track shifts in sentiment around ESG topics.
Lila MacLellan
lila.maclellan@fortune.com
@lilamaclellan
