1. The Italian Chamber of Lords Sits on Listed Company Boards. An Empirical Analysis of Italian Listed Company Boards from 1998 to 2006 P. Santella, C. Drago, A. Polo This paper is available free of charge on IDEAS: http://mpra.ub.uni-muenchen.de/2265/1/MPRA_paper_2265.pdf and SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1027947 3d Italian Congress of Econometrics and Empirical Economics Università Politecnica delle Marche, Facoltà di Economia "Giorgio Fuà", Ancona, (Italy). January 30-31, 2009

2. P.Santella, C.Drago, A.Polo2 Interlocking directorships in Italy 1998-2006 Theories on the function of interlocking directorships: the bright side Cooptation: sharing the board with directors of resource companies (bankers, suppliers, clients) Monitoring: bankers sitting on the boards of their debtors Legitimacy: inviting individuals with ties to important organisations

3. P.Santella, C.Drago, A.Polo3 Interlocking directorships in Italy 1998-2006 Theories on the function of interlocking directorships: the dark side Interlocking directors decrease competition in the market for corporate control violate directors’ fiduciary obligations as the agents of stockholders improve the ability of the controlling shareholders to expropriate the minority shareholders

4. P.Santella, C.Drago, A.Polo4 Interlocking directorships in Italy 1998-2006 Theories on the function of interlocking directorships: the dark side “The practice of interlocking directorates is the root of many evils” (Brandeis) ‏ Section 8 of the Clayton Act 1914 USA prohibited interlocks between firms competing in the same markets. Interlocking would facilitate the collusion between firms creating an informal communication channel between directors who could use it to make agreements against the consumers.

5. P.Santella, C.Drago, A.Polo5 Interlocking directorships in Italy 1998-2006 Interlocking directorships in Italy: an old story Ciocca (2007): since the end of the 19th century the Italian capitalism is characterised by cross-shareholdings, company pyramids, shareholder agreements, interlocking directorships. Rinaldi (2004), Rinaldi and Vasta (2005): between the end of the II World War and the 1970s interlocks (established through a very small number of directors) played an important role in guaranteeing the stability of the system Bianchi et al (2005): widespread recourse to director interlocks as a characteristic of the Italian stock market since the ‘70s. This may have favoured collusion, non-aggression pacts, and reduced competition.

6. P.Santella, C.Drago, A.Polo6 Interlocking directorships in Italy 1998-2006 Chamber of Lords: the data Board composition for the Italian stock market (MTA market, in 2006 99% of the total capitalisation of Borsa Italiana). We cover the 1998-2006 period for a total of 21,000 directorships. From the initial dataset we obtain firstly the two-way matrices and secondly the adjacency matrices to analyse the network of companies and the network of directors. We compare all the listed companies with the Italian Blue Chips index MIB30/S&P-MIB 40.

7. P.Santella, C.Drago, A.Polo7 Interlocking directorships in Italy 1998-2006 Methodology Initial dataset Adjacency matrices Directorships analysis Network components Network cohesion Network centrality Network longitudinal data Link persistency Two way matricesSocial Network Analysis Exploratory Data Analysis approach

8. P.Santella, C.Drago, A.Polo8 Interlocking directorships in Italy 1998-2006 Initial database (all directorships in 1998-2006)‏ Directorships by director 1998-2006 Link1Link1 Link2Link2 Board size by company 1998- 2006 Link1Link1 Link2Link2 All data are collected in the initial database that generates the affiliation matrices and two new tables/datasets: directorships by directors and board size by company 1998- 2006 Affiliation matrices by year (two-way matrices) used in network analysis

9. P.Santella, C.Drago, A.Polo9 Interlocking directorships in Italy 1998-2006 Adjacency matrices by year according to the network analysis methodology Affiliation matrices by year (two-way matrices) according to the network analysis methodology Network of longitudinal data We applied the network analysis to the adjacency matrices to study the structure of the interlocking directorship network

10. We use the interlocking directorships database (in Access format) present in the page

11. The interlocking directorships database

12. We collect data for each board 1998-2006 (source: Consob)‏

13. We archive the data in the “interlocking database”. The table structure: we collect data for directors (name and surname) in each company over the time

14. …So as to obtain the directorships data view over the time… The query permits the automatic computation…

15. …and the affiliation matrix used in the first part of the analysis…through the Ucinet software we obtain the adjacency matrix

16. P.Santella, C.Drago, A.Polo16 Interlocking directorships in Italy 1998-2006 Multiple directorships From 1998 to 2006 the same directorship structure every year: Onetimers (one board): 84% Twotimers (two boards): 10% Multilinkers/Lords (more than two boards): 6%

17. P.Santella, C.Drago, A.Polo17 Interlocking directorships in Italy 1998-2006 199819992000 2001 20022003 200420052006 1 2 3 or moreDirectorships 1998-2006

18. P.Santella, C.Drago, A.Polo18 Interlocking directorships in Italy 1998-2006 Directorships by director: how many boards for multitimers? Over the nine years considered we observe a reduction in the maximum number of directorships by director (from 8-10 in 1998-1999 to 6-7 in 2005- 2006)

19. P.Santella, C.Drago, A.Polo19 Interlocking directorships in Italy 1998-2006 Directorships 1998-2006 The two vertical lines represent 1 directorship and 2.5 directorships every year. The great majority of the directors are on the left of the 2.5-directorship line

20. P.Santella, C.Drago, A.Polo20 Interlocking directorships in Italy 1998-2006 Directorships by director and gender Very different pattern between male and female directors during the years. Overwhelming majority of male directors with respects to female directors Female directors 4% of the total of directors in 1998. They increase to 5% in 2006. Few “Lords” (or big-linkers) female directors, who tend to be part of families

21. P.Santella, C.Drago, A.Polo21 Interlocking directorships in Italy 1998-2006 The two vertical lines represent 1 directorships and 2.5 directorships every year Directorships by gender 1998-2006

22. P.Santella, C.Drago, A.Polo22 Interlocking directorships in Italy 1998-2006 Board size by company General structural stability of the system Reduced variance of company board size in 2005 and 2006.

23. P.Santella, C.Drago, A.Polo23 Interlocking directorships in Italy 1998-2006 Board size 1998-2006 (on the x axis)‏

24. P.Santella, C.Drago, A.Polo24 Interlocking directorships in Italy 1998-2006 Director flows over the nine years Being one or multi timer determines the career path In particular we have two different career paths: one path for one-timers/two-timers and one path for big linkers.  - For instance, low mobility from one directorship to four directorships.

25. P.Santella, C.Drago, A.Polo25 Interlocking directorships in Italy 1998-2006 Flows 1998-1999 Number of directors by directorships 1998 in the row-1999 in the columns

26. P.Santella, C.Drago, A.Polo26 Interlocking directorships in Italy 1998-2006 Flows 2005-2006 Number of directors by directorships 2005 in the row-2006 in the columns

27. P.Santella, C.Drago, A.Polo27 Interlocking directorships in Italy 1998-2006 Lords We identify 75 Lords, directors with at least 2.5 directorships per year from 1998 to 2006 (at least 23 in nine years). Lords are the main system connectors. Specific patterns for each Lord: stability, growth and decline. Lords tend to belong to families and to be also shareholders. Lords are overwhelmingly male

28. P.Santella, C.Drago, A.Polo28 Interlocking directorships in Italy 1998-2006 Directorships by director 1998-2006 (first eleven ones)‏ Lords: different career paths

29. P.Santella, C.Drago, A.Polo29 Interlocking directorships in Italy 1998-2006 Families: the rising sons Over the nine years emergence of several families such as Benetton, Pesenti, Ligresti, Caltagirone. Negative correlation in the same family (the father declines, the son rises) ‏ Families ensure continuity over time: they are network stabilizers.

30. P.Santella, C.Drago, A.Polo30 Interlocking directorships in Italy 1998-2006 Directorships by Families 1998-2006 (first eleven ones)‏ Families on the rise and families declining

31. P.Santella, C.Drago, A.Polo31 Interlocking directorships in Italy 1998-2006 Networks Lords are the main connectors. We move on to examine the companies they connect: the company network. We examine the structure of the nine networks in 1998-2006. In particular we study three aspects: (i) cohesion, (ii) centrality and (iii) links persistency over the time.

32. P.Santella, C.Drago, A.Polo32 Interlocking directorships in Italy 1998-2006 Networks Nodes represent the “actors” of the system, links represent the relationships between two actors (interlocks)

33. P.Santella, C.Drago, A.Polo33 Interlocking directorships in Italy 1998-2006 Networks Blue chip companies (1998-2006): slides 29-37, 48,55 Listed companies (1998-2006): slides 42- 52 Directors (1998-2006): slide 47 Blue chip financial companies (1998-2006): slides 56-65 Networks are directly generated by directorships data

34. P.Santella, C.Drago, A.Polo34 Interlocking directorships in Italy 1998-2006 Structural stability of the system Low number of isolates and low number of components Reduced density over the time Mediobanca is the center by betweenness over the period 2000-2006 Focus on financial companies to explore interlocks and competition Blue Chips Network visualization: emerging patterns

35. 1998 Italian Blue Chips

36. 1999 Italian Blue Chips

37. 2000 Italian Blue Chips

38. 2001 Italian Blue Chips

39. 2002 Italian Blue Chips

40. 2003 Italian Blue Chips

41. 2004 Italian Blue Chips

42. 2005 Italian Blue Chips

43. 2006 Italian Blue Chips

44. P.Santella, C.Drago, A.Polo44 Interlocking directorships in Italy 1998-2006 Blue chip companies are the most central companies into the entire company network according to betweenness This center does not change its relevance during the nine years We now move on to examine the entire structure of the network of listed companies Listed Company Network: structural aspects

45. P.Santella, C.Drago, A.Polo45 Interlocking directorships in Italy 1998-2006 Components and Isolates Starting from any of the nodes it is possible to reach any other node.

46. P.Santella, C.Drago, A.Polo46 Interlocking directorships in Italy 1998-2006 Components and Isolates In nine years one main component (all the companies communicate with all the other companies): percentage goes from 73% in 1998 to 76% in 2006. The number of isolates decreases over the time (-5% in nine years) ‏

47. P.Santella, C.Drago, A.Polo47 Interlocking directorships in Italy 1998-2006 Y-axis scales used are different to improve data visualization First component Isolates Total componentsTotal companies

48. P.Santella, C.Drago, A.Polo48 Interlocking directorships in Italy 1998-2006 Density Proportion of links (ties) with respect to the total.

49. P.Santella, C.Drago, A.Polo49 Interlocking directorships in Italy 1998-2006 Density and clustering coefficient S&P MIB companies show a higher level of density than listed companies. The network density decreases over the time

50. P.Santella, C.Drago, A.Polo50 Interlocking directorships in Italy 1998-2006 Y axis -scales used are different to improve data visualization Density: listed companiesDensity: Blue Chips Clustering coeff. : listed companiesClustering coeff. : Blue Chips

51. P.Santella, C.Drago, A.Polo51 Interlocking directorships in Italy 1998-2006 Centrality in terms of betweenness Betweenness: the number of paths that pass through a node

52. P.Santella, C.Drago, A.Polo52 Interlocking directorships in Italy 1998-2006 Centrality: betweenness The more central companies and directors in the network tend to not change in 1998-2006 Same actors are central year by year (although changing positions) ‏ Stability in centrality

53. P.Santella, C.Drago, A.Polo53 Interlocking directorships in Italy 1998-2006

54. P.Santella, C.Drago, A.Polo54 Interlocking directorships in Italy 1998-2006

55. P.Santella, C.Drago, A.Polo55 Interlocking directorships in Italy 1998-2006 Geodesic distance Distance between two actors in a network (number of relations in the shortest walk)‏

56. P.Santella, C.Drago, A.Polo56 Interlocking directorships in Italy 1998-2006 Geodesic distance The distance of 1 and 2 tends to decrease over the time The average geodesic distance tends to decrease over the time

57. P.Santella, C.Drago, A.Polo57 Interlocking directorships in Italy 1998-2006 199819992000 200120022003 2004 2005 2006

58. P.Santella, C.Drago, A.Polo58 Interlocking directorships in Italy 1998-2006 All listed companies: average geodesic distance is around 3.5

59. P.Santella, C.Drago, A.Polo59 Interlocking directorships in Italy 1998-2006 Asimmetry The asimmetry of the network increases over time. More central companies increase their centrality over the time.

60. P.Santella, C.Drago, A.Polo60 Interlocking directorships in Italy 1998-2006 Network centralization A centralized network is a network that typically presents many links around a central one. A decentralized network shows no particular differences between nodes

61. P.Santella, C.Drago, A.Polo61 Interlocking directorships in Italy 1998-2006 Network centralization The network becomes more centralized over the years. The network centralization increases for the listed companies, where the Blue Chips show an higher level over 1998- 2006

62. P.Santella, C.Drago, A.Polo62 Interlocking directorships in Italy 1998-2006 Listed companies: centralizationBlue Chips: centralization

63. P.Santella, C.Drago, A.Polo63 Interlocking directorships in Italy 1998-2006 We now move on to explore the financial blue chips network, as a sub-group of companies in the same business sector (such companies are supposed to be competition with each other). Financial Blue chips Network

64. P.Santella, C.Drago, A.Polo64 Interlocking directorships in Italy 1998-2006 Links persistency over the time We observe a main component for financial companies during 1998-2006. The network in this case contains few isolates The structure shows a very similar pattern with Mediobanca central in all networks Link persistence during 9 years.

65. P.Santella, C.Drago, A.Polo65 Interlocking directorships in Italy 1998-2006 1998 Italian Financial Blue Chips

66. P.Santella, C.Drago, A.Polo66 Interlocking directorships in Italy 1998-2006 1999 Italian Financial Blue Chips

67. P.Santella, C.Drago, A.Polo67 Interlocking directorships in Italy 1998-2006 2000Italian Financial Blue Chips

68. P.Santella, C.Drago, A.Polo68 Interlocking directorships in Italy 1998-2006 2001 Italian Financial Blue Chips

69. P.Santella, C.Drago, A.Polo69 Interlocking directorships in Italy 1998-2006 2002 Italian Financial Blue Chips

70. P.Santella, C.Drago, A.Polo70 Interlocking directorships in Italy 1998-2006 2003 Italian Financial Blue Chips

71. P.Santella, C.Drago, A.Polo71 Interlocking directorships in Italy 1998-2006 2004 Italian Financial Blue Chips

72. P.Santella, C.Drago, A.Polo72 Interlocking directorships in Italy 1998-2006 2005 Italian Financial Blue Chips

73. P.Santella, C.Drago, A.Polo73 Interlocking directorships in Italy 1998-2006 2006 Italian Financial Blue Chips

74. P.Santella, C.Drago, A.Polo74 Interlocking directorships in Italy 1998-2006 Summary. Our main findings: Multiple directorships around 16-17% of the total number of directors every year. Stability of career paths over the time: it is difficult for directors with one or two boards to move on to three or more directorships. We identify 75 “Lords” who sit on more than 23 boards in nine years (at least 2.5 boards per year). Lords are predominantly male and tend to be part of families of directors/shareholders. They are the main company connectors. The company network is characterized by one component with more than 70% of all the listed companies. The higher number of connections for the Blue Chips (MIB 30-S&P MIB 40 ). Companies in central position within the network tend to remain central over the nine years. Persistence in the links among almost all the financial and non-financial companies belonging to the Blue Chips index MIB 30-S&P MIB 40.

75. P.Santella, C.Drago, A.Polo75 Interlocking directorships in Italy 1998-2006 Conclusion Board interlocks in Italy go back to the end of the 19 th Century According to the literature, their function is to ensure collusion. We examined board interlocks from 1998 to 2006 The extent, depth and persistence over time of interlocks especially among the main Italian financial companies raise doubts on the extent of a competitive behaviour Interlocks are pervasive across financial and non-financial companies: systemic collusion?