Interlocking Board Seats and Protection for Directors after Schoon
We examine companies’ response to the Delaware case Schoon v. Troy Corp which permitted a board to alter indemnification arrangements for a former director retroactively. The decision left directors vulnerable unless their firm acted to restore protection. Using a hand-collected data set of director indemnification provisions, we measure the impact of interlocking directors, that is, directors who serve on boards of multiple firms, in propagating indemnification changes. Using panel data, we find that firms with an instance of outside director interlock with a firm that already responded to Schoon were nearly three times as likely to adopt enhanced indemnification protection as firms that did not have such a director. This effect holds only for outside directors and only for interlocks with responding firms. We identify other covariates associated with responsiveness: (i) a large proportion of outside directors; (ii) a designated independent lead director, and (iii) more board meetings in executive session are all associated with increased probability of response. The results are consistent with director networks empowering outside directors to protect themselves after an exogenous legal change, and highlights potential shortcomings in in-house legal advice to outside directors.