Abstract

How are governance practices propagated across firms? This article proposes, and em-pirically verifies, that observed governance practices are partly the outcome of network effects among firms with common directors. While firms attempt to select directors whose other directorships are at firms with similar governance practices (“familiarity effect”), this matching of governance practices is imperfect because other factors also affect the director choice. This generates an “influence effect ” as directors acquainted with differ-ent practices at other firms influence the firm’s governance to move toward the prac-tices of those other firms. These network effects cause governance practices to converge. (JEL D80, G32, G34, R10) Firms, even those that are publicly traded, operate with widely differing cor-porate governance practices. The theoretical governance literature has pro-vided some insights into the determinants of corporate governance practices such as board size (e.g., Raheja 2005), the fraction of outside directors (e.g., Hermalin and Weisbach 1998), CEO duality (e.g., Jensen 1993), and execu-tive compensation (e.g., Garvey and Milbourn 2006). There is, however, still