Directorate Interlocks in the

Biotech Industry:

Embeddedness and Cooptation

Laura L. Hansen, SociologyTheodora Welch, College of ManagementUniversity of Massachusetts BostonESS 2007

Interlocking Directorates

• Defined as board members sitting on more than one board of directors.

• All publicly traded companies are required to have at least 3 board members.

• Form over time in specific industries. (Mizruchi and Stearns 1988)

• May involve bankers, insurance company executives, investment bankers, attorneys, accountants, officers of firms in nonfinancial institutions (Mizruchi 1996)

Why Interlocks in the Biotech Industry are different:

• Biotech companies are highly entrepreneurial.

• Company founders are generally scientists, researchers, medical professionals.

• Contested terrain; many times an uncertain political and economic environment.

Contributing to confusion:

• Biotechnology terms – “genetic modification”, “genetic engineering”,

“genetic improvement”

• Controversy and reaction to biotechnological research – i.e. genetically engineered food, stem cell research, clinical trials

(Miller 2006)

Importance of Interlocks

• Benefits: Reduces uncertainty present when entering a crowded industrial niche.

• Risk: Technological domains become crowded with same direct ties, resulting in the inventions themselves being undistinguishable from one another (Podolny 2005).

Solutions: Cooptation or Structural Hole Formation?• Cooptation: link between cooptation

and profitability (Pennings 1980; Carrington 1981; Burt 1983).

• Cooptation, however, may have negative consequences in the form of redundancy of ties and information.

• Structural holes (Burt 1992) increase the efficiency of networks in a competitive environment.

Structural Holes (Burt 1992)

• “Forbidden Triad” (Granovetter 1983) vs. “Structural Holes” (Burt 1992)

Closure within a “forbidden triad”

Presence of a structural hole

(forbidden triad)

Hypotheses/Propositions:

• Interlocking directorates within biotech companies are necessary for cooptation. However,

• Companies within this specific classification (2836) are proposed to not be highly embedded, with some companies “orphaned” (2 or fewer interlocks).

• Cooptation through interlocking directorates does not necessarily offer more efficient networks, as compared to the presence of structural holes.

DATA• N = 425 network actors

• Two types of network actors:

1) Companies - 74 Biotech Companies labeled “2836” by the NAICS (North American Classification System) with FY December (same company reporting cycle)

2) Interlocked Board Members - 351 Board Members with membership on the boards

of the 74 companies who also have membership on other boards (the interlocks)

Methods

• Recap (Recombinant Capital) • SEC 10K (Annual Reports)

• Interlocks of biotech companies are tested for density of ties, embeddedness, and network efficiency measured by structural holes, using UCINET6 (Borgatti et al. 2003)

Partitioned Network, N = 22 (2836)

KEY: ACAD – Acadia Pharmaceuticals, Inc.

ACOR – Acorda Therapeutics, Inc.

ANIK – Anika Therapeutics, Inc.

AVRX – Avalon Pharma, Inc.

Results (N=425)• Geodesic Distance = 8.5 (Average reachable distance between actors, measured by ties)

• Low distance-based cohesion = .08 (Range 0-1)

• Low density (more actors = 0 than any other measure – Range 0-1, with 1 being more network tie density)

• Very efficient network based on structural hole measures (Average efficiency measure = .998 – Range 0-1, with 1 being very efficient)

Conclusions

• This particular network has low density, which might indicate low cooptation and perhaps more uncertainty.

• From structural hole measures, the network is highly efficient with very little in the way of redundant ties, meaning that information is more likely to be new to the network actors.

Next Step• Inclusion of the private companies that the

original 74 biotech companies are interlocked with.

Further Research• Testing the relationship between the

intensity of investment analysts’ coverage and the degree to which these companies are interlocked.

• Testing the “strength of weak ties” (Granovetter 1983).

• Use of blockmodels to test equivalency.