The risks of interlocked boardrooms in New Zealand

New Zealand’s business landscape is small by international standards. The NZX is home to around only ~180 publicly listed companies, compared to Australia’s 2000+.  So, it’s not unusual to see NZX directors appearing on boards of multiple companies. If anything, it’s to be expected.

Yet while there are benefits to shared directors, it may present some challenges.  From conflicts of interest to biases and lack of diverse thinking, interlocked boardrooms can expose companies to risks that may not be obvious on the surface-level but can undermine the company’s growth over time.  To help you spot the signs (and curb the effects) we’ve listed potential risks and how companies can mitigate them, ensuring their boards are always moving towards growth and governed with integrity.

THE CURRENT STATE

A smaller pool of companies naturally leads to a smaller pool of directors, and strong demand for those with sector-specific experience and a reputation for delivering results. This naturally raises the bar for governance standards in New Zealand, and that’s a great thing. 

This is exactly why we set out to create The Boardroom Table, to celebrate the success of directors and their respective companies, but it also highlighted a web of connections across the NZX.

Interested in good governance across NZ?  Sign up to access our directorship platform here.

There are some benefits to these interlocked boardrooms.  Companies that share directors can spread good governance standards. It can improve communication, share knowledge and, network amongst different boards. It also means more companies benefit from the strategic thinking of highly experienced, sought-after directors. In many ways, it can be a win-win.

the risks of interlocking

However, just as interlocked boards can bring cohesion and shared vision, it can also lead to tunnel vision and a myriad of risks that can impact growth.  Here are some of the most significant risks that boards need to look out for.

• Groupthink and cognitive bias

When directors serve alongside the same individuals across multiple boards, there’s a higher risk of groupthink.  Similar perspectives and established ways of thinking can limit robust debate, reduce constructive challenge, and narrow a board's field of view.

Over time, this can lead to unconscious bias in decision-making, making it more difficult to identify emerging risks and embrace innovation.  

• Conflicts of interest

One of the most widely recognised risks of interlocking boards is the potential for conflicts of interest.

Under New Zealand's Companies Act 1993, directors are required to disclose any actual or potential conflicts of interest. However, even when these obligations are met, overlapping directorships can create situations where directors face competing loyalties or where stakeholders perceive their independence to be compromised.

The risk intensifies when directors serve on boards within the same industry or adjacent sectors, where access to commercially sensitive information can raise concerns around competition and confidentiality.  

• Capability gaps

While interlocking directors often bring significant governance expertise, boards can become overly reliant on a narrow pool of talent. This can result in gaps in areas such as AI and technology, cybersecurity, sustainability, customer experience, or emerging market trends.

Strong governance requires a balance of expertise. Without this diversity, boards risk overlooking important issues or failing to challenge assumptions.

• Reputational risk

All these risks contribute to one of the most significant risks of all: reputational damage.  

Concerns around concentrated influence, perceived bias, or anti-competitive behaviour can erode trust and damage a company’s reputation - even if no wrongdoing occurs.

Stakeholders are entitled to scrutinise board governance practises (and they’re increasingly doing so).  And they may question whether decisions are being made independently and in the best interests of their shareholders and customers.  It undermines greatly their confidence.  One such high-profile example was when a group of Tesla shareholders questioned the independence of the electric carmaker's board, warning it is too close to boss and co-founder Elon Musk.  While those concerns intensified scrutiny of Tesla's governance practices, it was a subsequent SEC enforcement action that resulted in Musk stepping down as Chairman, the appointment of additional independent directors, and $40 million in penalties for Musk and Tesla combined.  This generated significant reputational damage, regulatory attention, and years of ongoing governance disputes for Tesla.

How Boards can mitigate these risks

• Diversifying perspectives 

Another effective way to counter the risks of interlocked boards is to introduce fresh perspectives from a trusted external partner.  This isn’t about replacing experienced directors.  Rather, it's about complementing existing governance expertise with specialist commercial knowledge and independent data-driven insights that can help boards test assumptions and identify opportunities and risks they may otherwise overlook.

How datamine can help

Managing the risks associated with interlocking boards isn't simply about following guidelines.  It's about ensuring boards have access to the insights, perspectives, and expertise needed to make confident decisions in an increasingly complex and uncertain business environment.

At Datamine, we're more than just the "data people".  We're a team of commercial leaders and technical specialists with experience spanning multiple industries and sectors in Australasia.  That breadth of experience enables us to bring an independent perspective to governance, strategy, risk, and company performance challenges. Whether it's unlocking hidden value or blind spots, validating assumptions, or providing deeper customer and market insights, we help boards and executive teams make better-informed decisions that drive commercial growth. 

If driving stronger company performance is on your mind, you can learn more about how we work alongside organisations, or reach out for a short initial conversation today.

About The Boardroom Table

The Boardroom Table is a first-of-its-kind service that sets a new benchmark for good governance in New Zealand's publicly listed boardrooms.  With data from over 200 sources, including financial metrics, media perception, and customer and employee sentiment, The Boardroom Table measures the relative impact a director has made to their company during their tenure. 

Eligible directors must hold either two or more current public New Zealand company directorships, or at least one current and one recent past directorship within the last 12 months.  More information can be found at datamine.com/theboardroomtable.