With little fanfare, U.S. corporations recently won a lot more freedom in putting together their boards of directors.
Just before adjourning, the 101st Congress substantially eased restrictions, in place since 1914, on the same directors serving on the boards of companies that compete with each other.
As the law firm of Jones, Day, Reavis & Pogue put it in a November memorandum to clients, "the interlocking directors statute, Section 8 of the Clayton Act, has been a lingering anachronism of the early 20th Century's somewhat simplistic concerns about possible business behavior."
As the drafters of the Clayton Act saw it, the whole purpose of the antitrust laws is to encourage competition. If the same executive is serving on the boards of companies that are supposed to be rivals, he or she will carry information back and forth and their prices and policies will end up being so much alike that the customer has little real choice.
That argument would still find wide support today. But Section 8 has long been criticized because it leaves no wiggle room. Any board interlock between competitors is unlawful, whether it does any harm, whether, in fact, it might add competitive zest to the market.
For instance, when Robert Bosch GmbH, the West German automobile parts maker, bought a significant chunk of Borg-Warner Corp., the Federal Trade Commission kept Bosch from seating any of its directors on the Borg-Warner board.
Bosch sold in the United States only to warehouse distributors specializing in import car parts andBorg-Warner sold to distributors who handled more conventional lines. Because the U.S. manufacturer made some parts that could be used on some imported cars, though, the interlock was banned.
The flat ban came in part because the legislators feared that the trusts would exploit any loophole, and in part because in 1914 it was pretty clear what business a corporation was in -- copper companies mined copper and railroad companies ran railroads. Companies that compete only at the margin were rare.
That's not so today, which is why Section 8 became a problem for business. If Acme Widgets, for example, buys a movie studio that owns a record company that runs some of its own retail outlets, that means that the chairman of Downtown Department Stores has to resign from Acme's board, because some of Downtown's properties have record and tape departments.
There has been little litigation under the section, but it means a lot more checking before a director can join a board, and it reduces the pool of experts available to a company, particularly one with diverse markets.
The Antitrust Amendments Act of 1990 significantly eases the problem. To begin with, the new law applies to a lot fewer companies. The prohibition used to ban interlocks between competitors if one of the pair was worth at least $1 million, measured by its capital, surplus and undivided profits.
Now that threshold has been raised to $10 million, and will go up automatically with inflation. Moreover, the law applies only if each of the two companies is over the limit.
Beyond that, the ban on board interlocks is now limited to situations in which the competition between the two firms is significant.
The statute specifically says that the same person can serve on the boards of competitors if:
At least one of the companies sells less than $1 million worth annually of the competing lines;
At least one of the companies gets more than 98 percent of its total revenue from noncompeting lines; or
The competing lines account for less than 4 percent of total sales for each of the two companies.
In other words, Congress is saying that interlocks are not a matter of public concern if one of the companies is a tiny player in the market or if the line is not of great significance to either firm.
"The net effect of these changes will be to allow directors or officers to serve on the boards of other companies even if there is some minor competitive overlap between those companies," Jones Day reported.
The easing of the Section 8 restrictions garnered little opposition in Congress. The measure was delayed until the end of the term only because it had previously been tied to more controversial antitrust changes, which at the last minute were postponed until next year.
But the very unanimity with which the legislators agreed that the only interlocks of danger to the economy were those involving significant direct competition shows how far antitrust attitudes have moved in the past decade.
In the late 1970s, reformers were calling for a stiffer Section 8, one that would ban interlocks between potential competitors and between customers and suppliers -- including suppliers of credit and capital. In fact, a 1978 report from a Senate Governmental Affairs subcommittee even decried the fact that many of the country's biggest companies have "indirect interlocks" -- that is, include among their directors persons who sit on another board where a director of another major corporation also serves.
Daniel B. Moskowitz is a Washington editor for Business Week newsletters.