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In Other People’s Money: The Bankers and How They Use It, future Supreme Court Justice Louis Brandeis described how America’s ‘financial oligarchy’ maintained power. He was writing in 1912 and describing the method that J.P. Morgan used to control the corporate sector. A key method was to use interlocking directorates, the “most potent instrument of the Money Trust,” which was when one man held “the inconsistent position of director in two potentially competing corporations.”

Brandeis described how overlapping directors fostered a daisy chain of corporate relationships, where a Morgan railroad firm bought steel from Morgan-dominated U.S. Steel, which borrowed money from a Morgan bank, which lent to Morgan’s General Electric, which sold electrical supplies to U.S. Steel, and so on and so forth. Basically interlocking directors facilitated turning corporate American into one giant collusive arrangement, erecting a silent clubby barrier to entry for new firms who didn’t have a board-level relationship with a potential large client.

The next year, in 1913, Congress passed Section 8 of the Clayton Act, which barred interlocking directorates. And it worked. For a long time, corporate America, though full of big firms, was not part of a large Money Trust-type of arrangement. But the Clayton Act, like much of antitrust doctrine, sat rather unused for forty years. So this ‘most potent instrument of the Money Trust’ returned.

The most prominent example of the return of corporate collusion was in the mid-2000s, when Google’s Eric Schmidt, because he was sitting on the Board of Directors of Apple, cooked up a scheme with Steve Jobs where they would stop hiring each others’ employees, which ultimately led to an embarrassing wage-fixing conspiracy and series of lawsuits throughout Silicon Valley. This was done on a ‘handshake’ basis, which is much easier when you are sitting in the same boardrooms.

The interlocking directorate problem today is most common among private equity firms like Thoma Bravo, Apollo, and Silver Lake, who roll up entire sectors and impose common operating standards on competitive firms. The law was so irrelevant that there was no reason to assume anything might change. That is, until it did change, two weeks ago. On October 19th, the Wall Street Journal reported a story with the headline, “Corporate Directors Resign as U.S. Targets Overlaps at Competing Firms.”

Three directors of SolarWinds resigned in response to the DOJ’s concerns about board overlaps, the Justice Department said. The three former board members all represented the interests of private-equity firm Thoma Bravo LP, the DOJ said. Investment funds managed by Thoma Bravo own 31% of SolarWinds’s shares outstanding, according to SEC filings.
Seth Boro has been a director at SolarWinds and is a managing partner at Thoma Bravo, according to SolarWinds’s most recent annual proxy statement. Mr. Boro is also a director of Dynatrace Inc., according to securities filings. James Lines and Michael Hoffmann also work at Thoma Bravo and have served on SolarWinds’s board, the proxy says.
SolarWinds is a network-management company that says its competitors include Dynatrace.

Solar Winds is the firm responsible for a historic hack of U.S. nuclear facilities because of the corporation’s poor quality standards. But poor quality doesn’t matter if most competitors are equally bad. Thoma Bravo, the PE investor in Solar Winds, also invests in Solar Winds rivals, and has its people on the boards of both companis. So they don’t even need an agreement to collude, it just happens naturally.

And that’s the logic for the Antitrust Division’s revived attack on interlocking directorates. It prevents the informal kind of collusion that allows private equity to dominate an entire sector through the same kinds of clubby social networks used by J.P. Morgan more than 100 years ago.

The Antitrust Division went after a number of firms beyond Solar Winds. They publicly forced the unwinding of five different interlocking directorates, in industries as varied sales intelligence software, space infrastructure, components and technologies for use in transportation applications, online corporate education services, and application performance monitoring. The goal here is to stop conspiracies before they start.

The effect of this action will reverberate across corporate America, as I’m sure plenty of antitrust lawyers are reading up on Section 8 precedent so they can advise clients. It’s not just the government that can enforce the Clayton Act. Private plaintiffs can do so as well. And they are easy to bring, since they mostly require showing an interlocking directorate and not much more than that. No fancy economists or market definition, just show they are competitors or potential competitors in product or labor markets, and boom there you go.

Clayton Act Section 8 cases aren’t profitable, but they can be brought by private parties, even by law student clinics. And wow is the economy full of interlocking directorates. For example, here’s a paper that came out just a few days after the Antitrust Division’s actions were announced showing that over half of all companies above $5M in revenue in the life science industry have “potentially illegal interlocked boards.”

That’s… a lot. So if corporate America seems like it is moving in lockstep, you’re not imaging things. They really are. Fortunately, we have a law to address it, and the Antitrust Division is finally enforcing it.

BIG by Matt Stoller

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