Abstract
In the last decade regulatory pressure includes appeals that corporate elites should reduce their multiple directorships to a minimum. The functionality of this governance mechanism is suggested by agency theory. The embeddedness view counter-argues that social relationships matter for the effectiveness of corporate governance. In particular for ill-structured tasks like stock price valuation social networks solve fundamental coordination problems in markets by reducing the risks of market exchange, by establishing a common base of recognition and by getting actions and blocking actions. For the Swiss banking sector this article shows that the social embeddedness of corporate elites reduces the volatility of stock prices. With respect to regulatory pressure against multiple directorships it recommends a more balanced view. While for investors and stakeholders certain amounts of stock price volatility are surly desirable, exorbitant fluctuations of stock prices – like in financial crises – are definitely not. Social embeddedness should therefore be considered by economic and financial theory: it does prevent the misspecification of regulatory proposals and incentive regimes.