Does putting politicians on the board create value for firms? Depends on how corrupt your country is, new research suggests

Wednesday, August 5, 2020 - 11:37

Appointing a politician to a corporate board is a common practice, but how much value is it really creating for the company? In some countries, up to two thirds of the largest firms have appointed someone with a political background to their board, but the matter of whether this actually benefits the company is still in question. 

Omar El Nayal, a researcher at Católica Lisbon School of Business and Economics, zeroed in on this subject in his new study published in the Journal of Management, where he asks the question: does the perception of corruption in society affect how the appointment of a politician to a board will be viewed by stakeholders? 

The answer is perhaps more complex than one would expect, but one thing is clear: investors tend to be more favorable to the appointment of a politician to a board of a regulated company in a nation that is viewed as more corrupt. It is there that someone with connections can have the largest impact on the needs of a firm. However, if a country is seen as not very corrupt at all, appointing a politician may not affect investors views of the company - or even sway them towards the negative. 

“Are politicians generally good for firms or not?”, Omar El Nayal asks during an interview about his paper, Ties That Bind and Grind? Investor Reactions to Politician Appointments to Corporate Boards. “It’s not really that they are always consistently good or consistently bad - the question is: when?” Previous literature on the subject does not make it clear. In order to try to understand this subject, Professor El Nayal spent several years collecting a large dataset which spans 14 countries and over one thousand companies’ board appointtees. Then, he looked at investor reactions to the appointment of politicians in these countries, trying to explore what might be connected to a positive or a negative response of stakeholders. 

Lots of factors play a role in how stockholders view the appointment of a politician to the board. One of them is corruption. “For economists, there is this debate going on about whether corruption is good or bad. The general consensus is that it’s bad, but every once in a while it can - what we can call - ‘grease the wheels”, Omar El Nayal explains. What his paper, co-authored with J. van Oosterhout and Marc van Essen, seems to demonstrate is that in countries with high perceived corruption, the appointment of a politician is more likely to be seen as positive by investors. The investor reaction is measured by looking at the stock market right after the announcement. 

So, what do investors like to hear? It looks like in countries with higher levels of perceived corruption such as Spain or Italy, it can make investors quite happy to see a regulated firm get a politician appointed to the board. The politician knows the ropes of policy-making, and can use their connections to influence decisions in favour of the company. 

However, one too many politicians and investors start to get nervous - for companies with a few politicians already on the board, new politically-connected board members are seen with distrust by investors, as they may have little added value to the company itself, and may try to use the company for their personal benefit. “Under certain conditions, corruption put together with political connections can be a disaster,” Omar El Nayal adds. “With corruption, political connections bring you a lot of benefits if used in a certain way, but they can also bring relative costs. In countries with less corruption, you don't have extremes - not a lot of benefits from your political connections, but they also don't bring you a lot of costs.”

The 14 countries in Omar El Nayal and colleagues’ dataset are some of the most developed economies in the world, which they selected because of the quality and availability of the data that they needed to work with. “If we do see that even among the world's most developed economies, corruption still has an impact, imagine if we replicated the study using more extreme examples,” Professor El Nayal remarks. 

Omar El Nayal has been an assistant professor at Católica Lisbon School of Business and Economics since 2019. He obtained his M.Phil. degree in Business Research and his M.Sc. degree in Hospitality Management from the Rotterdam School of Management (RSM), Erasmus University, The Netherlands. After completing his B.A in Finance at the American University in Cairo, he worked as a policy analyst at the Ministry of Finance of Egypt, and as business development manager of a tour operator based in Cairo. 

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