Corporate political decision-making : an investigation of the relationship between corporate board composition & lobbying.

Corporate Political Decision-Making

An Investigation of the Relationship Between

Corporate Board Composition

&

Lobbying

University of Amsterdam - FEB Supervisor: Dr. Ilir Haxhi

Second Reader: Dr. Johan Lindeque Final Version: 30/01/2014

Student: Stephen M.A. Zimmer Student Number: 10516107 MSc in Business Studies

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Abstract

Corporations are increasingly taking the lead in shaping government legislation. The corporate decision making body, the board of directors, can be classified as shareholder oriented (profit-maximization) or stakeholder oriented (incorporating the needs of stakeholders including environment and society at large). The composition and structure of the board of directors is a reflection of the governance orientation. In light of the policy making inefficiency concerning social matters and efficiency concerning business interests, this thesis argues that stakeholder oriented boards will designate less capital to lobbying activities than shareholder oriented boards. I explore the relationship between lobbying intensity (annual lobbying expenditures and number of lobbyists hired) and four board characteristics reflecting a stakeholder orientation of the S&P 500 in 2010.The separation of CEO and chairman function and the proportion of female directors was insignificant while the proportion of independent directors and the designation of a CSR committee proved to be significant. Based on agency and stakeholder theory this thesis incorporates the board of directors as a micro-level factor influencing corporate political decision making. It shows how strategic and value driven objectives are reflected in the composition of the board and subsequently affect corporate political activity (CPA).

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Table of Content

1. Introduction ... 5

2. Literature Review ... 8

2.1. Corporate Governance and Corporate Political Activity ... 8

2.1.1. Agency Theory - Shareholder Theory and CPA ... 10

2.1.2. Stakeholder Theory and CPA ... 12

2.1.3. The Board and CPA ... 13

2.2. Linking Board Structure to Corporate Political Activity - Hypotheses ... 15

3. Model ... 19 4. Methodology ... 20 4.1. Sample ... 20 4.2. Variables ... 21 4.2.1. Dependent Variable ... 21 4.2.2. Independent Variables ... 22 4.2.3. Control Variables ... 23 4.2.4. Method of Analysis ... 24 5. Results ... 26 6. Discussion ... 32 6.1. Managerial Implications ... 37

6.2. Limitations & Future Research ... 38

7. Conclusion ... 39

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Acknowledgement

I would like to thank Dr. Ilir Haxhi for his help and support during the process of writing my master thesis. Also, I wish to thank Johan Lindeque for providing valuable insights into his field of expertise. Special appreciation goes out to the social club ‘THE business group’ as well as my parents and girlfriend for their unconditional support and patience.

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Tables & Figures

Table 1 - Regression Models...24

Table 2 - Collinearity Statistics...25

Table 3 - Descriptive Statistics...26

Table 4 - Correlation Matrix...29

Table 5 - Regression Analysis...32

Figure 1 - Conceptual Model of Hypothesis...20

Figure 2 - Histogram with Dependent Variable: Lobbying Intensity...30

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1. Introduction

The rise in global trade and the provision of free trade agreements increase the uncertainty and complexity in both domestic and international competitive environments. Due to the nature of the business environments as well as the increasing influence of politics on business, firms will find it difficult to solely rely on market-oriented strategies (Baron, 1995; Ozer, 2010). Thus, as Weidenbaum (1980, p. 46) adequately explains, “[p]ublic policy is no longer a spectator sport for business”. In order to cope with and manage the external environment, corporations develop a variety of non-market strategies (Baron, 1995; Oberman, 1993; Yoffie & Bergenstein, 1985) and engage in corporate political activity (CPA) to influence

government legislation. To date, individual corporations and business groups represent by far the largest entity in the legislative community in Washington, D.C. (Hart, 2004; Scholzman & Tierney, 1986). In the United States (US), for-profit companies “...comprise at least half, and probably substantially more, of all interest organizations active at the national level” (Hart, 2004, p. 49).While stakeholder (social) welfare should be the overall result of a company’s involvement in corporate political activities (Singer, 2013; Mackenzie, 2007), firms

frequently engage in questionable CPAs for the sole purpose of shareholder profit

maximization (Singer, 2013; Mathur, 2011), competitor elimination (Oster, 1982; Pfeffer & Salanick, 1978; Shaffer, 1995; Stigler, 1971) and even income maximization of individual executives (Hart, 2004; Guo, 2009). In the past 15 years, corporations have spent $37 billion dollars on lobbying activities (http//:www.opensecrets.org) and have gained considerable political bargaining power. The government’s priority has shifted away from serving the civil society towards servicing the needs of big business. According to Hart (2004, p. 47)

“Congressional staffers, Supreme Court clerks, and executive branch bureaucrats tend to be absorbed by mundane issues that affect cost, price and market share”.

It is thus not surprising then, that corporate lobbying is usually considered as unethical and unjust (Singer, 2013; Stiglitz, 2006; Nolan, 2008; Heath et al. 2010; Reich, 2010). According to Yu & Yu (2010, p.1) “firms that lobby on average have a significantly lower hazard rate of being detected for fraud, ... and are 38% less likely to be detected by regulators. In addition, fraudulent firms on average spend 77% more on lobbying than non-fraudulent firms, and spend 29% more on lobbying during their fraudulent periods than during non-fraudulent periods”.

In light of the corporate scandals and deceptive business practices, scholars have urged organizations to reassess their corporate political objective and become more socially oriented

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(Hseih, 2004, 2009; Margolis & Walsh, 2003;). Singer (2013, p. 310) for instance states that “corporations ought to apply an ethic of care to all their stakeholders and generally do more to redress societal problems”. In early 2010 however, the United States Supreme Court in

Citizens United vs. Federal Election Commission gave for-profit corporations free political speech by removing the limit on direct political spending in elections. The current President of the US, Barack Obama, called it “a major victory for big oil, Wall Street banks, health insurance companies and the other powerful interests that marshal their power every day in Washington to drown out the voices of everyday Americans” (Liptak, 2010). Additionally the US Supreme Court argued that “corporate political activities can and should ultimately be assessed and controlled by corporate boards” (Dahan, Hadani & Schuler, 2013).

The corporate (political) objectives, established by the board of directors, can generally be assessed as being either shareholder or stakeholder oriented. A shareholder oriented view of the firm dictates that managers develop market and non-market strategies which maximize the wealth of the owners of the firm i.e. the shareholders. Stakeholder oriented firms on the other hand incorporate a wide array of stakeholder interests. The objective is to maximize welfare of “employees, customers, suppliers, local communities, environment and society in general” (Ayuso & Argandoña, 2007, p. 2). In this respect, lobbying may still be conducted so as to promote common interests (Brooke-Hamilton & Hock, 1997), such as regulations concerning public health and environmental protection.

The notion of individual firms lobbying for common interests is however quite unlikely, due to the capital intensity and the nature of lobbying itself. Especially in capitalist America, lobbying is predominantly performed to ensure continued profit maximization and sustained competitiveness.

Hence, it can be expected that stakeholder oriented corporate boards exhibit a lower level of lobbying intensity than shareholder oriented boards.

The Supreme Court 2010 Citizens United decision has been widely criticized as anti social and has immensely contributed to the transition of the government ‘of the people, by the people, for the people’ to a government ‘of the corporations, by the corporations, for the corporations’. The academic literature exploring CPA has mainly focused on resources and capabilities, institutions, political environments and performance implications (Lawton, McGuire & Rajwani, 2013). Only in recent years scholars have acknowledged the relation between corporate boards and CPA, in particular, the influence of managerial entrenchment (Mathur et al, 2013) as well as CEO tenure and board member heterogeneity (Ozer, 2010) on

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non-market strategies. Due to the variety of boardroom characteristics there are still a lot of variables which may be considered in relation to CPA. Furthermore, emphasis in the CPA literature has mainly been on political action committees and political party contributions (Brasher & Lowery, 2006). Therefore, in order to advance the current research on the relationship between the board of directors and CPA, this study seeks to determine the influence of board characteristics (such as leadership structure, directorial type, board heterogeneity and designation of a CSR committee) on lobbying. More precisely, the overall objective is to find out whether corporate boards, which due to their structure and composition can be classified as either stakeholder or shareholder oriented, exhibit lower or higher levels of lobbying intensity, respectively. Hinging on theoretical constructs of agency and

stakeholder theory, I explore the case of corporate infrastructure voluntarily easing CPA and subsequently develop a model which assesses the following research question:

How is the structure and composition of a corporation’s board of directors associated with corporate lobbying?

Corporate governance as well as CPA literature has emphasized the need for corporations to pay more attention to societal issues (Donaldson & Preston, 1995; Korn & Ferry, 2007, 2010; Singer et al, 2013). The research conducted by Korn & Ferry (2007, 2010) has shown that firms have altered the composition and structure of the corporate board in order to effectively tackle social and environmental issues. Based on CPA literature and the logic of agency and stakeholder theory, four board characteristics have been selected which are more conducive to CSR and, following the reasoning above, therefore less conducive to CPA.

This study makes several contributions to the research concerned with political activities of corporations. First, building on agency and stakeholder theory, this research incorporates the board of directors as a micro-level factor influencing corporate political activity. Representing the ultimate decision making body of a company, corporate directors can actively manage their political environment and control for whether and how much lobbying is acceptable. Second, this study contributes to the understanding of how corporate strategic and value driven objectives are reflected in the composition of the board of directors and in turn affect political involvement. Third, this study focuses on a rather neglected aspect of political engagement, lobbying. Prior studies have mainly focuses on micro and macro level antecedents concerning campaign contributions through the utilization of political action

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committees. In sum, this study contributes to the understanding of why some organizations lobby and others do not.

In order to assess the relationship between the structure and composition of a corporation’s board and CPA, I will propose several hypotheses which will be tested using regression analysis. The data set includes 414 out of the S&P 500 firms of the year 2010. Information on corporate board structure and composition will be gathered through the detailed analysis of annual reports and proxy statements as well as through the COMPUSTAT database and the Microsoft Excel add-in Datastream. Concerning CPA, this study focuses solely on lobbying, which companies may pursue through two corporate political strategies, namely the

informational and financial incentive strategy (Hillman & Hitt, 1999). Here lobbying intensity will be measured in terms of the annual lobbying expense (financial incentive strategy) and the number of lobbyists hired (informational strategy). The data on lobbying intensity of firms in 2010 will be retrieved from the Center of Responsive Politics

(http//:www.opensecrets.org).

The thesis proceeds as follows. The next section introduces the main theoretical constructs of corporate governance and reviews the literature on corporate political activity. After

discussing the shareholder-oriented view and the stakeholder-oriented view, the preceding paragraph will review the current literature on the relationship between a corporation’s board and CPA. Based on the insights of the literature review, four hypotheses and a corresponding model will be developed. Next, I describe the data sample and method used to test the

hypotheses. Subsequently, in section five, the results will be presented. Section six, provides a detailed discussion of the findings as well as implications, limitations and propositions for future research. Finally, there will be a conclusion.

2. Literature Review

2.1. Corporate Governance and Corporate Political Activity

Corporate governance generally concerns „the structure of rights and responsibilities among the parties with a stake in the firm” (Aoki, 2000, p. 11). In other words, corporate governance entails the study of power and influence, in terms of decision making, over corporate entities (Aguilera and Jackson, 2010; Tricker 2009). There are two basic models of corporate

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between management and stockholders. Consequently, the model focuses on the most salient common interest i.e. wealth maximization (Letza, Sun & Kirkbride, 2004). The stakeholder model on the other hand, views the corporation as a locus of responsibility in “maximizing the sum of the various stakeholders’ surpluses” (Tirole, 2001, p. 24). Here, the role of the board of directors is to account for a wide array of stakeholders’ interests rather than solely focusing on profit maximization. Essentially, the board of directors of a firm, which is the governing body of every corporate entity (Freeman & Evans, 1990), assumes responsibility for the organizations decisions (Tricker, 2009). The directors develop corporate strategies, plans and budgets, which go beyond day-to-day operations. The management of a corporation’s political activities cannot be categorized as a routine, day-to-day operation as it is predominantly associated with the allocation of large sums of capital and entails careful execution. Therefore, corporate political activities are part of the board of director’s area of responsibility (Ozer, 2010). CPAs include direct lobbying, soft money and campaign contributions, political actions committees, engaging in advocacy advertising and bribery (Austen-Smith & Wright 1996; Delmas & Montes-Sancho 2010; Hansen & Mitchell 2000; Okhmatovskiy 2010; Ring et al. 1990; Spiller 1990; Yoffie & Bergenstein 1985; Getz, 2002; Rehbein & Schuler, 1999).

The structure and composition of the board is subject to heterogeneity and differs across and within countries (Tricker, 2009). Thus, examining the structure and composition of the board of directors will help determine board characteristics which affect the primary existence of corporate political strategies and the degree of involvement with the external political environment. The bulk of the academic literature investigating corporate political activities has neglected the involvement of corporate directors in corporate political activities.

According to the most recent CPA literature review “Corporate Political Activity: A literature Review and Research Agenda” by Lawton et al. (2013), prior research has focused on three distinct concepts: the resource-based view, the institution-based view and the political environment. Also, the authors review the substantial literature concerning the effect of CPA on firm performance.

Firms can use a variety of political strategies. The viability of implementation depends on available resources and capabilities as well as the institutional and political environment in which the firm operates.

The study by Gram & Crawford (1979, p.62) contended that “market and non-market

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for both areas”. The authors argue that the ad hoc nature of corporations’ reaction to changes in the political environment i.e. adaptation to regulations and laws, is not the only strategic response. Sethi (1982) describes three approaches through which corporations engage their political environment: defensive mode, accommodative mode and political activism.

Similarly, Baysinger (1984) identified three proactive corporate political objectives: domain management, defence and maintenance. With respect to the proactive involvement of firms in the political arena (Baysinger, 1984), which entails public policy shaping (Weidenbaum, 1980), political activism (Sethi, 1982) and political buffering (Blumentritt, 2003; Meznar & Nigh, 1995), firms may also rely on political entrepreneurs (Yoffie & Bergenstein, 1985). The most prominent work investigating proactive CPA was conducted by Hillman & Hitt (1999). The authors developed a decision tree model which “includes a decision between a relational and a transactional general approach, a decision between individual and collective

participation and a decision among three types of strategies (informational, financial incentive and constituency building” (Hillman et al, 2004, p. 844-845). The decisions concerning the corporate political objectives and activities are based on a careful assessment of internal resources, the external environment as well as on the corporation’s governance orientation i.e. shareholder versus stakeholder.

2.1.1. Agency Theory - Shareholder Theory and CPA

A fundamental concept of corporate governance is the separation of ownership and control. The relationship between the ownership and management of a corporation is the cornerstone of agency theory which has been defined by Jensen & Meckling (1976, p.5) as “a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent”. Because both parties are concerned with the maximization of their respective utilities, the agent will not always perform the service in line with the interests of the principle (Jensen & Meckling, 1976). The agency dilemma dates back as far as 1776. Smith (1776) explains that “[t]he directors of companies, being managers of other people’s money than their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own”. Especially in Anglo-Saxon countries (Tirole, 2006), where minority shareholders are more present than block holders, the separation of ownership and directorship has gained momentum, shifting the power away from shareholders (Berle & Means, 1932). Directors are

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therefore prone to moral hazard. The managers of corporate affairs may engage in activities that are advantageous for their own personal benefits, but deleterious to the investors (Monks, 2008). Scandals in the early 21st century, involving companies such as Enron, WorldCom and Tyco Inc, constitute perfect examples of directors pursuing their personal interest,

demonstrating complete disregard for shareholders. In response to the deceitful practices of corporations, Congress passed the Public Company Accounting Reform and Investor Protection Act, also known as the Sarbanes-Oxley Act. In order to align the interests of investors and managers, companies develop director compensation packages which directly ties firm performance i.e. shareholder wealth, to executive remuneration (Hall & Lieberman, 1998). As a result the primary interest of both owners and directors is profit maximization, which constitutes a shareholder orientation of the firm. Directors may pursue the

organizational objective of shareholder wealth maximization through market as well as non-market strategies (Gordon et al, 2007; Lawton et al, 2013). Friedman (1970), a major

advocate of shareholder wealth maximization, equates any deviation of this objective to theft. Although there are ‘arguments for the primacy of shareholder value maximization’ (Sundaram & Inkpen, 2004), political engagement tends to ignore societal and environmental issues. The purpose of CPA is to promote corporate self-interests in order to maximize shareholder wealth. At times, even various stakeholders such as employees and suppliers are instructed to act in accordance with the company’s political objectives. In order to sustain and/or advance the competitive advantage, “firms may support legislation and regulation that benefits their position vis-a-vis rivals, entrants, substitute products, buyers and suppliers” (Shaffer, 1995, p.498). For example, public policy concerned with the amendment of water and air quality would improve public health and environmental protection. However, it would also has a profound effect on the competitiveness of firms, for instance due to increased production costs resulting from the mandatory implementation of environmentally friendly production standards. Hence, to protect the status quo, maximize profits and continue pursuing its

parochial interests companies continuously engage in a wide array of CPAs, which usually do not account for the society at large (Kotter, 1979).

CPA, in particular lobbying, is a costly endeavour. Multiple interest groups compete against each other in a zero-sum game for their interests to be incorporated into legislation and regulation. Lobbying is essentially an all-pay auction, where only the highest bidder wins and all other players’ monetary contributions are considered sunk costs. Because nearly every aspect of business is subject to governmental regulation, it can be expected that corporations

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will engage in extensive lobbying to ensure the sustainability of organizational goals i.e. shareholder wealth maximization.

2.1.2. Stakeholder Theory and CPA

‘Big business’ represents the largest entity in the legislative community in Washington, D.C. These corporations have gained considerable bargaining power with respect to the influence on the development and implementation of government legislation and regulation (Alzola, 2013), which has lead to a disproportionate representation of public interests (Barley, 2007; Clawson, Neustadtl & Weller, 1998) and society at large (Dahan et al, 2013). Essentially, the objective of maximizing shareholder wealth favours one group (shareholders) at the expense of another (society) (Clarkson, 1995). In contrast to shareholder theory, stakeholder theory “does not rely on a single overriding management objective for all decisions” (Freeman & McVea, 2001, p. 194). The stakeholder approach “sees the concentration of wealth in private hands as the main threat to positive freedom, particularly the quality of working life and the opportunities available to the majority of citizens” (Singer, 2013, p. 315-316). It is

indisputable that companies’ decisions affect a variety of stakeholders. Therefore, companies ought to integrate their responsibility, towards customers, employees, suppliers, local

communities, the environment and society in general, into the decision-making process concerning corporate affairs, which includes CPA.

Corporations could lobby to support “policies such as taxes on the wealthy (justice), a

negative income tax (ability to pay), Medicare for all (health) and a system of wage insurance (positive freedom)” (Singer 2013, p. 313). However it seems very unrealistic that top

executives would consider spending firm capital on issues which should have been addressed by the government in the first place or which should be addressed by the business sector as a whole. Especially in the US, where historically regulations have been designed to favour corporate wealth maximization objectives, it is doubtful corporations and their stakeholders will gain a substantial return on lobbying expenditures. Furthermore, every dollar spent on lobbying concerning social justice issues would entail a deviation from fixing the retention of financial returns and market power, ultimately diminishing competitiveness. It seems as though the attitude of ‘growth and greed’ in US corporations hinders effective political activity concerned with social welfare. Hence, it can be expected that stakeholder oriented firms exhibit a lower level of lobbying intensity than shareholder oriented firms.

Furthermore, because lobbying is essentially an all-pay auction, the auctioneer (Congressman, Supreme Court clerks, executive branch bureaucrats or any other individual involved in

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process of policy formulation) wants to maximize his or her utility. It is intuitive that one single corporation or even a business group is more likely to spend large amounts of capital on regulations that directly affect their competitiveness instead of regulations that affect all stakeholders.

2.1.3. The Board and CPA

In an ideal world, corporations conduct their operations in a socially responsible manner and incorporate social and environmental considerations into their overall corporate objective (Ayuso & Argandoña, 2007; Singer, 2013) in order to create social welfare. Individual firms may refrain from such a sustainable corporate conduct in order to better ensure steady growth of profit and market share.These firms are likely to engage and influence policy

makers/politicians in order to protect themselves against industry, social and environmental regulations which may be disadvantageous for the individual firm. Enron, for instance, made use of its political power to create ‘regulatory black holes’ (Gerth & Oppel, 2001) and was able to distort the company’s financial position for individual gain. The agricultural

biotechnology corporation Monsanto has been engaging in excessive lobbying in order to continue producing and distributing controversial patented genetically modified plant cells. Health issues, environmental concerns and the demand to label food products containing genetically modified organisms (GMO) have been successfully ‘lobbied away’. Only recently a law was passed, known as the ‘Monsanto Protection Act’, which provides the company with immunity to the federal courts on health related issues concerning GMO. Corporations may engage in “anti-competitive practices such as political lobbying” in order to incentivise politicians to incorporate the corporation’s narrow interests into the policy formulation process (Singer 2013, p. 308).

On the other hand, firms recognizing the negative social and environmental impact of their operations may also provide information to policy makers in order to develop regulations that inhibit unsustainable corporate conduct with respect to society and the environment.

The decision making power, concerning whether to lobby for protection or regulation, resides at the top of the organization. The board of directors is the highest governance body in the organization.

According to the upper echelon theory, “[o]rganizational outcomes - both strategies and effectiveness - are viewed as reflections of the values and cognitive bases of powerful actors in the organization” (Hambrick & Mason, 1984, p. 193). The most powerful actors within an

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organization reside at the very top, in the form of corporate directors occupying a seat on the company’s board. This research is based on the proposition that the structure and composition of the board needs to be adapted to the overall objective. Therefore, the structure and

composition of corporate boards will differ between corporations committing to shareholder wealth maximization and corporations committing to CSR and seeking “to address the needs of diverse stakeholders” (Ayuso & Argandoña, 2007).

How political activities are shaped by the structure and composition of the board of directors, has received very little attention in academic research. It is valuable to study corporate directors, as they monitor and have influence over the amount of resources allocated to CPA (Griffin & Dunn, 2004; Wilts, 2006). Corporate directors are also more exposed to public policies and are able to recognize which policies may or may not have a favourable impact on the competitive stance of the firm (Wilts, 2006; Yoffie & Bergenstein, 1985).

Gordon et al., (2007) and Hart (2004) suggest that senior executives have differing preferences concerning CPA. Similarly, Hadani’s (2007) study of founding family firms indicates that senior managers who are also part of the founding family have different preferences concerning CPA with respect to senior managers who are not affiliated with the founding family. The results show that founding family senior executives prefer relational CPAs over transactional CPA in order to ensure the long-term sustainability of the family business. Blumentritt (2003) also found a positive relationship between senior management commitment and CPAs. The author indicates that top management teams (TMT) that are strongly oriented toward government affairs will be more inclined to provide resources to CPAs. Another study, conducted by Mathur et al (2013), tries to address the criticism brought forth by Brasher & Lowery (2006, p. 1128) that “the literature does not provide very clear and consistent answers about why some organizations lobby and others do not”. Mathur et al. (2013) shows that managerial entrenchment determines the choice and degree of lobbying engagements and concludes that a higher degree of managerial entrenchment is associated with a greater tendency to engage in lobbying activities. Research directly analysing the relationship between board composition and CPA is performed by Ozer (2010), who explores how members of the board of directors affect the firm’s affinity to engage in political activity. More specifically, the author tests if TMT involvement in political activity will be positively associated with the firm’s corporate political activity and uses CEO tenure and TMT

heterogeneity to moderate the relationship. Ozer (2010, p. 1200) concludes that “firms may differ in their commitments to investing in corporate political activities depending on CEO

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and TMT characteristics” and states that further research is needed to confirm the results. While these studies provide compelling arguments that board members influence corporate political involvement, they do not take into account how a particular set of characteristics of board structures influence the involvement in CPAs. Analysing the composition and structure of corporate boards and the corresponding lobbying intensity of the firm will provide a clearer understanding about why some organizations lobby and why others organizations don’t. More specifically, this study aims to investigate the connection between the corporate governance model of a firm and lobbying intensity and thereby addresses Brasher & Lowery’s (2006) critique.

2.2. Linking Board Structure to Corporate Political Activity - Hypotheses

The governance structure, more specifically the board of directors, of a corporation essentially provides the institutional framework in which the relationship and interaction between the company and its stakeholders is set (Graaf & Herkströter, 2007; Luoma & Goodstein, 1999). In order to fully address the needs of the corporation’s stakeholders, the functioning and composition of the board needs to be adapted to that end (Ayuso & Argandoña, 2007). Therefore, the structure and composition of a board following a purely financial objective is likely to differ compared to the structure and composition of a board following an

‘authentically dual’ objective (Singer, 2013) which incorporates diverse stakeholder needs into strategic decision making.

Based on insights from agency and stakeholder theory as well as the CPA literature, I assert that stakeholder oriented board characteristics in terms of leadership structure, proportion of independent directors, female representation and the designation of a CSR committee will (negatively) influence the level of lobbying intensity.

Leadership Structure of the Board and CPA

The leadership structure of a board entails the relationship between the executive and supervisory function. The executive function i.e. strategic decision making, is performed by the board of directors which of course includes the CEO. The chairperson holds the

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example, s/he is responsible for remuneration as well as hiring and firing CEOs (Walsh & Seward, 1990). Although, this structure constitutes good governance (Cadbury, 1992), in the US it is still common that the CEO performs both the executive and supervisory function. This is known as CEO duality and despite its continued existence is viewed as a dangerous combination (Jensen, 1993). Having one person perform an action and subsequently evaluate that action as well as having control over his/her tenure and compensation potentially

undermines the board’s effectiveness. Hence, the CEO is unfit to perform the supervisory function apart from his or her personal interest (Jensen, 1993). Due to the existence of a well functioning and lucrative revolving door in the US, it may be of personal interest to the CEO to engage in CPA. Hart (2010, p.177) suggested that “the goals [...] may include fame (as in the case of ‘Davos man’) election to public office (‘Potomac fever’), enactment of policies of personal interest, and personal wealth, in addition to improving the collective fortunes

embodied by the firm”. Furthermore, Davidson et al (2004) asserts that when the position of chair and chief executive officer are combined there is an overall expectation of improved financial performance. Hence, an individual holding both positions may be pressured to attach greater importance to short term profit maximization and is expected to do so aggressively (Zhang, 2012).

Primarily concerned with financial performance measures the dual CEO is less likely to incorporate the demand of various stakeholders into the decision making process. A CEO responsible for only one (executive) function may be more able to balance financial and social performance. Hence, the dual CEO is likely to embrace lobbying as a mean to increase his personal wealth and prominence as well as the wealth of the firm.

Humphery-Jenner, Powell & Zhang (2013) also view CEO duality as constituting bad

governance and assert that firms in which the position of CEO and chairman is combined are more likely to engage in lobbying. It is therefore hypothesised that:

H1: Corporations where the CEO and chairman functions are separated will be negatively related with greater lobbying intensity than those where the functions are combined.

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Independent Directors and CPA

In order to successfully provide valuable advice and oversee strategic decisions, Finkelstein & D’Aveni (2013) argue that corporate boards need to be vigilant. The authors conclude that vigilant boards are characterized by a large proportion of independent, outside directors (Finkelstein & D’Aveni, 2013).

Independent directors are increasingly recruited (Securities and Exchange Commission, 1980) due to their diversity in expertise and skills (Pearce & Zahra, 1992). The diverse backgrounds of independent directors make them less likely to become entrenched with the CEO and subsequently legitimize top managements decisions (Ibrahim & Angelidis, 1995). Furthermore, they are more likely to “oppose a narrow definition of organizational

performance which focuses primarily on financial measures and will tend to be more sensitive to society’s needs” (Ibrahim & Angelidis, 1995, p. 406).

Because of the genuine interest in and knowledge of various stakeholders, independent directors may be more likely to support costly or unpopular decisions (Ayuso & Argandona, 2007), such as refraining from corporate political initiatives aimed at undermining

competitors or industry innovation. For example, it may be less costly to lobby against environmental regulations concerning CO² emissions than investing in the development of innovative filtering systems or redesigning the production process to make it more eco-friendly. Based on this reasoning hypothesis 2 reads:

H2: A larger proportion of independent board members will be negatively related with greater lobbying intensity compared to boards with smaller proportion of independent board members.

Corporate Board Heterogeneity and CPA

Good governance is also frequently associated with the inclusion of female representatives on the board of directors. Corporate board heterogeneity has been positively associated with creativity and innovation (Bantel & Jackson, 1989) and generally contributes to the boards’ diversity with respect to opinions, knowledge and skills.

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Several studies have shown that female directors exhibit more altruism than men (Güth et al, 2007) i.e. having more empathy towards social equality. Moreover, they are expected to be more concerned with the overall welfare of stakeholders (Ayuso & Argandona, 2007; Krüger, 2010) as well as the social performance of the corporation (Siciliano, 1996).

Furthermore, female directors are able to contribute to reducing the ascendancy of CEOs (Bradshaw et al, 1996) as well as break the homogeneous ways of solving company problems (Burgees & Tharenou, 2002). The latter is particularly interesting as it has become a viable option for large corporations to resolve problems and issues through lobbying. Hence, the inclusion of female representatives on the board of directors is likely to negatively influence the company’s propensity for lobbying.

Ozer (2010) contends that TMT heterogeneity may influence the level of corporate political activity. Although the results show gender heterogeneity to be insignificant, the author states that the sample is the major limitation as it only includes firms from the manufacturing industry. Here, Ozer’s (2010) claim is tested on a sample of firms operating in 10 major industries. Therefore:

H3: A larger proportion of female board members will be negatively related with greater lobbying intensity compared to boards with a smaller proportion of female board members.

Designated CSR Board Committee and CPA

Every company needs to account for multiple constituencies which are voluntarily or involuntarily affected by the operations of the company i.e. stakeholders. Differences exist however, in the way a firm decides to manage the various stakeholder groups. While there are different types of stakeholders which can be categorized based on three aspects - power, legitimacy and urgency (Mitchell, Bradley & Wood, 1997) - companies following either shareholder orientation or stakeholder orientation may have different approaches in dealing with these constituencies. The shareholder perspective stipulates that the governance of stakeholders is based on control (Kochan & Rubinstein, 2000). The stakeholder perspective on governance on the other hand is based on coordination and conflict resolution (Kochan &

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Rubinstein, 2000). I order to manage and cooperate with the diverse set of stakeholders companies frequently integrate CSR in the overall business objective. Due to the operational complexity, stakeholder oriented boards are likely to designate a separate committee for the oversight of issues concerning various stakeholder groups, the environment and society (Cramer & Hirschland, 2006).

While the objective of CSR is to create value for stakeholders (Freeman & Velamuri, 2006) it could also be argued that CPA may create value for stakeholders (Mackenzie, 2007; Singer, 2013). Stakeholder oriented boards could actively support policies concerned with social justice, universal healthcare and proactive environmental protection. Lobbying for social causes would be very altruistic but in light of US capitalism and hypercompetitive

globalization, also very unrealistic. Corporations seriously concerned with their responsibility towards multiple constituencies are likely to view lobbying as a wrong mean to that end. Moreover, in some cases CPA and CSR are incompatible (Palazzo & Richter, 2005) and if jointly employed often inconsistent (Slob & Weyzig, 2007). Therefore:

H4: A designated CSR committee will be negatively related with greater lobbying intensity compared to a board without a designated CSR committee.

3. Model

Figure 1 summarieses the hypothesis discussed above. In order to fully address the needs of various stakeholders, including the environemnt and society at large, corporations need to adopt the strucutre and composition of the board of directors to that end. In this study, a corporation where the the position of CEO and chairman is seperated, there is a large proportion of independnet directors and female directors as well as designating a CSR

committee, is said to conduce a stakeholder orientation of the board of directors. Recognizing the inviability of lobbying for a social cause as well as the unethical nature of lobbying itself, stakeholder oriented boards will exhibit lower lobbying intensity. Shareholder oriented boards (CEO Duality, small proportion of independent directors and female directors, no CSR

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committee) on the other hand view lobbying as a fundamental way of protecting the status quo and ensure continous profit maximization and will thus exhibit higher lobbying intensity.

Figure 1: Conceptual Model of Hypothesis

4. Methodology

4.1. Sample

The data set considered appropriate for this study consists of the S&P 500 firms of the year 2010. The Standard & Poor’s stock market index is widely used for academic research and arguably constitutes the best representation of the US stock market. The year 2010 is

particularly interesting as the US Supreme Court Citizens United decision on 21 January 2010 further closed the gap between business and politics. Subsequently the Center of Responsible Politics registered the highest lobbying expenditures in that year (3.5 billion dollars), from the start of its recordings in 1998 (1.4 billion dollars) until today.

Financial data, industry classification as well as data concerning the structure and composition of the board of directors of the companies is collected through COMPUSTAT, Risk Metrics

21

(Wharton Research Data Service) and DataStream, which proved very reliable. The missing data of each firm is updated by retrieving information of annual reports and proxy statements on corporate websites. If a firm of the S&P 500 data set is still missing data on a specific variable it was eliminated from the data set. The final data set yields a sample that consists of 414 firms of the S&P stock market index of the year 2010.

4.2. Variables

4.2.1. Dependent Variable

The dependent variable is termed ‘lobbying intensity’. Academic literature has identified several different strategies concerning CPA. The most prominent work investigating proactive CPA was conducted by Hillman & Hitt (1999). The authors developed a decision tree model which “includes a decision between a relational and a transactional general approach, a decision between individual and collective participation and a decision among three types of strategies (informational, financial incentive and constituency building” (Hillman et al, 2004, p. 844-845). The approaches to CPA can either be long-term (relational) or ad hoc

(transactional). The level of participation depends on the issue itself as well as on the amount of slack resources. For example, a firm with greater slack resources that faces firm-specific public policy issues is more likely to participate individually. The type of strategy may also be dependent a firm’s slack resources. The information strategy, for instance, includes lobbying and implies “the provision of information to policy makers by individuals representing the firm’s interest” (Hillman & Hitt, 1999, p. 834). This again implies that the firm has to hire lobbyists for various initiatives such as “reporting research and survey results; commissioning research/think-tank research projects; testifying as expert witnesses and in hearings or before other government bodies; and supplying decision makers with position papers or technical reports” (Hillman & Hitt, 1999, p. 834). The financial incentive strategy obviously requires the firm to have ready access to large sums of capital. This study tests the proposition, that shareholder-oriented corporations, which lobby for the attainment of firm-specific advantages, are likely to use the information and financial incentive strategy. As a result, these

corporations hire more lobbyists and provide more financial incentives to policy makers, indicating an overall higher lobbying intensity.

In sum, I consider parent company level annual lobbying expenses (in-house as well as through contracted lobbying firms) as the first measure for the lobbying intensity - financial incentive strategy (Hillman & Hitt, 1999). The number of lobbyist engaged through external

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service providers constitutes the second measure of lobbying intensity - the information strategy (Hillman & Hitt, 1999). Prior research has predominantly focused its attention on PAC contribution (Brasher & Lowery, 2006), this paper will solely focus on lobbying expenditures.

4.2.2. Independent Variables

The database COMPUSTAT (Wharton Research Data Services) proved reliable on assessing the leadership structure of each company of the sample. For missing data annual reports and proxy statements on corporate websites were assessed. Frequently, under the heading “Leadership Structure” it was stated if the role of CEO and chairman was separated or not, oftentimes stating advantages and disadvantages of the respective structure. Companies which exhibited CEO duality were coded as “1” and companies where the role of CEO and chairman was separated were coded as “0”.

The percentage of independent board members of all sampled firms was retrieved from the Microsoft Excel add-in Datastream. The database defines independent board members as individuals, who: are not directly employed by the company; are not a reference shareholder with more than 5% of the holdings; are only compensated for serving on the board; have no recent, immediate family ties to the corporation; and served on the board for less than 10 years.

Gender heterogeneity was assessed by calculating the proportion of female directors serving on the board relative to the total number of directors represented on the board. Information on the total number of board members as well as respective gender was gathered from the

database Risk Metrics (Wharton Research Data Services). Missing data was updated by reviewing the corporation’s proxy statements. Predominantly under the header ‘Overview’, the board of directors was presented frequently including pictures and the full name. When this was not the case, online search engines were utilized to find individual members’ biographies which proved successful.

Data concerning the instalment of a designated CSR committee was gathered through the Microsoft Excel add-in Datastream. If such data was lacking, corporate websites were consulted. Only entities were considered as a designated CSR committee, if information was provided which explicitly exemplified the implementation and long-term commitment of CSR initiatives as well as policies concerning for instance, the relationship with stakeholders

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and/or environmental protection. Companies were coded as “1” if they had installed a CSR committee and “0” if not.

4.2.3. Control Variables

Firm size. Firm size is an important determinant of lobbying intensity (Hansen & Mitchell, 2000; Brasher & Lowery, 2006). Because lobbying is essentially an all-pay auction,

companies need substantial capital in order to be the highest bidder. Furthermore, the development of legislations takes considerable time, implying continuous involvement of lobbyists. Net income, which measures the increase or decrease in stockholder equity, is an appropriate financial performance measure for this research. The greater a company’s total earnings the more able a company is to designate a specific proportion to lobbying.

Industry type. There are different regulations for different industries which have different effects on firm’s lobbying behaviour (Schuler et al, 2002; Andres, 1985; Master & Klein, 1985). For example, the Oil and Gas industry has been subject to intense scrutiny in the past decades with respect to regulations concerning for instance the use of fracking for the extraction of natural gas resources (Horn, 2013). In this research industries are classified by the Industry Classification Benchmark (ICB) of the NYSE. The ICB identifies 10 different industry types:

Basic Materials (Basic Resources, Commodities, Chemicals); Consumer Goods (Automobiles and Parts, Food & Beverage, Personal and Household Goods); Consumer Services (Media, Retail, Travel & Leisure); Financials (Banks, Financial Services, Insurance); Health Care (Health Care Equipment, Pharmaceuticals and Biotechnology); Industrials (Construction and Materials, Industrial Goods and Services); Oil & Gas (Oil and Gas Production and

Distribution); Technology (Software and Computer Services and Hardware and Equipment); Telecommunications (Fixed Line and Mobile); Utilities (Electricity, Gas, Water).

Industry effect is thus a dummy variable as each firm in the sample is coded as 1 if they are in a specific industry and 0 if not.

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4.2.4. Method of Analysis

In order to test the validity of the proposed hypothesis this research makes use of regression analysis. Regression analysis determines the change in a dependent variable with respect to a change in one or more independent variables. This statistical method essentially plots an optimally fitting a line through a set of points which represent observations. The basic regression equation is depicted below:

Y = α + ß

* X

+ ß

* X

+ ß

* X

+ ε

In this equation, Y represents the dependent variable, X the independent variables, α the constant where the best fitting line intersects with the Y-axis and ε the residual error term. The regression equation of this research reads:

YLobbyingIntensity = α + ß * X Leadership + ß * X %Independent + ß * X %Females

+ ß * X CSRCommittee + ß * X FirmSize + ß * X IndustryType + ε

The proper analysis of the hypothesized relationships gave way to the construction of five regression models. The first model included the dependent variable and the control variables. The independent variables were individually included. Hence, the last model consisted of all relevant variables. Table 1 gives an overview of all five regression models.

25 Table 1: Regression Models

The software used to conduct the regression analysis is SPSS Version 21 provided by IBM. Several dummy variables were created so as to convert the categorical values into numerical values. The independent variable CEO Duality was recoded into a dummy variable so that companies which exhibited CEO duality were coded as “1” and companies where the role of CEO and chairman was separated were coded as “0”. Similarly, the variable Designated CSR committee was coded as “1” if the company had installed a CSR committee and “0” if not. Furthermore, for the control variable Industry Type dummy variables were created so that each firm in the sample is coded as 1 if they are in a specific industry and 0 if not.

For the analysis to commence, I needed to rule out multicollinearity by checking for Tolerance and its reciprocal value Variance Inflation Factor (VIF) scores. The VIF scores needs to be below 5 and Tolerance scores above .20. As evident in the table below, there are no significant correlations among the independent variables.

Model # Control Variables Board Characteristics

Firm Size

Industry

Type CEO Duality

Indep. Directors Female Directors CSR Committee Model 1 X X Model 2 X X X Model 3 X X X X Model 4 X X X X X Model 5 X X X X X X

26 Table 2: Collinearity Statistics

5. Results

Descriptive Statistics

The descriptive statistics analysis of the dependent and independent variables provides the following results. The size of the corporate boards varies considerably within the sample of firms, ranging from 5 to 34 members with an average of approximately 11 (10.82) members per board. The number of females within corporate boards is surprisingly low and ranges from zero females being represented on the board to six females. However, the maximum

observation is a clear isolated case, as the mean value of 1.75 indicates. The results show that females only represent 16% of the boardroom population. The majority of corporations (70%) follow a leadership structure in which one person holds both the title of CEO and chairman.

Standard Collinearity Statistics

Coefficients t

Beta Tolerance VIF

CEO Duality 0.102 1.850* 0.945 1.059 Proportion of Independent Directors 0.095 1.754* 0.978 1.022 Proportion of Female Directors 0.081 1.389 0.834 1.199 Designated CSR Committee 0.161 2.827*** 0.878 1.139 Net Income 0.396 7.585*** 0.891 1.122 Industrials 0.045 0.649 0.606 1.65 Basic Materials -0.007 -0.109 0.766 1.305 Consumer Goods -0.130 -1.948* 0.643 1.555 Consumer Services -0.048 -0.718 0.641 1.561 Financials -0.077 -1.156 0.748 1.337 Health Care 0.036 0.547 0.664 1.505 Oil & Gas 0.119 1.898* 0.733 1.364 Technology 0.051 0.797 0.691 1.447 Telecommunication 0.009 0.165 0.869 1.06 Utilities 0.052 0.807 0.693 1.443

Dependent Variable: Lobbying Intensity *. Significant at 0.1 level

**. Significant at 0.05 level ***. Significant at 0.01 level

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Also, 65% of the corporations in the sample have a designated CSR committee. In terms of board independence, on average 55.2% of board members are independent.

Table 3: Descriptive Statistics

N Minimum Maximum Mean Stand. Dev. Lobbying Expenditures 414 0 39290000 1940602 3674390.613

Lobbyists Hired 414 0 197 14.843 22.845

Number of Revolver Lobbyists 414 0 140 10.980 17.889

CEO Duality 414 0 1 0.650 0.477

Number of Directors 414 5 34 10.816 2.437

Proportion of Independent Directors 414 9 92.860 55.164 16.472 Number of Female Directors 414 0 6 1.751 1.026 Proportion of Female Directors 414 0 0.500 0.160 0.088

Designated CSR Committee 414 0 1 0.690 0.463

The sample solely consists of corporations that engage in corporate political activity. It must be noted however, that 78 firms reported no lobbying expenditures for the year 2010.

Nevertheless, these corporations have either engaged in lobbying in the past or have engaged in other forms of corporate political activity. These firms have not been excluded from the sample as the associated corporate boards still see an opportunity to influence politics in order to sustain the objective of profit-maximization through other means of corporate political activity such as contributions to political action committees and/or presidential candidates. The reported annual lobbying expenditures of the remaining 336 firms range from $10,000 to $39,290,000. The number of lobbyists hired is in direct positive correlation (r = 0.823) with the associated lobbying expenditures. On average 14.62 lobbyists were hired by firms in the year 2010. Interestingly, on average half of the lobbyists hired were revolvers i.e. former federal employees. Revolvers are primarily hired not necessarily because of their expertise in a particular field but because of the potential to utilize the revolver’s network and relationship with government employees involved in shaping legislation.

Due to the linear relationship between the two dependent variables it is expected that the regression model outputs of using lobbying expenditures and lobbyists hired will not significantly differ. Therefore, I will only use lobbying expenditures (annual lobbying expenditures in dollar - financial incentive strategy) as the sole dependent variable.

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Correlation Analysis

The correlation coefficients measure the strength of the correlation between the dependent variable, the four independent variables as well as the two control variables firm size and industry type. The negative correlations between the industries are disregarded as they are mutually exclusive. The analysis portrays a positive correlation between CSR committee and the proportion of female board members (r = 0.277) at a significance level of 0.05, which is not surprising due to the altruistic characteristics oftentimes associated with both females as well as CSR. Further, the correlation of firm size and CSR committee is also positive (r = 0.165, p<0.05). This can be explained by the fact that larger firms tend to have a greater impact on society and the environment and have the financial and human resources to invoke a CSR committee. There are also several industry factors that can be observed. For instance, Financials are in negative correlation to CSR Committees (r = -0.130) whereas Consumer Goods are in positive correlation (r = 0.137). Both correlations are significant indicated by a p-value lower than 0.05. This is intuitive as financial products are less tangible and therefore less associated with for instance, harming the environment. Consumer Goods companies however, are frequently associated with the predominant negative aspects of consumerism as well as directly and indirectly contributing to the increase in global waste production.

Furthermore, the correlation of the proportion of female directors and companies in the Oil & Gas industry is negative, indicating that this particular industry is dominated by male

directors.

Societal concerns with respect to climate change and the environment make this industry particularly vulnerable to political regulations. Hence, it is expected that firms within this industry engage in lobbying in order to protect the status quo so as to ensure continued survival.

29 Table 4: Correlation Matrix

Mean s.d. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Board of Directors 1. CEO Duality .659 .477 1.000 2. Independent Directors .551 16.472 .052 1.000 3. Female Directors .159 .088 .084 .108* 1.000 4. CSR Committee .697 .463 .071 .072 .277** 1.000 Control Variables 5. Net Income 185.159 306.36 .074 .047 .063 .165** 1.000 6. Industrials .153 .357 .065 -.072 -.166** -.056 -.060 1.000 7. Basic Materials .052 .225 .083 .07 .007 .065 -.054 -.099 1.000 8. Consumer Goods .113 .315 -.065 -.048 .160** .137** -.019 -.148* -.084 1.000 9. Consumer Services .157 .355 -.083 .011 .092 -.061 -.045 -.174** -.098 -.147** 1.000 10. Financials .179 .375 -.036 .046 .021 -.130** .014 -.189** -.107* -.159** -.188** 1.000 11. Health Care .098 .292 .079 .060 .086 .019 -.014 -.135** -.076 -.144* -.134** -.145** 1.000

12. Oil & Gas .082 .267 .078 -.047 -.234** -.061 .129** -.121* -.069 -.102* -.120* -.131** -.093 1.000 13. Technology .112 .318 -.122** -.002 -.026 .051 .130** -.150* -.085 -.127** -.149** -.161** -.115* -.104* 1.000 14. Telecommunications .011 .085 -.057 -.017 .026 .057 -.009 -.036 -.020 -.030 -.036 -.039 -.028 -.025 -.031 1.000 15. Utilities .085 .267 .078 .005 .039 .076 -.077 -.121* -.069 -.102* -.120* -.131** -.093 -.084 -.104* -.025 1.000 *. Significant at 0.1 level **. Significant at 0.05 level ***. Significant at 0.01 level

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Regression

The most effective method of establishing a link between lobbying intensity and the

hypothesized variables is a regression analysis, where the independent and control variables are tested against the dependent variable. Initially the residuals of the dependent variable exhibited non-normality which left unchecked would have a negative influence on the validity of the results. Subsequently, I took the logarithm of the dependent variable i.e. lobbying intensity, after which a normal distribution of the residuals could be observed.

Figure 2: Histogram with Dependent Variable: Lobbying Intensity

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Calculating the logarithm of the dependent variable gave way to construct five regression models. The first model included the dependent variable and the control variables. The independent variables were individually included. Hence, the last model consisted of all relevant variables. The adjusted R-square measures the variability in the dependent variable which can be explained by the independent variables. In model 5, the adjusted R-square is equal to 0.213 which means that 21.3% of the variability in lobbying intensity can be explained by the independent variables chosen. As shown in the table below CEO duality is statistically insignificant (B = 0.029; p = 0.140) and therefore the null hypothesis cannot be rejected. The proportion of independent board members, is significant (B = 0.120; p = 0.065). The ratio of female board members is not statistically significant (B = 0.034; p = 0.259). Hypothesis two can therefore be supported and hypothesis three cannot. The output shows that the variable CSR committee is statistically significant however only at 5% (B = 0.110; p = 0.037). CSR committees are ever more common, however frequently established as a form of window dressing. Hypothesis four can be supported. As expected firm size is statistically significant at a level of 0.01, which is not particularly surprising as larger firms have more resources to engage in corporate political activities. Also the larger a firm and the more a firm is entrenched in the current regulatory state and is able to reap abnormal profits, the more it is inclined to protect the status quo and lobby away unfavourable policies.

32 Table 5: Regression Analysis

Model 1 2 3 4 5 R² 0.183 0.184 0.200 0.212 0.213 Adj. R² 0.158 0.156 0.169 0.180 0.178 Constant 0.000 0.000 0.000 0.000 0.000 Board of Directors CEO Duality 0.033 0.038 0.078 0.029

Proportion of Independent Directors 0.125** 0.097* 0.120**

Proportion of Female Directors 0.088 0.034

Designated CSR Committee 0.110** Control Variables Net Income 0.406*** 0.404*** 0.402*** 0.385*** 0.383*** Industrials 0.093 0.089 0.098 0.087 0.093 Basic Materials 0.052 0.049 0.045 0.030 0.032 Consumer Goods -0.008 -0.007 -0.006 -0.024 -0.028 Consumer Services 0.122* 0.122* 0.123** 0.133* 0.110* Financials -0.081 -0.071 -0.079 0.077 -0.092 Health Care 0.165** 0.161** 0.160** 0.144** 0.143**

Oil & Gas -0.011 -0.004 -0.004 -0.013 -0.006

Technology 0.046 0.052 0.052 0.034 0.036

Telecommunications 0.090* 0.097* 0.097* 0.085* 0.085*

Utilities 0.092 0.094 0.094 0.074 0.074

6. Discussion

This study was concerned with the relationship between the structure and composition of corporate boards associated with a stakeholder orientation and lobbying. The main objective was to show that stakeholder oriented boards’ exhibit lower lobbying intensity than

shareholder oriented boards. The reasoning was based on the particular nature of lobbying and the current and oftentimes dubious relationship between business and politics in the US. Drawing on research in agency and stakeholder theory, I argued that stakeholder oriented boards are likely to be characterized by separating the function of chairman and CEO, a high

Dependent Variable: Lobbying Intensity 1. Control Variables

2. Model one plus Leadership Structure

3. Model two plus Proportion of Independent Directors 4. Model three plus Gender Heterogeneity

5. Model four plus Designated CSR Committee *. Significant at 0.1 level

**. Significant at 0.05 level ***. Significant at 0.01 level

33

proportion of independent directors as well as female directors and designating a CSR committee.

The regression analysis reported that the independent variables ‘Designated CSR Committee’ and ‘Proportion of Independent Directors’ are significant, while ‘CEO Duality’ and

‘Proportion of Female Directors’ are insignificant. Furthermore, the coefficients of both significant variables are positive, indicating a positive relationship of each independent variable with the dependent variable, holding the other variables fixed.

The results of this study indicate no significant relationship between the leadership structure of a board and lobbying intensity. The two-tier board structure frequently found in continental Europe separates the function of CEO and chairman as a mean to improve governance and reduce the potential for opportunism (Tricker, 2009). It is argued that the supervisory function needs to be detached from the executive function in order to efficiently perform its purpose (Cadbury, 1992). Corporations in the United States predominantly tie the two functions

together. Approximately 65 % of the companies in the sample exhibit CEO duality. Due to the insignificant relationship between CEO duality and lobbying intensity it can be argued that CEOs may not necessarily need to hold a dual position in order to effectively advocate lobbying or become infected with the ‘Potomac fever’ (Hart, 2004). Merely holding the title of CEO may suffice in gaining influence in the political arena, an area outside the jurisdiction of the chairman. The nature of the US economy may necessitate that an organizational leader has both managerial and political capabilities (Holland, 1994). CEOs, in addition to

sanctioning the corporate political strategy, are “likely to be a valuable asset in its implementation, particularly lobbying” (Hart, 2004, p. 61). Furthermore, with respect to Davidson et al (2004) assertion that dual CEOs are expected to improve corporate financial performance, it can be argued that improvement of the financial performance is always at the top of the agenda irrespective of the leadership structure. Here, lobbying may be key in ensuring continuous profit maximization.

The proportion of independent directors on a corporation’s board has a significant effect on lobbying intensity, however not as hypothesised. Independent directors are well experienced, hold a diverse set of skills and oftentimes serve on multiple boards. Due to the nature of their position they are likely to administer a vast network throughout a particular industry which includes connections to federal employees, more specifically government officials.

Independent directors may be more successful in engaging politics than insider directors. Hence, a greater proportion of independent directors may enhance the corporation’s ability to employ lobbying as a mean for attaining company objectives. Furthermore, individuals who

34

furnish proof of an extensive (political) network are likely to be favoured. This is evident in the revolving door phenomenon where legislators and regulators move into corporate boards which are affected by the very same legislation and regulation (Burger, 2006).

It can therefore be argued that an individual’s experience in terms of engaging politicians and policy makers may constitute a reason for appointment and has the potential to influence the corporations lobbying intensity.

Similar to CEO Duality the proportion of female directors on corporate boards also manifests a trend throughout the sample. A staggering 80% of the companies in the sample employ two or less female directors. With respect to the average board size of approximately 11 members, gender heterogeneity cannot be exhibited. Clearly, men occupy most seats on the board of directors and the glass ceiling seems still to be firmly in place (Cotter, 2001). Moreover, females appointed to the board may be considered tokens, which will have trouble making their voice heard (Terjesen, Sealy & Singh, 2009). This is particularly the case when there is only one female on the board. In this study one-third of the sampled firms employ only one female director. According to Erkut et al (2008) the effect is reduced as the number of female directors is increased. In order to check if corporations that appointed ‘two or more’ female directors exhibited lower lobbying intensity I arranged the variable ‘proportion of female directors’ into two groups (Group 1: zero or one female; Group 2: two or more females). The results yielded no significant relationship with lobbying intensity. Hence, the proportion of female directors represented on a corporation’s board of directors has no significant impact on lobbying intensity. The reason, be it undermined authority, the glass ceiling phenomenon or token female appointment, remains elusive.

Designating a CSR committee proves to have a significant relation to lobbying intensity. As in the case of the proportion of independent directors, the regression coefficient, however, is positive.

Nearly every firm engages in some form of CSR so as to compensate for the routine exploitation of the known limitations of market-based systems (Singer, 2013), the

environment and society. Designating a CSR board committee demonstrates a commitment toward various stakeholders which are affected by the company’s operations. Approximately 70% of the firms in the sample have a designated CSR committee in place. However, there is a truly daunting incompatibility between the business operations of a company and the portrayed social responsibility, which leads to believe that CSR committees are designated to serve the demands of consumers and society and most importantly to positively influence corporate reputation and image. For example, Monsanto has designated a CSR committee and