Are politically experienced directors an important resource for the firm? Institutional environment as a moderator

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Master Thesis MSc. BA Strategic Innovation Management

Are politically experienced directors an

important resource for the firm? Institutional

environment as a moderator

January, 20th₂₀₂₀

Jeroen Grasmeyer University of Groningen Faculty of Economics and Business

S2742810

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ABSTRACT

A common misperception is the treatment of policymaking areas as exogenous factors. Consequently, firms mainly react to government decisions instead of fully understanding and potentially shaping the political environment. Therefore, the present study aimed to investigate the relationship between having politically experienced directors on the board and firm performance. Moreover, no known empirical research has focused on exploring the moderating effect of the institutional environment on the proposed relationship and therefore this research fills the research gap of describing how different political contexts affect firm-government relations. Using a multi-country data sample comprising 836 firms in the time period from 2004 until 2014, this research empirically tested the proposed relationship and concluded that having politically experienced directors does not lead to a significant increase in firm performance. However, the findings found support for the negative moderation effect of the institutional environment. Therefore, this thesis provides several important implications of theoretical and practical relevance. Theoretically, the results indicate that it is questionable whether politically experienced directors can bring the resources related to their political experience into the firm. On top of that, this research adds to current literature by empirically proving that the institutional context is an important exogenous factor in the relationship between politically experienced directors and firm performance. Practically, this study advises firms that are considering politically experienced directors to be cautious in their decision-making. Moreover, firms should take the institutional environment into account when deciding on assigning a politically experienced director.

Keywords: board characteristics, resource dependency theory, social capital theory, political connectedness, politically experienced directors, state capacity, firm performance, corporate governance, corporate political activity

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Measurements ... 14 Independent variable ... 14 Moderating variable ... 15 Control variables ... 15 Analytical method ... 16 RESULTS ... 18 Descriptive Statistics ... 18 Regression results ... 19 Robustness checks ... 22 DISCUSSION... 23 Theoretical implications ... 23 Practical implications... 26

Limitations and Further Research Directions ... 27

CONCLUSION ... 29

REFERENCES ... 30

APPENDICES ... 38

APPENDIX A: State capacity variable index legal provisions ... 38

APPENDIX B: Regression assumptions ... 39

APPENDIX C: State capacity index scores per country per year ... 42

APPENDIX D: Robustness Check with politically experienced directors as a nominal variable ... 43

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INTRODUCTION

Governmental policies shape the competitive environment and performance of firms in a myriad of ways (Hillman & Hitt, 1999). For instance, by changing a market’s size, implementing entry or exit barriers, arranging special tax or subsidy treatments and changing firm costs by modifying legislation (Shaffer, 1995; Lester, Hillman, Zardkoohi & Cannella Jr., 2008). A common misperception is the view that policymaking areas are generally exogenous factors and firms thus can only react to the mentioned government decisions (Hillman, Zardkoohi & Bierman, 1999). However, firms can, for example, do an attempt to reduce uncertainty by increasing their knowledge about the political environment (You & Du 2012; Dess & Beard, 1984). Moreover, in every non-totalitarian country, policy processes build upon interest aggregation from stakeholders. This ultimately creates possibilities for the firm to shape policy outcomes which, to a large extent, might affect the firm’s performance (Salamon & Seigfried, 1977; Hillman, Zardkoohi & Bierman, 1999).

One possible strategy to understand and potentially shape policy-making processes is assigning directors to the board with political experience and social relations in the policymaking process (Hillman, 2005). These directors are expected to be better able to understand and potentially shape policy-making processes to the firm's advantage (Pfeffer, 1972; De Figueiredo and Silverman, 2006; Liedong, Ghobadian, Rajwani & O’Regan, 2015). One practical example of the described phenomena is the assignment of former senator, governor and secretary of agriculture Mike Johanns to the board of Deere & Co in 2015 (Palmer & Schneer, 2019). Johanns left the Senate and his position on the Committee on Agriculture, Nutrition and Forestry only five days before his assignment. Samuel R. Allen, Deere’s chairman and Chief Executive Officer mentioned that: “Mike's wide range of expertise in the areas of agriculture, banking, commerce, foreign trade, law and governance will be valuable assets for the Deere & Company Board of Directors” (PR Newswire, 2015).

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Lawton, McGuire & Rajwani (2013) argued that further research should describe how different political contexts affect firm-government relations. Consequently, Peng (2003) argues that strategic management neglects the institutional context. In a similar vein, Sun, Mellahi & Wright (2012) stressed that future research should determine how the value of political ties differs for different institutional contexts. Specifically, making a distinction between developed and emerging economies is too simplistic since both emerging and developed economies are heterogeneous in their governmental capabilities (Sun, Mellahi & Wright 2012). Following these recommendations, this research is aiming to fill the formulated research gaps by examining the moderating effect of state capacity on the relationship between having politically experienced directors and firm performance. By including the state capacity moderator, this research is able to draw inferences based on specific institutional capabilities instead of working with the rather simplistic distinction between emerging and developed markets. On top of that, the variable state capacity incorporates those political processes that are closely related to the described benefits by resource dependency theorists on assigning politically experienced directors to the board. Therefore, this research strongly contributes to a more detailed understanding of the described relationship. Accordingly, the following research question is formulated:

“How do directors with political experience shape firm performance? And how does state capacity moderate this relationship?”

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In order to contribute in the former and latter ways, the remaining part of the paper proceeds as follows. First, this research gives an overview of recent academic literature on the topic of social capital theory and resource dependency theory in order to describe the relationship between having politically experienced directors on the board and firm performance. After, literature regarding the institutional environment will be further examined to argue for a moderating effect of state capacity on the described main effect. After elaborating on the data and the methodological approach, the findings will be presented in the results section. This is followed by an extensive discussion of the findings with attention to the limitations and future research directions. Finally, this research will end with a conclusion.

THEORY AND HYPOTHESES

External Board Social Capital and Resource Dependency Theory

In their seminal work, Pfeffer and Salancik (1978) highlight the important role of network building within and outside the organization for individual directors. This network-building aspect also plays an important role in the four primary benefits that come with boards, as described in the article of Hillman (2005: 466): “(a) advice and counsel, (b) channels of communication and information between the firm and external organizations, (c) preferential access to commitments or support from important elements outside the firm, and (d) legitimacy”.

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Therefore in this research, the abovementioned benefits of channels of communication and information between the external environment and preferential access to elements outside the firm are of utmost importance. More specifically, these benefits can be seen as ‘resource dependency tasks’ that contain a director’s functioning as a boundary spanner by providing a connection between the organization and its environment (Kim & Cannella, 2008). Subsequently, resource dependency theory argues that corporate boards ultimately are an instrument for firms to bring resources into the firm (Hillman & Dalziel, 2003). These resources can, for example, be leveraged to manage external dependencies (Pfeffer & Salancik, 1978; Carretta, Farrina, Gon & Parisi, 2012) or to reduce environmental uncertainty (Pfeffer, 1972). Therefore, this study perceives resource dependency theory and social capital theory as important complements. By doing so, this research does not only take into account the bridging function to the external environment described by social capital theory but also this bridge should be able to carry resources inside the firm, as is supposed by the resource dependency view.

Political Connections

As an integral part of the firm’s environment, public policies and governmental decisions shape the firm in all different kinds of ways (Hillman & Hitt, 1999). Therefore, instead of being passive reactors to government decisions, firms should apply an active approach to be able to understand and potentially shape government decisions and public policies (Salamon & Seigfried, 1977). These processes in which firms tend to understand and shape political decision-making are defined as ‘corporate political strategies’ (Hillman, 2005: 468). One important example of such a strategy is assigning a director to the board with political experience. Accordingly, literature argues that a person with political experience directly allied to the company might be better able to understand and provide favorable governmental action (Pfeffer, 1972; De Figueiredo and Silverman, 2006; Liedong et al., 2015).

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in the political process are seen as less efficient compared to assigning a director to the board with political experience (Sun, Mellahi & Wright, 2012). Assigning a director to the board with political experience is a long-term commitment since most of the directors are assigned for multiple years. The firm can then rely on a director’s experiences and relations in the political environment across time and different political issues (Hillman, 2005). Moreover, assigning someone to the board develops more trust compared to a situation in which the firm uses the experiences of the individual only for episodic exchanges with governmental parties (Sun, Mellahi & Wright, 2012).

Resource dependency literature describes several advantages of assigning directors with political experience to boards. First of all, assigning these directors results in unique information about the complex process of policy making (Hillman, Zardkoohi & Bierman, 1999). Secondly, the assigned director with political experience might serve as a tool to communicate with important actors in the political process (Hillman, 2005; Sheng, Zhou & Li, 2011). Thirdly, Pfeffer (1972) adds to these advantages by stating that a director may ultimately influence, via its connections, the political decisions of policymakers to the firm’s advantage. This on its turn influences firm performance, for example by blocking new legislation that harms the firm’s business interests (Shaffer, 1995). Also, the assignment of a director with political experience increases the extent to which governmental and political institutions assume that the behavior of the firm is desired and appropriate and thus increases the firm's legitimacy (Suchman, 1995). According to Peng, Tan & Tong (2004), this increased legitimacy will result in favorable treatments by the government and ultimately lead to increased firm performance. Finally, governments often own a compelling amount of scarce resources (Faccio, 2006). This is, for example, the case in China in which the Chinese government owns a significant amount of land, bank loans and also provides subsidies (Khwaja & Mian 2005). Maintaining links with governmental institutions in this sense may result in favorable investment decisions by the government which might increase firm performance. Taken together, resource dependency literature argues that the assignment of directors with political experience will provide the firm with several advantages that in turn improve the firm’s performance (Lawton, McGuire & Rajwani 2013; Hillman, 2005). Therefore, the first hypothesis is:

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9 State Capacity

In this research, the contingent effect of the institutional environment on the proposed main effect will be examined. Therefore, the underlying reasoning for the expectation that state capacity negatively moderates the relationship between assigning politically experienced directors to the board and firm performance will be elaborated.

According to Hendrix (2010), academic literature is still searching for a precise definition of state capacity. Skocpol (1985: 9) defines state capacity as “states’ ability to implement official goals, especially over the actual or potential opposition of powerful social groups”. Guillén & Capron (2016: 125) define state capacity as “the administrative ability to formulate and implement policy”. This research will, therefore, apply a combined definition by defining state capacity as "the states' administrative abilities to formulate and implement policy goals, especially over the actual or potential opposition of powerful social groups” (Skocpol, 1985; Guillén & Capron, 2016). According to Hanson & Sigman (2013), administrative abilities include those abilities to create policies and govern commercial activities. The definition used in this research focuses mainly on the policymaking process and thus is closely related to the mentioned first three advantages of assigning politically experienced directors: (a) the advantage of providing unique information about the policymaking process (Hillman, Zardkoohi & Bierman, 1999), (b) the advantage of having a channel of communication in the political environment (Hillman, 2005; Sheng, Zhou & Li, 2011) and (c) the advantage of influence over decision-making (Pfeffer, 1972; Liedong et al., 2015). Since the sample exists of firms in the Asian emerging market, special attention has been paid to literature that investigated the emerging market context. This is to be able to draw inferences from the contingent value of state capacity as a moderator in a low-level state capacity context.

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uncertainty and higher costs for the firm (Williamson, 1991). This uncertainty is caused by the high amount of new legislation that is created and has to be implemented in an attempt to meet the wishes of social and economic development (Mondejar & Zhao, 2013). Therefore, information-processing needs increase to better understand the political environment (You & Du 2012; Dess & Beard, 1984). Thus, in a less developed institutional context, firms use politically experienced directors more frequently as a channel of communication, which was described as one of the benefits by resource dependency theory in this research (Hillman, 2005; Sheng, Zhou & Li, 2011). On top of that, the uncertainty regarding the implementation of the high amount of new policies can also trigger the need for a close linkage to policymakers in a different way. By assigning a politically experienced director to the board, firms can use the higher amount of uncertainty in the policy creation and implementation stage to rapidly identify the right agencies and to shape policymaking in a favorable way (Mondejar & Zhao, 2013). Therefore, in a less developed institutional context, also the benefits described by resource dependency theory of expertise about and abilities to shape the political environment will be of high importance. Thus, in a lower state capacity context in which institutions are less mature and less stable and more uncertainty is involved, a focus on maintaining connections to political institutions is expected to lead towards a better achievement of the goals of the firm and thus increasingly leads to a rise in firm performance (Peng & Luo, 2000; Zhang & Li, 2008).

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All in all, these points lead to the expectation that state capacity negatively moderates the relationship between having directors on the board with political experience and firm performance. Therefore, the following hypothesis is proposed:

Hypothesis 2. State capacity has a negative moderating effect on the relationship between having directors on the board with political experience and firm performance.

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METHODOLOGY

As outlined before, this research will investigate the role of assigning directors with political experience to the board of directors on a firm’s performance. On top of that, the exogenous effect of state capacity will be tested as a moderator. This to complement current research, which predominantly focused on endogenous factors in the relationship between politically connected firms and firm performance, without taking into account state characteristics. Therefore, a statistical analysis is conducted to empirically test the proposed effects. The following section will describe the dataset as well as the data collection. Next to that, the measurements of the variables will be elaborated. Finally, the method of analysis will be discussed.

Data collection and sample

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13 Table I. Relevant firms per country

Non-Relevant Relevant Total

Country China 467 812 1279 India 168 401 569 Malaysia 253 161 414 Indonesia 115 150 265 Thailand 88 104 192 Philippines 35 75 110 Total 1126 1703 2829

In support of the use of the panel dataset, some advantages will be discussed in this section. First of all, a panel dataset can follow a sample of firms over time. This sample includes data from listed firms between 2004 and 2014. The data collected over a period of ten years (2004-2014) is an advantage since it allows to test for year differences, especially since the dataset includes periods of both economic growth until 2007 as well as years of economic crisis (Oehmichen, Braun, Wolff & Yoshikawa, 2017). This ultimately increases the generalizability of the results. On top of that, according to Hsiao (2006), panel data allows to include a lagged variable to observe dynamic relationships. In this research, a lagged variable for firm performance will be included in order to reduce endogeneity problems, which will be further elaborated in the analytical method section. Another advantage is the number of firms included in the dataset, namely 836 firms divided over six countries. This brings again the advantage of generalizability of the results since the high amount of firms allows to control for different industries. Consequently, panel data normally incorporates more degrees of freedom and more variability in the sample which increases the accuracy of the inference of model parameters (Hsiao, 2006; Hassan & Marimuthu, 2016).

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are well-shaped and more formalized (Li, He, Lan & Liu, 2012; Li, et al., 2008; Xu, Huang & Gao, 2012).

Measurements

This subsection will describe the variables and measurements of this study. The variables and measurements were carefully chosen and compared to relevant literature.

Dependent variable

Firm performance. For analyzing a firm’s performance this research will focus on the firm’s operating performance, approximated by the return on assets (ROA). The ROA of the firm demonstrates how effective the company is utilizing its asset base (Carpenter & Sanders, 2002). According to Gomez-Mejia & Palich (1997), ROA is the most common firm performance measure in academic management research. One of the reasons for this is that ROA is relatively hard to manipulate by the firm’s management (Gerhart & Milkovich, 1990). ROA has been calculated as net income divided by total firm assets. Therefore, the ROA measure suits this research well since this research tends to focus more on the performance of directors and how a political link can make directors contribute to the effectiveness of the firm. This as opposed to market-based measures, such as Tobin’s Q, which would have had a better fit if the focus of this research was mainly on the increased prestige and value of the firm when assigning a politically-connected director to the board.

Independent variable

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Moderating variable

State capacity. According to Fortin (2009), academic literature mainly focused on qualitative assessments of state capacity and hardly made use of quantitative measurements. However, the variable derived from the article of Guillén & Capron (2016) provides a quantitative measurement by examining the legal provisions for minority shareholder rights in different countries. A link to their cross-national and longitudinal dataset has been published in their article, from which the data could be downloaded.1 The data contains indexes of 78 countries (including all six countries of this research) based on information about the ten most important legal provisions regarding minority shareholder rights (Guillén & Capron, 2016). The ten legal provisions were each coded between 0 and 1 based on the nature and strength of the specific rule. Intermediate scores between 0 and 1 are also present since the provisions differed in their strength (Guillén & Capron, 2016). To provide a more detailed overview of the variable state capacity, Appendix A has been included which demonstrates the legal provisions and how they were coded. On top of that, Appendix B demonstrates the index scores per country per year. After all, the moderating variable that will be used is the total sum of scores, which thus can range from 0 to 10.

Control variables

With the implementation of control variables, this research tends to control for other factors that influence the relationship between the amount of politically connected directors and firm performance.

Board size. Total board size has been often linked to increased financial performance (Dalton, Daily, Johnson & Ellstrand, 1999) and therefore should be controlled for. Board size is calculated as the total number of directors on the board at a certain point in time.

Board tenure. The average tenure of the board also has been included as a variable to control for. Board tenure is defined as the average time in years directors are in their position. Academic literature related medium board tenure to have a positive effect on firm performance and therefore this research controls for board tenure (McIntyre, Murphy & Mitchell, 2007; Huang & Hilary, 2018).

Board age. The board’s average age is calculated by dividing the total age in years of the directors by the number of positions on the board. According to Bonn, Yoshikawa & Phan (2004), younger directors are more innovative and have better abilities to deal with changing

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environments compared to older directors. Therefore, age is expected to negatively affect firm performance and should be controlled for.

Next to that, firm size has been included as the total number of employees to control for differences in performance caused by the size of firms (Oehmichen et al., 2017). The natural logarithm of a firm’s number of employees has been calculated since this will be more convenient in performing the analyses.

Industry. Industry dummies are included in order to test for differences between industries. The dummy variables are dummy coded based on their SIC code, which was rounded on its first digit. This approach has been checked with a robustness check as will be demonstrated later in the results. The process of dummy coding resulted in a total of 7 industry dummy variables. Year. Year dummies are included in the regression to control for year-specific effects. The sample includes the years 2004 till 2014 and therefore 11 dummy variables were created.

Analytical method

In order to be able to answer the formulated research questions and find support for the hypotheses, this research is of quantitative nature. A hierarchical linear regression model has been used since this model is able to predict the values of a continuous response variable by using explanatory variables as well as to predict the strength of relationships between the variables (Hutcheson, 2011). Moreover, a hierarchical linear regression model tests the advancements in the separate models which can demonstrate a significant effect in support for the formulated hypotheses (Raudenbush, 1988). Both regression analysis and moderation analysis are executed by performing the Andrew Hayes RLM Macro version 1.01 in SPSS in order to report the Heteroscedasticity-Consistent Standard Error.

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Before running the regression analysis, certain assumptions have to be met and should also be reported to overcome a situation in which research presents surprising results that are questionable in their validity (Osborne & Waters, 2002; Poole & O'Farrell, 1971). First of all, there should be a linear relationship between the independent and dependent variables (Osborne & Waters, 2002). This will be tested by drawing a scatterplot for the standardized independent and dependent variables.

The output in SPSS should roughly demonstrate a linear graph, as is the case in Appendix C. In a similar vein, a graph for homoscedasticity was added to Appendix C. This second assumption tests whether the variance of errors is the same for all values and thus whether no heteroscedasticity exists. Ideally, the dots are placed in the graph without an obvious pattern (Osborne & Waters, 2002; Hayes & Cai, 2007). However, when examining the graph we must conclude that heteroscedasticity exists since the already low variability of the residuals decreases (Rosopa, Schaffer & Schroeder, 2013). Therefore, one can argue that the assumption of homoscedasticity does not hold which should be reported as a limitation of this study. To minimize the effects of heteroscedasticity, the recommendations described by Hayes & Cai (2007) were followed. A regression analysis will still be executed but the standard errors will be estimated in an alternative way that does not assume homoscedasticity. Therefore, in this research, we will make use of the Andrew Hayes RLM Macro version 1.01 in SPSS to run the regression and moderation analysis. This test allows to report the Heteroscedasticity-Consistent Standard Error instead of the usual standard error.

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Another moderate and significant correlation exists between the control variables age and tenure (r=0.371). Both variables might be related to each other because tenure evolves over time and the longer you are in the company the higher your age will become. Hence, the VIF factors in combination with the correlation matrix serve as evidence for the absence of multicollinearity issues.

Finally, the lagged dependent variable (ROA) has been checked for outliers by calculating Z-scores for the outputs of ROA. As a result, outlier values were detected and were replaced by the maximum outlier value.

RESULTS

In this section, the results of the statistical analyses will be demonstrated. First, the descriptive statistics will be illustrated. Second, the regression results will be revealed in order to be able to determine whether the hypotheses find support or not.

Descriptive Statistics

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19 Table II. Descriptive Statistics

Variables N Minimum Maximum Mean SD

Dependent variable ROA 2056 -2530.076 2539.676 -344.947 426.052 Independent variable Amount of directors with political experience 1703 0 15 2.410 2.404 Moderating variable State Capacity 1703 3.150 6.875 6.164 0.978 Control variables Board Size 1703 3 24 10.890 2.979 Board Tenure 1523 0 21 5.715 3.417 Board Age 1449 39.667 72.133 56.559 5.124

Firm Size (log) 1149 1.732 5.599 4.101 0.588

Valid N (listwise) 836

Regression results

Table III presents the results of the conducted linear regression analysis via the Andrew Hayes RLM Macro version 1.01 in SPSS with ROA as the lagged dependent variable. A linear regression model has been computed by including control variables as well as dummy variables for year and industry. This resulted in a total of 4 different models of which the corresponding standardized coefficients, heteroscedasticity-consistent standard errors and significance levels were demonstrated.

In model 1 only the control variables are included to test for the explanatory power of the control variables. The R-square in model 1 is 0.1267 and the adjusted R-Square is 0.1075. The control variables Board Tenure and Firm Size both remain significant throughout all models (p < 0.05). Board Size demonstrated significant results (p < 0.10) for all models except for model 3. Board age showed insignificant results for all models.

To check whether hypothesis 1 can be supported, model 2 should be examined in which the independent variable was added to the control variables in the regression analysis. The findings demonstrate that the influence of the number of directors on the board with political experience on firm performance is negative and insignificant. Also, the R-square increases minimally towards 0.1269 and the adjusted R-square decreases to 0.1066. Hypothesis 1 predicted a positive relationship and should thus be rejected.

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the main effect. The moderating variable is positive and insignificant and demonstrates small explanatory power since the R-square value minimally increases towards 0.128.

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21 Table III. Hierarchical Regression Analysis

Variables Model 1 Model 2 Model 3 Model 4

Amount of directors with political experience -0.0160 (0.0179) -0.0202 (0.0180) -0.0335 (0.0188)

State Capacity 0.0341 (0.0183) 0.0063 (0.0181)

Interaction

Amount of directors with political experience x State Capacity -0.0837 (0.0213)** Control variables Board Size -0.0752 (0.0063)** -0.0693 (0.0071)* -0.0640 (0.0073) -0.0684 (0.0072)* Board Tenure -0.1064 (0.0053)*** -0.01100 (0.0054)*** -0.1072 (0.056)*** -0.0909 (0.0060)** Board Age 0.0012 (0.0033) 0.0037 (0.0034) 0.0066 (0.0035) 0.0097 (0.0035) Firm Size 0.1043 (0.0356)*** 0.1051 (0.0358)*** 0.0970 (0.0380)** 0.1127 (0.0379)*** Dummy variables

Industry Dummies Yes Yes Yes Yes

Year Dummies Yes Yes Yes Yes

Constant 0.1295 (0.2720) 0.1011 (0.2899) 0.0985 (0.2909) 0.0061 (0.2970)

R Square 0.1267 0.1269 0.1279 0.1330

Adjusted R² 0.1075 0.1066 0.1065 0.1106

F-Statistics 10.1051*** 9.7624*** 9.4149*** 8.8885***

N 836 836 836 836

Notes: Heteroscedasticity-Consistent Standard errors between parentheses

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22 Robustness checks

Multiple robustness checks were executed to check the behavior of the regression coefficients when internal factors are modified. The robustness checks will be performed in three different ways. These three alternative measurements were chosen for the dependent, independent and control variables in order to increase the structural validity of the results (Lu & White, 2014). First of all, the independent variable will be calculated in an alternative way by transforming the variable into a nominal variable. If a board incorporates at least one politically experienced director, a value of “1” will be given, if a board does not have any politically experienced directors at all, the value will be “0”. This to check whether the results would change if we only check for the existence instead of also the amount of politically experienced directors. Appendix D demonstrates that the results change drastically. After the independent variable is replaced in our analysis, the main effect as well as the moderating variable becomes significant (p < 0.05). The interaction effect now demonstrates insignificant results.

As a second check for robustness, one of the control variables will be measured in an alternative way. The industry SIC codes were rounded on their first digit in the initial regression analysis. To check for robustness, the SIC codes were now rounded on their first two digits which resulted in two additional industry classifications for the same amount of firms. The results in Appendix E demonstrate that the main effect remains insignificant and the interaction effect remains significant (p <0.05).

The final check for robustness will incorporate an alternative measurement for the dependent variable (ROA). The ROA will now be lagged with two years to test whether the results would also hold if the performance was measured two years after the observation of the other variables. The results in Appendix F demonstrate that the main effect remains insignificant and the moderation effect remains negative and significant (p < 0.05). The sample size decreases to a total of 779 firms.

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DISCUSSION

In this study, the institutional context has been taken into account to come to new insights about the consequences for firm performance when assigning politically experienced directors to the board in different institutional contexts. Therefore, this research has led to several theoretical implications which will be discussed in this section. After that, the practical implications will be discussed. Finally, avenues for further research will be described.

Theoretical implications

Firstly, this research used and complemented arguments from social capital theory as well as resource dependency theory to propose that assigning directors to the board with political experience positively influences one firm’s performance. Contrary to these expectations, this study did not find a significant improvement in firm performance for firms with politically experienced directors. Instead, the results demonstrated an insignificant negative relationship. Therefore, this research makes an important contribution to earlier findings in academic literature that demonstrated positive significant results (Hillman, Zardkoohi & Bierman, 1999; Li et al., 2008). In general, it is impossible to argue that the results either exhibit non-existence of relationships or are the outcome of an ineffectively executed methodological approach. However, some viable explanations could be derived from academic literature to provide a more detailed context for the findings.

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findings might serve as a contribution to resource dependency theorists in order to broaden the scope when examining the relationship between politically experienced directors and firm performance. Namely, to become better able to determine the value of politically experienced directors, resource dependency theorists might not examine the relationship as one-way interaction but rather apply a market exchange perspective in which both parties receive and deliver resources from the other party. Also, future research can play an important role in empirically testing and describing this two-way interaction.

Another possible explanation for finding a negative insignificant result for the main effect could be that the political process is too complicated for the majority of the firms to reap the benefits of having a politically experienced director on the board (Hillman, Zardkoohi & Bierman, 1999). On top of that, for those firms that understand the complex political process, it remains questionable whether these firms can have enough influence to shape the outcomes of the processes. Further research should examine these processes in more detail.

Second, this research examined the contingent effect of the institutional environment in the relationship between assigning politically experienced directors and firm performance. By including the variable state capacity, derived from Guillén & Capron (2016), this research did a first attempt to test the contingent value of one country’s abilities in specific policy-making processes. State capacity, defined as “the states’ administrative abilities to formulate and implement policy goals, especially over the actual or potential opposition of powerful social groups” encapsulates important political processes that were described by resource dependency theorists. The processes of formulating and implementing policies are exactly these processes that the corporate firm tries to enter, understand and ultimately shape to its advantage (Salamon & Seigfried, 1977; Pfeffer, 1972; De Figueiredo and Silverman 2006).

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rather unexplored issue. Therefore, this research contributes to institutional theory by presenting empirical evidence for the contingent effect of policy-making processes in the proposed relationship between politically experienced directors and firm performance. The results demonstrated that for lower levels of state capacity, the effect of having politically experienced directors on firm performance became more positive whereas for higher levels of state capacity the influence of politically experienced directors on firm performance decreased. The rationale for the significant moderating effect of state capacity could be that information-processing needs increase in weaker institutional contexts to be better able to understand the political environment (You & Du 2012; Dess & Beard, 1984). Since the politically experienced director was described by resource dependency theory as a tool to communicate with and better understand the political environment, the value of having politically experienced directors could be higher in lower state capacity contexts (Hillman, 2005; Sheng, Zhou & Li, 2011). Moreover, in a low-level state capacity context, there is expected to be more potential to influence government decisions (Li, He, Lan & Liu, 2012; Li, et al., 2008).

In countries with more developed institutions, the rationale for finding a significant moderating effect for state capacity could be that due to the well-shaped and formalized institutions, the government is better able to extract persons from their loyalties towards contacts outside the political process (Guillén & Capron, 2016; Li, He, Lan & Liu, 2012; Li, et al., 2008).

Overall, this research contributed to literature so far by re-investigating the influence politically experienced directors have on firm performance by making use of more recent panel data in the Asian emerging market context. Next to that, by testing more accurately the contingent effect of the abilities of a country, this research generated fresh insight for future research about the institutional context of the proposed main effect. The political environment was frequently described by resource dependency theorists as crucial for deriving benefits from having politically experienced directors on the board (Salamon & Seigfried, 1977; Pfeffer, 1972; De Figueiredo and Silverman 2006). This research found support for this idea by demonstrating that the value of politically experienced directors on the board depends on the institutional environment.

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Therefore, one can argue that it makes a difference to examine also the total amount of politically experienced directors on the board, instead of exclusively measuring whether there is at least one politically experienced director or not. This could be an important avenue for further research to further examine these relationships. Next to that, the second and third conducted robustness tests demonstrated that recoding the industry SIC codes and lagging the dependent variable with two years, does not significantly change the results of this study. Therefore, these robustness checks contribute to the reliability of the findings.

Although overall the explanatory power increased throughout the different models, the R-squared values, ranging from 0.1267 till 0.1330, are not high. One possible explanation for this could be that numerous endogenous and exogenous factors influence a firm's performance (Capon, Farley & Hoenig, 1990; Hansen & Wernerfelt, 1989; Mirza & Javed, 2013. In that context, Capon, Farley & Hoenig (1990) divide these factors into three categories by mentioning that a variety of environmental, strategic and organizational factors influence firm performance. This variety of factors influencing firm performance can be a viable explanation of having lower R-squared values.

Practical implications

Besides the theoretical implications, this research also makes important practical implications. First, it might be of importance to consider the absence of a significant positive relationship between having politically experienced directors and firm performance. Although this research is not able to reliably exhibit that no relationship exists, the results suggest that assigning politically experienced directors to the board does not lead to an increase in firm performance. This results in an important practical implication for firms hunting for directors who contribute to their performance. These firms might be cautious in assigning directors with political experience since it is questionable whether these directors will be able to bring the resources related to their political experience into the firm. Since this research demonstrated insignificant results for the main effect, firms should not overestimate the value politically experienced directors can bring into the firm.

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firms should consider their institutional environment as an important exogenous factor that influences the value of having politically experienced directors on the board. Therefore, this research answered the recommendations for further research by providing a more detailed institutional context for firms that consider assigning a director with political experience to the board (Peng, 2003; Lawton, McGuire & Rajwani, 2013; Sun, Mellahi & Wright 2012).

Limitations and Further Research Directions

Despite these findings, this study has certain limitations that should be taken into account when interpreting and generalizing these results. These limitations allow for suggestions regarding future research. First of all, this study was built upon social capital theory and resource dependency theory as complements for which we argued that politically experienced directors function as a ‘bridge’ between the firm and the institutional environment. In an attempt to argue for a positive relationship between politically experienced directors and firm performance, we mainly focused on the resources that flow into the company, as described by resource dependency theorists (Hillman, Zardkoohi & Bierman, 1999; Hillman, 2005; Sheng, Zhou & Li, 2011; Pfeffer, 1972; Suchman, 1995). The rejection of the main effect in combination with this narrow focus leads towards an important role for future research to empirically investigate the liabilities for the firm in a two-way interaction with the government (Sun, Mellahi & Wright, 2012). On top of that, further research could investigate the complexity of the policy-making process as well. This to become able to conclude whether politically experienced directors are able to get access to, to understand and ultimately shape policy-making processes.

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Third, due to time constraints for this research, a simple linear regression analysis has been executed. With that regard, one must admit that this research is a first indication and future research should apply different approaches such as fixed or random panel regression in Stata or a Generalized Method of Moment (GMM) model since these approaches might have a better fit with the data. Where fixed-effect models assume that a correlation exists between individual effects and explanatory variables, random effect models do not assume this correlation (Schmidheiny & Basel, 2011). On top of that, random effect models apply estimators using both within and between-group variations. Therefore, to overcome potential issues of heterogeneity, future research should execute a Hausman test to determine whether random or fixed effect models are most appropriate in this situation (Bell & Jones, 2015). Next to that, the GMM model introduced by Hansen (1982) could be suitable in this situation. By applying the GMM model, potential issues of endogeneity are reduced since it is based on instrumental variables estimation and makes use of lags of the variables as estimators (Roodman, 2009). On top of that, this research reported that heteroscedasticity could be present in the sample. Therefore, applying the GMM model could be legitimate as well (Baum, Schaffer & Stillman, 2003; Oehmichen et al., 2017). Thus, a random effect or GMM model might demonstrate a better fit with this kind of research and therefore could lead to important further insights that could not have been derived from this research.

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CONCLUSION

This research aimed to investigate the relationship between having politically experienced directors on the board and firm performance. On top of that, the institutional abilities on the country-level were investigated as a moderator to increase our understanding of the institutional context in the proposed main effect. Therefore, this thesis tends to answer the following research questions: “How do directors with political experience shape firm performance? And how does state capacity moderate this relationship?”

To provide answers to these questions, academic literature from social capital theory and resource dependency theory was used to back up our hypotheses. Subsequently, the relationships were analyzed by receiving and extending panel data comprising 836 firms in the Asian Emerging Market context. The results of this research demonstrate that no empirical evidence could be found for the assumption that the amount of politically experienced directors has a positive impact on firm performance. Therefore, this research provided fruitful insights for academic literature to empirically investigate the proposed relationship as a two-way interaction since the described ‘bridge’ earlier in this study might be walked upon in both directions. More practically, the appointment of directors with political experience might not be seen as the universal solution to realize higher financial performance. On top of that, this research found that state capacity negatively moderates the proposed main effect and therefore is an important factor for firms to take into account in their decision-making when considering to assign a politically experienced director.

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APPENDICES

APPENDIX A: State capacity variable index legal provisions

This list of legal provisions was taken from the article of Guillén & Capron (2016: 137).

Legal provision Description

1. Powers of the general meeting for de facto changes

Equals 1 if the sale of more than 50% of the company’s assets requires approval of the general meeting; equals 0.5 if the sale of more than 80% of the assets requires approval; otherwise, it equals 0

2. Agenda-setting power Equals 1 if shareholders who hold 1% or less of the capital can put an item on the agenda; equals 0.75 if there is a hurdle of more than 1% but not more than 3%; equals 0.5 if there is a hurdle of more than 3% but not more than 5%; equals 0.25 if there is a hurdle of more than 5% but not more than 10%; otherwise, it equals 0.

3. Anticipation of shareholder decision facilitated

Equals 1 if (1) postal voting is possible or (2) proxy solicitation with two-way voting proxy form 27 has to be provided by the company (i.e., the directors or managers); equals 0.5 if (1) postal voting is possible if provided in the articles or allowed by the directors or (2) the company has to provide a two-way proxy form but not proxy solicitation; otherwise, it equals 0.

4. Prohibition of multiple voting rights (super voting rights)

Equals 1 if there is a prohibition of multiple voting rights; equals 2/3 if only companies that already have multiple voting rights can keep them; equals 1/3 if state approval is necessary; otherwise, it equals 0, except if there are several of these rules without total prohibition, in which case it equals 0.5

5. Independent board members

Equals 1 if at least half of the board members must be independent; equals 0.5 if 25% of them must be independent; otherwise, it equals 0.

6. Feasibility of directors’ dismissal

Equals 0 if good reason is required for the dismissal of directors; equals 0.25 if directors can always be dismissed but are always compensated for dismissal without good reason; equals 0.5 if directors are not always compensated for dismissal without good reason, but they could have concluded a non-fixed-term contract with the company; equals 0.75 if, in cases of dismissal without good reason, directors are compensated only if compensation is specifically

contractually agreed; equals 1 if there are no special requirements for dismissal and no compensation has to be paid. Note: If there is a statutory limit on the amount of compensation, this can lead to a higher score.

7. Private enforcement of directors’ duties (derivative suit)

Equals 0 if this is typically excluded (e.g., because of a strict subsidiarity requirement or hurdle which is at least 20%); equals 0.5 if there are some restrictions (e.g., certain percentage of share capital; demand requirement); equals 1 if private enforcement of directors’ duties is readily possible. 8. Shareholder action

against resolutions of the general meeting

Equals 1 if every shareholder can file a claim against a resolution by the general meeting; equals 0.5 if there is a threshold of 10% voting rights; equals 0 if this kind of shareholder action does not exist.

9. Mandatory bid Equals 1 if there is a mandatory public bid for the entirety of shares in case of purchase of 30% or 1/3 of the shares; equals 0.5 if the mandatory bid is triggered at a higher percentage (e.g., 40% or 50%); also equals 0.5 if there is a mandatory bid but the bidder is only required to buy part of the shares; equals 0 if there is no mandatory bid at all.

10. Disclosure of major share ownership

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39 APPENDIX B: Regression assumptions

Linearity

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Multicollinearity

VIF Factors

Variables VIF 1/VIF

Board Size 1.269 .788

Board Tenure 1.308 .765

Board Age 1.250 .800

Firm Size 1.148 .871

Amount of directors with political experience 1.354 .739

State Capacity 1.298 .770

Interaction Effect 1.256 .796

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Multicollinearity

Pearson Zero-Order correlations

Variables 1. 2. 3. 4. 5. 6. 7. 8. (1) ROA 1.00 (2) Board Size -0.028 1.00 (3) Board Tenure -0.027 -0.080 1.00 (4) Board Age -0.055 0.081** 0.371** 1.00 (5) Firm Size 0.077* 0.137** 0.012 0.040 1.00 (6) Amount of directors with political experience

0.021 0.333** -0.185** 0.164** 0.065* 1.00

(7) State Capacity 0.089** -0.136** -0.079** -0.150** 0.183** 0.045 1.00

(8) Interaction Effect -0.082** -0.034 0.122** 0.092** 0.092** -0.075** -0.267** 1.00

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APPENDIX C: State capacity index scores per country per year State capacity index scores were derived from Guillén & Capron (2016)2

Country Year Index score

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APPENDIX D: Robustness Check with politically experienced directors as a nominal variable

Amount of directors with political experience -0.0593 (0.0357)** -0.0650 (0.0353)** -0.0669 (0.0351)**

State Capacity 0.0409 (0.0183) 0.1025 (0.0317)*

Interaction

Amount of directors with political experience x State Capacity -0.0756 (0.0354) Control variables Board Size -0.0752 (0.0063)** -0.0597 (0.0067) -0.0536 (0.0069) -0.0556 (0.0068) Board Tenure -0.1064 (0.0053)*** -0.1145 (0.0055)*** -0.1107 (0.0057)*** -0.1026 (0.0061)*** Board Age 0.0012 (0.0033) 0.0130 (0.0034) 0.0168 (0.0034) 0.0182 (0.0034) Firm Size 0.1043 (0.0356)*** 0.0995 (0.0351)** 0.0891 (0.0374)** 0.0944 (0.0376)** Dummy variables

Constant -0.0752 (0.2720) -0.0597 (0.2723) 0.0845 (0.2770) 0.0845 (0.2770)

R Square 0.1267 0.1297 0.1326 0.1326

Adjusted R² 0.1075 0.1094 0.1102 0.1102

F-Statistics 10.1051*** 9.9838*** 9.2056*** 9.2056***

N 836 836 836 836

Notes: Heteroscedasticity-Consistent Standard Error between parentheses

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44 APPENDIX E: Robustness check with recoded SIC codes

Amount of directors with political experience -0.0502 (0.0186) -0.0532 (0.0188) -0.0647 (0.0196)*

State Capacity 0.0293 (0.0180) 0.0049 (0.0181)

Interaction

Amount of directors with political experience x State Capacity -0.0742 (0.0212)** Control variables Board Size -0.0599 (0.0068) -0.0422 (0.0075) -0.0378 (0.0077) -0.0404 (0.0076) Board Tenure -0.1023(0.0057)*** -0.1118 (0.0057)*** -0.1097 (0.0059)*** -0.0953 (0.0063)** Board Age -0.0060 (0.0035) 0.0009 (0.0036) 0.0040 (0.0036) 0.0047 (0.0036) Firm Size 0.0850 (0.0367) ** 0.0883 (0.0370)** 0.0810 (0.0390)** 0.0943 (0.0389)** Dummy variables

Constant 0.1537 (0.2759) 0.0672 (0.2945) 0.0655 (0.2954) -0.0138 (0.2999)

R Square 0.1070 0.1087 0.1094 0.1134

Adjusted R² 0.0862 0.0868 0.0864 0.0894

F-Statistics 7.8075*** 7.5272*** 7.1914*** 6.8426***

N 836 836 836 836

Notes: Heteroscedasticity-Consistent Standard Error errors between parentheses

Are politically experienced directors an important resource for the firm? Institutional environment as a moderator