Political and Government Connections on Corporate Boards in Australia
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This may be the author’s version of a work that was submitted/accepted
for publication in the following source:
Gray, Stephen, Harymawan, Iman, & Nowland, John
(2016)
Political and government connections on corporate boards in Australia:
Good for business?
Australian Journal of Management, 41(1), pp. 3-26.
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be identified by an absence of publisher branding and/or typeset appear-
ance. If there is any doubt, please refer to the published source.
https://doi.org/10.1177/0312896214535788
for publication in the following source:
Gray, Stephen, Harymawan, Iman, & Nowland, John
(2016)
Political and government connections on corporate boards in Australia:
Good for business?
Australian Journal of Management, 41(1), pp. 3-26.
This file was downloaded from: https://eprints.qut.edu.au/105094/
c© Consult author(s) regarding copyright matters
This work is covered by copyright. Unless the document is being made available under a
Creative Commons Licence, you must assume that re-use is limited to personal use and
that permission from the copyright owner must be obtained for all other uses. If the docu-
ment is available under a Creative Commons License (or other specified license) then refer
to the Licence for details of permitted re-use. It is a condition of access that users recog-
nise and abide by the legal requirements associated with these rights. If you believe that
this work infringes copyright please provide details by email to qut.copyright@qut.edu.au
Notice: Please note that this document may not be the Version of Record
(i.e. published version) of the work. Author manuscript versions (as Sub-
mitted for peer review or as Accepted for publication after peer review) can
be identified by an absence of publisher branding and/or typeset appear-
ance. If there is any doubt, please refer to the published source.
https://doi.org/10.1177/0312896214535788
1
Political and government connections on corporate boards in
Australia: Good for business?
Abstract
International studies suggest that directors with political connections provide significant
benefits to shareholders. Yet, whether this is the case in the political and business
environment in Australia is unknown. In this study, we examine the prevalence of former
politicians as non-executive directors in ASX-listed companies and the market reaction to
their appointment. In our sample of 1,561 companies in 2007, we find that former federal,
state, local and foreign politicians hold directorships in 5.32% of firms. Our event study
of new director appointments shows that the market reaction to the appointment of
former politicians is significantly lower than non-politicians. This indicates that
shareholders do not value the expertise that former politicians bring to corporate boards
in Australia, particularly when their political parties are not in power and when they have
less political and director experience. In summary, we find no evidence that former
politician directors possess valuable political connections in Australia.
Keywords
board of directors, director appointments, director experience, politicians, political
connections.
JEL codes
G34, G14, D72.
Political and government connections on corporate boards in
Australia: Good for business?
Abstract
International studies suggest that directors with political connections provide significant
benefits to shareholders. Yet, whether this is the case in the political and business
environment in Australia is unknown. In this study, we examine the prevalence of former
politicians as non-executive directors in ASX-listed companies and the market reaction to
their appointment. In our sample of 1,561 companies in 2007, we find that former federal,
state, local and foreign politicians hold directorships in 5.32% of firms. Our event study
of new director appointments shows that the market reaction to the appointment of
former politicians is significantly lower than non-politicians. This indicates that
shareholders do not value the expertise that former politicians bring to corporate boards
in Australia, particularly when their political parties are not in power and when they have
less political and director experience. In summary, we find no evidence that former
politician directors possess valuable political connections in Australia.
Keywords
board of directors, director appointments, director experience, politicians, political
connections.
JEL codes
G34, G14, D72.
2
Introduction
Following their terms in office, several high-profile politicians have obtained
directorships in Australian Stock Exchange (ASX) listed companies. This includes a
former prime minister (Keating), leaders of the opposition (e.g. Hewson, Peacock) and
state premiers (e.g. Borbidge, Brown, Goss, Greiner, Kennett, Wran). The results of
international studies suggest that directors with political connections can provide
significant benefits to shareholders (e.g. Agrawal and Knoeber, 2001; Faccio, 2006;
Goldman et al., 2009; Hillman, 2005). However, how many former politicians hold
directorships in ASX-listed companies and whether shareholders value the expertise that
politicians bring to boards of directors in the political and business environment in
Australia is unknown.
Prior studies of corporate boards in Australia have focused on the independence,
financial expertise, gender, experience and interlocking directorships of directors (Adams
et al., 2011; Aldamen et al., 2012; Balatbat et al., 2004; Christensen et al., 2010; Cotter
and Silvester, 2003; Gray and Nowland, 2013; Kiel and Nicholson, 2006; Wang and
Oliver, 2009). Further examination of the types of expertise present on corporate boards
is needed to ensure boards “comprise directors possessing an appropriate range of skills
and expertise” (ASX 2010, page 19). Since a number of recent media articles have
highlighted the existence (and questioned the usefulness) of former politicians as
corporate directors in Australia, this study focuses on this specific type of director
expertise.1
1 “Profile: From cabinet to boardroom” in Company Director Magazine, 1 December 2011; “Downer,
Brumby join Huawei board” in The Northern Star, 6 June 2011; “Parliament may back ban on former
politicians serving on boards” in The Australian, 23 November 2010; “Life after politics” in Company
Director Magazine, 1 August 2008.
Introduction
Following their terms in office, several high-profile politicians have obtained
directorships in Australian Stock Exchange (ASX) listed companies. This includes a
former prime minister (Keating), leaders of the opposition (e.g. Hewson, Peacock) and
state premiers (e.g. Borbidge, Brown, Goss, Greiner, Kennett, Wran). The results of
international studies suggest that directors with political connections can provide
significant benefits to shareholders (e.g. Agrawal and Knoeber, 2001; Faccio, 2006;
Goldman et al., 2009; Hillman, 2005). However, how many former politicians hold
directorships in ASX-listed companies and whether shareholders value the expertise that
politicians bring to boards of directors in the political and business environment in
Australia is unknown.
Prior studies of corporate boards in Australia have focused on the independence,
financial expertise, gender, experience and interlocking directorships of directors (Adams
et al., 2011; Aldamen et al., 2012; Balatbat et al., 2004; Christensen et al., 2010; Cotter
and Silvester, 2003; Gray and Nowland, 2013; Kiel and Nicholson, 2006; Wang and
Oliver, 2009). Further examination of the types of expertise present on corporate boards
is needed to ensure boards “comprise directors possessing an appropriate range of skills
and expertise” (ASX 2010, page 19). Since a number of recent media articles have
highlighted the existence (and questioned the usefulness) of former politicians as
corporate directors in Australia, this study focuses on this specific type of director
expertise.1
1 “Profile: From cabinet to boardroom” in Company Director Magazine, 1 December 2011; “Downer,
Brumby join Huawei board” in The Northern Star, 6 June 2011; “Parliament may back ban on former
politicians serving on boards” in The Australian, 23 November 2010; “Life after politics” in Company
Director Magazine, 1 August 2008.
3
International studies have examined the benefits and costs to firms of political
connections in different markets, such as China, Indonesia, Malaysia, Pakistan and the
United States. Theoretically, Hillman (2005) proposes that directors with political
experience can help firms to better understand the public policy process, provide a direct
channel to existing politicians, bureaucrats and decision makers that may result in
influence over political decisions, and provide legitimacy by associating their reputation
and status with the firm. Empirically, studies show that firms generally benefit from
political connections as they help firms to win government contracts and concessions,
and access external financing (Agrawal and Knoeber, 2001; Backman, 2001; Claessens et
al., 2008; Cull and Xu, 2005; Faccio et al., 2006; Goldman et al., 2011; Johnson and
Mitton, 2003; Karpoff et al., 1999; Khwaja and Mian, 2005). In this study, we are
interested in whether directors with political connections are expected to provide similar
benefits to their firms in the political and business environment in Australia.
This study makes a number of contributions, relevant to academic research and
practitioners. We are the first to examine the prevalence of former politicians as corporate
directors in Australia. In our sample of 1,561 ASX-listed companies in 2007, we find a
total of 84 directorships held by 59 former politicians in 83 companies. This includes 26
directorships held by 18 former federal politicians (prime minister, ministers and
members of parliament), 40 directorships held by 24 former state politicians (premiers,
ministers and members of parliament), 8 directorships held by 7 former local politicians
(mayors and councillors) and 10 directorships held by former foreign politicians (from
Botswana, Mexico, Philippines, Papua New Guinea, Singapore, South Africa, Spain,
United Kingdom and United States).
International studies have examined the benefits and costs to firms of political
connections in different markets, such as China, Indonesia, Malaysia, Pakistan and the
United States. Theoretically, Hillman (2005) proposes that directors with political
experience can help firms to better understand the public policy process, provide a direct
channel to existing politicians, bureaucrats and decision makers that may result in
influence over political decisions, and provide legitimacy by associating their reputation
and status with the firm. Empirically, studies show that firms generally benefit from
political connections as they help firms to win government contracts and concessions,
and access external financing (Agrawal and Knoeber, 2001; Backman, 2001; Claessens et
al., 2008; Cull and Xu, 2005; Faccio et al., 2006; Goldman et al., 2011; Johnson and
Mitton, 2003; Karpoff et al., 1999; Khwaja and Mian, 2005). In this study, we are
interested in whether directors with political connections are expected to provide similar
benefits to their firms in the political and business environment in Australia.
This study makes a number of contributions, relevant to academic research and
practitioners. We are the first to examine the prevalence of former politicians as corporate
directors in Australia. In our sample of 1,561 ASX-listed companies in 2007, we find a
total of 84 directorships held by 59 former politicians in 83 companies. This includes 26
directorships held by 18 former federal politicians (prime minister, ministers and
members of parliament), 40 directorships held by 24 former state politicians (premiers,
ministers and members of parliament), 8 directorships held by 7 former local politicians
(mayors and councillors) and 10 directorships held by former foreign politicians (from
Botswana, Mexico, Philippines, Papua New Guinea, Singapore, South Africa, Spain,
United Kingdom and United States).
4
We extend prior studies on board composition in Australia by examining which
types of companies have former politicians on their boards. Based on prior international
studies, we expect that former politicians are more likely to be on the boards of firms in
government-related industries (as they may assist with government negotiations and
obtaining government contracts), firms with more debt (as they may facilitate access to
credit) and bigger firms (as they may assist with the more intensive political oversight of
larger firms). We find that former politicians are more likely to be found on the boards of
companies with more debt, but not in bigger firms or in government-related industries.
We examine the market reaction to the appointment of former politicians to
determine whether shareholders value the expertise that former politicians bring to
corporate boards in Australia. We find there is generally an insignificant market reaction
to the appointment of former politicians, but the market reaction for former politicians is
significantly lower than for non-politicians. This is inconsistent with the positive market
reaction found in most prior international studies and indicates that shareholders do not
value the expertise that former politicians bring to corporate boards in Australia. Further
analysis shows that this is particularly the case when their political parties are not in
power and when they have less political and director experience.
From an international perspective we provide new evidence on two dimensions of
political connections. We specifically focus on directorships held by former elected
politicians. Prior studies have used a broader definition of politically-connected directors
that also includes individuals with experience in government administration, government
agencies, ambassadors, employees of political parties and election campaign staff
(Agrawal and Knoeber, 2001; Goldman et al., 2009). Our results indicate that
We extend prior studies on board composition in Australia by examining which
types of companies have former politicians on their boards. Based on prior international
studies, we expect that former politicians are more likely to be on the boards of firms in
government-related industries (as they may assist with government negotiations and
obtaining government contracts), firms with more debt (as they may facilitate access to
credit) and bigger firms (as they may assist with the more intensive political oversight of
larger firms). We find that former politicians are more likely to be found on the boards of
companies with more debt, but not in bigger firms or in government-related industries.
We examine the market reaction to the appointment of former politicians to
determine whether shareholders value the expertise that former politicians bring to
corporate boards in Australia. We find there is generally an insignificant market reaction
to the appointment of former politicians, but the market reaction for former politicians is
significantly lower than for non-politicians. This is inconsistent with the positive market
reaction found in most prior international studies and indicates that shareholders do not
value the expertise that former politicians bring to corporate boards in Australia. Further
analysis shows that this is particularly the case when their political parties are not in
power and when they have less political and director experience.
From an international perspective we provide new evidence on two dimensions of
political connections. We specifically focus on directorships held by former elected
politicians. Prior studies have used a broader definition of politically-connected directors
that also includes individuals with experience in government administration, government
agencies, ambassadors, employees of political parties and election campaign staff
(Agrawal and Knoeber, 2001; Goldman et al., 2009). Our results indicate that
5
shareholders react negatively to the appointment of former elected politicians as directors.
In addition, we are the first to focus on political connections in the political and business
environment in Australia. We find no evidence of valuable political connections in
Australia, a market where there is public funding of election campaigns and low levels of
political lobbying and corruption.
Politics in Australia
There are three levels of government in Australia. The federal government is a
constitutional parliamentary democracy with Australian citizens electing parliamentarians
to the federal parliament, which includes both a House of Representatives and a Senate.
The party or coalition of parties that controls the majority of seats in the House of
Representatives forms the government, appoints Ministers from their elected
parliamentarians and their party leader is the Prime Minister of Australia. The political
systems of Australia’s six states and two territories are structured in a similar way to the
federal government. Five of the six states have their own bicameral parliaments. Only the
state of Queensland and the two territories have unicameral parliaments. Premiers are the
heads of the state parliaments (Chief Minister in the two Territories). Local governments
are the third tier of government and consist of elected councillors. Mayors are the heads
of local governments. The main political parties in Australia are the Australian Labor
Party, Liberal Party of Australia and National Party of Australia. In most jurisdictions
these latter two parties co-operate and are known as the Coalition.
Australia is a developed country, with a common law legal origin and scores
highly on World Bank governance indicators – rule of law (96.2 percentile), regulatory
shareholders react negatively to the appointment of former elected politicians as directors.
In addition, we are the first to focus on political connections in the political and business
environment in Australia. We find no evidence of valuable political connections in
Australia, a market where there is public funding of election campaigns and low levels of
political lobbying and corruption.
Politics in Australia
There are three levels of government in Australia. The federal government is a
constitutional parliamentary democracy with Australian citizens electing parliamentarians
to the federal parliament, which includes both a House of Representatives and a Senate.
The party or coalition of parties that controls the majority of seats in the House of
Representatives forms the government, appoints Ministers from their elected
parliamentarians and their party leader is the Prime Minister of Australia. The political
systems of Australia’s six states and two territories are structured in a similar way to the
federal government. Five of the six states have their own bicameral parliaments. Only the
state of Queensland and the two territories have unicameral parliaments. Premiers are the
heads of the state parliaments (Chief Minister in the two Territories). Local governments
are the third tier of government and consist of elected councillors. Mayors are the heads
of local governments. The main political parties in Australia are the Australian Labor
Party, Liberal Party of Australia and National Party of Australia. In most jurisdictions
these latter two parties co-operate and are known as the Coalition.
Australia is a developed country, with a common law legal origin and scores
highly on World Bank governance indicators – rule of law (96.2 percentile), regulatory
6
quality (96.7 percentile), control of corruption (96.7 percentile) and government
effectiveness (95.3 percentile). These measures compare favourably to those of the
United States (91.1, 91.9, 85.8 and 88.6).2 Based on World Bank statistics, Australia’s
government expenditure is 26.2 percent of GDP, relative to 25.9 percent for the US.
Australia has similar restrictions on the share ownership and directorships of politicians
to the United States (Faccio, 2006). Politicians are not allowed to hold corporate
directorships while in office and must disclose their share ownership and changes in
share ownership during their terms in office.
One major difference between politics in Australia and the United States, however,
is the reliance of political candidates and parties in the United States on private funding.
Since 1984, elections have been at least partially funded by the government in Australia,
with candidates and parties polling at least 4 percent of the primary vote receiving $2.31
per vote in the 2010 federal election (13,131,667 votes were cast). Political parties in
Australia also receive private donations, with the federal Labor and Liberal parties
receiving $37 million and $30 million in 2010-2011.3 However, this hardly compares to
the estimated US$2.38 billion raised from private donors by the Democrat and
Republican presidential candidates for the US presidential election in 2012.4 Political
lobbying is also substantially greater in the United States. In 2012, US$2.45 billion was
spent on lobbying in the United States by a total of 12,016 registered lobbyists.5 In
2 These measures are from the World Bank Worldwide Governance Indicators (WGI) project
(http://info.worldbank.org/governance/wgi/index.asp). We use the United States as a reference due to the
abundance of research on political connections in the US.
3 Data sourced from the Australian Electoral Commission (www.aec.gov.au)
4 According to: http://www.washingtonpost.com/wp-srv/special/politics/campaign-finance/
5 Data from the Center for Responsive Politics: http://www.opensecrets.org/lobby/index.php
quality (96.7 percentile), control of corruption (96.7 percentile) and government
effectiveness (95.3 percentile). These measures compare favourably to those of the
United States (91.1, 91.9, 85.8 and 88.6).2 Based on World Bank statistics, Australia’s
government expenditure is 26.2 percent of GDP, relative to 25.9 percent for the US.
Australia has similar restrictions on the share ownership and directorships of politicians
to the United States (Faccio, 2006). Politicians are not allowed to hold corporate
directorships while in office and must disclose their share ownership and changes in
share ownership during their terms in office.
One major difference between politics in Australia and the United States, however,
is the reliance of political candidates and parties in the United States on private funding.
Since 1984, elections have been at least partially funded by the government in Australia,
with candidates and parties polling at least 4 percent of the primary vote receiving $2.31
per vote in the 2010 federal election (13,131,667 votes were cast). Political parties in
Australia also receive private donations, with the federal Labor and Liberal parties
receiving $37 million and $30 million in 2010-2011.3 However, this hardly compares to
the estimated US$2.38 billion raised from private donors by the Democrat and
Republican presidential candidates for the US presidential election in 2012.4 Political
lobbying is also substantially greater in the United States. In 2012, US$2.45 billion was
spent on lobbying in the United States by a total of 12,016 registered lobbyists.5 In
2 These measures are from the World Bank Worldwide Governance Indicators (WGI) project
(http://info.worldbank.org/governance/wgi/index.asp). We use the United States as a reference due to the
abundance of research on political connections in the US.
3 Data sourced from the Australian Electoral Commission (www.aec.gov.au)
4 According to: http://www.washingtonpost.com/wp-srv/special/politics/campaign-finance/
5 Data from the Center for Responsive Politics: http://www.opensecrets.org/lobby/index.php
7
Australia, there were a total of 612 lobbyists registered on the Federal Register of
Lobbyists in 2012.6
Literature review and hypotheses
In Australia, board of director research has predominantly focused on the independence
and monitoring role of directors, motivated by the introduction of new corporate
governance guidelines in the past decade (Aldamen et al., 2012; Balatbat et al., 2004;
Christensen et al., 2010; Cotter and Silvester, 2003; Wang and Oliver, 2009). Some
studies have examined other director characteristics, such as multiple directorships,
director experience and gender. Kiel and Nicholson (2006) examine the prevalence of
multiple directorships in ASX-listed companies in 2003 and find no relationship between
multiple directorships and firm performance. Gray and Nowland (2013) investigate
whether prior director experience is valued by shareholders and find a significant positive
market reaction to the appointment of the most experienced directors. Adams et al. (2011)
examine the gender of new director appointees and find the market reaction to the
appointment of female directors is significantly higher than male directors.7
A number of international studies have investigated the role political connections
play in business. While there are a number of ways to potentially identify political
connections, e.g. board connections, human ties and geographic ties, we focus on board
connections in this paper as our data allows us to specifically identify corporate directors
with prior experience as politicians. This approach has been previously used in cross-
6 Data sourced from: http://lobbyists.pmc.gov.au/who_register.cfm
7 International studies have also investigated other director characteristics, such as CEO experience, legal
expertise, banking expertise, supply-chain experience and busyness (Dass et al., 2010; Ferris et al., 2003;
Fich, 2005; Fich and Shivdasani, 2006; Guner et al., 2008; Krishnan et al., 2011). See Yermack (2006) for
a review of the literature.
Australia, there were a total of 612 lobbyists registered on the Federal Register of
Lobbyists in 2012.6
Literature review and hypotheses
In Australia, board of director research has predominantly focused on the independence
and monitoring role of directors, motivated by the introduction of new corporate
governance guidelines in the past decade (Aldamen et al., 2012; Balatbat et al., 2004;
Christensen et al., 2010; Cotter and Silvester, 2003; Wang and Oliver, 2009). Some
studies have examined other director characteristics, such as multiple directorships,
director experience and gender. Kiel and Nicholson (2006) examine the prevalence of
multiple directorships in ASX-listed companies in 2003 and find no relationship between
multiple directorships and firm performance. Gray and Nowland (2013) investigate
whether prior director experience is valued by shareholders and find a significant positive
market reaction to the appointment of the most experienced directors. Adams et al. (2011)
examine the gender of new director appointees and find the market reaction to the
appointment of female directors is significantly higher than male directors.7
A number of international studies have investigated the role political connections
play in business. While there are a number of ways to potentially identify political
connections, e.g. board connections, human ties and geographic ties, we focus on board
connections in this paper as our data allows us to specifically identify corporate directors
with prior experience as politicians. This approach has been previously used in cross-
6 Data sourced from: http://lobbyists.pmc.gov.au/who_register.cfm
7 International studies have also investigated other director characteristics, such as CEO experience, legal
expertise, banking expertise, supply-chain experience and busyness (Dass et al., 2010; Ferris et al., 2003;
Fich, 2005; Fich and Shivdasani, 2006; Guner et al., 2008; Krishnan et al., 2011). See Yermack (2006) for
a review of the literature.
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