NASHVILLE, Tenn.ñ Companies that form political connections with government officials to obtain perks or preferential treatment are characteristic not only of countries traditionally labeled as corrupt, but are commonly found in countries known for their transparent systems, according to a new study by the Owen Graduate School of Management at Vanderbilt University. It is the first study to closely examine the legal connections to politicians and the various restrictions placed on their behavior.
The findings cited in "Politically Connected Firms" indicated that among companies surveyed, when a connection or relationship with a politician existed, the company had a higher leverage and market share, and was able to obtain funds more easily from government-controlled banks. The company also paid lower taxes than it ordinarily would, since the political connection allowed it to circumvent the tax system.
"It is critical to note that ‘connection’ should not in any way be confused with ‘corruption,’" said Mara Faccio, an assistant professor of management at Owen who authored the study. "From a business perspective these connections might not be the wisest or most ethical bonds to establish, but they are completely permissible within the laws of each individual country."
Prof. Faccio considered a company "connected" if one of its largest shareholders or top directors is a member of parliament, a minister or the head of state, or is closely related to a top official. She examined more than 20,000 firms in 47 countries from Argentina to Zimbabwe. She found 541 firms that had top directors or large shareholders who were serving in a national parliament or the government. The firms represent almost three percent of all listed corporations, and close to eight percent of the world’s market capitalization.
Examples of such connections include Lord Browne of Maddingley, a member of the British House of Lords and chairman of British Petroleum; the late Giovanni Agnelli, who had a life term as senator and whose family controls more than 10 percent of the votes in 18 Italian listed firms; and the son of Malaysian Prime Minister Mohamad Mahathir, a controlling shareholder of several listed corporations.
"We also found this connections phenomenon characteristic of countries that impose restrictions on foreign investments, as well those that have transparent systems, such as the United States and the United Kingdom," said Prof. Faccio. She noted that because of a transparency system of checks and balances, as well as various government watchdog agencies, corruption doesn’t gain a foothold in the U.S. and the U.K.
Better Breaks, but Not Always Better Performance
Surprisingly, the study also indicated that connected companies were poorer financial performers than non-connected firms. Firms with strong political connections had an inferior accounting performance record, and their return-on-investment and market-to-book ratios were lower than the non-connected firms.
"Poorly performing companies may look at political connections as a way to obtain relief from some of their problems," Prof. Faccio explained. "But it’s not a solution. Often, these are companies that lack competent management to begin with ñ or they operate in an extremely difficult economic climate."The greatest number of politically connected companies, the study showed, were in Indonesia, Russia, Malaysia and Thailand. The least number were in Argentina, Brazil, Colombia and Peru.
"The common perception many people have of some South American countries is that they are highly corrupt," Prof. Faccio said. "But we found very few instances of political connections and many examples of strong restrictions in those countries, such as not allowing politicians to serve on boards of directors."
Some Connections Better than Others
Prof. Faccio said certain types of political connections appeared to be more beneficial than others.
"Our study showed that greater benefits occur if the relationship to an official is at the prime minister level rather than with a lower level government official, such as a member of parliament," she said. "This is especially true if the connection is a long-term one rather than one of shorter duration."
"In the same vein, an owner of a company ñ rather than one of the company’s directors ñ should be the one who forms the political connection with a government official, rather than a company director," Prof. Faccio said. She also noted that it is better if a company owner becomes a politician, rather than having the company hire a government official. "Very few entrepreneurs have won election as prime minister or president," she said.
For each country, Prof. Faccio gathered names of members of parliament or government using the Chiefs of State directory, as well as the official site of the country’s government. Politicians were cross-checked with names of the top directors of listed companies, and names of shareholders came from each country’s stock exchange or supervisory authority.
Connecting the Dots
Most Connected Countries
- Indonesia
- Malaysia
- Russia
- Thailand
Least Connected Countries
- Argentina
- Brazil
- Colombia
About Owen
Founded in 1969, the Owen Graduate School of Management at Vanderbilt University is ranked as a top institution by Business Week, The Wall Street Journal, U.S. News & World Report, Financial Times and Forbes. For more news about Owen, visit www.mba.vanderbilt.edu.
Media contact: Susanne Loftis (615) 322-NEWS
susanne.loftis@vanderbilt.edu