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Politicians on the Board of Directors: Do Connections Affect the Bottom Line?

Amy J. Hillman
Journal of Management 2005 31: 464
DOI: 10.1177/0149206304272187

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Journal of/ Politicians
ARTICLE
10.1177/0149206304272187
Hillman Management on /the
June
Board
2005of Directors

Politicians on the Board of Directors:

Do Connections Affect the Bottom Line?
Amy J. Hillman*
Department of Management, W. P. Carey School of Business,
Arizona State University, P.O. Box 874006, Tempe, AZ 85287-4006

Resource dependence theory emphasizes the importance of linking firms with external contingen-
cies that create uncertainty and interdependence. A critical source of external interdependency
and uncertainty for business is government. One way to link a firm to the government is appointing
ex-politicians to the board of directors. This study compares the boards of two groups of firms—
those from heavily and less regulated industries—and finds the former group has more politician
directors. Firms with politicians on the board are associated with better market-based perfor-
mance across both groups, although the relationship is more pronounced within heavily regulated
industries.

Keywords: boards of directors; politicians; board composition

Marrying Washington and Wall Street Adds Value for Shareholders

—Merrill Lynch Television Advertisement (2002)

The relationship between corporate America and politicians is at the forefront of today’s
public scrutiny. Ties between the Bush administration and Enron, Vice President Dick
Cheney’s role at Halliburton, and the “revolving door” between Washington, D.C. and corpo-
rate executive suites and boardrooms are the subjects of current debate (e.g., Wall Street Jour-
nal, 2002, 2003). Close ties between business and government are not new to the 21st century,
however. There have been similar linkages for decades, although their scrutiny has ebbed and
flowed along with public sentiment.

*Corresponding author. Tel.: 480 965-3402; fax: 480 965-8314.

E-mail address: amy.hillman@asu.edu

Journal of Management, Vol. 31 No. 3, June 2005 464-481

DOI: 10.1177/0149206304272187
© 2005 Southern Management Association. All rights reserved.
464

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 Hillman / Politicians on the Board of Directors 465

Resource dependence theory, pioneered by Pfeffer and Salancik’s (1978) work, which
takes its conceptual roots in Thompson’s (1967) open system view of organizations, offers a
compelling rationale for why firms form linkages with government. Pfeffer and Salancik
(1978) and Thompson (1967) suggested firms are dependent on external organizations. This
dependency creates risk and uncertainty, which in turn affects performance. Firms that create
linkages with important sources of external dependency can reduce uncertainty (Pfeffer,
1972) because these linkages buffer firms from environmental fluctuations (Thompson,
1967). The reduction in uncertainty provided by such linkages also lowers transaction costs
inherent with external exchange (Williamson, 1984) and ultimately improves survival (Singh,
House, & Tucker, 1986) and performance.
Government policy, regulation, and enforcement are major forces in the external environ-
ment of business (Hillman, Zardkoohi, & Bierman, 1999; Mahon & Murray, 1981; Marsh,
1998; Shaffer, 1995). Despite trends toward lower trade barriers and deregulation and privat-
ization worldwide, government policy still holds enormous impact on the operations of firms.
Deregulation itself means that governments are making more decisions with more opposition
from interest groups than ever before. Molitor asserted, “In a world of uncertainties, where
change is the one thing we can count on, business needs the ability to anticipate and adapt suc-
cessfully to changes in matters of public policies” (1977: 4).
Because of the uncertainty government regulation creates, many firms have sought to “co-
opt” government by creating linkages between the firm and politicians (Selznick, 1949). This
co-optation often comes in the form of politicians and other individuals with access or influ-
ence to the government process being “absorbed” into the firm either through employment or
election to the firm’s board of directors. Resource dependence scholars argue boards of direc-
tors are a primary method for absorbing critical elements of environmental uncertainty into
the firm (Boyd, 1990; Hillman, Cannella, & Paetzold, 2000; Pfeffer, 1972).
One of the basic propositions of resource dependence theory is that the need for environ-
mental linkages, such as those provided by directors, is a function of the levels and types of
dependence facing the organization (Boyd, 1990; Pfeffer & Salancik, 1978). That is, each
company’s board of directors ideally includes ties specific to their environment. The ties poli-
tician directors create, therefore, should be positively associated with firm performance given
the importance of government to business. However, some firms, such as those in heavily reg-
ulated industries, are more critically affected by public policies than others (Lang & Lockhart,
1990; Mahon & Murray, 1981). This suggests that although politicians on the board may be
beneficial for all firms, these linkages will be even more important for some.
I explore two fundamental tenets of the resource dependence perspective on boards as it
applies to directors with political experience (i.e., ex-politicians). First, the association
between firm performance and politicians on boards is examined. Given the importance of
government, resource dependence logic suggests that firms with politicians on the board will
outperform those without. Second, I compare two groups, a heavily regulated sample and a
less regulated sample of firms in terms of the number of politicians present on corporate
boards. Resource dependence logic suggests that the former will have more politician direc-
tors than the latter due to differences in their environment. Finally, although a positive rela-
tionship between politician directors and performance is expected across both groups, the
strength of the relationship should be magnified in the more heavily regulated sample. Sub-

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466 Journal of Management / June 2005

group analysis is used to examine the relative effect of politicians on the board and perfor-
mance in the two contexts.
Even though existing research supports the tenet that board composition reflects the exter-
nal environment of firms (e.g. Boyd, 1990; Hillman et al. 2000), these studies often do not
explore the performance effects of such board-environment alignment. Those studies that do
examine boards and firm performance often examine fairly general board attributes such as
board size or number of outsiders on the board (e.g., Boyd, 1990; Dalton, Daily, Ellstrand, &
Johnson, 1998; Dalton, Daily, Johnson, & Ellstrand, 1999) rather than examining spe-
cific attributes of directors that would match boards to their specific environments. My study
contributes to this literature by examining both the board-environment and the board-
performance links, and by examining a specific director characteristic relevant to board-
environment alignment, the presence of directors with political experience.
The organization of my article is as follows. First, I provide a brief overview of resource
dependence logic as it applies to corporate boards. Second, I review the importance of govern-
ment to firms and discuss how appointing politicians to a board can be viewed as a part of a
firm’s corporate political strategy, defined as those attempts to shape government policy in a
manner favorable to the firm (Baysinger, 1984). These two sections provide the basis for for-
mal hypothesis generation. Next, I present my sample, methodology, and results. I conclude
with a discussion of several post hoc analyses, conclusions, and scholarly and practical
implications of my findings.

Corporate Boards as Links to the External Environment

Scholars in the resource dependence tradition emphasize the role of directors as providers
of important resources (Boyd, 1990; Daily & Dalton, 1994a, 1994b; Hillman et al., 2000;
Pfeffer, 1972; Pfeffer & Salancik, 1978). Pfeffer and Salancik (1978) and others argued four
primary benefits come from boards: (a) advice and counsel, (b) channels of communication
and information between the firm and external organizations, (c) preferential access to com-
mitments or support from important elements outside the firm, and (d) legitimacy. Pfeffer and
Salancik noted, “When an organization appoints an individual to a board, it expects the indi-
vidual will come to support the organization, will concern himself [sic] with its problems, will
variably present it to others, and will try to aid it” (1978: 163).
Previous research finds the provision of these important resources by the board signifi-
cantly related to firm performance. For example, Westphal (1999) found advice and counsel
provided by boards improves firm performance, as does the legitimacy that boards often bring
to firms (Bazerman & Schoorman, 1983; Daily & Schwenk, 1996; Selznick, 1949). Similarly,
the information boards provide in their role as conduits between firms is linked to improved
firm performance (Haunschild & Beckman, 1998; Rosenstein & Wyatt, 1994). Boards are
also helpful in the acquisition of resources, often on more favorable terms (Boeker &
Goodstein, 1991; Stearns & Mizruchi, 1993; Zald, 1969), and in strategy formulation or mak-
ing other important firm decisions (Judge & Zeithaml, 1992; Lorsch & MacIver, 1989).
One of the basic tenets of resource dependence theory is that the need for linkages to the
environment such as those facilitated by the board is a function of the levels and types of

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 Hillman / Politicians on the Board of Directors 467

dependence facing the firm (Boyd, 1990; Hillman et al., 2000). At its most aggregate, this sug-
gests that firms operating in uncertain environments will benefit from multiple linkages that
result from larger boards or multiple interlocking directorates (Pfeffer, 1972). A recent meta-
analysis of board size and firm performance confirms that board size is positively associated
with firm performance (Dalton et al., 1999). This empirical finding is consistent with Pfeffer
and Salancik’s argument that “the greater the need for effective external linkage, the larger the
board should be” (1978: 172) in that large firms are often viewed as more complex and
dependent on diffuse stakeholders.
With regard to board interlocks, two studies examine the relationship between the number
of board interlocks and environmental uncertainty. Pfeffer and Salancik (1978) found the
number of board interlocks increases along with competition. Boyd (1990) examined the rela-
tionship between environmental uncertainty (measured by munificence, dynamism, and com-
plexity), board size, and number of interlocks and found board size related to all three ele-
ments of environmental uncertainty, whereas the number of interlocks is related only to
munificence. These results prompted him to conclude that when resources are scarce and
competitive uncertainty is high, board size will decrease but the number of interlocks increase,
suggesting the need for densely connected directors. Thus, existing research supports the con-
tention that environmental dependency and board size/interlocks are related and that these
aggregate measures of composition are related to performance. However, indications of what
types of linkages are important beyond the absolute number are largely absent in previous
research.
Two notable exceptions to this are the early work by Pfeffer (1972) and the recent work by
Hillman et al. (2000) that discuss specific types of linkages and directors as they relate to a
firm’s environmental conditions. Pfeffer (1972) found capital-intensive firms tend to have
larger boards with a greater percentage of outside directors, and more attorneys and represen-
tatives of the financial community serving as directors. He also found more attorneys serving
as directors in regulated industries. Despite these promising early findings, identifying spe-
cific environmental conditions and the specific type of directors/boards that align the firm with
those conditions has been largely ignored within governance research until the more recent
study by Hillman et al. (2000).
Hillman and colleagues (2000) studied board composition longitudinally and how it
changes to reflect a major environmental shift deregulation. These authors developed a
resource dependence categorization scheme for four types of directors and the resources they
bring to a firm, drawing heavily on the work of Baysinger and Zardkoohi (1986). They found
empirically that when the U.S. airline industry was deregulated, board composition shifted to
reflect the changed environmental conditions. For example, under deregulation, the authors
found more directors added to airline boards with experience in competitive market condi-
tions. Hillman and colleagues did not, however, explore the performance implications of these
changes.
In summary, resource dependence logic provides a compelling rationale for the creation of
linkages between the firm and its external environment through boards. Research to date has
not examined the board-environment match and its relationship to performance with much
specificity, however. Those studies that have explored specific forms of board-environment

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468 Journal of Management / June 2005

alignment do not incorporate performance effects. I now turn to one form of environmental
dependency, that between firms and the government, to facilitate such an effort.

Boards as Corporate Political Strategies

Despite global trends toward privatization and deregulation, the government is still a major
source of external dependency for firms (Hillman & Hitt, 1999; Keim & Zeithaml, 1986). The
processes of deregulation, privatization, and the negotiation of multilateral trade agreements
create conditions where governments are making more decisions that materially affect firms
than ever before. For decades, scholars in the area of corporate political strategies have empha-
sized the importance of creating proactive strategies for dealing with the government and pub-
lic policies (for an early example, see Epstein, 1969).
Early studies and reviews on corporate political strategies in the Journal of Management
examine the implications of public policy decisions for firm strategy (e.g., Keim & Baysinger,
1988; Shaffer, 1995) and contribute to the foundation of this research stream. Running
throughout this stream of research is the recognition that public policies and government deci-
sions affect all aspects of a business and can significantly affect the bottom line (Hillman &
Hitt, 1999; Marsh, 1998; Schuler, 1996). However, firms need not simply be passive reactors
to public policy. Firms can play an active role in shaping government decisions and policies,
and through such “corporate political strategies,” firm performance can be affected (Salamon
& Seigfried, 1977).
Corporate political strategies, defined as those proactive actions taken by firms to create a
public policy environment favorable to them (Baysinger, 1984), are the methods by which
firms create exchange with political decision makers in the public policy arena. This view of
corporate political strategies recognizes the interdependence between business and govern-
ment, not simply a unidirectional relationship. Business is dependent on government, but gov-
ernment is also dependent on businesses in general for taxes, employment, and specifically,
political decision makers can benefit from the support of business in the form of financial con-
tributions, information about constituents’ preferences and policy impact, and mobilizing
constituent support (Hillman & Hitt, 1999). The concept of the political arena as an exchange
marketplace with demanders and suppliers has a rich heritage in corporate political strategy
literature (e.g., Hillman & Hitt, 1999; Hillman & Keim, 1995; Schuler, Rehbein, & Cramer,
2002). This concept takes its roots in Nobel Prize winner Buchanan’s work in political econ-
omy (e.g., 1968, 1987), which depicts political decision makers as self-interested actors just as
actors are in economic marketplaces, thereby rejecting the notion of a “public interest” inde-
pendent from the competition between individual interests. In this exchange view of politics,
political decision makers supply public policy in return for information about constituents’
preferences, financial incentives such as campaign contributions, and constituency support
such as votes for reelection (Hillman & Hitt, 1999). Thus, corporate political strategies are the
primary vehicle for exchange between firms and political decision makers.
One such strategy is the appointment of directors with political experience to the board.
This political strategy is witnessed anecdotally as large numbers of individuals with political
experience are asked to join corporate boards. For example, Vernon Jordan, a close friend of

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 Hillman / Politicians on the Board of Directors 469

Bill Clinton, at one time served as a director on 12 Fortune 500 boards. Today’s heightened
scrutiny of the linkages between corporate America and the government again focuses atten-
tion on boards with politician directors, such as Wendy Graham, former chair of the CFTC and
wife of U.S. Senator Phil Graham serving on Enron’s board of directors.
Firms that invite politicians to join their boards presumably see benefits from such an
action. Parallel to the general arguments by resource dependence scholars, adding politicians
to a board may provide (a) unique information about the public policy process, which due to its
complexity is often very expensive or difficult for a firm to obtain (Hillman et al., 1999); (b) a
channel of communication or access to existing politicians, bureaucrats, and other political
decision makers with whom the board member is aligned; (c) potential access to political deci-
sion makers that may result in influence over political decisions (Pfeffer, 1972); and (d) legiti-
macy (Galaskiewicz & Wasserman, 1989). These benefits should in turn improve firm perfor-
mance. Therefore, when comparing firms with politician directors to those without, the logic
of resource dependence theory suggests the former should outperform the latter. Thus,

Hypothesis 1: Politicians on the board of directors are positively associated with firm financial
performance.

Connections with the government vis-à-vis corporate boards are expected to be associated
with superior performance given the importance of government to business. Early work in
political economy, however, suggests that firms that are most affected by the government will
engage in more political strategies to influence public policy (Pittman, 1977; Zardkoohi,
1985). Firms in heavily regulated industries are more critically affected by public policies than
those in less regulated industries (Lang & Lockhart, 1990; Mahon & Murray, 1981). This sug-
gests that forming linkages with the government takes on increased importance for firms in
more heavily regulated industries. Yoffie (1988) asserted that if government is important to a
firm’s competitive future, political action must be a strategic priority. Hillman and Hitt (1999)
similarly argued that when firms are more dependent on government policy, they will be more
likely to develop “relational” approaches to political strategy by building relationships, con-
tacts, and resources across issues and over time. Appointing a politician as a director is one
political tactic that meets such a description. Unlike more “transactional” lobbying where a
firm engages in an episodic exchange of information with a political decision maker, appoint-
ing a director to the board is a long-term commitment. His or her expertise, connections, and so
on are present for a multiple-year term (with most directors reelected for multiple terms) and
can be called upon across time and political issues. This suggests that firms that are more
dependent on the government will be more likely to appoint politician directors, in keeping
with general resource dependence logic that boards should be a reflection of the external envi-
ronment facing firms (Boyd, 1990; Pfeffer & Salancik, 1978). This also suggests that the per-
formance benefits associated with politicians on the board will be magnified within more
heavily regulated industries. Therefore,

Hypothesis 2: Firms in more heavily regulated industries will have a greater number of politicians on
their boards than firms in less regulated industries.

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470 Journal of Management / June 2005

Hypothesis 3: The politician-on-the-board association with firm financial performance is greater in

heavily regulated industries than in less regulated industries.

Method

Data and Sample

A sample to test the above hypotheses was constructed to facilitate the comparison of
groups that were heavily government regulated and those less government regulated based on
Baron’s (2000) conceptual continuum of government control across industries. Baron (2000)
depicted one end of the government regulation continuum as industries where the government
exercises considerable control over opportunities such as telecommunications, biotechnol-
ogy, and cultural “sin” industries (e.g., tobacco, alcohol, and gambling). At the other end of
the spectrum of government regulation are industries where opportunities are controlled more
often by markets and where government exercises relatively little control over firms and their
activities such as consumer electronics and retail establishments. In between is a range of
industries that conceptually fall somewhere in the middle of heavily and less heavily regu-
lated. Baron (2000) did neither rank order degree of regulation nor provide any quantitative
measure of regulation applicable to individual industries, nor am I aware of other researchers
who do. Therefore, to capture two groups with substantially different regulatory environ-
ments, I pull my sample from the exemplar industries at the two ends of Baron’s conceptual
continuum. The heavily regulated sample is composed of 50 randomly chosen firms each from
telecom, biotech/pharmaceutical, and “sin” sectors. These 150 firms are then compared with
50 firms each from the retail, household, and electronics sectors for a total of 300 sample
firms.

Measures

Dependent and independent variables. A count variable is used to measure the number of
directors on each board with political experience. The board of directors of all 300 firms was
examined for the number of directors with political (elected or appointed) experience at the
local, state, or national level. Two independent coders read through proxy statements for each
firm from the year 2000 and coded the number of directors on each board with political experi-
ence. When a determination of political experience was unclear for individual directors, bio-
graphical information from Who’s Who in Corporate America was consulted. Because the
information provided in these sources is fairly straightforward in terms of identifying political
expertise, interrater agreement was .98, with the few disagreements settled by discussion. This
coding procedure is only able to capture formal political experience of directors and is unable
to capture informal political connections that may arise, for example, from social relationships
or indirect ties with politicians. Reliable data on more informal political connections a director
might have is very difficult to come by and thus is not captured here. Nonetheless, I expect the
coding of formal political experience to be a good indicator of the performance relationship
that might also accompany more informal connections.

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 Hillman / Politicians on the Board of Directors 471

Firm performance is operationalized by both market- and accounting-based measures

because of the multidimensional nature of firm performance and limitations of any one type of
measure to capture performance (Dalton et al., 1998; Keats, 1988). Keats (1988), for exam-
ple, found that market and accounting-based measures of performance represent two sepa-
rate dimensions negatively correlated with one another. Keats (1988) and others (e.g.,
Chakravarthy, 1986; Keats & Hitt, 1988) argued that market-based measures reflect forward-
looking expectations of performance, whereas accounting-based measures reflect past suc-
cess. I use two market-based measures (e.g., Tuschke & Sanders, 2003), market capitalization
and market-to-book ratio (Tobin’s Q). Market capitalization values were log-transformed.
The market-to-book ratio is calculated as market value divided by the replacement value of
assets, where conceptually scores over 1 indicate the generation of above-normal perfor-
mance. Although there are multiple approaches for calculating the replacement value of
assets, I use the simplest here, book value of assets. Although book value has limitations (e.g.,
if assets have been on the books for a long time, q can be inflated), Chung and Pruitt (1994)
found that the correlation between this simple measure of replacement value and more sophis-
ticated measures of Tobin’s Q equal to .93. I also use two accounting-based measures of per-
formance, return on sales (ROS) and return on assets (ROA). ROA is perhaps the most com-
mon measure of firm performance in management literature (Daily, Certo, & Dalton, 2000),
whereas ROS provides a less biased performance measure for cross-sectional comparisons
across firms with varying levels of asset intensity (Bettis, 1981; Florin, Lubatkin, & Schulze,
2003). Data for the measures were taken from COMPUSTAT. Firm performance measures
came from the same year as board composition, 2000, and in all cases firm performance was
adjusted by industry (Johnson, Hoskisson, & Hitt, 1993).

Control Variables

Total board size is included as a control variable because it has been previously linked to
improved financial performance (Dalton et al., 1999). By including board size as a control
variable, the number of politician directors can also be understood in terms of relative effect
without the difficulties associated with interpreting ratio variables (Edwards, 1994). Board
size data also came from proxy statements. Firm size was also used as a control variable
because of its association with firm performance and governance (Dalton et al., 1998). Here I
use number of employees, log transformed. Finally, prior performance is controlled for (per-
formance t – 1), using the instrumental variable technique to avoid specification problems
(Johnston & DiNardo, 1997; Tuschke & Sanders, 2003). For each separate analysis of the four
performance measures, the measure of prior performance takes the same form (e.g., predict-
ing adjusted ROA using prior adjusted ROA as a control).
Testing of Hypothesis 1 includes all 300 firms in the sample, using market capitalization,
market to book, ROA, and ROS as the separate dependent variables with number of politician
directors as the independent variable and board size, firm size, and prior performance as con-
trol variables in the regression equation. Hypothesis 2 is tested by comparing the mean num-
ber of politically experienced directors in my heavily regulated and less regulated subgroups
using ANOVA. Finally, Hypothesis 3 proposes that the strength of the association between

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472 Journal of Management / June 2005

Table 1
Descriptive Statistics and Correlation Matrix
Variable M SD 1 2 3 4 5 6

1. Number of politicians 0.31 0.715 1.00

2. Board size 7.91 2.70 .47** 1.00
3. Firm size (log number of
employees) 3.03 1.31 .48** .18** 1.00
4. Adjusted market
capitalization 0.10 1.46 .39** .12 .62** 1.00
5. Adjusted market to
book (Tobin’s Q) 0.01 0.98 .10 .01 –.01 .43** 1.00
6. Adjusted return on assets –0.04 0.22 .03 –.07 –.06 –.06 –.05 1.00
7. Adjusted return on sales –0.02 0.28 .02 .01 –.08 –.12 –.07 .36**

**p < .01

firm performance and politicians on the board will be a function of the degree of regulation in
the industry. Studies that hypothesize about the strength of a moderated relationship are most
appropriately analyzed using subgroup analysis (Boyd, 1995; Venkatraman, 1989). I estimate
correlations across the two different subgroups (heavily regulated vs. less regulated) and com-
pute a z statistic to determine whether the magnitude of the effect varies significantly across
groups to test this hypothesis. In addition, a Chow test is conducted to compare the regression
coefficient strength within the subsamples in comparison with the pooled sample.

Results

Table 1 provides descriptive statistics for all variables and a correlation matrix. The signifi-
cant correlations between the control variables of firm size and board size and number of poli-
ticians on the board suggest the appropriateness of including them as controls. However, vari-
ance inflation factors (VIFs) indicate no multicollinearity problem in my data (recognizing
that the various operationalizations of performance are used in separate equations), in that no
VIF is greater than 10 and the mean of all VIFs is not considerably larger than 1 (Chatterjee &
Price, 1991).
Table 2 presents the results of the regression test of Hypothesis 1. Table 2 is presented with
four columns representing the operationalizations of firm performance, adjusted market capi-
talization, adjusted market to book, adjusted ROA, and adjusted ROS. Each of these models is
statistically significant; however, in only the models using market-based measures (market
capitalization and market to book) of firm performance is the number of politicians on the
board significant (p < .01 for both). These results do not hold in the models of accounting per-
formance measure ROA or ROS. Thus, Hypothesis 1, that politicians on the board will be
associated with superior performance, receives mixed support.
The lack of findings for the accounting operationalization of performance is perhaps not
surprising. First, the two forms of performance operationalization have been found in previ-
ous research to be negatively correlated with one another (e.g., Keats, 1988; Keats & Hitt,

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 Hillman / Politicians on the Board of Directors 473

Table 2
Regression Analysis Predicting Firm Performance
Adjusted Adjusted Adjusted Adjusted
Market Market Return Return
Capitalization to Book on Assets on Sales
SE SE SE SE

Number of politicians .23** .10 .19** .07 .02 .03 .03 .02
Board size .10* .06 –.13* .11 –.10* .05 –.05 .03
Firm size (log number of
employees) .73** .16 –.07 .09 –.00 .01 –.02 .03
Prior performance
(instrumental) .28** .15 .13* .17 .31** .26 .37** .28

Adjusted R2 .258 .221 .225 .203

F value 13.64*** 10.51*** 11.63*** 10.31***

Note: N = 300.
*p < .05
**p < .01
***p < .001

1988) as they are in my sample, indicating that they represent different aspects of perfor-
mance. Accounting-based measures are more short-term in nature, tap only historical perfor-
mance, and are subject to managerial manipulation (Briloff, 1972: McGuire, Schneeweis, &
Hill, 1986; Watts & Zimmerman, 1990). An indicator of the reliance of accounting-based
measures on historical performance in my sample is the significant effect of the control for
prior performance in the models of ROA and ROS, as shown in Table 2. Without this control
variable inclusion, the models are not significant. In addition, accounting-based measures
have difficulty capturing intangible assets and relationships such as those created by director
expertise and networks (Bentson, 1982; Watts & Zimmerman, 1990). Market-based mea-
sures, on the other hand, are representative of the future expectation of the firm and as such are
much better suited to capture the value of intangibles (Watts & Zimmerman, 1990). Therefore,
although empirical support herein of Hypothesis 1 is mixed, one potential explanation for the
lack of support using ROA and ROS is the limitation of accounting-based measures to capture
the type of relationship explored here. For example, having influence over the regulatory pro-
cess could mean defeating or altering the language of a proposed regulation that would be det-
rimental to the firm. Both forms of influence are likely to benefit the firm, but the effects of
such influence are long-term and will not show up on a profit and loss statement.
Hypothesis 2, that firms in the more heavily regulated industries will have more politicians
on their boards than those in less regulated industries, is also supported. The mean number of
politicians on the board for the heavily regulated industries is .52, whereas the mean number
of politicians on the board in the less regulated industries is .09. The difference between the
means is statistically significant at the p < .001 level.
Hypothesis 3 predicts that the relationship between politicians on the board and firm per-
formance will be stronger in the more heavily regulated sample. Given the results of Hypothe-

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474 Journal of Management / June 2005

Table 3
Regression Analysis Predicting Firm Performance—Subgroup Analysis
Less Regulated Sample Heavily Regulated Sample
Adjusted Adjusted Adjusted Adjusted
Market Market Market Market
Capitalization to Book Capitalization to Book
Variable SE SE SE SE

Number of politicians .20** .09 .12* .06 .29** .11 .26** .07
Board size .10* .08 –.14* .13 .11* .06 –.12* .11
Firm size (log number of
employees) .73** .13 –.08 .10 .72** .18 –.04 .11
Prior performance
(instrumental) .26** .11 .12* .19 .29** .15 .15* .17
2
Adjusted R .170 .162 .281 .243
F value 9.12*** 8.85*** 13.89*** 12.42***

*p < .05
**p < .01
***p < .001

sis 1, I only tested this hypothesis using the market-based measures of performance, adjusted
market capitalization, and adjusted market to book. Testing of this hypothesis was done in two
ways involving splitting the sample into the two subgroups. First, I compare the correlations
between the number of politicians and financial performance across groups. The correlation
for the heavily regulated subgroup and market to book was .32, whereas in the less regulated
subgroup, the correlation was .054 (z = 1.67, p < .09). For market capitalization, the correla-
tion for the heavily regulated subgroup was .42, whereas for the less regulated subgroup, it
was .08 (z = 2.79, p < .03), indicating that these correlations are significantly different, sup-
porting this hypothesis. However, given the results supportive of Hypothesis 1, that politicians
on the board are positively associated with market-based performance, and those supportive
of Hypothesis 2, that there are more politicians on the boards of the heavily regulated
subsample, for further confirmation, I used a Chow test to compare the strength of regression
coefficients for each subsample (Chow, 1960). The first step of the Chow test is to run separate
regression equations for each subsample. Table 3 provides the results of these analyses, show-
ing the variance explained in the heavily regulated group and magnitude of the regression
coefficient for the number of politicians on the board to be higher than for the less regulated
group. Once this two-sample groups regression analysis is run, the next step is to compute the
error sum of squared residuals for each sample group and unrestricted sum of squared residu-
als, or sum of the error sum of squared residuals from each group. This unrestricted sum of
squared residuals is then compared with the restricted error sum of squares from the pooled
sample, arriving at an F statistic of 13.89 for adjusted market to book and an F statistic of 9.12
for adjusted market capitalization. Comparing these to F-distribution tables shows both to be
significant at the .01 level, lending support for Hypothesis 3.

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 Hillman / Politicians on the Board of Directors 475

Post Hoc Analyses

Although not a formal part of the theoretical arguments developed here, data gathering and
analyses suggested a number of potentially interesting post hoc analyses. First, although I do
not formally hypothesize or test a causal relationship between politicians on the board and
firm performance, an argument could be made that ex-politicians choose to only join the
boards of well-performing firms. The question of whether highly performing firms or larger
firms are better able to attract directors with political experience goes unanswered with the
methodology above. As a check, I ran additional analyses using prior performance for 1, 3,
and 5 years back (adjusted market capitalization, market to book, ROA, and ROS separately)
and firm size as predictors of the number of politicians on the board in 2000. The regression
models were not significant (not reported here), suggesting in my sample that prior perfor-
mance is not a significant determinant of the number of politicians on the board, but further
research into how directors are attracted to specific firms is a promising area of study. Ideally, a
more rigorous test for this alternate hypothesis would examine performance prior to each
political director’s appointment to the board, but data difficulties (e.g., boards with multiple
politicians, some politicians joining at founding prior to public trading, mergers prior to the
sample time period that make the unit of analysis difficult) prevent me from exploring this
here.
Second, resource dependence logic provides the foundation for the hypothesis that politi-
cians on the board will be associated with firm performance. In my hypotheses development
above, an underlying assumption was that more politicians were better, hence the operation-
alization as a count of the number of directors with political experience on the board. This
assumption was based on a number of considerations. First, the United States is a highly feder-
alist system, particularly since Reagan’s “new federalism” that pushed more power to the
states beginning with his election in 1980. This suggests that in a system like the United States,
political experience is not universal—the contacts and expertise a politician gains at the state
level are quite different from those gained at the national level. Political experience and con-
nections also likely vary based on whether the person is appointed (representing a closer net-
work within party and agency) or elected (which would represent broader bipartisan ties and
experience). Therefore, my assumption was that any one given politician is unlikely to repre-
sent the ties and experience to all the various levels of government and networks of potentially
useful contacts and knowledge. Thus, when comparing directors with political experience,
each is likely to represent a different set of contacts and type of expertise; no one director is a
perfect substitute for another despite some overlap. However, this assumption might be ques-
tioned—are multiple politicians really better than just one? After all, directors are costly to a
firm, and there is an opportunity cost to choosing one director over another. To check this alter-
native hypothesis, I transformed my politicians-on-the-board variable to a binary yes/no vari-
able and reran my regression equations with all four operationalizations of performance and
relevant controls. The results using adjusted ROA and ROS were not significant as previously
found with the count operationalization. The results using the binary indicator of politician(s)
on board/no politician on the board and the adjusted market-based measures of market capital-
ization and market to book yielded both a significant overall model and regression coefficient
for the indicator, but the adjusted R2 indicator of variance explained fell significantly (market

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476 Journal of Management / June 2005

to book from 22% to just below 18% (R2 = .178) and market capitalization from 26% to below
20% (R2 = .196), suggesting that the count operationalization provides for additional explana-
tory value beyond the binary indicator. However, I do agree there is likely a point of diminish-
ing returns to the addition of directors with political expertise. My sample involves a restricted
range in that the board with the highest number of politicians had 5 directors (of a total board
of 14); unfortunately, given the overall low representation of politicians on boards and that
very few boards have a large number of politician directors, the point of diminishing returns
remains an area for future research.
My assumptions about the nature of political experience and connections that underlie the
choice of a count of the number of politicians also provide for further analyses into the specific
nature of the experience on my sample boards. To provide for an examination of the politicians
on my sample boards and the effect of their expertise and network of connections on firm per-
formance, directors were also coded along two dimensions: elected versus appointed political
experience and state- versus national-level experience.1 Descriptively, of the 93 political
directors in my sample, 39 were elected to political office and 54 were political appointees.
Only 8 of the directors had state-level political experience, whereas 85 had national political
experience. These two dimensions are highly related because all appointees in my sample
served at the national level. Due to the small number of state-level politicians in my sample, I
am unable to make statistical inferences about their effect on firm performance. However,
when running my regression analyses with adjusted market to book and adjusted market capi-
talization as the measures of firm performance and three separate equations for each depen-
dent variable substituting the number of directors with national political experience, the num-
ber of directors with appointed experience, and the number of directors with elected political
experience as independent variables with controls as described earlier, only the number of
directors with national political experience was a significant predictor of both measures of
firm performance. The lack of results for appointed and elected counts may be due to restricted
sample size but again represent areas for future research.
One final post hoc descriptive finding that may be of interest is to divide the sample into the
heavily regulated and less regulated subsamples to see if the nature of political experience
holds any distinguishable patterns. All of the state-level political directors serve on boards of
the heavily regulated sample, and in further decomposing the subgroup, all serve on the boards
of “sin” industry firms, specifically gambling entities. This is perhaps not surprising given that
gambling is affected significantly more by state than national regulations. For firms in the
gambling industry, having ex-state-level politicians may be particularly valuable and again
reflects the more specific nature of their regulatory environment. Although this is simply
descriptive of my sample and not a statistical test of the influence of state-level politicians on
the performance of gambling firms (again something I am unable to make credible infer-
ences on given the small sample size of this subgroup), it does reflect agreement with overall
resource dependence logic and indicates a promising area for future research. Directors with
national political experience and those with elected and appointed experience, on the other
hand, are proportionately represented within our two subsamples and across industry groups
within each. Although as stated previously, the heavily regulated subsample has a much higher
number of politicians, there was no discernible pattern of differences regarding type of expe-
rience or level of experience other than the state-level data mentioned above.

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 Hillman / Politicians on the Board of Directors 477

Discussion and Conclusion

Overall, my results indicate mixed support for the prediction that politicians on the board of
directors are associated with better performance. The number of politicians on the board of
directors was significantly and positively related to my market-based measures of perfor-
mance, but not to my accounting-based measures of performance. Although my findings
using accounting-based operationalizations of performance were not supported, the limita-
tions of this type of performance measure may pose a viable explanation for the mixed results.
Resource dependence theory provides a compelling logic for the positive association with
market-based performance—firms that create linkages to this important source of interdepen-
dency and uncertainty can reduce uncertainty and gain access, information, legitimacy, and/or
resources compared with those firms without such ties on the board.
My results also indicate that firms in more heavily regulated industries have more politi-
cians on their boards than less regulated firms do. Again, this finding supports resource
dependence logic that a board of directors should reflect the environment facing the firm. The
greater dependency on government in the heavily regulated subsample creates a need for more
linkages through the selection of more directors with political experience.
Finally, the associations with market-based financial performance are stronger within the
more heavily regulated context. These findings are in keeping with resource dependence logic
that boards should be aligned with the environment of the firm, and the more the firm is
dependent on the government, the greater the performance effect of political directors.
Despite these findings, this study has limitations that should be considered when interpret-
ing these results and generalizing from them. Most notably, the study is cross-sectional, which
limits the ability to discern causality. The question of whether firms with politicians on their
boards improve performance as a result of specific appointments is not answered with my
methodology. When interpreted in light of existing literature, an inferred answer to the ques-
tion, however, may be “yes.” Hillman et al. (1999) studied stock market reaction of personal
service, when a manager or director goes from a firm to government, and found abnormal
returns accrue to firms that create such a linkage. Hillman et al. acknowledge “not every exam-
ple of personal service may be the result of conscious formulated political strategy, our results
are an indication of the effect such political efforts may have on firm performance” (1999: 79).
Although having a manager or director leave the firm for political office may not always be a
part of a firm’s political strategy, electing a politician to the board is a more conscious effort
consistent with a political strategy. Further studies isolating the change in performance from
such an event would help support this inferential logic.
Another important limitation of this study is its U.S-centric view. The relationship between
business and government and, specifically, politicians on the board of directors and firm per-
formance is likely to be different in other institutional contexts (Hillman & Keim, 1995;
North, 1990). Future research can benefit from exploring the relationships hypothesized
herein in different institutional settings and refining theory further given the differing regula-
tory conditions across nations and industries.
Finally, my study here is only able to answer the question “Do political directors’ connec-
tions affect the bottom line?” not “How do political directors’ connections affect the bottom
line?” Although resource dependence logic provides theoretical rationales for how these con-

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478 Journal of Management / June 2005

nections benefit the firm, my methodology cannot test these ideas directly. Future research,
particularly qualitative research that can shed insight into these mechanisms and how they
work, would be fruitful.
The results of this study have implications for scholarly research both in the area of corpo-
rate governance and corporate political strategies despite these limitations. For governance
researchers, the evidence supports the resource dependence role of directors as providers of
important resources and suggests that further research into specific forms of environment/
director alignment may be fruitful. Although general empirical evidence has supported larger
boards as beneficial for firm performance, this study examines a specific type of director and
the environmental alignment that makes his or her presence important. My post hoc analyses
suggest there are more opportunities for further analyses of matching environment to board
characteristics and the effect of such on performance. Future research could explore other
types of directors (e.g., gender and ethnically diverse boards, representatives of important
stakeholders, etc.), how environment/board alignment is achieved, and its subsequent effect
on performance. For corporate political strategy scholars, these results are consistent with
growing evidence that corporate political strategies are linked to firm performance and the
existence of relational approaches to government actors. Future research could examine how
such directors complement other political strategies used by the firm (e.g., do firms with polit-
ical directors also have larger lobbying and grassroots efforts?). In addition, more work along
the lines of my post hoc analyses into the specific form of political experience and connections
a director has and the performance of the firm on whose board he or she serves is an area war-
ranting additional inquiry.
For practitioners, the evidence herein suggests a strategic role for board composition.
When searching for new director candidates, environmental dependencies may point toward
the need for specific skills. This evidence suggests that boards composed of directors who can
align the firm with its environment are positively associated with financial performance.
Given the current dominant view of directors as monitors of management, this evidence also
points to the need to consider a broader range of resources provided by the board when select-
ing directors. The current public scrutiny of boards, for example, and the attention paid when
high-visibility ex-politicians or those with extensive political ties are appointed to boards may
be warranted given my findings. The findings herein are at least suggestive that benefits accrue
to firms with these politically experienced directors, although my study is unable to capture
the specific nature of these benefits.
Finally, the results have implications for public policy. Although the nature of the data used
does not allow for direct testing of specific benefits that accrue to firms from the addition or
presence of a director with political experience as discussed above, the positive association
between such directors on the board and market measures of performance indicates the market
at least perceives such benefits exist. For public policy makers, this suggests that the costs and
benefits of policies such as the Clinton administration’s moratorium on corporate service
should be explored.

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 Hillman / Politicians on the Board of Directors 479

Note

1. I am grateful to the editor and anonymous reviewers for suggesting these additional analyses.

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Biographical Note

Amy J. Hillman is an associate professor and Dean’s Council of 100 Distinguished Scholar in the W. P. Carey School
of Business at Arizona State University. She received her Ph.D. in strategic management and business & public policy
from Texas A&M University. Her research interests include corporate governance, corporate political strategies, and
how resource-dependence linkages improve firm performance. She is currently associate editor of the Academy of
Management Journal.

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