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Do Political Connections on Boards Lead to Higher Stock Prices

A study says companies with Republican directors saw shares jump 3 percent after the 2000 election; Democrats lost 3 percent.

November 7, 2008
Related Topics: Global Business Issues, Future Workplace, Ethics, Latest News
The membership of corporate boards could change significantly based on the outcome of the election Tuesday, November 4, because some companies may look to hire former lawmakers and Bush administration insiders. And such hires could make a difference in the share price of corporations, if the findings from a forthcoming study are to be believed.

According to the study, which will be published soon in the Review of Financial Studies, companies whose boards had Republican connections fared better after the 2000 election than companies with boards with Democratic connections. Specifically, stock prices at the Republican-leaning companies jumped about 3 percent more on average than those of other companies in the S&P 500, while Democratic companies dropped about 3 percent.

This disparity was noted especially among companies that had at least one board member with former affiliations with the Republican Party and no board members with affiliations with the Democratic Party.

“We got some flak about this, because people were saying it is not exactly cronyism and it is just individuals who know how the government works,” said Eitan Goldman, an Indiana University finance professor who co-authored the study with professors from the University of North Carolina and the European School of Management and Technology. “We’re not legal scholars, so we’re not saying whether it is legal or illegal.”

The study found that 153 of the S&P 500 companies had political connections during the 2000 elections. There were 78 companies whose boards had only Republican affiliations, while Democratic-affiliated boards controlled 47 companies and the remaining companies’ boards had at least one director with affiliations to each major political party.

Another study by the same authors found that among companies that received government contracts from 1995 to 1998, those with Republican-leaning boards fared better than their counterparts, receiving on average about $500 million more in contracts, while Democratic-leaning companies on average won $75 million less in contracts.

There are plenty of possible explanations for the correlation, Goldman said. Company returns could have been better in industries, such as defense and oil, which naturally lean Republican and would have benefited regardless of who was on the board.

“There’s no clear evidence that [having a partisan board member] gives access to politicians,” Goldman said.

And while they don’t have data for other elections, Goldman said it was likely that companies with Democratic-affiliated board members would fare better under Democrat Barack Obama. “It would make sense that it would go both ways,” he said.

Peter Gleason, CFO of the National Association of Corporate Directors, said many companies have moved away from hiring “big-name politicos” as directors in recent years and have focused instead on directors with specific skill sets. “We’ve got Sarbanes-Oxley now. We’ve got independence requirements. … Things have changed,” he said.

However, Gleason noted that former government officials often have important skill sets, such as the accounting expertise possessed by former commissioners of the Securities and Exchange Commission. This could lead to a rush to snap up some former Bush administration appointees when they leave office in the next few months, he said.

A number of corporate boards already include former government officials, such as Al Gore at Apple and former Reagan administration economic advisor Martin Feldstein at American International Group.

Filed by Nicholas Rummell of Financial Week, a sister publication of Workforce Management. To comment, e-mail

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