Social hierarchy effect of political strategy: Exploring chairman's political position influence on independent directors' dissent

• Published date: 01 May 2023
• Author: Shihua Chen,Yan Ye,Khalil Jebran,David H. Zhu
• Date: 01 May 2023
• DOI: http://doi.org/10.1111/corg.12467

ORIGINAL ARTICLE

Social hierarchy effect of political strategy: Exploring

chairman's political position influence on independent

directors' dissent

Shihua Chen

1

| Yan Ye

1

| Khalil Jebran

1

| David H. Zhu

2

1

School of Business Administration, Dongbei

University of Finance and Economics, Dalian,

China

2

Department of Management and

Entrepreneurship, W. P. Carey School of

Business, Arizona State University, Tempe, AZ,

USA

Correspondence

Khalil Jebran, School of Business

Administration, Dongbei University of Finance

and Economics, 217 Jianshan Street, Shahekou

District, Dalian, China.

Email: khaliljebran@dufe.edu.cn

Funding information

National Natural Science Foundation of China,

Grant/Award Number: 72072025

Abstract

Research question/issue: Although the dark side of corporate political connections

has been highlighted in recent studies, their adverse consequences on board decision

making have received limited research attention. In this study, we posit that the polit-

ical position of a chairman leads to greater power and a higher ranking on the board,

which adversely influences the dissenting behavior of independent directors.

Research findings/insights: In line with our predictions, we show that the presence

of a chairman with political position will reduce the likelihood that independent direc-

tors will dissent on board proposals. Such influence is particularly weaker in firms

that have higher status independent directors on boards and are state owned but

stronger among firms in regulated industries and those strongly influenced by

Confucian beliefs. These predictions are supported using a sample of Chinese firms

from 2004 to 2016.

Theoretical/academic implications: Our findings contribute to the board dynamics

and decision-making literature by highlighting how the political position of a board

chairman can adversely affect the decision-making quality of the whole board by

reducing the propensity for independent directors to dissent.

Practitioner/policy implications: The findings of this work also provide important

insights to policymakers who are keen to improve corporate governance mechanisms

by designing political strategies for firms.

KEYWORDS

corporate governance, China, independent directors' dissent, political position

1|INTRODUCTION

Many firms depend on the government for access to important

resources and use political strategies to influence government policies

to their benefit (e.g., Hillman et al., 2009; Pfeffer & Salancik, 2003;

Zheng et al., 2015). One important strategy is to appoint politically

connected individuals to firms' boards of directors (Hillman

et al., 2009; Pfeffer & Salancik, 2003; Sun et al., 2016). Such political

capital can provide many advantages to firms, including tax benefits,

competitiveness in the market, access to financing, and improvement

in overall performance (e.g., Faccio, 2006; Hillman, 2005; Peng &

Luo, 2000; Zheng et al., 2015).

While the majority of studies demonstrate the potential benefits

of having political connections, the negative consequences of these

connections have received less attention. Scholars have recently iden-

tified the dark side of political connections by demonstrating how

they can adversely affect firms (such as increasing rent appropriation

and regulatory enforcement costs; Leung & Sharma, 2021; Sun

et al., 2016). However, there is still a lack of evidence about whether

political connections adversely affect boardroom decision making. The

Received: 26 April 2021 Revised: 26 May 2022 Accepted: 31 May 2022

DOI: 10.1111/corg.12467

Corp Govern Int Rev. 2023;31:425–444. wileyonlinelibrary.com/journal/corg © 2022 John Wiley & Sons Ltd. 425

opaqueness of board operations has limited research on board deci-

sion making (Adams et al., 2010; Ma & Khanna, 2016), so exploring

how a firm's political connections affect its board's decision making is

of both theoretical and practical significance.

In the present study, we suggest that the appointment of an indi-

vidual with a political position to the board of directors grants him or

her more power, which often creates an informal hierarchy among

board directors. Firms that depend heavily on the government often

treat politically affiliated directors with high regard as these individ-

uals can help secure access to critical resources. In this case, board

members attach importance to the social dimension of political

position, and any person who has such position is viewed as more

powerful (Emerson, 1962; Hickson et al., 1971; Pfeffer &

Salancik, 2003). Given that informal hierarchies are created as a result

of the social dimensions that are valued in the group (Anderson &

Brown, 2010; Magee & Galinsky, 2008), we posit that an individual

who simultaneously holds both the chairmanship and political position

tends to have greater power and a higher ranking in the hierarchy.

With the greater power coming from his or her political position, this

chairman can significantly influence the strategic decisions made by

the entire board. In this study, we highlight the consequences of polit-

ical connections by showing how board chairman political position

reduces the dissenting behavior of independent directors during

decision-making.

We examine the influence of chairman political position on inde-

pendent directors' behavior for two reasons. First, we specifically

focus on independent directors because while their interest in the

company may be limited, they play an important monitoring role

(Jiang et al., 2016). These directors can issue fair and objective judg-

ments regarding the issues of company and are generally unaffected

by certain factors such as related interests, making it easier to exam-

ine how the decisions of the board are influenced by hierarchical dif-

ferences. Second, we examine the political position of the chairman

because in Chinese enterprises, chairmen not only take part in daily

management decisions but also are responsible for the routine opera-

tions of the company (Firth et al., 2006). For this reason, chairmen are

generally viewed to be more influential than chief executive officers

(CEOs) (Firth et al., 2006; Zhu et al., 2016). As representatives of top

management, company chairmen strategically manage board-related

issues, and opposition to a board proposal is likely opposition to the

chairman's position (Ma & Khanna, 2016).

Our analysis of a large sample of Chinese listed firms from 2004

to 2016 supports our argument that the presence of a board chairman

with political position reduces the likelihood that independent direc-

tors will dissent on board proposals. Given that dissent is an indicator

of effective governance mechanisms (Jiang et al., 2016; Tang

et al., 2013) and an important means for independent directors to

exercise their supervisory power (Jiang et al., 2016;Ma&

Khanna, 2016), the political position of the chairman reduces the

effectiveness of governance mechanisms and directors' supervisory

power. Such influence can be affected by several contingency factors,

including independent director status, state ownership, regulated

industry, and Confucianism's influence on a firm.

This work offers two important contributions. First, it contributes

to the political connections literature. Recent studies have drawn the

scholarly attention by showing that political connections adversely

affect firms by enabling rent appropriation by large shareholders (Sun

et al., 2016), reducing the quality of financial reporting (Liedong &

Rajwani, 2018), and increasing the cost of regulatory enforcement

(Leung & Sharma, 2021). While these studies focus largely on the neg-

ative effects of political connections on firm outcomes, they ignore

whether the appointment of directors with significant political posi-

tions can adversely affect the board's decision-making process. In this

study, we theorize that implementing a corporate political strategy,

such as by appointing a chairman with a political position, will nega-

tively affect the quality of board decision making by reducing the

supervision ability of independent directors.

Second, this research contributes to the boardroom dynamics

literature by specifically examining a key type of decision-making

behavior of independent directors: expressing dissent. Literature on

boardroom dynamics suggests that the efficiency of board decision

making can be affected by several factors, including prevailing social

pressures (Hambrick et al., 2015), board–CEO conflicts (Veltrop

et al., 2021), directors' expertise (Veltrop et al., 2017), and presence

of information-processing barriers (Boivie et al., 2016). A key finding

from this literature is that the healthy expression of dissent by inde-

pendent directors is critical for making effective board decisions.

We extend this stream of literature by proposing that board

chairmen gain more power by holding a political position, which

affects the dissent expressed by independent directors on board

proposals. Our findings offer a novel perspective on why boards are

unable to fulfill their monitoring roles efficiently by fully expressing

dissent.

2|THEORY AND HYPOTHESIS

2.1 |Corporate political connections

Studies that utilize resource dependence theory propose that firms

mitigate uncertainty and reduce their dependence on their external

environments by co-opting resource providers (Hillman et al., 2009;

Pfeffer & Salancik, 2003). When resources are substantially controlled

by the government (Li & Liang, 2015; Sun et al., 2016), firms actively

seek out political ties with the government (Hillman, 2005; Pfeffer &

Salancik, 2003), mostly by appointing individuals with important

government positions as board directors (Hillman, 2005; Lester

et al., 2008; Sun et al., 2012). Firms view these directors both as

human capital possessing relevant knowledge and experience in the

government and as political capital that can sway government policies

in their favor (Sun et al., 2016). Such political capital can help firms in

multiple ways, including by reducing environmental uncertainty,

increasing access to financial resources controlled by political institu-

tions, lowering transaction costs, and providing tax benefits

(e.g., Faccio, 2006; Hillman, 2005; Peng & Luo, 2000; Sun et al., 2016;

Zheng et al., 2015). Most important, firms establish political

426 CHEN ET AL.