Forging Agents of the State? How Political Institutions Impact CEO Compensation in SOEs

Abstract

We show that governments around the world use the high-powered incentive of executive compensation to turn CEOs of partially state-owned enterprises (SOEs) into ‘agents of the state’. The current literature on principal-principal (PP) agency theory does not adequately explain how non-controlling shareholders are duped by the deployment of private means towards public ends, or how this agency problem can be repaired since governments cannot be kept in check with conventional corporate governance mechanisms. We develop a novel theory detailing how political institutions act as de facto corporate governance mechanisms by impacting governments’ ability to co-opt SOE CEOs to the detriment of non-controlling shareholders. Matched-samples evidence covering publicly listed firms from 20 countries corroborate our political-institutional extension of the PP agency framework. More specifically, we find that political power and political factionalization aggravate PP agency problems by enlarging incumbent governments’ sway over partially SOEs, whereas political constraint and political polarization reduce these problems.