From Backroom to Boardroom: Role of Government Directors in U.S. Public Firms and Their Impact on Performance

Abstract

We examine the role of government directors (outside directors with government experience) on corporate boards. We find that government directors are more likely to miss board meetings and announcements of their appointments are greeted more negatively. We also find that unlike other outside directors, their board presence does not affect the sensitivity of CEO turnover to performance. In addition, firms with government directors experience weaker operating performance and more negative merger announcement returns. However, these firms pay less tax and their mergers are less likely to be challenged by antitrust authorities. Using an instrumental variables approach to control for endogeneity bias does not change the results. We further find that the adverse effects of government directors are largely alleviated when firms have high government sales, operate in regulated industries, or have politically connected government directors.