Political connections, ownership structure and quality of governance

Abstract

PurposeThe purpose of this paper is to ask the following question: is there a link between being politically connected, the quality of governance and the company’s ownership structure?Design/methodology/approachThe author then examined Canadian companies from the S&P/TSX index for the year 2015.FindingsPolitical connectedness is significantly associated with lower quality of governance in relation to shareholders’ rights; ownership concentration is associated with lower quality of governance in relation to the overall governance, board of directors, shareholders’ rights and compensation structure indices; ownership structure does not mediate the relationship between political connections and quality of governance; and number of political connections through the executive is associated with less risky governance practices in relation to compensation structure; in other words, when members of the executive are politically connected, the firm adopts better compensation practices.Research limitations/implicationsThe time limitation is the main weakness of this study and probably the cause of observed mitigated results.Practical implicationsThe author hope that the results will inform regulators on the need not only to further regulate the business-politics relationship, but also to consider the specific traits of concentrated ownership companies and the most critical aspects of corporate governance in politically connected firms, such as shareholders’ rights, particularly those of minority shareholders. For example, an intriguing case to investigate in the Canadian context would be Pierre Karl Péladeau’s foray into Quebec politics and the controversy ignited by his political bid in light of his position as majority shareholder (75 percent) in communications giant Quebecor Inc.Social implicationsIn fact, the results shown that concentrated ownership firms have lower governance quality than non-concentrated ones. Furthermore, in a concentrated ownership context, the minority shareholders’ rights could be threatened. In this sense, the results also shown that shareholders’ rights seem to be the most critical governance issue for the politically connected Canadian firms. These results are therefore the indication that Canadian financial market regulators must take action about politically connected and concentrated ownership firms in order to further protect minority shareholders’ rights.Originality/valueThis study makes a double theoretical contribution by enriching the literature on corporate governance and by providing one of the first investigations into the direct and comprehensive relationships between political connections, governance and ownership structure.