Politically induced board turnover, ownership arrangements, and performance of SOEs

Abstract

AbstractManuscript TypeEmpiricalResearch Question/IssueThis study investigates the impact of elections on board member changes and its relationship with profit‐oriented performance of state‐owned enterprises (SOEs), thus providing new insights on political tie heterogeneity.Research Findings/InsightsUsing a unique hand‐collected dataset of 200 SOEs in six countries of the former Socialist Federal Republic of Yugoslavia (SFRY) from 2010 till 2014, we find that board member changes within SOEs, unlike for private enterprises, are politically motivated rather than performance induced. We reveal that SOEs with higher levels of board member changes encounter lower productivity and profitability levels. These findings suggest that political interference via board member changes causes organizational inefficiencies and poor SOE performance. Moreover, the results show that board member changes are insignificant for the performance of large SOEs and SOEs governed by independent government body.Theoretical/Academic ImplicationsThis study reveals an indirect channel for political interference, thus contributing to a better understanding of political tie heterogeneity. Moreover, our study is the first to link political interference and performance of SOEs through introduction of election cycles into the board member changes–performance relationship.Practitioner/Policy ImplicationsThe results of this study provide insights for policymakers who are interested in enhancement of SOEs' performance. They suggest ways in which board appointment procedures should be altered as to be insulated from political interference. In addition, they show boards how they can lower the negative consequences of frequent board member changes.