Deregulation and Board Composition: Evidence on the Value of the Revolving Door

Abstract

According to the conventional wisdom, a revolving door operates between government and industry. High ranking government officials leave office and head for Washington law firms or major corporations where they use their connections and influence to further their new employers' political interests. Despite the pervasiveness of this story, remarkably little evidence exists on the motivations underlying the revolving door phenomenon. Indeed, a few competing theories attempt to explain the revolving door phenomenon, but almost no work has been done to empirically distinguish which of these theories is most relevant. In this study we examine the participation of political directors on the boards of natural gas companies over a period of deregulation. We focus on the 1986 deregulation of the natural gas extraction companies. This event provides a natural experiment to distinguish between competing theories, namely the traditional rent-seeking revolving door theory and the managerial human asset theory. Using data covering the period from 1978 to 1998, we test whether deregulation altered composition of the board as the firm's environment changed. In particular, did deregulation cause firms to reduce the number of political directors on their boards? We find evidence that board members serve a rent-seeking role. In general, the 1986 deregulation of natural gas extraction is associated with a decrease in the number of political directors on boards. In addition, using a fixed-effects model we find that deregulated firms reduce the number of political directors.

Keywords: Corporate governance, deregulation, political directors

Keywords: Corporate governance, deregulation, political directors

JEL Classification: G34, G38, K22