CEO Political Ideology, Shareholder Primacy and Dividend Policy
What is the purpose of a corporation? While common law, which prevails in Anglo-Saxon countries, prescribes that the purpose of a firm is to maximize shareholder value, other legal systems tend to accord at least some importance to stakeholders other than the shareholders. For example, the German corporate law system explicitly refers to employee interests while making employee representation on boards of directors mandatory subject to firm size. While such countrywide explanations are useful in answering the question about what the purpose of a corporation should be, they are not helpful for furthering our understanding of the reasons behind the observed heterogeneity in the behaviour of firms from the same legal regime. For example, why do some firms from the same legal regime follow a more shareholder-centric approach while others prioritize the welfare of their employees over their shareholder? Importantly, how do these differences in approach affect firm policy?
Findings from academic research, especially over the past two decades, suggest that the personal values of corporate executives and board members are important determinants of corporate policies. However, only recently have a number of researchers started to explore the link between executive values and firm policies by focusing on a major channel between the two, i.e. the attention that executives accord to various corporate stakeholders. The contributions of this line of research are two-fold. First, it highlights that executive values may be a source of variation in the level of attention that the firm gives to its shareholders as compared to other stakeholders. Second, it suggests that these differences have wider implications for corporate policies as well as key decisions.
Contributing to this line of research, this paper provides evidence that CEO political preferences determine the CEO’s attention to the firm’s employees as compared to its shareholders, and ultimately shape the firm’s dividend policy. Specifically, we hypothesize that liberal CEOs, as compared to their conservative counterparts, pay less attention to shareholders and this is reflected in the firm’s dividend policy. We find support for our hypothesis, as firms with liberal CEOs are less likely to pay dividends and have significantly lower dividend payouts. In contrast, conservative CEOs pay more dividends, even if this requires redundancies. Nevertheless, we do not find any systematic differences in performance between liberal CEOs and conservative ones.
Again, these findings lend support for the view that CEO preferences matter in the sense that they shape firm policies. When hiring a CEO, the board of directors may consider, alongside other CEO characteristics, the CEO’s political ideology as a key influence on the CEO’s management style. The board may also take into account the CEO’s political ideology when designing the CEO’s employment contract and incentives, thereby possibly aligning the CEO’s management style with the corporation’s culture if there would be need for this.