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Business, Finance
In state-owned enterprises, the existence and the increasing proportion of politically connected directors on the board have increased corporate environmental protection investment. In non-state-owned enterprises, the existence and the increasing proportion of politically connected directors on the board lead to lower corporate environmental protection investment levels.
- political connection
- environmental protection investment
- China
1. Introduction
In recent decades, concerns about the negative impact of economic and social development on the environment have attracted significant attention from both entrepreneurs and governments, particularly in emerging economies. The issue of environmental pollution resulting from rapid growth poses a significant threat to sustainable development. A large amount of literature has been devoted to the research on sustainable development, and their contributions are significant [1,2,3,4,5]. Therefore, politicians are expected to undertake more measures to monitor firms and protect the environment. However, in emerging economies, political connections between commercial firms and the government are prevalent due to incomplete market mechanisms and the lack of law enforcement. The connection between the government and corporations may have two different influence patterns on a corporation’s behavior. On the one hand, an insider in a corporation may help the government better monitor the corporation’s behavior. On the other hand, this connection may help the corporation seek favorable treatment from the government, ultimately hindering government monitoring.
With increasingly strict environmental governing concerns, enterprises face a dilemma: invest more in environmental protection to comply with minimum standards set by the administration or pay the higher cost of penalties [6,7,8]. Although existing literature has examined the relationship between external environmental regulation and firm environmental protection investments [9,10,11,12,13,14], the impact of internal governance mechanisms on investment behavior has been largely underestimated. These factors play a crucial role in analyzing corporate environmental protection investment behavior. In China, it is common for a former or current government official to serve as a manager or director of a listed company, and such individuals can influence a company’s behavior and performance [15,16,17,18,19]. That influence may be changed by a company’s ownership [20,21,22,23].
Directors are often regarded as an institutional arrangement to address agency problems [24]. Apart from supervising management [25,26], directors play a crucial role in a company’s investment decision-making [27,28] and provide critical relational resources for its long-term development [29]. The study of enterprise behavior has shed light on how board structure affects enterprises [30]. Board structure typically includes board size, the proportion of independent directors, age structure, and gender composition of the directors, as well as their professional background [31,32]. Recently, more works have paid attention to a specific board structure, politically connected directors with administrative backgrounds on the board [33]. As a link between government and enterprises, politically connected directors can affect company performance, and there are two opposing views on this issue. Some argue that politically connected directors can establish a beneficial political connection and improve enterprise performance by providing relational resources and taking advantage of the government’s policy [34,35,36,37]. Other literature contends that politically connected directors are a significant channel for government intervention in enterprises. Companies with politically connected directors often undertake more political goals, lowering enterprise performance. In light of the study conducted by Xiao and Shen (2022) [38], which focused on the impact of political connections on environmental protection investment, it is important to note that their research did not take into account the ownership structure of the companies involved. However, ownership identity can significantly alter the mechanism through which politically connected directors affect environmental protection investment. Ownership differences play a crucial role in corporate governance and can have a substantial influence on the operations of companies, particularly in the context of China [39].
State-owned enterprises bear more social responsibilities and policy burdens than non-state-owned enterprises and face greater government intervention [40]. Despite the greater government intervention, state-owned enterprises enjoy government paternalism, which provides them with financial subsidies, increased loans, or lower taxes when they suffer losses [41,42]. Due to the increasingly severe issue of environmental pollution, local governments face growing pressure from residents and central authorities to improve environmental conditions and reduce pollution. As a result, politically connected directors in state-owned and non-state-owned enterprises have distinct impacts on corporate environmental protection investment behavior. In non-state-owned companies, politically connected directors are viewed as resource providers, while in state-owned companies, they are often perceived as supervisors. Therefore, it is necessary to distinguish the mechanisms employed by companies with different ownership structures. In state-owned enterprises, politically connected directors may serve as a channel for government intervention in corporate behaviors as the government appoints them. Such directors will likely take additional responsibilities on public issues like environmental protection to reduce the government’s burden and advance their political careers. Consequently, politically connected directors in state-owned enterprises often act as “supervisors of the government”.
In contrast, owners of non-state-owned enterprises expect politically connected directors to use their political resources to lower operating costs and avoid regulation, which amounts to political rent-seeking behavior. In non-state-owned companies, politically connected directors typically serve as “relational resource providers”. This tendency is particularly pronounced when the local government has stronger economic growth and financial pressures.
2. Political Connection and Environmental Protection Investment
The Influence of Politically Connected Directors on Environmental Protection Investment in State-Owned Enterprises
China’s state-owned enterprise reform aims to enhance the competitiveness of state-owned enterprises, for which the government has formulated a new strategy. This involves creating state-owned asset management companies and enterprise groups that alter the government’s control mechanism. The government attempts to shift from direct to indirect control by constructing state-owned asset management companies and enterprise groups. Although the structure improves state-owned companies’ performance, it has the unintended consequences of weakening the government’s control over these enterprises and escalating the costs incurred by the government to intervene in their operations [53].
The promotion of local officials is determined by a comprehensive evaluation system, which covers various aspects such as economic development, social stability, and environmental protection. The local official must outperform their peers to succeed in the evaluation process. In this regard, state-owned enterprises play a significant role in their work. However, this creates policy pressure, making the government hesitant to relinquish control over state-owned enterprises. Despite the new structure weakening the government’s control, it still retains the right to appoint directors to these enterprises. As a result, politically connected directors are often appointed to the boards of state-owned enterprises, as it has become an effective method for the government to maintain control over them [47].
Politically connected directors can be classified into two categories: retired and current. Retired directors are often concerned about their retirement benefits and tend to act cautiously to avoid political risks [36]. Therefore, catering to government policies becomes one of the best choices for them to deal with political risks. In contrast, current politically connected directors still have opportunities for further promotion. Working in state-owned enterprises may be a temporary strategy for them to navigate political turbulence or a test from higher-ups. In either case, their work must align with the government’s needs and meet the evaluation system’s criteria for the promotion. As a result, current politically connected directors also tend to meet government policy needs. In summary, politically connected directors in state-owned enterprises often serve as government supervisors.
The Influence of Politically Connected Directors on Environmental Protection Investment in Non-State-Owned Enterprises
Since the 1980s, non-state-owned enterprises in China have experienced significant growth and have become an integral part of the emerging market. However, China’s market mechanism and legal system are still not fully developed, and the private economy faces discrimination in terms of government policies and legal protection [54]. In contrast, state-owned enterprises have an inherent advantage due to their close relationship with the government, which provides them with greater access to resources, such as financing assistance, lower entry barriers into regulated industries, and government subsidies [55]. Despite these challenges, non-state-owned enterprises have been able to compete with state-owned enterprises with the help of a better stimulation system.
State-owned enterprises often pursue diverse operational objectives, while non-state-owned enterprises focus primarily on maximizing corporate value. Therefore, when hiring a manager, non-state-owned enterprises prioritize the capability to generate profits. The board members play a critical role in the corporate senior management structure. They provide two important resources for corporate development: knowledge resources represented by the directors’ personal experiences and professional skills [56,57] and social relational resources used to exchange external information and obtain external support [29]. In general, board members are chosen based on their ability to contribute to the company’s growth and success rather than any other factors, such as political connections.
In Chinese traditional culture, relational resources hold significant value, particularly those from the government [58,59]. Politically connected directors, who understand government workings and policy interpretation, are a valuable resource for non-state-owned enterprises. Unlike with state-owned enterprises, a structural hole exists between non-state-owned enterprises and the government. The structural hole is a disconnect between two groups that do not interact closely [60,61,62,63]. Politically connected directors in non-state-owned enterprises often occupy this position and connect non-state-owned enterprises and social resource centers such as governmental agencies. As a result, non-state-owned enterprises are willing to offer high salaries to hire politically connected directors, hoping to obtain political benefits like tax reductions, government subsidies, and administrative permits for regulated industries. Consequently, politically connected directors in non-state-owned enterprises are considered “relational resource providers”.
Smart business owners consider both the cost and income of environmental protection. However, the cost of environmental protection investments is considerably higher than the cost of regular enterprise equipment investments. Certain essential environmental protection investments, such as those in environmental protection facility construction and environmental protection technology upgrading, can consume a significant portion of a company’s cash, which significantly burdens non-state-owned enterprises. Despite environmental protection investments offering a large portion of social benefits shared among residents, the government, and market participants, such investments rarely provide direct economic benefits to the enterprises themselves.
As a result, non-state-owned enterprises are often unwilling to make environmental protection investments in order to increase their profits. However, as environmental laws and regulations continue to improve, the cost of violating environmental regulations rises, and thus enterprises are forced to increase their environmental protection investments [6,64]. Compared with state-owned enterprises, non-state-owned enterprises are more vulnerable to enhanced environmental regulations. To mitigate the impact of stricter environmental regulations and avoid costly environmental protection investments, non-state-owned enterprises preferably tend to establish political connections.
Politically connected directors can serve as valuable “relationship resource providers” in non-state-owned enterprises by bridging the gap between these businesses and the government, shielding them from potential government exploitation. This link has been shown in studies, such as Fisman and Wang (2015) [65], which found that enterprises with political connections are rarely punished for environmental pollution. This can be explained by the fact that these connected enterprises have ways to deal with local government oversight. Furthermore, even after punishment decisions have been made, politically connected enterprises can still overturn or avoid them through their connections with authorities [66]. The effectiveness of relationship resources provided by politically connected directors in non-state-owned enterprises depends on the quality of their relationships. Each individual’s social resource network has limitations, and different people have different relationship networks based on their experiences, personalities, and preferences. By having more politically connected directors in a non-state-owned enterprise, communication channels between the business and the government can be broadened, which allows them to avoid environmental regulation and reduce environmental protection investments.
This entry is adapted from the peer-reviewed paper 10.3390/su152215982
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