From boots to suits: do military directors protect shareholders’ wealth?

Abstract

This paper explores the influence of military directors in protecting shareholders’ wealth through CEO compensation and corporate dividend payout policies. Based on manually collected data on corporate boards of non-financial companies operating in Pakistan, the results indicate a significant negative association between the presence of military directors on corporate boards and CEO compensation, thus supporting the notion that such directors are effective in monitoring and curtailing excessive rent seeking behaviour by the agents. In other words, presence of military directors on Pakistani corporate boards reduces agency costs and in turn enhances shareholders’ wealth. Results also indicate significant positive relationship between presence of military directors on boards and dividend payout, hence signifying that such directors are effective in enhancing shareholders’ wealth by reducing free cash flow opportunities that would otherwise be deployed by agents for their private benefits. We further found military directors with business education and wider networks to have significant positive association with dividend payout but not the case with CEO compensation. We control for board attributes, agent heterogeneity and firm-specific attributes in all our models. Overall, the benefits of military directors’ inclusion on corporate boards in Pakistan have far broader strategic, economic and policy implications on the nation besides resolving the principal-agent problems in the boardroom.

Military directors and stock price informativeness: What's all the fuss about?

“…Third, by drawing empirical evidence from an interventionist emerging economy i.e. Pakistan, our finding broadens the scope of the current theory on military directors in another cultural context characterised by lower shareholder protection, weak governance, higher market volatility, lower corporate growth, dominance of family-owned business groups, strong corporate-political connections, and high military interventions in political and economic affairs (Nawaz et al 2023). Fourth, we enrich and supplement the ongoing scholarly debate around outside directs' attributes (e.g., Armstrong et al 2014;Ferreira et al 2011;Gul et al 2011;Huang and Ni 2017).…”

“…However, board's ability to monitor and advise the agents is largely determined by the knowledge, experience, and expertise of the board of directors. Diversified boards, in terms of gender (Adams and Ferreira 2009), expertise and experience (Huang et al 2016) as well as with particular backgrounds such as with military service experience (Benmelech and Frydman 2015;Nawaz et al 2023) have direct implications for corporate outcomes.…”

“…Of those limited research conducted outside the US, studies report that military directors reduce economic performance (An et al 2020) but lower the cost of debt for the incumbent firm (Harymawan 2018). Nawaz et al (2023) report that directors with military service experience curtail excessive rent seeking-CEO compensation-behaviour of the agent and reduce free cashflow opportunities by awarding higher dividend payouts thereby protecting shareholders' wealth.…”

“…This study heeds this gap and provides the first direct empirical evidence, analysing the impact of military directors on stock price informativeness from an emerging economy. In doing so, we aim to contribute to the literature that explores what type of directors protect shareholders' interests and improve corporate governance quality (e.g., Adams and Ferreira 2009;An et al 2020;Gul et al 2011;Huang et al 2016;Nawaz et al 2023).…”

“…Pakistan offers a unique milieu due to the heavy involvement of the Pakistani military in the reconfiguration of the economic and international trade policy to resolve the macroeconomic challenges the country faces since its independence in 1947. As Nawaz et al (2023) explain, unlike Korea Pakistan military's role has not diminished neither has it increased to an absolute control as is the case for Egypt. Instead, Pakistan military is strategically involved in the economic affairs, using corporate board appointments as one of the alternatives to revive the corporate sector and enhance investors' confidence and to strengthen its volatile economy.…”