Regulation and the Evolution of Corporate Boards: Monitoring, Advising or Window Dressing?

It is generally agreed that boards are endogenously determined institutions that serve both an oversight and advisory role in a firm. While oversight role of boards has been extensively studied relatively few studies have examined the advisory role of corporate boards. In this study we examine the participation of “political” directors on the boards of natural gas companies between 1930 and 1998. We focus on the 1938, and 1954 regulation and 1986 partial deregulation of the natural gas industry. Using datasets covering the period from 1930 to 1990 and 1978 to 1998, we test whether regulation and deregula tion altered the composition of companies’ boards as the firms’ environment changed. In particular, did regulation cause an increase and deregulation a decrease, in the number of “political” directors on corporate boards? We find evidence that the number of “political” directors increases as firms shift from market to political competition. Specifically the regulation of natural gas is associated with an increase in the number of “political” directors and the deregulation is associated with a decrease in the number of “political” directors on boards. Eric Helland, Dept. of Economics, Claremont-McKenna College, email: [email protected]. Michael Sykuta, Dept. of Agricultural Economics, University of Missouri-Columbia, email: [email protected]. The authors wish to thank Sam Peltzman (the editor), an anonymous referee, Bennet Zelner, Steve Ferris, Robert Lawless, Per Fredrickson, Rui de Figueiredo, Peter Klein, Oliver Williamson, Kira Markiewicz, Daniel Snow and the participants at the 2000 annual meetings of the International Society for New Institutional Economics, Tubingen, Germany, The Public Choice Society annual meetings and the annual meeting on Network Industries in Transition, and seminar participants at Claremont McKenna College, Washington University, University of California, Irvine and University of California, Berkeley. We thank Pam Shramek for her research assistance. An earlier version of this paper was titled “Deregulation and Board Composition: Evidence on the Value of the Revolving Door.” Claremont Colleges working papers in economics Claremont Graduate University • Claremont Institute for Economic Policy Studies • Claremont McKenna College • Drucker Graduate School of Management • Harvey Mudd College • Lowe Institute • Pitzer College • Pomona College • Scripps College