UK companies with MPs on the board increase in value faster: Study

Big Ben in London, Westminster, England
Evening traffic headed towards Big Ben in London, UK. Undated. (photo: ryanking999 / DepositPhotos)

Having a parliamentarian on the board offers significant benefits to companies, according to research from the University of Groningen on United Kingdom businesses. Almost half of the top 50 public firms in the UK have connections with a sitting parliamentarian, according to the researchers. 

Doctor Swarnodeep Homroy of the University of Groningen and Colin Green of NTNU measured the performance of 338 UK companies after a policy change was implemented in 2002 which allowed British parliamentarians with outside business interests to initiate parliamentary proceedings. They found that businesses political connections experienced significant increases in financial returns following this policy change. Firms with political connections increased in value by around 8 percent compared to businesses with no political connections in the three day window around the announcement of the regulation. 

For this study, the researchers considered a politically connected company to be a company that employs a currently sitting parliamentarian as a director on the board or as a consultant. The researchers also found that after the amendment companies - both politically connected and unconnected - reduced their financial contributions to political parties. According to the researchers, this indicates the value represented by direct access to policy making. 

The matter of lawmakers having connections with the corporate world has always been controversial, due to concerns of corruption and cronyism. "The concern is that the elected representatives will not work in the interests of their electorate, but be influenced by their corporate interests", Dr. Homroy explained to NL Times. "The concern is particularly strong in modern times, when we have an increased concentration of wealth and increasingly powerful companies." According to Homroy, the worst case - if unlikely - scenario is if companies can influence public policies through political connections at the cost of social welfare.

There are two possible ways in which political connections can affect a company's value, Dr. Homroy explained. The first is through corruption and cronyism. The second is through information. "Politicians in Western European countries are often highly educated individuals with skills that are valuable to companies", he said. "Imagine you are a politician with a degree in engineering and you are on the board of directors of an energy company. You can use your expertise to advise the company on technical matters. At the same time, it is possible that you use your political influence to shape regulations on the energy market that favors the company you are connected to."

Such scenarios are unlikely to happen in the Netherlands under current legislation. Dutch parliamentarians are not allowed to have corporate affiliations while they are serving in the Tweede Kamer, the lower house of Dutch parliament. Connections between politicians and companies are generally also frowned upon in the Netherlands, Homroy said.