State Political Ideology as a Corporate Control Mechanism: Evidence from China

Governments routinely seek to control the firms in their jurisdictions in order to align corporate behavior with public policy objectives. In democratic countries, governmental control of firms tends to be effectuated primarily through the formal mechanisms of state ownership and legislation. In this paper, however, we show that in autocratic societies, the informal control mechanism of political- ideological exposure of the corporate elite is commonly used as a “third way” of establishing firms’ compliance with government-mandated objectives. We theorize that through political-ideological exposure, individuals are “prepared” for business careers in which they become “agents of the state” and help implement state policies by influencing boardroom decision making. We capitalize on China’s recent (2012) political-ideological shift from pro-market “Dengism” to corporate social activity- focused “Xiism” to assess how political ideology is used as an instrument of implementing state policies. We test our ideas on a longitudinal (2008–2016) dataset of 848 Chinese listed firms. Results show that boards with politically exposed directors make the shift to Xiism-congruent behavior faster. This transition proceeds even more rapidly when firms are located in “politically imprinted” regions representing the historical power base of President Xi, but unfolds slower in regions with high-quality public governance, which are more resistant to policy swings. Our study advances the literatures on the role of political ideology in management and political institutional theory.