Seat in China’s Parliament Pays Dividends for CEOs

June 20, 2013, 4:07 PM

Report: Seat in China’s Parliament Pays Dividends for CEOs

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When China’s parliament, the National People’s Congress, meets once a year to vote through the Communist Party’s policy decisions, something like a carnival atmosphere prevails.We may now have a better idea why the deputies seem so happy to be there. The kudos of NPC membership has a measurable positive impact on their business interests, according to a new study. Getting a CEO on to the NPC provides a one-off boost to a company’s share price of about 3%, Rory Truex of Yale University found.

Since the 1990s, the Party has been making an effort to bring businessmen – or “the advanced productive forces,” as then-president Jiang Zemin called them – into the political process.

As a result, 503 of the 2,987 members of the last congress – which met from 2008 to 2012 – were CEOs, chairmen or other important leaders of various companies. Forty-eight of those businesses are listed on stock markets, and provided the data for the study.

Compared to other firms in the same industries, their operating profit margin was between 7 and 7.5 percentage points higher in a given year, Mr. Truex’s study found. He used complex statistical workarounds to correct for the possibility that only the bosses of the best companies were getting seats on the congress.

The research was inspired by theories of authoritarian politics which see rubber-stamp institutions like the NPC as a clever way of co-opting potential opponents into the political process and paying them sweeteners to keep them on side. But it has not been clear exactly what form those sweeteners take, since there is no clear mechanism for NPC members to lobby for their own interests at the parliamentary session. The body has never declined to approve a single law.

Mr. Truex’s statistical work, supported by interviews with analysts, suggests that an intangible “reputation boost” from NPC membership opens doors and boosts confidence in a firm.

“For an enterprise to be an NPC member, it means the government has supported you, and the bank will be very glad to lend money to you,” one anonymous interviewee told him.

Authorities are also likely to be more tolerant if your factory produces a little pollution, another interviewee said.

“If the CEO is an NPC member, he can say that his company is important to the economy,” this person said. “If you don’t have an NPC seat, the government will just shut it down.”

The Communist Party shares the NPC with eight smaller parties, as well as some unaffiliated members – although the Party does control the nomination process, so it is unlikely to suffer too much opposition in the legislature.

At the same time, deputies get to bask in the government’s reflected glory, and find their lives a little easier next time they have to deal with the bank or the Ministry of Environmental Protection. What’s not to like?