1 Introduction

Regulatory agencies have over the years focused on various matters related to the board of directors in enhancing corporate governance quality and firm performance. One aspect that has been promoted in the corporate governance code in many countries is board diversity and inclusion. This prompted studies to look at the influence of board membership in terms of gender (Ye et al. 2019), expertise (Güner et al. 2008), experience (White et al. 2014), education (Nawaz 2022a, b), and ethnicity (Haniffa and Cooke 2002; Haniffa and Hudaib 2006) on governance quality, firm performance, and disclosure practices. More recently, studies have explored whether inclusion of directors with diversified traits such as academicians, accounting and finance experts (Güner et al. 2008) and those with military service experience (Malmendier et al. 2011; Benmelech and Frydman 2015; Li and Rainville 2021) can have direct implications on corporate operations and policy outcomes. The interest in military personnel to fulfil corporations’ human capital needs, especially at the strategic or corporate board level, is due to their superior decision-making and leadership skills through the trainings they received which would be helpful in the boardroom (Grönqvist and Lindqvist 2016).

Earlier studies on the influence of military experienced directors on corporate boards are concentrated in the US due to their significant presence in the country’s corporations. Those studies document military experienced CEOs to be associated with more conservative and precise disclosures, better acquisition outcomes (Lin et al. 2011), higher leverage (Malmendier et al. 2011), less incidence of fraud and financial misconduct (Benmelech and Frydman 2015), lower levels of investment (Benmelech and Frydman 2015), and less aggressive tax strategies (Law and Mills 2017). More recent studies found the presence of military experienced directors to be associated with lower performance and less investment in R&D (Li and Rainville 2021) as well as less earnings management and higher forced CEO turnover (Cai et al. 2021). Interestingly, in relation to CEO compensation, Li and Rainville (2020) found the presence of military directors tend to award higher CEO compensation while Cai et al. (2021) found the opposite.

Of those limited studies conducted outside the US, Harymawan (2018) found Indonesian firms with military directors enjoy lower cost of debt. An et al. (2020), based on a cross-country study, document military directors reduce economic performance. Lin et al. (2021) and Jaroenjitrkam and Maneenop (2022) found military directors to be associated with lower performance and higher leverage in the context of China and Thailand, respectively. Interestingly, Kim et al. (2017) found military experienced directors to be less likely to commit fraud in the context of Korea but the opposite in the case of China (Lin et al. 2021). Jaroenjitrkam and Maneenop 2022) and Kim et al. (2017) both found military directors to be associated with lower dividend payout in Thailand and Korea, respectively.Footnote 1

The inconclusive results for some of the corporate outcomes observed in the US and in other countries can be attributed to different contexts and the discrepancy in the behaviour of military directors may reflect the repercussions on the manifestation of military values beyond military institutions due to their role and power in local and international arena. Therefore, there is a need for further studies to enhance our understanding on the role and influence of military directors on corporate boards in different contexts.

In this paper, we study the impact of board diversity in the form of military directors’ role in enhancing shareholders’ value and reducing agency costs by means of CEO compensation and corporate dividend payout in the context of Pakistan. The focus on shareholders’ value and the choice of the two proxies is premised on agency theory (Fama and Jensen 1983) which posits that the primary role of the corporate board is to protect the interest of shareholders by monitoring and advising the agents, thereby reducing the agency costs and moral hazard. 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. Furthermore, unlike Korea (Kim et al. 2017), Pakistan military’s role has not diminished neither has it increased to an absolute control as is the case for Egypt (Eissa and Eliwa 2021). 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 as well as increase the inflow of foreign direct investments (FDIs) to strengthen its volatile economy. Hence, military directors on corporate boards within the context of Pakistan are expected to be more prone to serve and protect shareholders’ interest.

Based on hand-collected dataset comprising 267 non-financial firms from 12 sectors listed on the Pakistan Stock Exchange (PSX) for the period 2009–2019, our results support the notion that military-trained directors are better suited to serve and protect shareholders’ interests to continue the nation building agenda in Pakistan. The negative relationship with CEO compensation and positive association with dividend payout are robust to alternative economic specifications and military director proxies. We further found military directors with business education and wider networks to be positively associated with higher dividend payout but has no impact on CEO compensation.

Our study contributes to the accounting and finance as well as governance literature in several ways. Firstly, we contribute to the literature that analyses the causal effect of board structure on agency costs (e.g., Chhaochharia and Grinstein 2009; Ryan Jr and Wiggins III, 2004) by providing empirical evidence that inclusion of military directors on corporate boards is an effective governance mechanism to curtail agents’ rent seeking behaviour and reducing agency costs.

Second, we add new insights to the growing literature on corporate dividend policy (e.g., Ye et al. 2019) in general, as well as extend the emerging literature stream analysing the effects of military directors on corporate dividend policy (Kim et al. 2017), particularly in the context of emerging economy (Jaroenjitrkam and Maneenop, 2022), by establishing that inclusion of military directors to corporate boards reduces free cashflow opportunities available to agents to benefit themselves by promoting higher dividend payout to shareholders. Our result is opposite to Jaroenjitrkam and Maneenop (2022) and Kim et al. (2017) in the context of Thailand and Korea, respectively. Thus, our finding broadens the scope of the current theory on military directors in another politico-economic 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 2022a).

Third, we enrich the emerging strand of research on the implications of military directors for corporate strategic outcomes (An et al. 2020; Benmelech and Frydman 2015; Jaroenjitrkam and Maneenop, 2022; Kim et al. 2017; Li and Rainville 2020, 2021) by highlighting which attributes of the military directors may protect shareholders’ wealth. Specifically, our results supplement earlier research which suggests that directors enhance boards’ monitoring and advisory functions, thereby complement corporate governance quality (e.g., White et al. 2014). To that end, we provide empirical evidence, suggesting that military directors with business education and wider networks are more capable in protecting shareholders’ interests.

The rest of the paper is organized as follows. Section 2 discusses the context, theoretical framework adopted in this study and development of our research hypotheses. Section 3 discusses the research design and data. Section 4 presents and discusses the empirical findings while Sect. 5 provides results for robustness testing. Section 6 concludes the paper.

2 Context, theoretical framework, and hypotheses development

2.1 Military involvement in political-economy and the corporate world

Military institutions produce officers who are trained to lead in winning wars, overcoming internal conflicts as well as making success in international military alliances (Hannah et al. 2009). Leadership is and continues to be a mainstay of the military. Culturally, militaries are enamoured by leadership, and they endeavour to develop leader competencies and skills needed for the next level of leadership through formal education, operational assignments, and self-development (Hannah et al. 2009). Since they are trained to analyse and assess risks, to ask questions that challenge the status quo, as well as to make decisions and command often under intense pressure, such incredible skills can be utilized beyond the war cabinet and war fields. Hence, it is not surprising to find military personnel, especially retired officers, taking on key leadership roles in the respective country’s political affairs and offer their services to support the political and civic establishments (An et al. 2020; Jaroenjitrkam and Maneenop, 2022; Kim et al. 2017; Li and Rainville 2020, 2021).

It has been widely observed, especially in developing countries, that military intervention in politics is often associated with economic crisis and stagnation in economic growth, and governments are also more likely to be overthrown by force when economic conditions deteriorate (Mayer 2008). One prominent example of interventionist economy is China, which is characterised by cheap labour, higher productivity, and moderate levels of corruption. Military directors are strategically appointed to help improve governance quality and curb illicit practices such as bribery and corruption in the Chinese corporate sector. Despite stringent policy to curb corruption, Lin et al. (2021) found firms with military directors to underperform and have higher risk, highlighting the discrepancy between policy and practice.

On the other extreme is Egypt, with an ex-military chief holding the presidential office and the Egyptian army directly controlling the country after the coup d'etat of 2013. The country until now is characterised by cheap labour, poor productivity, higher levels of corruption, and illicit political practices such as kickbacks and bribes in the economic affairs. Military directors are appointed due to their strong network ties to the Egyptian establishments regardless of whether it is a military or bureaucratic setup, but such military directors are found to be detrimental for Egyptian corporations as they tend to underperform and affect the economy adversely (Eissa and Eliwa 2021). Likewise, despite being a constitutional monarchy, Thai army has launched 12 coups since 1932 (the last one in 2014) and has entrenched itself to the economic sector of the country to the extent that it controls some of the key financial and non-financial institutions of the country. Similar to China, Jaroenjitrkam and Maneenop (2022) report that Thai firms with military-experienced directors underperform and have higher risk. Interestingly, despite the prolonged exposure to military rule during their formative years, South Korean army’s role in the economic affairs of the country is diminishing from the corporate sector. Kim et al. (2017) report that South Korean firms with military directors are less likely to commit corporate fraud.

In the case of Pakistan, its military has been strategically entrenched into the politico-economic affairs of the state since its independence in 1947. The economic decline under the kleptocratic elite and the political instability exacerbates the decline in export-oriented sectors and the flow of foreign direct investments (FDIs), causing recurring balance of payments crises that require bailouts. Furthermore, unlike China, Pakistani businesses are globally uncompetitive. Hence, due to difficulty in mustering resources required to compete at a global scale, consolidation of the military is seen as a plausible solution to fix “political uncertainty and instability [which] are anathemas to a market-based economy” (for more details, see, Husain 2009). In other words, the alliance between the country’s civic-and-military establishment was formed to fight the economic war of survival. Consequently, Pakistan military becomes heavily involved in the reconfiguration of the economic and international trade policy to resolve the macroeconomic challenges. This strategic shift is akin to its strategic ally, China, which initiated its economic revival with military-run organizations and over the decades has developed companies that have a more global outlook.

Despite the strong presence of Pakistan military officials both in the public and private sector organisations, especially in state-run economic entities, they are seen as less prone to illicit activities such as kickbacks and bribes relative to the political elite who is at the centre of financial corruption in the country. Besides, Pakistani military has built their own conglomerate, which is worth billions of dollars catering all major economic sectors from real estate, banking and logistics to education services, supports hubs, and bakeries. The fact that military officials, including ex-military personnel, run this military conglomerate suggest that military-trained business leaders possess excellent business acumen in managing diversified businesses. An et al. (2020) note that praetorianism is common in war-affected interventionist economies whereby militaries strategically endorse appointments of their retired servicewomen and men to the corporate boards as a proxy for control over the publicly held corporations. Staniland et al. (2020), in tracing the career path of Pakistani military officers, identify an institutionalised transmission belt that channels military-serviced personnel into the state and civic organisations upon completion of their military service. The study further notes the assumed positions offer influence and generous financial rewards and serve as a second – financially more rewarding – career for the retired military officers. Thus, the deployment of ex-military trained personnel is strategic and not consequential.

However, the effects of military directors on corporate strategies and outcomes remain unexplored in this unique context of Pakistan, thus prompting the conduct of this study to narrow the gap in the literature. Given the different politico-economic setting and military involvement in Pakistan compared to the US, China, Korea, Thailand and Egypt, an analysis of the impact of military directors in protecting shareholders interest in market-based economy can help enhance our understanding of the board diversity phenomenon.

2.2 Theoretical framework and hypotheses development

Separation of ownership and control in publicly held companies gives rise to agency costs due to the conflicting interest between the principal and agent (Fama and Jensen 1983). Agency costs comprised of monitoring, bonding, and residual loss (Jensen and Meckling, 1976). Monitoring costs are incurred in hiring external auditors to verify the financial statements and appointing non-executive directors to ensure managers conform to regulations as well as contribute to strategic planning and policies to enhance shareholders’ value. Bonding costs are related to covenants that prevent the company from taking certain actions, such as imposing restrictive dividend payout. Residual loss relates to expenses incurred as a result of conflicting interests between shareholders and managers.

Board of directors, especially non-executive directors, are expected to advise and monitor the agents to enhance shareholders’ interests in terms of appreciation in corporate value and dividend awards, as well as ensure that managers are not compensating themselves with higher rewards that may jeopardise the firm’s financial sustainability. As noted by Nawaz (2022a, b), having the right board composition in terms of knowledge, skills, expertise, and experience will help improve corporate governance quality. Prior studies have considered the impact of military directors on board and concluded that they help improve the quality of decisions as well as decrease divisiveness and conflict at the corporate board level, thereby improving corporate governance quality and corporate strategic outcomes (Benmelech and Frydman 2015; Law and Mills 2017; Lin et al. 2011). We therefore extend prior studies by analysing the impact of military directors on two corporate policies, viz. CEO compensation and corporate dividend payout, that have implications on shareholders’ wealth. We argue that these are relatively better proxies to determine if the inclusion of military directors at the corporate board level will enhance shareholders’ interest by reducing agency costs in the form of CEO compensation and increasing dividend awards to the shareholders.

Board of directors play no executive role in the day-to-day functioning of the company. Their primary duty is to provide strategic direction to the agents such as the CEO while monitoring them to ensure that the agents work in the best interests of shareholders. The CEO is responsible for implementing strategies to enhance shareholders’ wealth. Thus, it is the CEO who is held accountable for the performance outcomes of the company and not the board of directors. As such, the CEO may claim higher financial rewards such as bonuses and increments when the company performs better, and they may get fired by the board if the company does not perform well. Arguably, it is the CEO traits relative to board of directors that may explain corporate performance. Since board of directors are responsible for making strategic decisions including decisions related to CEO compensation and corporate dividend payout policy, their impact on corporate strategic posture would be more pronounced in such decisions relative to performance outcomes. In the following sub-sections, we provide theoretical arguments and extend our research hypotheses, informed by the relevant literature.

2.2.1 CEO compensation

The rapid rise in CEO compensation, which consists of basic salary, stock options, long-term incentive plans, retirement package and other perks, has sparked the interest of researchers and regulators on the pay-setting process and also in identifying the determinants of executive compensation in corporations (Liu et al. 2023). If executives are improperly compensated, they may not have the incentive to increase profit and boost the share price, which can be costly for shareholders. Equally, executives may be given raises and bonuses even when their companies are faltering due to corporate structure that provides them with more power. This is consistent with the managerial power hypothesis (e.g., Chhaochharia and Grinstein 2009), which contends that managers’ influence over the corporate board allow them to extract excessive rents in the form of compensation. Hence, it is not surprising to find CEO compensation being one of the major contributors to agency costs (Elston and Goldberg 2003).

Proponents of agency theory (e.g., Fama and Jensen 1983) argue that one way to curb moral hazard is to strengthen the corporate governance structure. A diversified and independent board can potentially improve board vigilance (Chen et al. 2023) in ensuring that agents serve shareholders’ interest (Chhaochharia and Grinstein 2009). Since outside directors tend to be completely independent, they are in a better position in restraining managers’ influence over the board and also able to make unbiased judgments about the quality of the CEO and in turn, making effective decisions on compensation, hiring, and firing.

Results of empirical studies on board independence and CEO compensation are mixed. Chhaochharia and Grinstein (2009) report board independence having direct implications on compensation decisions: i.e., board dominated by outside directors have a bargaining advantage over the CEO resulting in compensation being more closely aligned to shareholders’ interests. On the contrary, Ryan Jr and Wiggins III (2004) found firms dominated by non-executive-directors award higher equity-based compensation to CEOs.

In a departure from studies on board independence, Li and Rainville (2020) focus on board diversity and investigates the effect of non-executive military-trained directors on corporate board and executive compensation. Based on a sample of S&P1500 firms, the study found CEO compensation to be higher in firms with outside directors dominated by military veterans; thus, implying that military directors may not be acting in the best interest of shareholders. However, findings from a single study in a developed economy such as the US cannot be generalised to developing economies characterised by different corporate environment and social and political-economic contexts.

In the case of Pakistan, it is common for military officers to be deployed into the state and civic organisations upon completion of their military service due to the civic-military mutual alliance formed to protect the country’s economic interest. Since serving wider interest in society has been ingrained in the psyche of military officers, their presence as independent outside directors on the boards of Pakistan public listed companies could aid in improving the quality of board discussions and increasing the ability of the board to effectively monitor managers. In other words, their presence can help curtail any excessive rent seeking behaviour by the agents, and thereby protect shareholders’ interest as well as boost the confidence of market participants. Therefore, our first hypothesis is as follows:

H1a

The presence of military-trained outside directors on corporate boards is negatively associated with CEO compensation.

Besides working background of outside directors, prior research in the governance literature has also considered other traits such as education and networking, and social ties that may facilitate board vigilance and enhance corporate governance quality (Güner et al. 2008; Nawaz 2022a, b; White et al. 2014).

Staniland et al. (2020) observe that retired Pakistani military personnel tend to study and attain university degrees in the field of business, law, and politics. The attainment of such degrees helps to strengthen their personal profile and make their candidacy more attractive for the corporate sector. Therefore, military trained directors who are well verse in business know-how would be expected to be more vigilant observers and more capable to curtail the rent seeking behaviour of the agents and thereby protect the interests of the shareholders. Hence, we hypothesise the following:

H1b

The presence of military-trained outside directors with business degree on corporate boards is negatively associated with CEO compensation.

The opportunity to serve in the military and the nature of military training results in servicemen having close network ties with their peers even after they leave military service and join the corporate sector. Military-trained outside directors can capitalise on their social network ties to gain insights into the broader corporate sector and treat the agents according to market norms and not allowing room for the agent to exploit the board for rent seeking. These arguments are supported by the resource dependence perspective and social network theory, which observe that well-networked/connected board of directors are better monitors and advisors due to better access to information and influence (Nawaz 2022a). This will enhance capability of military directors in monitoring agents’ rent seeking behaviour. Therefore, we hypothesise the following:

H1c

The presence of highly connected military-trained outside directors on corporate boards is negatively associated with CEO compensation.

2.2.2 Dividend payout

Dividend policy, which is closely related to capital structure, has bearing on shareholders and debtholders. Since the board of directors are responsible for corporate dividend policy and authorising the dividend payout, the structure and composition of boards can potentially mitigate the conflicts of interest between corporate insiders (executive directors) and outside shareholders (La Porta et al. 2000).

The agency costs of free cash flow theorem (Jensen 1986) argues that dividend policy is a good corporate governance device to mitigate and reduce the free cash flow opportunities within the firm that would otherwise be deployed for private benefits by managers. Dividend payments to shareholders make it less likely for managers to use the firm’s free cash flow to invest in low-return projects or to waste on organizational inefficiencies at the shareholders’ expense (Herron 2021). While dividend payments would reduce the free cash flow at the disposal of managers in pursuing their private interests (Jensen 1986), it also increases the firm's reliance on external financing. Since the incumbent managers must now raise capital externally, this will increase their exposure to greater scrutiny by outside investors and regulators, which in turn help in mitigating the agency problem.

Dividend policy is also an important mechanism in addressing asymmetric information between agent and principal. According to signalling theory (e.g., Riley 1975), market participants are inclined to use dividend payout announcement as a signal of firm value especially when there is greater trust and confidence in board members. In good institutional environment with greater shareholder protection, dividend payout can be expected to be higher but in the absence of effective monitoring from minority shareholders and when shareholders’ rights are weak, managers are less incentivised to pay large amounts of dividends (La Porta et al. 2000). Hence, shareholders have to erect structural safeguards in the form of diversified boards as a proxy to protect their interest and to curtail the opportunist behaviour of corporate managers.

Recent studies in the governance literature document the association between board diversity and dividend payout. Khan et al. (2022) found diversity in nationality, experience and educational background play an influential role in encouraging Turkish companies to pay high dividends and they conclude that board demographic diversity attributes can mitigate agency conflicts between controlling and minority shareholders through setting up effective dividend payout policies. In this vein, Herron (2021) highlights that in weak legal regimes, firm-level governance increases dividend payout ratios, thus implying that firm-level governance is effective at increasing shareholder rights in weak legal regimes. In short, firms represented by directors with diversified talents and expertise increase board’s monitoring capability, which in turn helps to alleviate information asymmetry between management and outside investors (Ye et al. 2019).

Against this backdrop and consistent with the aim of this study, we argue that directors with military service experience will choose to uphold the good perceptions of them as the protector of the nations’ wealth and when they join corporate board, they also want to be seen as the protector of shareholders’ interests. In this vein, Kim et al. (2017) asserts that military directors whose raison d'être, after all, is to protect shareholders’ interest by scrutinizing the executives, would continue to uphold strong military values and affect board’s ability and willingness to monitor managerial decisions. Likewise, Jaroenjitrkam and Maneenop (2022) argue that instilled with a robust sense of duty and morality in their formative years, military directors are expected to manifest these values in corporate financial policies pertaining to corporate dividend payouts.

Since the corporate sector in Pakistan are highly concentrated with family ownership (Nawaz 2022a) and given the prevalence of lower shareholder protection, weak governance, higher market volatility, lower growth, strong corporate-political connections, and lack of transparency in the business environment, market participants such as investors look up to the outside directors on corporate boards for confidence building signals to inform their investment decisions. Therefore, announcement of dividend payouts by the boards with military directors would send positive signals to the market. The signalling effect would not only enhance investors’ confidence but also mitigate information asymmetry and adverse selection that would result in higher market valuation for the incumbent firm and overall higher economic efficiency.

In summary, the presence of military trained directors on the boards are more likely to make well-reasoned decisions and are more inclined to promote shareholders’ interest by addressing agency problems and consequently, are more inclined to initiate and set higher dividend payout ratios (Jaroenjitrkam and Maneenop, 2022; Kim et al. 2017). Hence, we hypothesise that firms with military directors would reduce free cash flow opportunities by increasing dividend payouts. More formally, we extend the following hypothesis:

H2a

The presence of military-trained outside directors on corporate boards is positively associated with dividend payout.

As in the earlier discussion on directors’ education background and network ties, we expect military trained directors with an education background in business studies would support strategies that promote shareholders’ protection which includes reducing free cash flow opportunities by promoting higher dividend payouts. Continuing with this line of argument, we also expect connected military directors to reduce free cash flow opportunities that agents may create for themselves. In doing so, such directors are expected to protect the interests of the shareholders. Our theorizing is informed by the resource dependence theory, which posits that firms seek the appointments of resource-rich outside directors to gain access to resources such as information, reputation and as the appointed board of directors become more externally connected, the corporate board is likely to have greater access to resources and information, which improves board’s vigilance that translates into greater shareholder protection (Pfeffer and Salancik 1978). Consistent with this view, existing literature provides strong evidence that the capital markets view outside directors as efficient monitors of management and that the inclusion of directors with diversified background and experience reduces agency costs and enhances corporate dividend payouts (e.g., Borokhovich et al. 2005). Hence, we extend the following hypotheses to test the effects of military directors’ traits viz., education background and network, on corporate dividend policy:

H2b

The presence of military-trained outside directors with business degree on corporate boards is positively associated with dividend payout.

H2c

The presence of highly connected military-trained outside directors on corporate boards is positively associated with dividend payout.

Figure 1 illustrates the theoretical framework and the variables for the research hypotheses tested in this study.

Fig. 1
figure 1

Theoretical framework and hypotheses

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3 Research method

3.1 Data sample

There were 539 public listed companies categorised under 21 sectors and sub-sectors on the Pakistan Stock Exchange (PSX) in 2019. We removed all 17 financial companies and 255 companies with missing data for the period 2009–2019, providing us with a final sample of 267 non-financial companies from 12 sectors. This is the maximum study period possible as the PSX observed a floor in prices in 2008, which halted trading.

Table 1 provides details on the sample distribution and breakdown of publicly listed firms with military directors on their board across the non-financial sectors. It can be seen that the percentage of firms with military directors has slightly decrease over the years from 22% in 2009 to 17% in 2017 before increasing to 20% in 2019. Sector with the highest percentage of firm having military director is manufacturing (33%) followed by Information, Communication & Transportation (30%), which are both important sectors of the economy.

Table 1 Sample distribution
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We collected financial data from DataStream and supplement this with firm-specific data, which was collected manually from annual reports retrieved from the sampled firms’ websites as well as the State Bank of Pakistan’s website. Data on corporate governance features, including data on military directors, was hand-collected from various sources such as annual reports, corporate governance reports, company bulletins, press releases, individual company websites, and local newspapers archives.

3.2 Research variables

i. Dependent variables

Our first dependent variable addressed the agency cost proxy which is related to CEO compensation, as this is considered as the most appropriate proxy for agency costs that firms incur in monitoring to prevent manager’s self-serving behaviour (Elston and Goldberg 2003). Although earlier studies (e.g., Elston and Goldberg 2003; Li and Rainville 2020), have used three diverse proxies to account for agency costs related to CEO compensation, i.e., CEO total compensation, CEO salary-based compensation, and CEO bonus-based compensation, we only considered bonus-based compensations in this study as bonus are associated with level of performance while salary is usually fixed.

Prior studies have used various proxies for corporate dividend policy (see, Ye et al. 2019, among others): e.g., ratio of cash dividends to total assets and cash dividends to net income ratio, to name a few. Onali et al. (2016), however, advocate the use of dividend to equity ratio reasoning that the additional advantage of using equity in the denominator rather than earnings eliminates the problem of dealing with negative dividend payout ratios. Hence, we adopt dividend to equity ratio to proxy for the impact of military directors on corporate dividend policy.

ii. Independent variables

(a) Military directors’ attributes

Military directors are identified in the study based on profile information of each board member available on the company’s website. To be classified as military directors, they must have graduated from military academy or have served in the military. We also collect information on military directors’ education and networks. Hence, we have three proxies related to military directors to measure their impact in reducing agency costs: (i) presence of military directors is a binary variable with 1 if there is at least one military director as outside director on the board, and 0 otherwise; (ii) military directors’ education is a binary variable with 1 if the military outside director has business-related degree, and 0 otherwise; and (iii) military directors’ connectedness or networks which refers to the number of military directors on the board who sit on another board that has at least one military director.Footnote 2

iii. Control variables

We use three sets of control variables: board attributes, agent/management attributes and firm-specific characteristics. Board attribute variables include board size, measured as the total number of directors on the board, and board independence, which is the number of non-executive directors scaled by board size (Chhaochharia and Grinstein 2009; Ye et al. 2019).

With regards to agent attributes, we considered two aspects that may affect compensation: (i) whether the CEO is classified as specialist or generalist, and (ii) CEO’s tenure. We used Custódio et al.’s (2013) CEO ability index to classify CEOs into specialist (CEOs with a narrower but deeper set of knowledge and skills) and generalist (CEOs with a broader set of knowledge and skills). Since longer serving CEOs may capitalise on their internal/organisational knowledge to influence board’s agenda and decision making, we therefore control for the CEO tenure based on the total number of years the CEO serves in the current firm (An et al. 2020; Li and Rainville 2021).

As for firm-attributes, we controlled for firm size, leverage, growth in sales and firm age as suggested by earlier studies (see, Benmelech and Frydman 2015; Güner et al. 2008; White et al. 2014, among others) to account for their potential impact on CEO compensation and dividend payout policy. Table 2 provides a summary of the operationalisation of the research variables in our study.

Table 2 Operationalisation of variables
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3.3 Econometric specification

Consistent with the aims of our study, we tested the impact of military directors on agency cost related to CEO compensation and dividend payout ratio, while controlling for corporate governance and firm-specific variables. The two main equations tested using OLS fixed-effect multivariate regression were as follows:

$${CEO compensation}_{i,t}= \alpha +{\beta MilDirect}_{i,t}+ {\gamma CG}_{i,t}{\prime}+ {\delta X}_{i,t}{\prime}+{\theta }_{i}+{\upeta }_{i}+ {\varepsilon }_{i,t}$$
(1)
$${Dividend payout}_{i,t}= \alpha +{\beta MilDirect}_{i,t}+ {\gamma CG}_{i,t}{\prime}+ {\delta X}_{i,t}{\prime}+{\theta }_{i}+{\upeta }_{i}+ {\varepsilon }_{i,t}$$
(2)

In Eq. 1, we tested for only the bonus aspect of CEO compensation while in Eq. 2, we tested the ratio of dividend payout. βMilDirect refers to three attributes related to military directors which are of interest in this study, viz. presence of at least one military trained outside director on the board, presence of at least one military trained outside director on the board with business degree, and the ratio of military trained outside directors on the board with military connection with another board. \({\gamma CG}_{i,t}{\prime}\) and \({\delta X}_{i,t}{\prime}\) are controls for corporate governance (including both board and agent/management attributes) and firm-specific variables, respectively, while \({\theta }_{i}\) and \({\upeta }_{i}\) represent industry fixed effects and year fixed effects. \({\varepsilon }_{i,t}\) is the error term to mitigate the concern on omitted variables.

4 Results and discussion

4.1 Descriptive statistics and correlation matrix

Table 3 presents the descriptive statistics for all research variables. As can be seen in column two, the mean values for the main dependent variables are as follows: CEO bonus-based compensation is Pakistani Rupee (PKR) 39,462,000 while the dividend payout ratio is 18.6%.

Table 3 Descriptive statistics
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Turning to attributes of the military directors, it can be seen that 19% of the companies included in the sample have at least one military director serving on their boards, 20% of military directors graduated with a business degree and 32% of them have military connections in other boards. As for the corporate governance mechanisms, the results indicate that the average board size of sampled companies during the study period is 4 with 59% of the boards dominated by independent non-executive directors. Turning to agent heterogeneity, about 72% of the companies are led by specialist CEOs while the average tenure of CEOs working in current firm is 4 years with the longest tenure being 14 years. As for firm-related control variables, firm size and leverage have mean values of PKR426,782,000 and 54%, respectively. The mean growth in sales is 17% while the mean for firm age since inception is 17 years.

Table 4 presents the correlation matrix along with the multicollinearity diagnostics, using the variance inflation factor (VIF). The mean VIF value is 1.54 with a maximum and minimum of 2.72 and 1.01, respectively. The results indicate that there are no concerns of multicollinearity for the independent variables.

Table 4 Correlation matrix
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4.2 Military directors and CEO compensation

We use Eq. 1 to analyse the impact of military directors’ attributes on CEO bonus-based compensation and the results are reported in Table 5. The presence of at least one military director on the board is found to reduce CEO bonus compensation by 13.2% and it is statistically significant at the 1% level, thus supporting our hypothesis H1a. This implies that the presence of at least one military director on the board is associated with a 12.4% reduction in CEO bonus compensation. In terms of economic significance, when military director on the board increases by one standard deviation, bonus compensation decreases by 5.7% relative to its mean.

Table 5 Regression results for military directors attributes and CEO Bonus-based compensation
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With regards to military director’s education, results show a significant negative relationship, at the 10% level, between military directors with business degree and CEO bonus-based compensation, thus our hypothesis H1b is weakly supported. Nevertheless, this implies that military directors with business background are well equipped to understand the complexity of corporate business and are well positioned to monitor and reduce agency cost. As for military directors’ network, results indicate no significant relationship with CEO bonus-based compensation, thus our hypothesis H1c is rejected.

With regards to board attributes, only board size is positively and significantly associated with CEO compensation while for agent attributes, both specialist CEO and CEO tenure are positively and significantly associated with CEO compensation. As for the firm-specific control variables, only firm size and sales growth are positively and significantly associated with CEO compensation.

We perform additional analysis by classifying sampled firms into large vs small firms using the median of total assets as the cut-off point. Surprisingly, results reported in Table 6 indicate military directors’ presence on the board reduces agency cost only for large firms. The direction of the relationship remains unchanged for smaller firms, but the relationship is not statistically significant. These results suggest that the presence of military directors on boards of large companies are more effective in curtailing any excessive rent seeking behaviour by the agents, thereby reducing agency cost.

Table 6 Regression results for military directors attributes and CEO bonus-based compensation split by firm size
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Likewise, military directors’ education background decreases agency costs only in large firms but for small firms, their presence actually increases agency cost. This is because small firms in Pakistan are closely held or family firms, thus the managers may have more sway on the strategic decisions relative to outside directors even if they have business background. As for the military directors’ connectedness/network, the analysis shows no statistically significant results across both models.

4.3 Military directors and dividend payout

We use Eq. 2 to analyse the impact of military directors on corporate dividend policy viz. dividend payout ratio and Table 7 presents the results. The presence of at least one military director on the board increases the dividend payout ratio by 8.17% and it is statistically significant, at the 1% level, thus, supporting our hypothesis H2a. This suggests that firms with at least one military director on boards tend to award greater dividend payout ratio of 8.17% than other firms. This impact is economically significant. Thus, the presence of at least one military director on board is associated with an 8.51% increase in dividend payout ratio. In terms of economic significance, when firms with at least one military director increases by one standard deviation, dividend payout ratio increases by 3.68% relative to the mean. The pronounced impact suggests that inclusion of military directors on corporate boards facilitates good governance and consequently promotes dividend payouts (Ye et al. 2019). Equally, these results strengthen the earlier arguments pertaining to the role of military in the economic revival of the country (Husain 2009) and the strategic placement of military-trained directors to corporate boards (Staniland et al. 2020) to boost investors’ confidence which may be reflected in higher market value.

Table 7 Regression results for military directors attributes and dividend payout ratio
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With regards to education of military directors, results show a significant positive relationship, at the 1% level, between military directors with business degree and dividend payout ratio, thus, our hypothesis H2b is supported. This implies that military directors with business background have greater influence on dividend policy. As for military directors’ network, results indicate a significant positive relationship, at the 1% level, thus, our hypothesis H2c is also accepted.

With regards to board attributes, both board size and board independence have significant effect on dividend payout with the former in negative direction while the latter in positive direction. The results imply bigger boards may not be an effective governance mechanism compared to board independence. It is also worth noting that the influence of board attributes for CEO compensation and dividend payout is different; bigger boards tend to award higher compensation but lower dividend payout while board independence only has positive effect on dividend payout. As for agent attributes, only specialist CEO is significantly related to dividend payout. With regards to control variables, only sales growth and firm age are positively related to dividend payout.

When splitting the data based on firm size, results in Table 8 show a significant positive relationship, at the 1% level, between presence of military directors and dividend payout regardless of size. This reaffirms our notion that military directors are more inclined to mitigate free cashflow opportunities that can be exploited by agents for their own interest at the expense of shareholders including in smaller firms. This finding adds new insights to prior related studies on dividend policy (Herron 2021).Footnote 3 Military director’s education is strongly significant in the case of large firms but weakly significant in small firms. On the other hand, military networks are only significant for large firms. Overall, our results suggest that the presence of military directors on corporate boards, especially those with business qualifications and having more networks, can induce higher dividend payout ratio and reduce agency cost, and this is prominent in the case of larger firms.

Table 8 Regression results for military directors attributes and dividend payout ratio split by firm size
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Since profitable firms would offer more free cashflow opportunities for the agents to exploit, we therefore analyse the effects of military directors on corporate dividend policy in high profitability (high market value) relative to low profitability (low market value) firms. Results as reported in Table 9 reaffirm that military directors aid in reducing free cashflow opportunities and promote higher dividend payouts which consequently enhance market value. Their impact remains prominent for highly profitable (with higher market value) firms only.

Table 9 Regression results for military directors attributes and dividend payout ratio split by profitability and market values
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Overall, the divergent impact of military directors on executive compensation and dividend payouts in our work relative to Li and Rainville (2020) for the former and Jaroenjitrkam and Maneenop (2022) for the latter results, provide new insights and extends the existing literature. Likewise, our analysis suggests that inclusion of military directors improves firm performance as reflected in higher profitability which consequently allow for higher dividend payout and boost the market value. The result is contrary to the earlier evidence of Jaroenjitrkam and Maneenop (2022), Kim et al. (2017) and Li and Rainville (2021) for Thailand, Korea and the US, respectively. This highlights the importance to consider the operating environment. More importantly, results observed in our work strengthen Kim et al.’s (2017) argument, who insists that directors exposed to military values develop a heightened sense of duty and ethics, however, these values are largely influenced by the environments in which they operate. Thus, findings observed in one socio-politico-economic environment cannot be generalised to another, especially, if there exist significant differences in terms of economic growth and the rule of law.

5 Robustness test

We perform various robustness tests to supplement and strengthen our main findings. First, we challenge our main proxy measure (military director dummy) and replaced it with an alternative proxy of military directors: military director ratio, measured as the ratio of military directors to board size. We repeat our analysis with this new proxy to analyse the effects of military director-ratio on CEO bonus-based compensation and corporate dividend policy. Table 10 reports the results, which are largely consistent with our main findings.

Table 10 Regression results for the effects of ratio of military directors on the board on CEO bonus-based compensation and corporate dividend policy
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Next, we employ the two-stage least square regression (2SLS) with instrumental variables to cope with possible endogeneity.Footnote 4 We use two instrumental variables (IVs) for the 2SLS specification as a source of exogenous variation in the fraction of military directors on the board. First, we trace military director’s previous industry experience either in the military-owned business organisations or corporate appointments in the relevant industry before joining the current company. We code 1 if the military director has previous work experience in the same industry and 0, otherwise. Accordingly, we estimate a regression of military directors’ industry experience against the controls and an instrumental variable in the first stage regression. Next, we use military directors’ international deployments as proxy for exposure, measured as a dummy variable with 1, if the director has had international deployments/appointments, and we use this in the second stage regression.

Table 11 presents the results. Models 1 and Model 2 in Panel A show results related to CEO bonus-based compensation. The results are statistically significant across the models, thus endorsing that military directors in Pakistan play effective monitoring role in curbing ineffective compensation contracts. We replicate the same robustness analysis for corporate dividend policy and the results are reported in Model 3 and Model 4 in Table 11. Our results remain robust, i.e., military directors positively influence the corporate dividend payout policy. Thus, the central tenets of our findings remain unchanged in a battery of sensitivity test, thereby further strengthening our argument that military directors reduce agency costs and improve corporate dividend payout ratio.

Table 11 Robustness test: effects of military directors on CEO compensation and dividend payout ratio
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We also present relevant statistical tests confirming the validity of the instrument variables (IVs) used in the 2SLS analysis. Results of the diagnostic tests satisfy both the relevance criterion and exclusion restrictions. Specifically, the validity of the instruments is confirmed via the Cragg and Donald’s (1993) Wald-F weak-instrument test statistics. Next, we perform Sargan’s (1958) statistics test for over-identifying restrictions. The statistically insignificant results for the Sargan’s test provide evidence that our IVs are acceptable. While these additional remedies help alleviate concerns for endogeneity, consistency across diagnostic tests validate our econometric strategy and further strengthen our results that military-trained directors in Pakistan do protect shareholders’ wealth. Table 12 presents a summary of the results for the main models and the models after splitting based on size.

Table 12 Summary of results
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6 Summary and conclusions

In this study, we investigate the impact of board diversity in the form of military-trained directors on corporate governance outcomes, particularly in protecting shareholders’ wealth, based on CEO compensation and dividend payout policies. In relation to CEO compensation, our results indicate that independent military trained directors, especially in large companies, are effective in curtailing any excessive rent seeking behaviour by the CEO thereby reducing the agency cost. In other words, CEOs in large firms with military directors may not have much discretion to influence their compensation contracts. This result is in contrast to Li and Rainville (2020) but similar to Cai et al. (2021) which are both studies in the US context. We further find military trained directors with business education to reduce CEO compensation but no effect in terms of network-ties.

As for dividend policy, our results indicate that independent military trained directors in the boardroom tend to award higher dividend payout, thus reducing free cash flow opportunities that would otherwise be deployed by management for their private benefits. Our result is opposite to Kim et al. (2017) and Jaroenjitrkam and Maneenop (2022) in the context of Korea and Thailand, respectively. We further find military trained directors with business education and network-ties to also be associated with higher dividend payout.

Overall, our study suggests that the presence of independent military directors on the boards of listed companies in Pakistan is an effective mechanism in monitoring management and mitigating agency problems for protecting shareholders’ interest. The findings further inform market participants, including shareholders/investors as to which directors are qualified to safeguard their interests in publicly held companies. On a larger economic front, these findings also inform the regulator who would consider which board attributes are crucial in implementing certain regulations to account the agents and to offer better protection for shareholders, thereby enhancing investors’ confidence in the market. In short, our results imply that recruitment and appointment of military personnel to the boardroom should be encouraged especially given their wider socio-politico-economic role in providing stability for the economy to flourish and boosting confidence of market participants.

Like any other empirical investigation, our study opens several avenues for future research. While we measure the impact of military directors’ presence on corporate strategic preferences and outcomes, future research may explore the reasons and incentives for military directors to occupy corporate board positions in public listed companies. While we consider the role of military directors in relations to corporate dividend payout, future research may examine the impact of military directors on corporate buyback policy, subject to availability of data on buyback. Finally, future research may consider measuring the effects of military directors on corporate strategic outcomes using measures such as M&A deals, other payout policies relative to firm cash holdings, firm innovation level, and corporate investment to actually reflect how military trained directors affect the strategies within the firms they serve.