The Political Polarization of Corporate America
The United States is increasingly divided along partisan lines. Pew Research Center (2017) shows that party identification is now a more significant predictor of Americans’ fundamental political values than any other social or demographic divide. Social groups, such as families and neighborhoods, are becoming increasingly politically homogeneous. In contrast, the workplace has long been considered the social context best positioned to provide opportunities for regular interactions and conversations across partisan lines (Mutz and Mondak, 2006; Hertel-Fernandez, 2020). Yet, we have a limited understanding of the degree of political polarization in the workplace and how it has changed over time.
In our new paper, we study political polarization among important decision makers in the firm: top executives. We combine data on the top-5 earning executives in US S&P 1500 firms with information on party affiliations from voter registration records. We use voter registration records from California, Colorado, Illinois, Massachusetts, North Carolina, New Jersey, New York, Ohio, and Texas, spanning the period from 2008 to 2020. We restrict our sample to these locations because other states either do not share voter registration records or do not track voters' party affiliations over time.
We observe that US executives are predominantly Republican. Among executives that we can link to a political party in the voter records, 69% are Republican and 31% are Democrat. The share of Republican executives is substantially higher in the voter registration data compared to the political contributions data, as many executives donate to both parties. The share of Republican executives increases from 63% in 2008 to 75% in 2016 and then declines to 68% in 2020.
Partisanship of Executive Teams
We define the partisanship of an executive team as the degree to which political views within the same team are dominated by a single party. More specifically, we measure the partisanship of executive teams as the probability that two randomly drawn executives from the same team are affiliated with the same political party. The partisanship of the average executive team in our sample is equal to 64%. This level of partisanship is high relative to what one would expect based on political contributions. More importantly, we find a 7.7 percentage-point increase in the average partisanship of executive teams over our sample period. The years with the highest annual increase in partisanship are 2010, 2012, and 2016, that is around presidential elections and the passage of the controversial Affordable Care Act (‘Obamacare’).
What drives the increase in the political polarization of executive teams? One possibility is that the increase in partisanship is a reflection of changes in the share of Republicans and Democrats in the overall population of executives. Alternatively, the increase in partisanship could result from an increased tendency of executives to match with like-minded partisan executives. Using Monte Carlo simulations to generate measures of randomly occurring partisanship, we document that 61% of the increase in partisanship is driven by an increased tendency of executives to match with other executives who share their political views. This increase the tendency to match on political affiliation is particularly stark in the last few years of our sample period (post 2016), as can be seen in the figure below. The remaining 39% is driven by the executive population as a whole becoming more politically homogeneous (ie Republican). Most of the changes in team partisanship are driven by executive turnovers, rather than by within-person changes in party affiliation. Further decomposing the increase in assortative matching, we find that a substantial part of the effect is driven by executives increasingly sorting on political ideology into states and industries.
We also study the role of political views in shaping team formation at a more granular level. Specifically, we test whether political alignment with other team members influences executives’ decision to leave the firm. We find that, within a given firm-year, executives who are politically misaligned with the majority of the team have a 3.2-percentage-point higher probability of leaving the firm, relative to executives whose views are not aligned with the rest of the team. This effect corresponds to a 24% increase in the likelihood of departure relative to the unconditional turnover probability of 13%. We observe again an increase in this effect over time.
Consequences for Firm Value
An important remaining question is whether the departure of politically misaligned executives is good or bad for shareholders. From a theoretical perspective, the implications of increased political homogeneity on shareholder value are ambiguous. On one hand, greater political homogeneity may be bad for shareholders if it exacerbates individual partisan biases in economic decision-making or if it leads to inefficient hiring and firing decisions. On the other hand, if partisan disagreement prevents executives from working together efficiently as a team, greater political homogeneity may be in the interest of shareholders because it avoids deadlock. To shed light on this important question, we study abnormal stock returns around the departures of politically aligned and misaligned executives.
Departures of misaligned executives trigger substantially larger losses for shareholders, indicating greater political homogeneity in the executive suite is likely not in the interest of shareholders. The incremental losses to shareholders around executive departures amount to $238 million for executives who are politically misaligned. We also find evidence that departures of misaligned CEOs are more likely to be involuntary.
Overall, our paper highlights a robust trend toward a political polarization of corporate America. This trend implies the growing tendency of US individuals to socialize and form relationships with politically like-minded individuals extends also to C-level executives in large, public US companies. We further show that some aspects of this trend toward more political homogeneity in the executive suite are value-destroying for shareholders.
Vyacheslav (Slava) Fos is Professor of Finance and Hillenbrand Family Faculty Fellow at the Carroll School of Management, Boston College.
Elisabeth Kempf is Associate Professor of Finance at Harvard Business School.
Margarita Tsoutsoura is Associate Professor of Finance at Olin Business School, Washington University in St. Louis.
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