Growing Political Polarization in Executive Suites

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Corporate leadership teams have become less politically diverse over the past decade according to The Political Polarization of Corporate America (NBER Working Paper 30183). Vyacheslav Fos, Elisabeth Kempf, and Margarita Tsoutsoura find an increasing tendency for executives to team up with people who share their political affiliation, and an increasing share of Republican executives overall, in a study of senior corporate leadership at companies headquartered in nine populous states.

The researchers compare voter registration records between 2008 and 2020 with data on the top five executives, based on earnings, at roughly 60 percent of the firms in the S&P 1500. They limit their analysis to this subset because detailed historical voter registration data were only available from nine states: California, Colorado, Illinois, Massachusetts, North Carolina, New Jersey, New York, Ohio, and Texas. They define partisanship based on the extent to which a single party affiliation prevails among members of a leadership team.

The last 12 years have seen an increase in both all-Republican and all-Democratic executive teams.

The analysis suggests that the average partisanship of an executive team increased by 7.7 percentage points over the 12-year study period. The average team also became more gender diverse over the same period — a trend that might have been expected to lead to more disparate political views. The researchers acknowledge that they cannot determine the extent to which increased partisanship results directly from people wanting to live and work among those who think like themselves or indirectly from the characteristics of the firm or the location of its headquarters.

Sixty-one percent of the increase in partisanship is attributed to a greater inclination of executives to match with those who share their political views, known as assortative matching. The remaining 39 percent resulted from the overall executive population becoming more politically homogeneous, with an uptick in the share of registered Republicans. Assortative matching is more prevalent in the telecommunications, entertainment, finance, real estate, and energy sectors than in other industries. The increase in assortative matching among executives is more than twice as large as would be expected on the basis of voter registration trends where they reside.

Executives affiliated with both parties are driving polarization, as reflected in an increase over the study period both in all-Republican and in all-Democratic executive teams. But the Republican Party made greater gains, increasing from 63 percent of executives in 2008 to 75 percent in 2016, before declining to 68 percent in 2020.

Executives whose party affiliations are in the minority of their executive team have a 3.2 percentage point higher probability of leaving their firm than those in the majority in a given year. That represents nearly a quarter of the unconditional turnover probability of 13.4 percent during the sample period. CEOs misaligned with the rest of the executive team are also 27 percent more likely to be fired than their better-aligned peers.

The effect of board homogeneity on firm performance is difficult to assess on a priori grounds. A more homogeneous board may be less likely to deadlock over decisions, but it may also be more susceptible to costly groupthink. The stock market reaction to the departures of executives who diversify their teams is consistent with the latter view. The researchers estimate that cumulative abnormal returns are 1.7 percent lower in the wake of a misaligned executive’s departure than when an aligned executive leaves. They associate the departure of a misaligned executive with an average $238 million loss to shareholders of the affected company.

— Steve Maas