UPDATED: February 27, 2023
Originally published in the inaugural edition of Carroll Capital, the print publication of the Carroll School of Management at Boston College. Read the full issue here.
In recent years, many Americans have nurtured the art of tiptoeing around politically sensitive topics when gathering with family and socializing with friends, or they’ve taken the opposite tack of hurdling into the fray. They’ve practiced these diplomatic or polemical arts in their private lives, though probably not as much in the workplace: By most accounts, the atmosphere at work has been less charged politically for most people. But that’s changing, too.
In a recent survey by the Society for Human Resource Management, nearly half of employees reported that they had either been involved in political disagreements at work or had witnessed such arguments. And research from the Carroll School has revealed that these tensions are escalating even more dramatically in corporate boardrooms.
You’d think that if any groups of professionals were inclined to put profits above politics, it would be the executive teams of major corporations. That, however, is not what Carroll School Finance Professor Vyacheslav (Slava) Fos and two colleagues have discovered in their research on political polarization in the C-suites.
“We always thought that money comes first—that top executives leave their political views at home,” says Fos, speaking of past assumptions by researchers. “But no—people take into account the political views of their peers when deciding to join the team, when to leave, and even who to fire.”
The key finding: Executive teams are becoming more likeminded as executives depart because they don’t align with the team’s political majority. Furthermore, the research cuts finely enough to show that in case after case, such a departure adversely affects the market value of a firm.
Fos and collaborators—Harvard’s Elisabeth Kempf and Cornell’s Margarita Tsoutsoura—have been able to uncover hidden dynamics in boardrooms by culling through 12 years of voter registration records, cross-checking with public disclosures about executives at 1,500 leading firms. Their paper, originally published online by the National Bureau of Economic Research, is under revision at a top journal; the findings will be presented in April at the Bureau's spring meeting in Chicago.
“We always thought that money comes first—that top executives leave their political views at home. But no—people take into account the political views of their peers when deciding to join the team, when to leave, and even who to fire. ”
Executive teams are “increasingly partisan,” the scholars write, defining partisanship as “the degree to which a single party dominates political views within the same executive team.” They cite two factors: Republicans constitute a growing share of executive teams at the 1,500 firms (which rattles the familiar narrative that companies are becoming “woke”); and top executives, Republican or Democratic, are “matching” with peers of their own party.
Such partisanship is “value destroying for shareholders,” say the professors, who tracked stock prices following departures of executive team members. They studied two groups: departing executives who aligned with the political majority on their teams, and those who did not. Over two trading sessions, the average return on stocks was 1.7 percent lower for the second group of politically “misaligned” executives who departed (a statistically significant difference for such a short period). Investors are often able to sniff out the reasons for these departures or at least know something is awry when someone leaves abruptly.
The market frowns upon boardroom partisanship. The flip side is that politically diverse executive teams are good for a firm’s value and rewarded by investors. But don’t bet on an upswing of bipartisanship as the country lurches toward another presidential election.
