Executive Partisanship On The Rise. NewsWire

NewsWire: 7/22/22

• From 2008 to 2020, corporate executives became more partisan and more Republican. Executives are also more geographically segregated, with Republicans more likely to work in red states and Democrats in blue states. (The Washington Post)
• NH: It's no secret that over the last decade Americans have grown more politically polarized. Now a new study published by the National Bureau of Economic Research shows that executive suites and boardrooms have become more polarized as well. Let's explore the findings. 
• The researchers examined the party registrations of nearly 3,800 executives from over 900 S&P 1500 firms. Boardroom partisanship was defined as "the degree to which political views within the same executive team are dominated by a single party." The researchers found that since 2008, the chance that two randomly selected executives from the same team are members of the same party has increased by +7.7 percentage points. In other words, boardrooms have become more politically homogeneous.
• The paper outlined a second trend: Overall, these executives of big corporations have become more conservative. In 2008, 63% of executives were Republicans. In 2020, that share rose +5 percentage points to 68%. This finding contradicts recent claims that the leaders of big business are becoming "woke" liberals. 
• The researchers noted that the increase in the overall Republican share itself explains 39% of the rise in boardroom homogeneity. Even if executive teams were chosen purely at random across this population, the rising GOP share would automatically result in a greater chance of like-minded people working together (especially Republicans working with Republicans). The remaining 61% is explained by executives self-sorting  themselves in ways that cannot be explained by chance. That is, they are deliberately choosing to work in firms and in teams with like-minded people. 
• Moreover, the researchers found that boardrooms are more geographically segregated. Executives in red states are increasingly likely to be Republican. And executives in blue states are increasingly likely to be Democratic. 
• So is this trend good or bad for business? You might assume that it's good--and suppose that executives with similar views may work together more effectively. Interestingly, the researchers found the opposite. After a politically misaligned executive leaves a company, they found, stock returns fall -1.7 percentage points lower for that company than if the departing executive was aligned with the boardroom.
• Why? The authors speculate mavericks are good for companies and fend off groupthink; when one leaves, the business loses alternative ways of thinking. Maybe. But IMO there's another, equally good explanation. For a politically misaligned executive to stay at a company, there must be something exceptional worth staying for. But when that person leaves, it's a sign the company has lost that distinguishing advantage. 
• In the first explanation, a maverick departure is the cause of poorer perceived performance. In the second explanation, it is the effect of some adverse event, which is soon reflected in poorer perceived performance. Either way, the departure of political mavericks is not (on average) a favorable sign.