In the last few years, there has been a big rise in the differences between the major parties in the United States.
In the last few years, there has been a big rise in the differences between the major parties in the United States. Now, a person's party affiliation is a better indicator of their core political beliefs than any other social or demographic difference. Politically, families and neighborhoods are becoming more and more like each other. On the other hand, we don't know much about how political polarization at work has changed over time or if it changes the value of a company.
To fill this gap, we looked at how political differences affect the senior teams, which make the most important decisions for the company. Top leaders at companies that are on the stock market make for an interesting setting for a number of reasons. First, the Securities and Exchange Commission requires that leaders' names be made public. This lets us link their names to voter registration records and find out which party they belong to. Second, they are in charge of making and carrying out the company's most important choices. Recent studies show that political partisanship affects not only how families think about the economy and make economic decisions, but also how economically savvy agents in high-stakes situations think about the economy and make economic decisions. So, political divisions on senior teams could have big effects on how businesses make decisions and how much they are worth.
It's not clear right away if changes in the political polarization of leadership teams should mirror trends seen in the general population. The workplace has always had more political diversity and more chances for people from different parties to talk to each other than other places. For example, study from the past shows that the workplace is a much more likely place to meet people with different views than the family, the neighborhood, or a voluntary organization. This shows that having the same political views may not be as important in the workplace. Investors, regulators, and stock markets have also put pressure on companies to have more diverse executive teams and boards of directors. This may also lead to more diversity in politics.
By putting together data from Execucomp on the top executives of U.S. S&P 1500 companies and voter registration records, we were able to show that between 2008 and 2020, executive teams became more partisan. We said that partisanship is how much the political views of the same senior team are dominated by one party. More specifically, we looked at the likelihood that two randomly chosen executives from the same team belong to the same political party. Based on this measure, we found that the average loyalty of executive teams rose by 7.7 percentage points between 2008 and 2020. As a point of comparison, this rise is almost three-quarters of the decrease we saw in gender similarity during the same time period. The fact that executive teams are becoming more partisan is even more surprising when you think about how the growing diversity of gender should, if anything, lead to more diversity in political views. We can also rule out the idea that leaders are acting in a way that makes them look like they have the same political views as their peers.
Why are management teams getting more and more politically divided? One theory is that the rise in partisanship is due to changes in the number of Republicans and Democrats among executives as a whole. Another reason for the rise in partisanship could be that leaders are more likely to hang out with people who share their views. We found that 61 percent of the rise in politics is because executives are more likely to hang out with other executives who have the same political views as them. The remaining 39% is due to the fact that the political views of executives are becoming more alike, especially in terms of being Republican.
We looked into the idea that executives with similar views end up working together. Our data showed that executives from the same political party are 34% more likely to work for the same company. Moreover, we found that the role of political views in determining executives' matching has increased over time, especially between 2016 and 2020. We found that most of the matching effect is caused by more political ideology-based sorting into geographic areas. Sorting into different businesses and fitting in with other team members by switching parties also help explain the rise in political matching, but these two factors play a smaller role. It's interesting that the rise in political matching among executives is more than twice as big as what would be predicted if executives followed the same trend as all registered voters in the same state or metro area.
To prove that political beliefs play a role in putting together executive teams, we found evidence that leaders' political beliefs affect their decisions to leave a company. We found that executives whose political views are different from the majority of the team have a 3.2% higher chance of leaving the company than executives whose views are the same as the majority. Compared to the normal turnover rate of 13 percent, this affect makes it 24 percent more likely that someone will leave. Even if you take into account the reasons why executives leave a company, the finding still stands. We also saw that this effect got stronger over time.
One important question that still needs to be answered is whether or not the departure of leaders with the wrong political views is good or bad for shareholders. It's not clear what effect greater political similarity will have on shareholder value. On the one hand, more political similarity could be bad for shareholders if it makes it harder for people to put aside their partisan biases when making business choices or makes it harder to hire and fire people in the best way. On the other hand, if political differences make it hard for directors to work together as a team, more political similarity may be in the best interest of shareholders because it keeps things from getting stuck. To answer this question, we looked at the unusual stock returns that happened when leaders who were politically aligned or not aligned left their jobs. When executives with different political views leave, owners lose a lot more money. This suggests that more political similarity in the executive suite is probably not in the best interest of shareholders. Shareholders lose $238 million when leaders leave because they don't agree with the company's politics. We also found proof that misaligned leaders are more likely to be forced to leave their jobs.