CEO Politics Can Spur (or Stifle) Business Innovation
Political affiliation offers more reliable clues about a CEO’s inclination to take risks than factors like age or education.
By Steve Brooks
Liberals and conservatives don’t just think differently about politics. According to recent psychological research, their brains actually clash over their basic approaches to the world.
“They’re different in how much ambiguity and risk they can accept,” says Vijay Mahajan, marketing professor at the McCombs School of Business at The University of Texas at Austin. Studies have found that liberals tend to take more risks, and conservatives tend to fear loss and uncertainty.”
It’s no surprise that those disparities should bleed over into business, says Saim Kashmiri, a former McCombs Ph.D. student who’s now assistant marketing professor at the University of Mississippi. Research shows that Democratic-leaning CEOs take higher levels of financial risk, like research spending and borrowing, than their Republican counterparts.
In the age of the iPhone and the Tesla Model S, however, Kashmiri noticed a gap in prior studies: how CEOs’ political leanings affect innovation. Firms that launch radical new products have been the stars of the financial markets, but such introductions are also risky — failure rates are near 90 percent. Are blue CEOs more likely to take those chances than red ones?
To find out, he and Mahajan looked at 421 CEOs and a key sign of their ideological bents: 16 years’ worth of campaign contributions, on record at the Federal Election Commission. The researchers measured each CEO’s political ideology (on a liberal-conservative continuum) and compared that to rates of new product introductions from 2006 to 2010.
They found that liberal CEOs introduced significantly more new products per year, on average, than conservative CEOs. Furthermore, firms that replaced a highly conservative CEO with a highly liberal one experienced a significant increase in annual new product introductions.
They also found that Wall Street was taking note. Firms with more liberal CEOs had significantly greater Tobin’s Q than those with conservative CEOs. Tobin’s Q compares the total market value of a company’s outstanding stock and debt to the book value of its assets. The higher the ratio, the higher investors’ expectations are for growth.
“The market is paying attention to what a company like Apple is going to do next,” Mahajan says. “What really generates revenue for them is new products. Their innovation is a signal to the market, and the market rewards that.”
However, the same firms’ stocks were also significantly more volatile, reflecting the bigger gambles of new products. “Those products have higher failure rates,” Kashmiri says. “But in some cases, they transform the industry. So they tend to have higher highs and lower lows.”
When a company appoints a new CEO, particularly a first-time CEO with little track record, both investors and board members may be uncertain about how much innovation the executive will pursue. Political affiliation, the researchers say, offers more reliable clues than demographic factors like age or education. “You can use a CEO’s political contribution data as an effective signal in combination with other factors you’re looking at,” Kashmiri says.
Different investors, he notes, have different comfort levels for risk. If they’re wondering how risky a new CEO might turn out to be, they can review that individual’s history of contributions, which are easily searchable online.
Boards can use the same information when headhunting. If game-changing new products are a priority, they might give extra consideration to a Democratic-leaning prospect. If they’re more concerned with stability, they might tilt the opposite direction.
The research also suggests measures a board can take to rein in an aggressive CEO. Tying compensation more closely to the stock price made a liberal CEO less likely to take risks, the analysis found. Other limitations on executive clout, like including a marketing officer in the top management team, had similar effects.
“You can diminish the impact of political ideology if you want to do that,” Kashmiri adds. “You can put checks and balances in to lower their power.”
Neither ideology is necessarily better or worse for business, stresses Mahajan. What matters is how a CEO’s temperament aligns with a company’s goals.
“At the end of the day, all CEOs have to do what’s best for their stakeholders. But the paths they take may be influenced by who they are. Innovation strategy starts from the top.” — Vijay Mahajan
Values That Shape Marketing Decisions: Influence of Chief Executive Officers’ Political Ideologies on Innovation Propensity, Shareholder Value, and Risk is published in the Journal of Marketing Research.
Originally published at www.texasenterprise.utexas.edu on July 27, 2017.