What a lack of political diversity does to corporate leadership teams

It’s important to mix it up.
It’s important to mix it up.
Image: REUTERS/Jonathan Ernst
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Corporate leadership teams are often composed of people with the same political ideology. A 2015 survey of 1,000 board members at U.S. companies found that they disproportionately leaned Republican. In some market sectors, like industrials and utilities, as few as 15% of board members identified as Democrats, compared to 49% of the U.S. population. In sectors like consumer goods, on the other hand, leadership teams lean liberal.

Neither situation is healthy for business. Why? Executive teams that consist only of conservative or liberal members are susceptible to the same type of “groupthink” that can result with all-male or all-white leadership teams.

How politics can influence corporate decision-making

Studies have shown that the political leanings of corporate leaders influence how companies do business. For example, politically conservative CEOs are less likely to engage in mergers and acquisitions, and when they do make acquisitions, they are more likely to use cash than debt. Liberal CEOs, meanwhile, tend to prioritize corporate social responsibility more than conservative CEOs.

But whether corporate leaders lean left or right, they are not operating in a vacuum. In a study published earlier this year, my colleagues and I found that when the political affiliation of a company’s CEO differs from the party controlling the White House or Congress, the company cuts back on research spending and retains more earnings relative to its peers—in effect, saving money for a rainy day. This was true regardless of whether the economy was booming or in a recession.

This risk-averse behavior suggests that CEOs perceive a potential threat when their politics diverge from the national political climate—and they adjust their company’s investments accordingly.

Political variation is an important form of diversity

Research has long shown that companies with ideologically diverse boards outperform politically one-sided companies in terms of total market value and lower management costs.

Having ideologically diverse corporate leadership is especially important right now, when the US is at an economic and political crossroads. Two CEOs with different political leanings may look at the same data about US president Joe Biden’s economic stimulus package or his proposed infrastructure bill and come to vastly different conclusions about whether to invest aggressively in the future or hold back. And if other C-suite executives and board members share the same political ideology, as is often the case, they’re less likely to challenge the assumptions that go into the CEO’s decision-making.

Companies can address political biases and prevent tunnel vision by choosing executives and board members with a wide range of political ideologies. In the same way that greater gender and racial diversity leads to broader thinking, political diversity enables companies to look at the same problem or set of data from different perspectives.

Hiring for political diversity

Ensuring a range of political perspectives are represented in company leadership can be tricky. Companies might consider looking at candidates’ political registrations and past donations, although doing so may raise privacy concerns. Another approach is for hiring committees to ask candidates about their perspectives on the current political environment and how they would make business decisions in response to a variety of scenarios.

Nominating and hiring committees should be attentive to their own biases when choosing candidates. People have a well-documented tendency to favor those who are like them or mirror their own views. Committees also can cast a wide net and look outside of existing networks for candidates with more diverse backgrounds.

Political diversity typically aligns with gender and racial diversity

It’s worth noting that attempts to diversify the politics of corporate leadership teams can work hand-in-hand with efforts to expand their gender and racial makeup. Corporate boards currently lean white, male, and conservative, but Black board members are three times as likely as white board members to identify as Democrats, and female board members are equally split between Democrat and Republican.

As the movement to diversify corporate leadership continues to pick up steam, executives, board members, and shareholders should consider political diversity in conjunction with racial and gender diversity. This is particularly important in the US right now given that the fight over the country’s post-Covid economic priorities is so highly partisan. To navigate this polarized time, companies need to have management teams and boards that reflect a broad range of views, including attitudes about politics.

Dr. Matthew Semadeni is a professor of strategy and Dean’s Council Distinguished Scholar in the Department of Management in the WP Carey School of Business at Arizona State University. His research focuses on corporate management teams and business strategy.