Every few months a new study confirms what social media tells us every day: Democrats and Republicans no longer like each other much. Some partisans say they won鈥檛 date someone from the other party. Others claim they鈥檇 disapprove if their child married across party lines.
Now two professors in the Seidner Department of Finance at the Carroll School of Management have shown the business world isn鈥檛 exempt from America鈥檚 partisan fever. Business people too are shying from interacting with their political opposites.
Professor Vyacheslav (Slava) Fos
In a , Professor Vyacheslav (Slava) Fos, a Hillebrand Family Faculty Fellow, and two colleagues have found that the executive management teams of large American public companies have become more politically homogeneous. Sitting around a conference table has become yet another activity Americans won鈥檛 do with political opponents.聽
Professor Ran Duchin has identified a practical outcome of the partisan pique鈥攃ompanies have become less likely to merge across party lines. Duchin, the Coughlin Family Professor, and three co-authors show, in a , that companies where employees mostly donate money to one party have become less likely to combine with ones where employees mostly give to the other.
Simply put, in mergers and acquisitions, Republicans prefer to pair up with fellow Republicans, and Democrats with fellow Democrats. What matters these days isn鈥檛 whose product lines complement yours, but who shares your views on the right to bear arms.
Both professors鈥� research was recently highlighted in , and the findings come as a surprise to those who believed that people were less likely to let partisanship color their dealings in business than in their personal and family lives. One would think that businesses aim to identify and exploit profitable markets, not let their partisan flags fly. A co-worker鈥檚 or merger partner鈥檚 MAGA hat should matter less than that person鈥檚 contribution to the bottom line.
But executives aren鈥檛 just their jobs鈥攖hey鈥檙e American citizens (or at least residents), and they鈥檙e living in a politically rancorous time. Political scientists have shown that American politics has become more driven by emotion and identity than policy disagreements. This phenomenon, called , fuels hostility. (Interestingly, it鈥檚 not unique to the United States鈥攖he move toward affective polarization has been documented .)
“What matters these days isn鈥檛 whose product lines complement yours, but who shares your views on the right to bear arms.”
Still, Fos says he was surprised that corporate executives couldn鈥檛 set aside politics. 鈥淚鈥檇 imagine that executive teams would be the last place where people would put party interests ahead of everything else,鈥� he says. 鈥淚f someone鈥檚 the most talented person, that person should work for the company,鈥� regardless of party allegiance.
Yet Fos and his co-authors show that politics is driving out some presumably talented folk: An executive is more likely to leave a firm if he or she belongs to the minority party there. Managers must be fine with this鈥攖hey鈥檙e letting it happen鈥攂ut shareholders aren鈥檛. The researchers document that a company鈥檚 stock drops when a 鈥渕isaligned executive鈥� departs. 鈥淭he incremental losses to shareholders around the departures of executives who are politically misaligned with their team amount to more than $200 million for the average 铿乺m in our sample,鈥� they write.
Fos and his colleagues studied executive teams from 2008 to 2020 and will soon be updating their paper with additional data showing that 鈥渢he polarization we describe was even stronger during 2021 and 2022,鈥� he said. The researchers measured partisanship as 鈥渢he probability that two randomly drawn executives from the same team are affiliated with the same political party,鈥� using voter registration records to identify party affiliation.
Professor Ran Duchin
Their study didn鈥檛 address why management teams have become more partisan, but Fos suspects 鈥減eople feel uncomfortable being around people of different political views.鈥� That discomfort may stem from disagreements鈥攁bout, say, likely economic outcomes or prudent corporate policies, given who occupies the White House or controls Congress, he says. Whatever the reason, executives of differing political views have become less likely to find the common ground needed to collaborate. 聽
Collaboration matters in mergers. No corporate decision requires such intense, high-stakes interaction between two executive teams. Duchin鈥檚 research shows politics is inhibiting cooperation there too.聽
Duchin and his co-authors gathered data from 1980 to 2018 to assess the partisan bent of US public companies. To depict each firm鈥檚 partisanship, they identified employees via LinkedIn and matched their profiles to voter registrations. They also collected information on the campaign contributions of employees and all residents of the state where the firm is headquartered.
The researchers then calculated a firm鈥檚 political affiliation 鈥渁s the average of (1) the number of a company鈥檚 employees, identified through LinkedIn, that are registered as Democrats, divided by its total number of employees registered as Democrats or Republicans; and (2) the number of individual employees鈥� political donations to Democratic committees divided by the total number of donations to both Democratic and Republican committees in the past two presidential election cycles.鈥�
An interesting feature of this setup is that it captures the partisanship of all employees who donate, not just the executives.
In other words, the sample represents everyone participating in post-merger integration activities鈥攖he lawyers, accountants, and supply-chain managers who must collaborate with counterparts at another company. Duchin and his co-authors hypothesize that differences in employees鈥� politics can cause integrations to go awry.聽
“In my view, polarization has created mistrust. If counterparties don鈥檛 trust each other, they can鈥檛 reach a deal.”
That matters because executives often tout the potential synergies of mergers. As the researchers note, 鈥淪ince 88% of the mergers in the sample make some reference to integration, political distance is more often than not an economically meaningful predictor of merger formation.鈥� If people can鈥檛 cooperate, synergies can鈥檛 emerge.聽
鈥淚n my view, polarization has created mistrust,鈥� Duchin says. 鈥淚f counterparties don鈥檛 trust each other, they can鈥檛 reach a deal.鈥�
Mistrust thus has become a friction that executives must weigh when considering a deal. The fact that Duchin and his co-authors find that mergers become less likely as the political distance between firms increases suggests that, in many cases, executives are passing on mergers that otherwise make sense. 鈥淓ven though operationally or financially there are synergies, you may still not merge because the integration costs are so high,鈥� he says. Lawyers and investment bankers are likely advising executives accordingly: cross-party mergers will be too fraught to be worthwhile.
Duchin believes education has a role in helping calm America鈥檚 partisan angst. Universities need to ensure they鈥檙e forums for robust but civil discourse on difficult political questions. 鈥淲e have to say that on campus it鈥檚 OK to have sensitive political discussions,鈥� he says. By learning to disagree civilly, students will learn a life skill they can apply on the job.聽
Fos, for his part, sees learning as an antidote too鈥攂ut in the boardroom, not the classroom. He says his results about the increasing political homogeneity of executive teams suggest that US companies are engaged in a giant natural experiment. Some teams are choosing to be more Republican, some more Democratic, and some are still trying to balance the two.聽
鈥淲ith the passage of time, we鈥檒l see who鈥檚 wrong and who鈥檚 right,鈥� he says. 鈥淎nd we鈥檒l see how the more politically diverse executive teams perform compared to the more homogeneous ones. It may be painful, but we will learn.鈥�
