Local biz community split over tax policy mirrors polarization at national level
Image by Data Base Camp
Ostensibly pro-business electeds on the San Jose City Council (Mahan, Casey, Foley, Mulcahy) surprised recently by advocating for lowering voter thresholds for new taxes. This is a position many local businesspeople (and most Californians) oppose. Below, The Harvard Gazette explores how this reflects national trends, in which business leaders self-segregate around political groupings.
KEMPF: … What we found is that there is a separation of companies into Democrat and Republican companies more so than they used to be. Our measure of the degree to which one single party dominates directly speaks to that trend. We have another measure where we look at the likelihood that an executive who is misaligned politically with the rest of the team leaves the company. That measure has also increased in the last couple of years. Post-2015, you see that executives who are politically misaligned tend to leave their team at higher rates. It all speaks to the same phenomenon, which is that we see more political silos across U.S. firms.
GAZETTE: Does the corporate divide mirror the political geography of red and blue states?
KEMPF: After we documented the trend toward greater partisanship of executive teams in our paper, we wanted to find out where does the fact that one single party dominates a given executive team come from. To understand this trend, it is very important to understand political segregation across geography. What seems to be happening is that executive teams in California and New York are becoming more Democrat, and at the same time, executive teams in Texas and Ohio are becoming more Republican. It is this geographical sorting that has increased a lot, which explains a big part of the phenomenon.
Go Deeper:
GAZETTE: Does the increasing partisanship among top U.S. executives pose any danger or risks for shareholders and stakeholders?
KEMPF: In our current paper, we’re looking at the implications for shareholders, but I hope that there’s going to be more research on the implications for stakeholders, employees, capital providers, local communities, etc. We thought it was important to look at the consequences for shareholders because it’s not obvious whether shareholders would prefer a more politically homogeneous or less politically homogeneous team.
On one hand, you could argue that if we have more homogeneous teams, maybe the executives within the teams get along better and have less disagreement, and they are able to get things done. On the other hand, when you only have one type of political ideology, you might be missing out on an important kind of perspective that might improve your decision-making, and one could argue that the trend toward more political homogeneity is a bad thing.
Within this theoretical ambiguity, we looked at stock price reactions to executives leaving the firm and what we found was that when a misaligned executive leaves, meaning executives who bring diversity to the team, that is particularly destructive to firm value. We saw that firms lose, on average, $238 million more around those executive departures compared to departures of executives who are aligned with the team and are contributing to more homogeneity. That suggests that investors don’t seem to view the departures of misaligned executives as a good thing, but rather as something that is very destructive for firm value. It seems that this trend is at least not in the financial interests of shareholders.
[Editor’s note: Elisabeth Kempf is an associate professor of business administration at Harvard Business School.]
Read the whole thing here.
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