It may seem unlikely that the political leanings of chief executives affect their likelihood of buying overseas firms, but research from the Warrington College of Business at the University of Florida suggests otherwise. The study shows that conservative CEOs are much more likely to buy international firms than engage in new alliances with them.
“In the past, the expectation has been that conservative people tend to be conservative with their money, they tend to shun risk, whereas liberal people tend to be less risk averse,” the researchers explain. “What we found is that in the context of international expansion, our expectation of risk aversion essentially reverses. We find that more conservative CEOs are associated with more risk-seeking strategies, such as acquisitions.”
Higher risk
When venturing into new markets, acquisitions carry a higher level of risk compared to alliances, but they offer a greater degree of control. Drawing on insights from previous studies on political ideology, researchers posit that it is this added control that attracts conservative CEOs to acquisitions, compensating for the inherent risks associated with acquiring international firms.
Conversely, executives with liberal leanings appear to prioritize openness to novel influences, including forming business alliances, a characteristic closely associated with liberalism.
To discern the political orientations of recently appointed CEOs, the authors examined publicly available data on individual political donations made in the years preceding their assumption of the chief executive role.
Those who contributed to the Democratic or Republican parties were classified as liberal or conservative, respectively. The researchers evaluated the strength of their political ideology based on the consistency of their donations. Approximately one-third of the CEOs had not made any monetary contributions to either party and were considered politically moderate.
Influencing strategy
Subsequently, the researchers analyzed how these ideological inclinations influenced the international strategies pursued by these firms between 2010 and 2018. The dataset encompassed 193 CEOs representing 176 companies listed in the S&P 500. The findings revealed that the more conservative the CEO, the greater the likelihood of opting for acquisitions over alliances.
For businesses and shareholders seeking to steer decision-making processes away from political biases and toward more rational approaches, board oversight emerges as a potential avenue.
By instilling effective governance mechanisms at the board level, organizations can mitigate the impact of ideological predispositions and promote more objective and strategic decision-making in international expansion efforts.
“Generally speaking, the characteristics associated with sound board structure—independent directors, sound vigilance—weaken this political ideology effect,” the researchers explain. “The board structure is really important. We need board members that are not asleep at the wheel.”
