CEO-board political alignment and firm performance: An examination of declines from homogeneity that are mitigated by CEO psychological traits

Abstract

As people group themselves by their political ideologies, ideological alignment is likely to occur in workgroups—including boards of directors. While some research highlights positive outcomes from shared group characteristics, homogeneity can also hinder decision-making due to fewer perspectives being considered, limited sharing of non-conforming information, and narrowed problem solving. Building from prior research, we contend that substantial political alignment between a CEO and board members aligns them toward a common cognition, which fosters negative effects associated with homogeneity and subsequently reduces firm performance. We further contend that these performance reductions can be mitigated by psychological traits associated with managerial discretion. An analysis using surveys from CEOs and political donation data finds support for the hypothesized negative effects from political alignment, and also finds that performance declines from political alignment are mitigated when CEOs have a more internal locus of control. We discuss implications from these findings.