CEOs in multi-business companies act as internal investors for business units. Our research suggests that they approach resource allocation in one of two very different ways. Liberal-leaning CEOs, seeking collaboration among units, are more likely to favour an even-handed approach when allocating resources. Conservative-leaning CEOs, seeking to spur competition, tend to favour merit-based allocations that may create large disparities between business units.
We studied the resource allocation practices of Fortune 500 corporations and the (publicly available) political donations of their CEOs to establish each leader’s relative ideology along the conservative-liberal spectrum. This analysis of political contributions and resource allocations reveals a clear relationship between CEOs’ political values and their tendency to distribute resources evenly or disparately — presumably based on the perceived differences in recent profitability of individual business units.
Effect of organisational culture
Our study indicates that CEOs’ tendency to inject their ideological preferences in resource allocation are amplified when the CEO’s personal values match organisational culture as reflected in the prevailing political ideology of employees and dampened when they do not. For instance, resources would likely be allocated in the most evenhanded way at a liberal-leaning corporation that is led by a like-minded CEO. On the other hand, a conservative CEO might find his efforts to enact an extreme “feed the winner, starve the loser” allocation policy tempered at an organisation that tends toward the liberal and egalitarian.
Moreover, ideological alignment can benefit firm performance. Our findings demonstrate that equal allocation creates greater value for companies with a liberal-leaning workforce. Variable allocation produces superior returns for companies that are conservative in terms of employees’ political leanings.
The mind of the CEO
There are two psychological processes that may explain how political ideologies of CEOs affect their seemingly rational strategic choices: behaviour channeling and motivated cognition. In the event of behaviour channeling, leaders explicitly promote the choices that most closely align with personal values, regardless of their views about the instrumental payoffs of those choices. With motivated cognition, leaders implicitly seek out and interpret events and results that support their values, finding instrumental merit in those choices that are consistent with their personal philosophies.
So, which of these psychological processes explains the effect of CEO ideologies on resource allocations? We find that the effect of CEOs’ ideology on their firms’ allocation behaviours is more pronounced when those CEOs have a financial stake in the success of the firm (as indicated by their personal shareholdings and equity-based compensation). This suggests that CEOs view it financially prudent to engage in resource allocation choices that are aligned with their personal convictions. Therefore, the psychology of motivated cognition seems to provide a more powerful explanation than behavioural channeling for the effect of CEO ideology on strategic allocation choices.
So, which is the more effective style of resource allocation? How do these ideologies and subsequent behaviours impact a firm’s performance? There is no one definitive answer here. Both egalitarian and merit-based distributions of internal resources have their positives and negatives. Our study suggests that the more aligned a firm’s ideology and allocation style—liberal and evenhanded or conservative and variable—the greater the enhancement of firm performance.
- This blog post is based on the authors’ paper “Evenhandedness in Resource Allocation: Its Relationship with CEO Ideology, Organizational Discretion, and Firm Performance”, Academy of Management Journal, October 2018.
- The post gives the views of its authors, not the position of LSE Business Review or the London School of Economics.
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Abhinav Gupta is assistant professor of strategic management at the Foster School of Business, University of Washington, Seattle. His current research focuses on the political ideology of corporations and elites, inter-organisational diffusion and social activism.
Forrest Briscoe is a professor of management and organisation in the Smeal College of Business at the Pennsylvania State University. He received his PhD in management from the MIT Sloan School of Management in 2003. Prior to pursuing a PhD, he worked in consulting for John Snow Inc. in Boston, focusing in the health care and automotive industries, and in the area of non-market strategy. Much of his research focuses on how organisations decide to adopt new practices and strategies, and how such changes spread across industries and fields of organisations.
Donald C. Hambrick is professor, Evan Pugh University Professor and Smeal chaired professor of management at the Pennsylvania State University’s Smeal College of Business. He has written extensively on strategy formulation and implementation, executive staffing and incentives, and the composition and processes of top management teams. He was president of the Academy of Management in 1992-93. He also has served on the board of directors of the Strategic Management Society.