Gupta & Wowak (2017). The Elephant (or Donkey) in the Boardroom: How Board Political Ideology Affects CEO Pay.

Authors:

Abhinav Gupta – Foster School of Business, University of Washington

Adam J. Wowak – Mendoza College of Business, University of Notre Dame

Interviewers:

Johnathan Cromwell – Harvard Business School

Article link: http://journals.sagepub.com/doi/abs/10.1177/0001839216668173

Hello, ASQ bloggers. My name is John Cromwell, and I’m a doctoral student at Harvard Business School and part of the organizing committee for the ASQ blog. This is the second installment of our new ASQ podcast series. Today, I’m interviewing Abhinav Gupta and Adam Wowak about their forthcoming ASQ article, “The Elephant or Donkey in the Boardroom: How Board Political Ideology Affects CEO Pay.”

Abhinav and Adam, thanks so much for joining us today. If we could get started by you telling us a little bit more about yourselves and your research. What motivated you to undertake this project? Where did the idea come from, and how did it evolve as it went through development?

AG: That’s a difficult and a thought-provoking question. In one way the origins of this paper can be traced all the way back to our decisions to study certain topics at the onset of our respective careers. Adam has always been very interested in studying issues related to executive compensation, and I have gravitated towards understanding the organizational implications of political ideologies for several years now. So as I see it, this paper was real fun to write because it was right at the intersection of our research interests and combined our thinking really well. But to answer your question more pragmatically, I would say the earliest inception of this project is when I was studying organizational political ideology for my dissertation and found that political psychologists have described the notion of personal responsibility or proportionality as a central difference between liberal and conservative workers. And that reminded me of the classic structure versus agency debate which crops up every now and then in all of management subfields, and I started wondering about whether a CEO’s worth for an organization is partly a matter of directors’ political preference.

At that time, I discussed this idea with Adam, who I know was very interested in and was an expert on the topics of executive compensation, and in addition to being a very good writer. To our good fortune, the data on directors’ political ideologies was available through public sources, and that is the Federal Election Commission database. And I think it is fair to say, like all social scientists, management researchers find it challenging to measure individuals’ beliefs and attitudes, which we believe is part of the reason why researchers have not studied the filters and value systems of corporate directors. At this point, given that we had identified the construct of political ideology, which I believe is quite provocative, and had a reasonable plan to measure it, we believed that was our starting point and our hook to engage the corporate governance folks.

With your second question, how did it evolve, it’s always fun to look back and think about how the paper has changed over time. In this case, we had framed an original version of this paper around our independent variable, which is board political ideology, and tried to position CEO compensation as the key context to assess its implications. But the collective wisdom of our friendly reviewers prevailed, and we corrected it of course pretty soon. Actually, now that I think about it, we benefited greatly from our friends’ feedback. Our friends’ advice was to frame the paper more sharply around CEO compensation, which made the framing more squarely around the centrally important corporate governance question, which is, why are CEOs paid the amounts they are?

While refining the paper quite a bit throughout the process, we were fortunate that we didn’t really face major obstacles in the true sense of the term. Our results clearly showed the difference in compensation philosophy with liberal- versus conservative-leaning boards. And we found fantastic reviewers and a great editor, Chris Marquis, who saw merit in our paper and its contribution from the beginning. And we are sincerely thankful for that. There were, of course, challenges, such as coding a large data set of political contributions and writing the paper carefully to maximize its relevance for governance literature. These challenges are intrinsic to any high quality paper.

Great, so something you just mentioned, Abhinav, about writing the theory section, integrating these literatures. Something I noticed when I read it is that you had to develop the theory and hypotheses by integrating literature that doesn’t necessarily speak to each other. And these are the literatures on corporate governance, political ideology, and upper echelons theory. What was your strategy for integrating these literatures, and what were the biggest challenges you faced when doing so?

AG: I will let Adam answer that question.

AW: Sure, so, although they haven’t traditionally been examined alongside each other, the good news for us is that they’re actually pretty compatible, and they each speak, in one way or another, to our paper’s core idea that governance is a function of leaders’ beliefs about how to govern. And this was a common thread that we kept coming back to again and again as we went about integrating theories and concepts from the different domains that you mentioned.

For instance, even though it’s true, or at least we argue, that much of the research on corporate governance at least implicitly assumes that directors tend to share a common view about what constitutes good governance—which is, of course, an opportunity and a blind spot that we try to address—it’s also the case that director beliefs are still assumed to motivate their actions in a typical governance study. We just kind of focused on the variance in those beliefs in the form of political ideologies as a predictor of their decisions. And then the recent upper echelons work on CEO political ideology provided us with a good starting point from which to build our own arguments about directors’ ideologies and decision making. And from there it was a matter of zeroing in on the aspects of ideology that would matter most in shaping boards’ decisions specifically about executive compensation. Obviously ideologies—there’s a lot that goes into political ideologies, and we had to identify the most relevant aspects or facets for our domain.
 
The last part of your question, what were some of the challenges we faced, probably the most challenging issue we encountered was identifying and articulating the specific aspects of political ideology that would most directly influence these pay-related decisions. There was a bit of trial and error involved there, and it’s one area where our editor and reviewers were actually really helpful in terms of offering suggestions and critiques that helped us hone in on and sharpen our arguments into a coherent and cohesive theoretical story.

All right, so moving on to the methods. When developing your measure for political ideology, how much of this procedure was done before the review process and how much was influenced by the review process itself? What advice would you give to students who want to use archival data, as you did, to construct a measure about attitudes and beliefs?

AG: Great question. I think it’s easy to answer the first question because the reviewers were largely on board with our measurement approach. They pushed us to clarify some important analytic choices, such as why is it reasonable to code non-donors as ideologically moderate, and why it is okay to take a simple average of directors’ ideology to compute a board’s overall ideology. And both of these are important issues and require strong measurement theory, which we tried to provide in our revision. So overall we are again grateful that we had constructive reviewers at ASQ.

In terms of advice for students, we would offer encouragement to think creatively about capturing values and beliefs through archival data. While on many occasions it is practical and desirable to collect primary data through surveys, it can be quite hard in other situations and may come with other well-known biases such as social desirability. For example, if you ask people about their political ideology, lots of people will rate themselves as ideologically moderate. And if you compare that with how they lean on various social and economic issues, you find that they are much more liberal or conservative than they report. So in those situations archival measures can be very helpful.

And for people who are interested, a good discussion of this issue can be found in papers by Eugene Webb and Karl Weick, who have long urged researchers to creatively design studies and seek out what they call trace indicators of executive psychological proclivities. Eugene Webb, for instance, wrote a paper in the 1960s where he measured political beliefs of journalists by looking at how much coverage they gave to which politicians, which I thought was a clever measurement approach. Building on those early ideas, management researchers have since utilized diverse, archivally obtained indicators, using text, audio, and video data to measure corporate executives’ personalities, beliefs, and attitudes. All such measures, however, require extensive validation before a top-tier journal like ASQ will find them acceptable. And reviewers appreciate it if authors pay attention to the reliability and validity proactively rather than waiting for reviewers to bring them up.

The bottom line here is that students should not shy away from thinking creatively about using archival data to measure psychological constructs. But do it thoughtfully and by fully considering the implications of these choices.

JC: Yeah. I mean, that’s really great advice. I personally really like using archival data. I think you make a good point about asking somebody a question that they may have reason to not answer fully truthfully, and using some kind of measurement or some other indicator evidence that captures their behaviors to complement their attitudes I think is a really good point.

So the next question I have is one I was probably most excited to ask you when reading your paper because I think it’s an issue that while you guys experience specifically because you’re talking about politics, I think lots of researchers experience when people are trying to interpret their data, or use their data, or use their papers and findings. So you’ve heard the adage that many mothers say that you should never talk politics at the dinner table. But with this paper, you decided to talk politics at the research table. When conducting a study on such a politically charged topic, how did you maintain an objective distance while developing the paper?

AW: Yeah, that’s a really important question, and it’s one that we discussed several times and tried to keep in mind as we went about writing the paper. We really, really focused on keeping our language as politically neutral as possible, as the very idea underlying our paper is that people will differ in their beliefs about what good governance looks like. Depending on where you, me, and Abhinav fall on the ideological spectrum, we might all have very different views about CEOs’ roles in the success of the firm and then how these individuals should be rewarded or penalized. We were careful, at least as we tried to convey in our paper, that doesn’t mean that any one position is right and another is wrong. Instead, our argument was that directors are generally trying to govern the best they can, but they also have different ideas based on their ideologies about what good governance looks like. And maybe this is naive on my part, but I like to think that people on both sides of the political spectrum could read our paper and find at least some parts of our theory that they agree with. I personally don’t think that either side comes off as the villain or the hero in our paper.

And that kind of leads in to the last part of your question regarding the practical implications of our work. I don’t think that boards should take away from our study that the liberal governance approach is necessarily better or the conservative governance approach is necessarily better than the other side’s because, as we repeatedly argue, each represents a subjective—not objective, subjective—set of beliefs about the way the world works. But I do think that directors can benefit by being aware of their own biases and how those biases influence—in this case their political ideologies influence their decisions outside of the voting booth. There’s obviously been lots of research that looks at political ideologies and how they influence decision making in all kinds of domains. It could help them, getting back to directors, to better understand the reasons why, for instance, some directors on their board disagree with them about governance-related matters. It seems reasonable to expect that considering an issue from multiple ideological perspectives will help a board reach the decisions that are, if not palatable, at least understandable to all of its members.

As a follow-up question, now that the study’s done, given the timing of the presidential election and the inauguration, I’m sure this paper is receiving quite a bit of extra attention. How do you talk about your study to those who are interested in it, particularly when they seem like they may be trying to use it to achieve a political objective?

AG: Well I think our answer would be that we both try to be as politically neutral in communicating the study and its relevance. And what I have found interesting so far is that when you tell the audience about the key findings of this paper, they usually tend to see something that furthers their ideological point of view. A lot of conservatives are happy to see that conservative-leaning boards tie pay and performance more tightly together, whereas many liberals tend to approve the fact that liberal boards are paying less to the CEO than the conservative boards, who they argue tend to overpay the CEOs. So while we invite any of these political stances, we have found it interesting so far how people have reacted to it so far.

So in the study, you measured how much prior firm performance affected CEO pay, and you found that it was enhanced with boards that were more conservative – as you said. The theory provided is that people who are more conservative believe that individuals have a greater influence on company performance and therefore deserve higher rewards. Did you think about testing this underlying assumption by measuring whether CEO pay actually influenced future firm performance?

AG: Well that’s interesting to think about. We didn’t consider looking at it in this paper—looking at pay as a cause as opposed to an outcome of firm performance, as that would involve a different set of theoretical arguments and mechanisms, such as what actions do CEOs take in response to pay. But it’s hard to envision that the conservative or liberal pay approaches generate quantitatively better firm performance. It is very distal, in my mind, from CEO pay in terms of the causal chain of things. But maybe there are some contextual conditions that make one approach more conducive to success than another, which could be interesting to explore in future research.

Another, and perhaps bigger, issue is that there is lack of clarity on how much CEO compensation can ever influence firm performance. For a large corporation, firm performance can be a very distant and noisy dependent variable. And it becomes quite hard to empirically identify the relationship between pay and performance in any causal way. Perhaps it may be more clearly studied in a sample of entrepreneurial firms, which are less bureaucratic and arguably depend more strongly on right executive actions and incentives. Also, an experimental approach may work better, particularly so if you can find an externally generalizable sample of executives, which is usually pretty hard for experimentalists to achieve. Alternatively, an intermediate approach could be to perhaps consider the effect of CEO pay on some strategic choices that executives make, and that linkage I believe is potentially more identifiable. So the interesting question would be whether conservative boards are inducing, intentionally or unintentionally, different set of behaviors from the CEO and deliverables. And that would be super interesting.

I agree. The last question I have is about your teamwork and collaboration on the paper. How did your partnership for this paper develop, and how did you work as a team throughout the process?

AW: Well, you know, as I assume is often the case with papers that end up in premier outlets like ASQ, our collaboration was, I think—and I’m guessing Abhinav would agree—a big reason for the ultimate success of the paper in the review process. I honestly had a blast working on this paper both because of the topic, which I find inherently fun, and more importantly, because of how pleasant Abhinav is to work with. When he approached me with the initial idea for the paper, I couldn’t say yes fast enough. And we were off and running immediately.

Just to give you an idea of how quickly everything came together, I went back and looked at my e-mails, and this was a surprise even to me to look at it. We had our initial conversation about the paper back in early March of 2015, and six months later we were submitting it to ASQ. And that’s after writing up a draft, circulating it to friendly reviewers, so this went really quickly.

JC: Okay, now you’re just bragging. [laughs]

AW: No, see, I point that out because it’s unusual, I think, for all of us, and we were very fortunate on many dimensions. But one of the reasons for that was that we were just having such a good time on the project. We were working so well together that we were just very motivated to kind of get this thing written and out the door. And that again speaks to the quality of the collaboration. I can’t imagine it would have happened that way if we weren’t having so much fun.

And the friendship aside, I think—and Abhinav touched on this earlier, but—our complementary skills and backgrounds really made for a smooth partnership. Abhinav has obviously done quite a bit of work on political ideology. One of my areas of focus is executive compensation. So each brought unique but compatible perspectives to the table.

In summary, it was really just a treat to work on this paper. So much so that we’re currently working on some others—some new projects that we’re also very excited about and hope to one day be discussing on a future podcast like this one, if we’re so lucky.

AG: I couldn’t agree more. It was great fun to do this project with Adam. I really enjoyed our collaboration and look forward to writing more papers together. And I am grateful about how smoothly we were able to execute this project. And we would like to thank ASQ for helping authors like us do that.

AW: Definitely. I second that, and John thanks to you for taking part in this blog. It’s a great idea. I speak for Abhinav in saying we fully support this.

AG: Absolutely. Thanks a lot, John.

Yes, thank you. Abhinav and Adam, we really appreciate you joining us today, sharing your thoughts and experiences about your paper. I found it personally truly fascinating. I expect many of our readers and listeners will also find it similarly intriguing. To the ASQ blog community, thanks again for listening. Be sure to check out the next installment of our ASQ podcast series that will be coming out in June 2017, when the next issue of ASQ is published. Thanks!/


References

Webb, Eugene J. “One way to tell a columnist.” Columbia Journalism Review 1.3 (1962): 23.

Webb, Eugene, and Karl E. Weick. “Unobtrusive measures in organizational theory: A reminder.” Administrative Science Quarterly 24.4 (1979): 650-659.

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