The CEO’s political ideology influences resource allocation within an organization

Abhinav Gupta

Why do some multi-business corporations distribute resources evenly across units while others award resources variably?

According to research by Abhinav Gupta, an assistant professor of strategic management at the University of Washington Foster School of Business, it may have to do with the CEO’s political ideology.

Gupta and co-authors Forrest Briscoe and Donald Hambrick of Pennsylvania State University 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.

Collaboration or competition?

“CEOs in multi-business companies act as internal investors for business units,” says Gupta, a Michael G. Foster Faculty Fellow. “And they appear to approach resource allocation in one of two very different ways.”

Liberal-leaning CEOs, seeking collaboration among units, are more likely to favor an even-handed approach when allocating resources. Conservative-leaning CEOs, seeking to spur competition, tend to favor merit-based allocations that may create large disparities between business units.

Organizational ideology

Gupta’s study also indicates that both approaches to resource allocation are amplified when the CEO’s personal values match the prevailing political ideology of employees and dampened when they do not.

So, 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 organization that tends toward the liberal and egalitarian.

Moreover, ideological alignment can benefit firm performance. The study demonstrates that equal allocation creates greater value for companies with a liberal-leaning CEO and employees. Variable allocation produces superior returns for companies that are conservative across the board.

The mind of the CEO

Gupta believes that there are two psychological processes that may explain how political ideologies of CEOs affect their seemingly rational strategic choices: behavior channeling and motivated cognition.

In the event of behavior 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?

The study demonstrates that the effect of CEOs’ ideology on their firms’ allocation behaviors 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). Because of this, Gupta says, it is likely that CEOs view it financially prudent to engage in resource allocation choices that are aligned with their personal convictions.

“As such,” he adds, “the psychology of motivated cognition seems to provide a more powerful explanation than behavioral channeling for the effect of CEO ideology on strategic allocation choices.”

Bottom line

So, which is the more effective style of resource allocation? How do these ideologies and subsequent behaviors impact a firm’s performance?

Gupta and his co-authors suggest that there is no one definitive answer. Both egalitarian and merit-based distributions of internal resources have their positives and negatives.

What they can conclude is 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.

Evenhandedness in Resource Allocation: Its Relationship with CEO Ideology, Organizational Discretion, and Firm Performance” was published in the October 2018 Academy of Management Journal.