The Executive as Outlier: How Firms Adapt to Political Opposition

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October 18 , 2022  |  By Jack Travis, Jason Ridge

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When your environment suddenly seems like it’s warring against you, strategies that you would normally employ with confidence might be seen as unnecessary risks in your now-hostile environment. To survive a riptide, even the most confident swimmers have to go against the instinct to swim back to the shore. In “When Not One of the Crowd: The Effects of CEO Ideological Divergence on Lobbying Strategy,” Nalick, Kuban, Ridge, Zardkoohi, Bierman and Schijven explore how CEOs stay afloat when the national political climate differs from their own. 

Upper echelons literature has previously suggested political ideologies are lenses through which CEOs view the potential impact that the national political climate has on business. CEOs interpret the current political climate in terms of how it aligns with their own ideology and values. Ideologies can either be high in convergence, which means that a CEO’s ideology resembles the national climate, or high in divergence, which is the opposite. 

Previous research has also suggested that when a CEO’s political ideology is in opposition with the national political climate, the executive perceives it as a threat and reduces market-related investments. What makes Ridge and his coauthors’ research innovative is that it examines a CEO’s actions outside of the firm. If CEOs adjust their market-related investments based on the political climate, then how might they also adjust their non-market strategies?  In particular, how might CEOs adjust their lobbying strategies during these times? 
How Firms Adapt to Political Opposition  

While firms have long been considered strategic actors, it’s well known that people are driven by beliefs and morals. Using organizational fit literature, the authors explore how value-driven individual CEOs affect corporate political activity with their political ideologies. Specifically, they examine how value and strategic motivations influence lobbying activity within firms.  

Governments can impact firms through actions such as tax policy and industry regulations. Therefore, CEOs guide approaches to corporate political activities, and their perceptions of the government as an ally or adversary are vital when considering potential non-market actions and political activity. Lobbying is a non-market action in which firms attempt to manipulate the same government from which perceived threats originate. When firms lobby, they provide valuable information to politicians to hopefully receive favorable policy outcomes in return.   

Lobbying, however, can be fraught with uncertainty and risk. The more a CEO’s ideology differentiates from the governing party, the less likely they will be to lobby. This is because when a firm provides information to politicians, that policymaker may then enact policy that is detrimental to the firm’s business. Thus, if a CEO discerns a difficult national political climate in opposition to their own ideologies, they may have concerns about how supplying information will benefit their firm.  

To meet perceived governmental opposition, the authors suggest firms shift between insourced and outsourced lobbying. When facing opposition, they expect CEOs to contract lobbyists externally rather than internally. Internal lobbyists are employees of the firm and management perceives them as less effective since they likely share the ideologies of the company, which have now become a liability. Contracting externally allows firms to benefit from an outside perspective, broad strategic complementarity and value agreement with the policymakers of an opposing party. 

Sometimes key conditions affecting the relationship between firms and policymakers make lobbying essential to business and consequently unavoidable by firms. Specifically, the authors find firms in heavily regulated industries, such as transportation, will have to lobby regardless of value congruence, due to the necessity of interacting with the government due to the regulation the governing party imposes. Regarding this trend, the authors hypothesize regulation will lessen the effect of an ideological divergence between the CEO and the federal government has on lobbying expenditures. Furthermore, contracting external lobbyists due to divergence between ideologies will be seen less in regulated industries. 
How ideological congruence affects firms 

The authors’ research and testing supported their findings and exposed many additional lobbying trends.  

Firstly, outside of CEO behavior, the authors confirmed industrial regulation moderates the effect divergence has on lobbying. Even further, the authors examined firms’ dependence on government contracts, much like regulation, moderates the effect ideological divergence can have. In fact, government-contract dependence may lessen the effects that divergence has on the internal versus external lobbying ratio and other general lobbying activities. 

Political interest can also affect where firms source lobbyists. For example, in heavily regulated industries, such as transportation, the most insourcing occurs with the convergence of moderate ideologies rather than politically extreme ideologies.  

Most importantly, however, the authors discovered a fundamental difference between ideologically neutral CEOs and those with strong opinions on politics. Testing showed that an increase in CEO and federal liberalism—the proportion of a Democratic majority across the legislative and executive branches—resulted in lobbying expenditures decreasing.  

In their research, the authors consider CEOs who act as campaign donors to be politically active. They found active CEOs lobby more, have greater variance in their lobbying and use more insourced lobbying. Convergence between personal ideologies of moderately liberal and conservative CEOs and the national political climate will also result in more lobbying. However, in the case of extreme ideologies, either liberal or conservative, CEOs lessen lobbying activity, regardless of industry regulation. Interestingly, the insourced lobby ratio will be higher for a liberal CEO confronting a conservative government than a conservative CEO confronting a liberal government. Potentially, these findings could offer confidence to a board of directors attempting to gauge a potential CEO

Operating in a partisan political environment can be complex. Using these findings, we can better predict the effects a CEO’s politics might have on business, specifically lobbying expenditures. Depending on the extent to which a company allows the CEO to shape the firm in their political image, a board should recognize both the advantages of ideological convergence as well as the doors ideological divergence closes. 

Jason RidgeJason Ridge is professor of strategic management in the Sam M. Walton College of Business at the University of Arkansas. He received his Ph.D. in strategic management from Oklahoma State University. His research has been published in premier journals in the management field such as the Academy of Management Journal, the Strategic Management Journal, and the Journal of Management with three of his articles being featured in the Harvard Business Review.