Polarized Corporate Boards

Abstract

We show that political polarization between directors and a CEO negatively impacts the effectiveness of corporate boards. At the director level, polarization increases directors’ incentive to monitor the CEO but creates a hostile board environment and discourages moderate directors’ board meeting attendance. This leads to compromised board capacity at the firm level and significantly reduces forced turnover-performance sensitivity. Our results are more pronounced in presidential election years and for firms with more monitoring and advising needs. Finally, we show that polarization in the boardroom lowers investment-Q sensitivity. Our findings highlight the real economic cost of political polarization.