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Social class origins of CEOs appreciably affect their companies’ strategic risk-taking, study finds

January 17, 2016

For more information, contact: Ben Haimowitz , (718) 398-7642, press@aom.org

The presidential election campaign steams ahead, and all but inescapable are the family histories of the candidates – the unique case of Jeb Bush, of course, but also the well-advertised fact that Marco Rubio's father was a bartender or John Kasich's dad was a letter carrier or that Hillary Clinton grew up in a middle-class family that had a drapery business.

 

In the corporate world, as in politics, leadership counts for something too. Yet, click onto a public-company Web site seeking biographical information about its CEO, and details about his or her early life are almost invariably lacking, personal background data rarely reaching back farther than college.

 

How paradoxical this absence is emerges in new research that reveals how social class origins "exert a lasting influence on executive decision-making."

 

Indeed, the paper in the current issue of the Academy of Management Journal finds that class origin appreciably affects one of the most important characteristics associated with corporate leadership, whether for good or ill – the willingness to take strategic risks. In the words of the new study, "social class origins of top executives help to explain their risk-taking preferences at the firm level years later, such that CEOs of lower and upper social class origins take greater strategic risk than their middle class counterparts, [and] CEOs from the lower social classes engage in lower levels of strategic risk-taking than their upper social class counterparts." 

 

In sum, "childhood social class matters. Despite some executives taking the long road to the corporate elite, executives appear to hold on to the lessons and understandings garnered from their formative years."

 

Class origin also interacts with educational and career experiences in quite different ways. In the words of the study, "CEOs from lower social class backgrounds become more risk averse as the amount of elite education increases… [but] the level of elite education [does] not significantly influence the relationship between upper social class origins and risk-taking." In addition, a varied management background, in contrast to advancement along a single functional track, "serves to amplify the relationship between CEO social class origins and strategic risk-taking among executives from both the lower and upper social classes"—appreciably more than is the case with managers born into the middle class.

 

Notwithstanding these findings, the study's co-authors, Jennifer J. Kish-Gephart of the University of Arkansas and Joanna Tochman Campbell of the University of Cincinnati, express no surprise when told that information on CEOs'  social class backgrounds is not readily available on company Web sites. Comments Prof. Kish-Gephart, "Even though inequality has lately come to the fore as a public issue, two widely held American beliefs persist – first, that the U.S. is largely a classless society and, second, that people shed or discard the vestiges of their social class roots when they achieve upward mobility. Countering these beliefs is, I think, an important contribution of our study."

 

Indeed, scholars too, the professors write, have generally devoted little attention to "how childhood experiences with social class – and subsequent upward mobility – influence individuals in the workplace, including those who have ascended to the top of the corporate hierarchy. In this study we take an initial step toward addressing this conspicuous oversight and examine the influence of CEOs' perceived social class background on strategic risk-taking at the firm level."

 

To this end, Profs. Kish-Gephart and Campbell did something unusual, even unprecedented. While others had investigated the relationship between elite education and executive behavior, the professors went right to the source, sending a one-question survey to CEOs of the largest US public corporations that asked which of five categories (upper, upper-middle, middle, lower-middle, lower) best described their family while they were growing up. In all, 265 CEOs provided the requested information, of whom 3.4% were from lower-class backgrounds, 38.5% from lower-middle, 38.1% middle, 17% upper-middle, and 3% from upper. The authors were able to find supporting evidence for the CEOs’ answers through subsequent interviews with 31 of the chief executives. 

 

Supplementing this information with data  from a variety of sources, the professors analyzed how social class, and its interaction with education and functional career diversity, related to strategic risk-taking, as gauged by three measures for each year of CEO tenure – company spending on research and development, capital expenditures, and value of long-term debt. As would be expected, the analysis controlled for many factors that might affect strategic risk-taking, such as company size and profitability, industry characteristics, and CEO tenure, salary, share ownership, and stock-option awards. 

 

The professors report that, in general, CEOs raised in the two top and two bottom family categories exceed those in the middle in terms of strategic risk-taking, with chief executives from upper- and upper-middle class backgrounds the biggest risk-takers of all. Why should this be? Citing diverse social scientific research, the study notes that, "having grown up with an abundance of resources, individuals from the upper social classes have experienced the benefit of a substantial safety net [so that they] tend to perceive the world as safe, welcoming, and full of opportunity...In comparison...the middle class safety net is smaller and less secure...such that those from the middle classes are especially motivated to maintain their current position and minimize the likelihood of status loss."

 

As for CEOs from the bottom two rungs of the socioeconomic ladder, "they have less to lose and may be willing to accept the potential downside of a risky decision." But getting the benefit of an undergraduate or graduate education at an elite college or university tends to reduce their risk-taking inclination, leaving them in this regard below CEOs from middle class families who attended similar schools. As the authors explain, "Rather than having nothing to lose, individuals of lower class origins who have graduated from an elite institution now have a ‘positive balance’ ...As one CEO from a lower social class background communicated to us, 'You don't need to throw another Hail Mary pass if you're ahead by 20 points.'" 

 

In contrast, attending an elite school evidently has little effect one way or another on risk-taking of CEOs raised in upper- or upper-middle-class households. In explanation, the authors write that for such individuals "obtaining an elite education is not uncommon or unexpected [so they] may not perceive (or objectively accrue) any significant increases in their economic or social capital." 

 

Education is a particular concern of the study, because, as the authors explain, a focus "on the effects of early, formative life experiences...places a high importance on the elite status of undergraduate education as a key period of growth and self-discovery in the life of young adults." Borrowing from earlier research, they classify 29 U.S colleges and universities as elite. In all, 15.4% of the sample were never awarded an undergraduate degree, 70.3% gained it at a non-elite institution, 5.6% earned it at an elite institution, and 8.7% were awarded both an undergraduate and graduate degree by an elite institution.

 

The study makes no judgment as to whether higher levels of strategic risk-taking are ultimately good or bad for companies. Comments Prof Campbell: "There has been plenty of research on both sides of that question. What there can be no doubt about is that strategic risk-taking is a fundamental part of leadership, and we believe our study throws an entirely new light on this aspect of decision-making.”

 

In an e-mail, the professors add: “No one ought to hire a CEO based on social class, but, hopefully, the insights of this paper and other research it prompts will add a layer of understanding to interactions that occur every day in executive suites and more broadly in corporate life."

 

 

The paper, “You Don't Forget Your Roots: The Influence of CEO Social Class Background on Strategic Risk-Taking," is in the December/January issue of the Academy of Management Journal. This peer-reviewed publication is published every other month by the Academy, which, with 18,000 members in 116 countries, is the largest organization in the world devoted to management research and teaching. The Academy's other publications are Academy of Management Review, Academy of Management Perspectives, Academy of Management Learning and Education, Academy of Management Annals, and Academy of Management Discoveries.

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