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Study Examines Relationship between CEOs, Social Class and Risk Taking Thinkstock

Study Examines Relationship between CEOs, Social Class and Risk Taking

Your CEO’s social status might determine whether or not he or she is a risk taker, and knowing that might determine how you should approach requests for resources and funding for capital projects.

A new study by a University of Arkansas management professor shows how origins of social class explain risk-taking behavior – good or bad – by the top executives at the largest U.S. public corporations.

In a survey of 265 chief executive officers, Jennifer Kish-Gephart, assistant professor of management in the Sam M. Walton College of Business, and co-author Joanna Campbell at the University of Cincinnati found that CEOs with lower and upper social-class origins take greater strategic risks than those who grew up in middle-class families. Within the two high-risk categories, CEOs with upper social-class origins engage in higher levels of strategic risk-taking than their lower social-class counterparts.

“The CEOs who were raised in relative wealth and privilege turned out to be the biggest risk-takers,” said Kish-Gephart. “Having grown up with an abundance of resources, individuals from the upper social classes have experienced the benefit of a substantial safety net, so they tend to perceive the world as safe, welcoming and full of opportunity. The middle-class CEOs, not so much.”

The researchers theorized that CEOs with lower social-class origins, compared to those with a middle-class background, engage in more risk-taking because they may perceive themselves as having “less to lose” and therefore may be more willing to accept the potential downside of a risky decision.

Relying on data from a variety of sources, the researchers defined 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.

The surveys contained one question: Which category – upper, upper-middle, middle, lower-middle or lower – best described their family while they were growing up? Of the 265 CEOs who responded, 3.4 percent said they were from lower-class backgrounds, 38.5 percent from lower-middle, 38.1 percent from middle, 17 percent from upper-middle and 3 percent from upper. The authors found supporting evidence for the CEOs' answers through follow-up interviews.

The researchers also examined the moderating effect of education, especially attendance at 29 colleges and universities previously identified as “elite.” Slightly more than 14 percent were awarded undergraduate and/or graduate degrees at an elite institution, and 70.3 percent obtained an undergraduate degree at a non-elite institution, while 15.4 percent did not have a degree.

Attendance at an elite college or university tended to reduce risk-taking among CEOs who came from lower social-class backgrounds. However, level of education did not significantly influence risk-taking of CEOs with upper social-class origins.

“Whether or where upper social-class CEOs attended college does not appear to affect their risk taking,” said Campbell. “This may be because, for this group, obtaining an elite education is more often than not the norm. They probably do not experience significant changes to their economic or social capital as a result of graduation from an elite institution.”

Varied Management Background Amplifies Risk Taking

The study also found that a varied management background, in contrast to advancement along a single track, amplified the relationship between CEO social-class origins and strategic risk-taking among executives from both lower and upper social classes.

Historically, public corporations have provided minimal biographical information about their CEOs, and scholars generally have devoted little attention to how childhood experiences with social class influence individuals in the workplace, including those at the very top of an organization. This issue hasn’t been too controversial until recent years, as shareholders and the public in general have reacted strongly to announcements of CEO compensation, especially for those who lead the largest U.S. banks, some of which the government saved following the housing and financial crisis.

“Our work suggests that social-class origins exert a lasting influence on executive decision-making,” said Kish-Gephart. “In short, childhood social class matters. 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.”

“You Don’t Forget Your Roots: The Influence of CEO Social Class Background on Strategic Risk-Taking,” was published in the December/January issue of Academy of Management Journal.

(This article originally was published on Research Frontiers, home to research news at the University of Arkansas, and is used with permission. In addition to daily updates on the Research Frontiers web site, Research Frontiers magazine is produced by the Office of University Relations in the Division of University Advancement.)

About the Author: A former newspaper reporter, Matt McGowan has worked as a science and research writer at the University of Arkansas since 2005. He covers business, engineering and law.

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