CEO Activism and the Cloak of Social Responsibility

 CEO Activism and the Cloak of Social Responsibility

In August 2005, when Hurricane Katrina ravaged Florida and the Gulf Coast, leaving unprecedented destruction and human misery in its wake, Walmart was one of the first companies on the scene. Springing into action, the company used its emergency management team and renowned logistics capabilities to bring relief efforts to ravaged parts of New Orleans and Mississippi. Walmart representatives arrived on the scene long before most government agencies could react.

In an October 2005 speech entitled “Twenty First Century Leadership,” then-Walmart CEO Lee Scott asked of his company, “What would it take for Walmart to be that company, at our best, all the time? What if we used our size and resources to make this country and this earth an even better place for all of us: customers, associates, our children, and generations unborn? What would that mean? Could we do it? Is this consistent with our business model? What if the very things that many people criticize us for—our size and reach—became a trusted friend and ally to all, just as it did in Katrina?”

Though the issues may be new, American business leaders have been engaging in social issues for well over a century.

Using the experience with Katrina as a springboard, Lee Scott led Walmart to take an active role in the environmental sustainability movement. Walmart, by most measures, has had a significant impact moving sustainability to the mainstream consciousness of the consumer.

Taking a stand on something like Katrina, or even the environment, still allows a company to avoid some measure of controversy. After all, who is opposed to hurricane relief? Further, the sustainability movement is seen favorably by most Americans. However, since Lee Scott moved Walmart into sustainability in 2005, CEOs have increasingly taken more controversial positions on issues that historically have been off limits. We have seen Target take a position on gender identity and bathrooms, CVS on cigarettes, and more recently, Walmart and Dick’s Sporting Goods on guns.

A convoy of Walmart trucks waited to enter New Orleans on Sept. 1, 2005, after the city was battered by Hurricane Katrina. Government agencies said the massive storm taught them that big-box retailers need to be an integral part of hurricane preparation and relief efforts. Nicholas Kamm/AFP/Getty Images

Though the issues may be new, American business leaders have been engaging in social issues for well over a century. In 1914, the Ford Motor Company announced that it would pay a minimum wage of $5 per day—more than double the industry wage at the time—and later reduced the workday from nine-hour shifts to eight-hour shifts. Contemporaries praised founder Henry Ford as a great humanitarian, but Ford claimed that humanitarianism had nothing to do with it. He was setting policies to attract and keep the best possible workforce he could—and refused to frame his business decisions as socially responsible.

In his memoir, My Life and Work, he explains, “The payment of high wages fortunately contributes to the low costs because the men become steadily more efficient on account of being relieved of outside worries. The payment of five dollars a day for an eight-hour day was one of the finest cost-cutting moves we ever made, and the six-dollar day wage is cheaper than the five. How far this will go, we do not know.” In 1915, however, Ford would start taking controversial activist stances on how to end World War I, would run unsuccessfully for Senate in 1918, and in the 1920s would publish anti-Semitic material in his newspaper, the Dearborn Independent.

CEOs are not the only activists in the business community, though. Author Jeff Gramm contends that shareholder activism has been alive and well in the United States since Benjamin Graham clashed with Northern Pipeline in 1927, pressuring the company to distribute excess cash to shareholders. Gramm chronicles that history in his recent book Dear Chairman. Shareholder activists can be very pro-shareholder like Benjamin Graham or more pro-consumer like Ralph Nader, who grew toward shareholder activism in his later years.

The payment of five dollars a day for an eight-hour day was one of the finest cost-cutting moves we ever made, and the six-dollar day wage is cheaper than the five.

Henry Ford

Milton Friedman captured some of the history between activist shareholders and activist CEOs in his now 50-year-old essay, “The Social Responsibility of Business Is to Increase Its Profits.” Specifically, he noticed how corporate executives would raise wages “to be a socially responsible business” when it was clearly in their self-interest to raise wages to attract better talent and reduce shrinkage or sabotage. He also observed that, more blatantly, executives frame corporate donations as efforts to improve their communities rather than as self-interested gifts that maximize their tax deductions. In his essay, Friedman coined the term “the cloak of social responsibility” to describe how CEOs transform self-interested actions into exercises in social consciousness.

So, CEOs taking positions on social issues and committing corporate resources to support these positions is nothing new. The relationship between CEO and shareholders took its most recent turn on August 19, 2019, when 181 CEOs signed the Business Roundtable’s “Statement on the Purpose of a Corporation.” The statement posits that companies have stakeholders beyond its shareholders and that profit and return is not its only objective.

This is an extreme departure from the historical objective of a company: it has long been held that fiduciary duty to the shareholder is the driving factor in the strategic objectives of a company. Some even argue that acting on behalf of “stakeholders” who are not shareholders may violate that fiduciary responsibility. Yet at least one signatory of the agreement has doubled down on its commitment to social responsibility. Almost two months after the release of the “Statement on the Purpose of a Corporation,” Amazon created a webpage outlining “Our Positions” on a wide variety of social issues, including the minimum wage, climate change, and immigration.

What would motivate a CEO and their respective companies to take controversial positions? Companies, especially publicly traded companies, live and die on quarterly and annual results. A few percentage points on the top or bottom line can mean the creation or destruction of billions of dollars of value. Many of the controversial issues that are in the public eye today reflect the split that exists in our country.

The split is not only political—that is, Democratic or Republican—but also geographical: the two coasts versus the vast middle. We see a bifurcation in our cities versus our rural areas, our age demographics, and our racial makeup. Against this backdrop, taking a position on an issue could have a massive impact on a company. Companies taking positions on political issues (or politicians) can find themselves on the wrong side very quickly. Since World War II, the majority party in Congress has changed seven times (even more if you count only one party controlling either the House or the Senate) and the presidency has changed parties nine times. If you are going to take a position, be sure it is one that you can stand on, because recent history has shown that political cycles are much shorter than business cycles.

5 Things to Consider Before Taking an Activist Stance

Before jumping into the activist role, here are some things you should consider:

1. CEO activism remains a rare phenomenon.

Despite lots of press to the contrary, CEO activism remains an exceptional activity. In 2018, researchers at the Stanford Graduate School of Business surveyed 3,544 CEOs and found that the vast majority never go on the record regarding social or political issues in a meaningful way. Only 12% of S&P 1500 company CEOs engage in activism, and much of this activity was less controversial (i.e., surprisingly mainstream) than headlines such as “The New CEO Activism” might suggest.

And the Stanford researchers surveyed only publicly traded companies, not the far more numerous group of private businesses, where CEOs can more easily avoid publicity. So, if you’re not receiving outside pressure to engage in CEO activism, don’t let your internal team talk you into it without clear and compelling reasons.

2. Potential backlash requires preparation.

Activist executives go at least as far back in American history as Thomas McKenney and John Jacob Astor’s differing views on Native Americans and the fur trade of the early 1800s.

The difference today is the speed at which social pressure can be brought to bear. Social media and the 24-hour news cycle have changed the model. CEOs almost immediately know when something has gone viral as tweets and retweets begin to rain down in indescribable quantities. Protests, email campaigns, and boycotts can organize in an instant and have an impact not only on business but on organizational morale and dynamics.

Several years ago, Target responded to internal and external pressure and made an activist decision regarding the use of restrooms by transgender individuals. A boycott followed swiftly and Target would spend $20 million to install private bathrooms in stores. Thankfully, CEO statements and company positions can also be disseminated in seconds, changing the narrative instantly. Being prepared is key. The blade of corporate activism swings in both directions, but the speed at which it does can be dizzying.

3. CEOs can advocate for state or national economic issues instead.

CEO activism is framed as a political activity, even though it is far removed from the political decisions made by executive, legislative, and judicial players in Texas or Washington, DC.

In fact, the Stanford survey intentionally disregarded CEO advocacy on matters such as trade negotiations, tariffs, and corporate tax rates. Yet these are the very things that CEOs can address far more effectively than political actors. It’s almost like asking CEOs to do the job of Congress and vice versa. Who is speaking out to create economic environments where businesses can flourish? Texas is such a place at present but so was Michigan at one time.

Rather than becoming embroiled in social issues, you might consider speaking out on an economic issue that’s important to you or your business. Be mindful, however, that even seemingly benign topics can be met with resistance. Walmart’s recent efforts to encourage US manufacturing have been a contributor to the resurgence of US-based production. Surprisingly, some critics accused Walmart of trying to minimize their reliance on Chinese imports. Others said that those were not the kind of jobs we wanted back in the US. Even when you think everyone will be on board, activism will often result in criticism.

4. Private ownership affords special freedoms.

Founded in 1972, Hobby Lobby had almost 200 stores when it initiated its policy of closing on Sundays in 1998. The company later noted that it estimated $100 million in lost sales when it made the decision. Company leadership could have put on the “cloak of social responsibility” and stated that they did this for the sake of climate change (reduced energy usage and less car travel to their stores) or to take a stance against war (by promoting peace and mindfulness among its workforce). But, largely because it is a privately owned company, Hobby Lobby’s leadership felt comfortable clearly communicating that they implemented this policy for religious reasons—the least favorably regarded category of corporate activism according to the Stanford survey.

Similarly, Chick-fil-A’s religion-based decision to stay closed on Sunday would be very difficult if it were a public company. As a private company, Chick-fil-A can make the decision to forgo its Sunday earnings without pressure from shareholders.

5. The cloak of social responsibility increases the risk of political capture.

The objective of any CEO activism should be to take a position that benefits the corporation as well as society as a whole. As Friedman pointed out, CEOs often don the cloak of social responsibility to earn public goodwill for decisions that ultimately serve the interests of the business. These two things can be very difficult to separate. Friedman would argue that when the CEO allows “social responsibility” to dominate their decision making, the result is to “extend the scope of the political mechanism to every human activity”—meaning that the corporation becomes a tool for certain social interests and can thus open itself to political influence. Why, for example, would legislatures pass potentially controversial gun control legislation when they could pressure CEOs to take their preferred stances instead? CEOs can minimize the risk of political capture by using the cloak sparingly and being up front about the benefits of this activity to their companies.

Across two centuries of American business history and thousands of executives, CEO activism remains a relatively rare activity, with only a handful of CEOs—public or private—ever announcing a public position on a political matter. Though some headlines claim that CEOs are “breaking with tradition” and taking stances on social issues, ours are not the first corporate executives to assume the cloak of social responsibility.

For years, Harry Potter was forced to live in a cupboard under the stairs while his hosts blamed him for all manner of their unhappiness. Along the way, he goes to wizarding school, hones some of his powers, and is given a Cloak of Invisibility. Ultimately, he realizes that he’s a very powerful wizard who doesn’t really need a Cloak of Invisibility to succeed—though that cloak certainly proved useful on several occasions. Somewhat like Harry Potter, US corporations live in a cupboard under the stairs, are blamed for all manner of societal evils, and are often reminded of their status as guests.

Note that the Business Roundtable’s “Statement on the Purpose of a Corporation” starts and ends with the hosts: “Americans” and “our country,” respectively. Like Harry Potter’s invisibility cloak, the cloak of social responsibility might prove useful from time to time when troubles come—so use it as you must. However, our hope is that US corporations remember that their true power remains in generating long-term value for shareholders. The ultimate statement a CEO can make is staying in business.

4 Approaches to CEO Activism

Imagine a product that has an 18-month lifecycle and is constructed with many rare-earth (or “conflict”) metals. The product is not easy to recycle given the complexity of its construction, and the company continues to raise the price of newly introduced models. Further, the product’s company gives virtually no money to charitable causes. Its leadership states that it is the company’s product, not tax-deductible donations, that will make a difference in the world.

You’ve probably guessed by now that this is Apple Computer and the iPhone during Steve Jobs’ tenure. During that time, Apple created billions upon billions of dollars of value for shareholders by focusing on two fundamentals: making insanely great products and delighting customers.

At his best, Ford took a very similar approach, stating, “Most certainly business and charity cannot be combined; the purpose of a factory is to produce, and it ill serves the community in general unless it does produce to the utmost of its capacity.” These are both examples of one approach to the issue of CEO activism: focus squarely on maximizing long-term shareholder value while taking no substantive positions. This is just one of four places a CEO might find him- or herself on the above matrix. Let’s explore the other three:

The Separation Strategy

After navigating a period of intense criticism centered on founder S. Truett Cathy’s support for “traditional marriage,” Chick-fil-A released this statement in July of 2012: “We are a restaurant company focused on food, service, and hospitality; our intent is to leave the policy debate over same-sex marriage to the government and political arena.”

As a private company, they clearly showed that they will separate business and political issues and not allow others to force their integration. Though Cathy did dip his toe in activism, the company has since modeled the Separation Strategy to distance itself from criticism. At present, they have pretty much stayed focused on “food, service, and hospitality,” even as protests roiled restaurant openings throughout their expansion into Canada.

The Engagement Strategy

For decades, Patagonia has leveraged its position as a private company to say and do things important to its founder, Yvon Chouinard. The company is clearer than ever that “we’re in business to save our home planet.” In a recent interview, Chouinard even noted that when it comes down to two candidates for a job, they hire the person most committed to saving the planet. Fully engaging in social activism has associated costs and benefits, but Patagonia works hard to align company activities to core values.

The Cloak of Social Responsibility

The 2019 Business Roundtable statement is a good recent example of the “cloak of social responsibility,” often worn to relieve political pressures or to transform self-interested activities into something that seems less shareholder-focused. CEOs of public companies can and have used the cloak in tough situations. CEOs might find it promotes both brand loyalty and employee loyalty but increases the risk of being captured by political actors.

Bill Simon and Blaine McCormick

Bill Simon is the former President and CEO of Walmart, US. He is currently a Senior Advisor with KKR and Executive in Residence at Baylor University. Blaine McCormick is Chair of the Department of Management at the Hankamer School of Business at Baylor University.

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