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18 March 2019
It feels like CEOs are stepping into it—the political fray, that is—all the time these days. And recently, there has been a lot of pressure on CEOs to voice their views on political, environmental and social issues. According to the Global Chair of Reputation at Edelman, the expectation that CEOs will be leaders of change is very high. Last year, Edelman's Trust Barometer showed those expectations at a record high of 65 percent; "[t]his year, the call to action appears to be yet more urgent—a rise by 11 points in the public's expectation that CEOs will speak up and lead change. Today, some 76 percent of respondents believe CEOs need to step up." Similarly, in this year's annual letter to CEOs, BlackRock CEO Laurence Fink focused on the responsibility of corporations to step into the breach created by political dysfunction: "Unnerved by fundamental economic changes and the failure of government to provide lasting solutions, society is increasingly looking to companies, both public and private, to address pressing social and economic issues. These issues range from protecting the environment to retirement to gender and racial inequality, among others." In the absence of action from government, he counsels CEOs, "the world needs your leadership." (See this PubCo post.) To be sure, a number of CEOs have jumped in to meet this challenge. But this study, "The Double-Edged Sword of CEO Activism," suggests that, notwithstanding the public perception of widespread CEO activism, the incidence of CEO activism is actually relatively low. And public reaction seems to vary depending on the topic, but can, in some cases, lead to consumer backlash. Is there a better way to handle it? The authors of this article think so.
What is CEO activism? As discussed in the study, definitions can vary. For example, are CEO statements that are "defensive" in response to attacks or pressures on the company "activism"? What about "statements on social or environmental matters that are phrased as personal preferences or expressions of opinion without advocating that corporations or society take action"?
In their study, the authors looked at "all public statements in national media and corporate transcripts made by the current CEOs of all companies listed in the S&P 1500 Index." From that collection of content the authors excluded "advocacy statements related to corporate matters, including statements about corporate tax rates, federal and state regulations, and political issues with widespread economic implications, such as the fiscal cliff, the debt ceiling, budget sequestration, NAFTA, and tariffs. These statements are common across a large number of CEOs in response to questions about policy impacts on their business." However, the authors included as part of the study those statements that clearly represented the CEO's personal belief as well as statements that were not so clear and may have reflected either a personal belief or a corporate position, such as statements that were considered "commercially beneficial" because they "align with the company's core line of business and appear potentially beneficial in terms of customer or employee retention, or addressing external critics." (One of the examples given in this context was a statement by the CEO of a soft drink manufacturer advocating plastic collection and recycling.) The rationale for including these statements was that it was not really possible to determine whether the statement was a "proactive" one that reflected the CEO's personal belief or a "defensive" one that the CEO felt compelled to take because of external pressures. Also included were statements touting company awards or high scores on ESG indices. These statements were then divided into five categories: "the environment, diversity and inclusion, immigration and human rights, other social issues, and politics."
With regard to activist statements in the national media by CEOs of S&P 500 companies, the authors found that 28% made "public statements about social, environmental, or political issues either personally or on behalf of the company," while only 10% made statements that were clearly personal. For the S&P 1500, the percentages fell precipitously. With respect to CEOs of S&P 1500 companies, only 12% made these types of statements and only 4% were clearly personal. The authors found that about half of the activist CEOs advocated diversity, the most frequently promoted topic, followed by the environment (41%), immigration (23%), other social issues (19%) and political issues (17%). On social media, such as Twitter, the authors found that the level of CEO activism was only "modestly" higher. The authors attribute the impression that there is "widespread CEO activism" to "a few vocal outliers," CEOs of large companies who attract a lot media attention. Otherwise, they found that most of the activist CEOs expressed activist views on only one or two topics.
The study also considered how the public responded to CEO activism, finding that, while conceptually, the majority of the public supports CEO activism, the public is quite divided when it comes to particular issues. (What a surprise….) In a survey of 3,544 persons, almost 2/3 had a favorable view of CEOs of large companies using "their position and potential influence to advocate on behalf of social, environmental, or political issues they care about personally, while one-third (35 percent) do not." The issues viewed most favorably in this context were environmental issues (78%), renewable energy (68%), sustainability and climate change (each 65%). Some social issues also received high favorability responses, such as healthcare (69%), income inequality (66%), poverty (65%), and taxes (58%). Issues regarding diversity and social equality were more mixed, and "[c]ontentious social issues—such as gun control and abortion—and politics and religion garner the least favorable reactions. Of these issues, CEOs speaking up about gun control is the only one with a net-favorable position (45 percent favorable versus 35 percent unfavorable)."
In terms of the commercial impact resulting from CEO activism, the authors found that the public was more likely to react negatively—or at least remember doing so—as a result of disagreement with a particular CEO activist position by refusing to purchase or reducing the level of purchase of the company's product (35%) than to react positively when they agreed with the CEO by buying more (20%). The authors concluded that "CEO activism is a double-edged sword: CEOs who take public positions might build loyalty with employees, customers, or constituents, but these same positions can inadvertently alienate important segments of those populations."
To the extent that CEOs are considering taking stands on contentious social, political or environmental issues, are there effective ways for CEOs to consider when and how to take a stand? In this article from the WSJ, two business school professors give us their views, based on interviews and research, on the right way and wrong way for CEOs to express activist views, especially given the risk that companies can, in some cases, face backlash from consumers and others.
The authors identify three instances when, in their view, it makes the most sense for a CEO to weigh in on a controversial issue:
According to the most current Edelman Trust Barometer, there is a significant "trust advantage" for employers: "71 percent of employees believe it's critically important for 'my CEO' to respond to challenging times. More than three-quarters (76 percent) of the general population concur—they say they want CEOs to take the lead on change instead of waiting for government to impose it.")
To make activist statements most effective, the authors recommend the following:
The authors of the study discussed above also raise a number of issues regarding board involvement in CEO activism: "How well do boards understand the advocacy positions of their CEO? How well do they understand the advocacy positions adopted by their company (such as through Twitter)? Are they involved in decisions to take public stances on controversial issues, or do they leave these decisions to the discretion of the CEO? Should boards be more engaged in these decisions, particularly when a public stance has the potential to impact positively or negatively the commercial performance of the organization?" The extent of any board involvement will likely vary from company to company and may well depend on a number of factors, such as the circumstances and nature of the CEO's statement and the likelihood of impact on the company itself.
For further information on this topic please contact Cydney Posner at Cooley LLP by telephone (+1 415 693 2000) or email (firstname.lastname@example.org). The Cooley LLP website can be accessed at www.cooley.com.
This article has been reproduced in its original format from Lexology – www.Lexology.com.
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