The Corporate Social Responsibility movement has grown considerably in recent decades, as companies accept that it is good business to be good corporate citizens. Some of these actions have a clearly political bent, such as support for Black Lives Matter, or the cessation of selling confederate flags.
Traditionally, firms have tended to stay clear of such issues, in a stance typified by Michael Jordan’s famous comment that even Republicans buy sneakers. In recent years, however, firms have begun to take a firmer stance, due in large part to expectations from consumers that they do so.
This Corporate Sociopolitical Activism (CSA) can take numerous forms, but can be broadly defined as a firm’s public demonstration of support for, or opposition to, one side of a partisan sociopolitical issue.
New research from the University of Arizona explores how customers and investors respond to CSA from firms, and how this in turn affects the performance of the firm.
“We argue that CSA publicly signals a firm’s sociopolitical values and increases uncertainty among investors for at least two reasons,” the researchers explain. “First, CSA may deviate from the political values of key stakeholders–customers, employees, and state government legislators. Second, CSA signals a shift in a firm’s strategic commitments. Firms focusing more on sociopolitical issues may divert resources (money, time, attention) from other more profit-oriented activities.”
Therefore, the researchers proposed that CSA will have a negative effect on the financial performance of the firm. However, the results suggest things are not quite so straightforward, and the effect of CSA can actually vary considerably from firm to firm, and in some cases can have a positive impact.
Corporate activism
The researchers examined the issue across a number of key contingency factors. For instance, they wanted to test the extent to which CSA activities deviate from the political value of stakeholders. The results suggest when this occurs, it results in a 2% fall in stock value for the firm, but when the values are aligned, it can increase stock returns by around 1%.
They then explored how the implementation of CSA provided a signal of the company’s overall commitment to activism. Here, there appeared to be a direct connection between the level of commitment shown by the firm and the uncertainty expressed by investors.
“The more strategically committed a firm seems to be, the more uncertain investors become,” the researchers say. “CSA that takes the form of an action (vs. a statement), is delivered by the CEO (vs. another executive), is motivated purely on moral terms (vs. rationalized as being good for business), or is conducted alone (vs. in a coalition with multiple other firms) signals stronger commitment and, ultimately, a more negative impact on a firm’s near-term stock price.”
Being aligned
Perhaps unsurprisingly, the alignment between CSA activities and the values of stakeholders was also reflected in longer-term performance. When alignment was achieved, it resulted in an 8% increase in sales growth in the following quarter, and an even bigger 12% growth in the following year.
This is likely to be because of the impact the CSA has on strengthening the relationship with customers, employees and other key stakeholders, all of whom are broadly supportive of the company’s stance.
For managers thinking of engaging in CSA activity, therefore, the advice appears to be to pick actions that they’re confident aligns with the values of key stakeholders, and accept that this is a long-term play that may result in a short-term dip in share price and/or sales growth.
