Study shows corporate activism can help, or hurt, the bottom line

Silhouette of protesters and company logos

Taking a stand on divisive social and political issues can help companies when the stance aligns with the values of stakeholders, according to new findings by Lundquist College assistant professor of marketing Joshua Beck and co-authors.

Research that looked at the effect of corporate activism on the stock prices of publicly traded companies and published in the Journal of Marketing also shows that net losses in stock value can occur if activism does not align with primary stakeholders, including customers, employees and state legislators. The findings were reported in the paper “Corporate Sociopolitical Activism and Firm Value.”

“Activism creates uncertainty,” Beck said. “Investors are predicting the reactions of key stakeholders.”

Well-aligned activism can strengthen relationships with customers and employees. Poorly aligned activism, alternatively, may result in customer boycotts or employee disengagement, all of which can impact the stock price, he explained.

Lawmakers may even retaliate. In 2018, a Republican-led Georgia Legislature stripped a jet fuel tax exemption from Delta shortly after the airline cut ties with the National Rifle Association.

The conclusions were reached by measuring the change in stock market value within a five-day period surrounding corporate activism events, which were isolated from product launches, earnings releases or other variables that might contribute to a change in the price of the stock.

If the activism didn’t align with a company’s primary stakeholders, stock values decreased by more than 2 percent, using a model with data from the Center for Research in Security Prices. If the move aligned with stakeholders, stock prices increased by almost 1 percent.

“The downside from misalignment was larger than the upside from alignment,” Beck said.

In addition to stock value, the researchers examined corporate cash flow in the quarter following any corporate activism, as well as throughout the following year.

The findings reveal that if activism is aligned with the political values of a company’s customer base, quarterly sales can increase by as much as 8 percent, Beck explained. Significantly deviating from customers or lawmakers, however, can limit sales growth. That is especially true when activism diverges from all three stakeholders, resulting in a quarterly sales decline of 4 percent.

The researchers examined 293 incidents of corporate activism by 149 firms located throughout the United States, all occurring between January 2011 and October 2016. They selected sociopolitical issues from the Pew Research Center's 2014 Political Polarization in the American Public report and the Political Polarization and Typology Survey.

Examples of corporate activism included Amazon removing Confederate flag merchandise from its website and the Kroger grocery chain issuing a statement on its in-store open-carry policy.

To measure alignment, the researchers surveyed more than 1,400 adults in the United States. Each received a random selection of five corporate activism events. They were then asked to label each occurrence of corporate activism on a scale ranging from “very liberal” to “very conservative.”

Those results were then averaged. A second survey of 375 people helped researchers classify each company’s typical consumer as right- or left-leaning.

“For example, respondents rated Whole Foods as typically having more liberal customers and Cracker Barrel as usually having more conservative customers,” the authors said.

The political makeup of company employees was then established through political contribution data from the Federal Election Commission. The political orientation of the state legislature in which the company was headquartered also was factored in.

The researchers then compared the political values of each group to the political orientation of each activist event.

What became clear, Beck said, is the negative effects of corporate activism can be lessened by aligning with customers and at least one other stakeholder. Managing to align with two out of three primary stakeholders, including customers, meant companies saw no stock impact and an increased cash flow.

That speaks to customers being the most important stakeholder when considering corporate activism, Beck said.

Other factors also mattered. The stock price was unaffected if the company reduced investor uncertainty by explaining how activism is good for business or joining in a coalition of multiple companies supporting the same activist cause, a “confidence in numbers” effect.

Despite the risks, trends in corporate activism seem likely to continue, Beck said.

Collaborating with Beck on “Corporate Sociopolitical Activism and Firm Value” was Yashoda Bhagwat, assistant professor of marketing at Texas Christian University; Nooshin Warren, assistant professor of marketing at the University of Arizona; and George Watson IV, assistant professor of marketing at Portland State University.

—By William Kennedy, Lundquist College of Business