An increasing number of CEOs are nowadays taking public stances on sociopolitical issues. The authenticity of these CEO sociopolitical communications or “CEO activism,” however, cannot be taken for granted.
Even purportedly socially conscious companies sometimes take actions inconsistent with their stated ideals. Starbucks, Amazon, and Apple, for instance, style themselves as being “pro-stakeholder” oriented; however, they have also been accused of undermining their employees’ efforts to unionize. Many CEOs and companies have taken strong stances on reproductive rights, while at the same time financing the very politicians who work to have these rights restricted.
Behaviors like these naturally invite charges of hypocrisy and raise skepticism about the authenticity of CEO or corporate communications.
A new study published in the Strategic Management Journal examines under what conditions CEO activism can create firm value when stakeholders are sophisticated and, hence, rationally concerned about whether this activism truly reflects CEO values.
The study presents a game-theoretical model that assumes that consumers cannot directly discern when CEOs make false statements to pander to valuable demographics, but are savvy enough to understand in which circumstances false statements are most likely. It also assumes that consumers with a liberal or conservative sociopolitical orientation care about buying from a firm whose CEO has similar views.
When liberal consumers are considered more valuable than conservatives, a CEO may have an incentive to pretend to support certain sociopolitical causes to please liberal consumers – a practice the authors of the study label “wokewashing.” Based on these assumptions, the study characterizes three types of situations where CEO activism may or may not work. These are: the quiet-life, wokewashing, and the credible CEO activism equilibria.
In markets where profit margins are quite high while consumers care relatively little about sociopolitical issues, a CEO is generally better off by not engaging in sociopolitical activism, thus enjoying a quiet life. “CEO activism is often not a profitable strategy,” explains Gaia Melloni, one of the authors of the study who is an assistant professor at the University of Lausanne. “There are costs in taking controversial stances. Keeping a low profile can be a good strategy when profits margins are high because then alienating some of your customers is very costly. As Michael Jordan once said, ‘Republicans buy sneakers, too.’”
CEOs tend to engage in sociopolitical activism when instead a strategy of “sociopolitical differentiation” has the potential to significantly increase (initially low) profit margins. Here the catch is whether or not activism can be credible and, hence, effective.
“The wokewashing equilibrium emerges in uncontested terrains where a certain viewpoint is dominant,” adds Andrea Patacconi, corresponding author and a professor at the University of East Anglia. When most consumers agree on what is “right” and what is “wrong” (e.g., environmental sustainability is good), it may be quite hard to establish credibility. The incentives to pander to customers are simply too high. As a result, all CEOs tend to take similar stands regardless of their personal beliefs, rational consumers fully discount these stands, and CEO activism is neither credible nor effective.
In contrast, credible CEO activism arises in hotly contested terrains, where both sides of the debate have many passionate supporters (e.g., pro-life vs. pro-choice). “In this equilibrium, taking a controversial stance lends credibility to the CEO’s messages and activism, which can result in higher profits. A controversial stance brings in more engaged consumers who are willing to pay higher prices for a brand that shares their ideologies while alienating and losing patrons from the opposing side,” notes Nick Vikander, another co-author, who is an associate professor at the University of Copenhagen. “Controversy is a feature, not a bug, of credible activism because, without some opportunity cost, sociopolitical communications are simply not credible.”
So, how can firms communicate more credibly? One way is through controversial communications, as discussed above. Another is by hiring a CEO with an intrinsic motivation to take a stand (e.g., a reputation for speaking her own mind). The study shows that, when it comes to creating profits, this intrinsic motivation is generally a double-edge sword.
On the positive side, when a CEO’s stand on a topic is driven by intrinsic motivation, higher profits can sometimes be generated versus if the CEO was only concerned with maximizing profits. The reason is that rational consumers understand that the stand is then more likely to be genuine. “However, it is also important to understand that intrinsic motivation can sometimes result in excessive, profit-destroying activism where it would be more beneficial to just remain silent,” concludes Professor Melloni. That is, intrinsically motivated CEOs do not just talk more credibly, they may also talk too much.
Strategic Management Journal, published by the Strategic Management Society, is the world’s leading mass impact journal for the highest quality research on a diverse mix of topics relevant to strategic management.
Melloni, G., Patacconi, A., & Vikander, N. (2023). Cashing in on the culture wars? CEO activism, wokewashing, and firm value Strategic Management Journal. https://doi.org/10.1002/smj.3542.