The Risks of CEO Activism

What happens when business leaders take stands on controversial issues?

The Risks of CEO Activism

WHILE CEOS HISTORICALLY avoid taking public stands on controversial topics, that might be changing, according to a new paper in the Stanford Closer Look series. It was produced by the Corporate Governance Research Initiative (CGRI) at the Stanford Graduate School of Business in California and written by David Larcker, the James Irvin Miller Professor of Accounting at Stanford; Stephen Miles of executive coaching firm The Miles Group; Brian Tayan, researcher at CGRI; and Kim Wright-Violich of impact investment firm Tideline.

The paper examines how boards should weigh the costs or benefits when CEOs use social media to take public positions on environmental, social, and political issues not always related to their businesses. "CEO activism is not new, but it is becoming more common and receiving more attention," says Larcker.

"The 'double-edged sword of CEO activism' reflects the tricky risk calculation for CEOs as they wade into public commentary on often highly controversial issues," adds Miles. "CEOs are commenting on issues that were once thought to be a third rail-such as gun control or climate change .... While certain groups may respond positively to a bold statement over social media, investors may penalize a company with a stock dip if they feel that a position is too edgy for that particular company."

To negotiate public activism, the researchers say, CEOs must plan for three common scenarios: event-driven crises such as floods or fires, when CEOs must react quickly and genuinely; CEO-driven stands that the company takes in response to some defining societal issue such as gun control or LGBTQ rights; and simmering issues, such as animal cruelty or plastic waste, that lurk in the background of every industry. "CEOs must try to be proactive about ... what risks they are taking coming out on either side of an issue," Miles notes.

"Activist statements can have a real impact-positive or negative-on customer and employee attraction and retention," Larcker adds. "There are tremendous differences across age groups and political affiliations, and every company's population is different. It's critical that the CEO and senior management develop a guiding framework around the level and tenor of CEO activism, and then run this framework by the board of directors, to ensure that the path is strategically appropriate for the company."

Download "The Double-Edged Sword of CEO Activism."