An Essay by Keith Darcy and Morgan Hamel
Previously, employees and other stakeholders were reluctant to raise concerns and lacked an effective means to do so. Today, however, social media has changed the game completely – stakeholders everywhere have awakened to their power to demand seismic changes in the way businesses conduct themselves.
A report from the law firm Herbert Smith Freehills (HSF) warns of an unprecedented rise in workplace activism across all sectors and geographies, with 95% of respondents envisaging a rise in employees making their voices heard over social media in the next five years. Respondents to the survey said that workforce activism could result in a loss of revenue up to 25% per year.
We’re seeing this play out in real-time as global companies (still catching their breath from the pandemic) race to distance themselves from doing business with and/or in Russia. Hundreds of companies have ceased or suspended operations in the country, and while these actions feel appropriate to many witnessing the atrocities, devastation, and loss of innocent life in Ukraine, it raises questions about which causes companies care about, and how far they are willing to go to satisfy which stakeholders. Management consultant Laurence Duarte points out that some are questioning whether companies should have to take a stand against Russia, given strife elsewhere in the world. She raises the point that if brands act in Russia they might be asked to do the same in China over human rights violations or where their business interests may be significantly larger.
Witness Disney’s CEO Bob Chapek’s late response to the “Don’t Say Gay” bill signed into law by Florida Governor Ron DeSantis. It was later disclosed that Disney had made political contributions to lawmakers who voted for the bill. Mr. Chapek’s memo to employees seeking to explain Disney’s silence on the anti-LGBTQ legislation poured gasoline on the issue instead and immediately started the hashtag #Boycott Disney movement. He later announced a $5 million grant to the Human Rights Campaign, which immediately rejected the offer and immediately removed Disney’s name as a corporate sponsor of their annual gala. Since this company crisis emerged Disney’s stock fell over 15%. Until this issue arose Disney has long boasted of its efforts for being at the forefront of the LGBTQ+ movement.
Similarly in Texas, 65 corporations – including IBM, Apple, and Capital One – signed a letter in the Dallas Morning News opposing Governor Greg Abbott’s investigation of instances where young children are being treated for transitioning. More recently, Citigroup announced it would pay travel costs for employees affected by the restrictive abortion law in that state. Uber, Match Group, and Salesforce have introduced similar policies, and the leak of Roe v Wade has ratcheted up pressure on corporations.
This poses a significant challenge for leaders and companies who have so far been able to squeak under the stakeholder activism radar with neatly framed board room posters highlighting corporate values like “integrity”. As Alison Taylor – executive director of Ethical Systems and adjunct professor at the Stern School of Business – points out, “The Roe v. Wade leak shows that cynically stoking the culture wars for short term brand advantage is ultimately a pyrrhic victory. Internally, stakeholder capitalism rhetoric has unleashed armies of purpose warriors who know that if their demands aren’t met, strategic leaking offers a powerful form of leverage. Externally, touting your “purpose” can stoke domestic and international political risk.” Executives find that increasingly they have to take a stand on divisive social issues such as reproductive rights because their workforce and customer base has strong opinions on the subjects. The challenge? Stakeholders don’t always feel the same about moral topics in business. These issues can have significant implications for recruitment and retention of employees and on customer loyalty.
These are just a few instances where stakeholders’ perceptions of what’s right or moral can have enormous implications for companies and their leaders whose personal reputations are at risk if they’re caught flat-footed. All it takes is for an issue to go viral to impact employee and customer responses, as well as to affect shareholder value.
Stakeholder Activism – Employees
It is an age of restructuring, re-engineering, rightsizing, reorganizing, and flattening of organizations. As employees reluctantly trade the comforts of the old social contract (job security for modest pay), dependence upon and loyalty to the company has been replaced by estrangement and cynicism.
Employees, customers, and shareholders are putting pressure on companies to make public commitments regarding pressing issues such as: diversity, equity and inclusion (DEI); climate change; pandemic safety; environment, social and governance (ESG); and Russia’s war Ukraine. A recent Financial Times survey asked business leaders where the greatest pressure to speak up was coming from. More than 70% cited employees. Attracting and retaining employees today depends upon acting on the company’s stated values, something especially important to Generations Y and Z, who make up the majority of today’s workforce.
Failure to respond to stakeholders in a way that they find satisfactory can have extremely negative consequences for both leaders and their organizations. In 2018, for example, 20,000 employees of Google walked out to protest sexual harassment, racial and gender discrimination, and an end to forced arbitration. Among the issues was the severance payment of $90 million to one of the company’s top executives who resigned in a sexual harassment case.
Similarly, in 2019, over 4 million employees in 150 countries walked out to protest the lack of urgent plans by businesses worldwide regarding climate change.
The cost for leaders who fail to adequately navigate the moral demands of their employees is high. In 2020, Yael Aflalo, CEO of fashion brand Reformation, stepped down after accusations of racism by a former employee, only to be found “not racist” in an investigation. The report, conducted by the law firm Morgan, Lewis and Bockius LLP and published in October 2020 found the “workplace culture is not ‘racist’,” and asserted it “did not find any evidence that [former CEO and founder Yael Aflalo’s] conduct toward any Reformation employee was racially motivated.” Aflao’s reputation was nevertheless severely compromised.
Stakeholder Activism – Shareholders
Over the past decade, there has been a dramatic increase in shareholder activism to exert pressure on management regarding certain issues. Some of these include:
- Racial and gender gaps, including on boards of directors demanding plans for improved diversity, equity, and inclusion
- Environmental, social and governance (ESG) plans by the company
- Excessive executive compensation viz a viz the rank and file
- Governance weaknesses
- Purpose versus profits as well as stakeholder capitalism
Increasingly, shareholders look to business as critical to leading change on a variety of social issues, especially given the inability of governments to effectively deal with them.
Last year, a case example occurred when Engine No. 1 purchased a very small stake in Exxon/Mobil, and enlisted support from BlackRock, Vanguard and State Street Bank. It enabled Engine No. 1 to place three directors on Exxon’s board to accelerate plans to reduce carbon emissions, the failure of which would have significant negative consequences on its long-term financial performance. Subsequently, Exxon’s shares have risen dramatically.
Elsewhere, Goldman Sachs is subject to a class-action lawsuit by several teachers’ unions for securities fraud resulting in $13 billion in losses from material misstatements and failure to disclose conflicts of interest. Specifically, the shareholders claimed Goldman made generic representations in earlier SEC filings that inflated its stock price, including: “We have extensive procedures and controls that are designed to identify conflicts-of-interest; honesty and integrity is at the heart of our business; our representation is at the heart of our business;” and “our clients’ interests always come first.” The Supreme Court returned the case back to the Second Circuit Court of Appeals for clarification.
The outcome of this case will have significant ramifications. Can organizations be held legally accountable for their words, stated beliefs, and values or are they merely marketing slogans which have no meaning? In an age of “purpose over profit;” ESG (environment, social, governance) and corporate responsibility statements are proliferating companies may now need to be extremely cautious in their public pronouncements. However the Goldman Sachs case is resolved, executives must be reminded that words without actions are an empty chalice, and stakeholders everywhere are taking notice. The focus on social issues by shareholders has risen dramatically and represents an important seismic shift in long-term investing.
Stakeholder Activism – Customers
Given the extraordinary availability of information, customers (as well as employees, shareholders, and regulators) are acutely aware of gaps between a company’s stated values and its actual practices. Company brands can be destroyed by overstating intentions or worse, exposing significant gaps between their words and actions. The organization “Brand Trust” surveyed over 12,000 people globally and found that 71% said that if they perceive a company as prioritizing profit over people, they’ll lose trust in the company forever.
The challenge for all businesses today is significant: customers are looking for leadership on issues of real consequences, and they are aligning their dollars with their ideals. Indeed, 58% of Edelman Trust Barometer respondents (2022) said they would buy or advocate for brands based on their beliefs and values. Issues demanding attention include:
- High cost of healthcare
- Climate change and sustainability
- Gender equity
- Gun violence
- Voting rights
Protecting a company’s brand is essential to its long-term success. Companies that have suffered the consequences of their actions include:
- Uber’s loss of subscribers when its frat culture was exposed.
- VW and its involvement in creating “defeat devices” to manipulate the EPA carbon emission tests cost the company over $40 billion in settlements and lawsuits, as well as an extraordinary loss of reputation.
- Wells Fargo and a completely misguided compensation system that led to cheating their customers caused long-term brand damage.
- And in the recent trial of Elizabeth Holmes, ex-CEO at Theranos, the defence argued unsuccessfully that her public claims of success were mere puffery and aspirational.
In a crowded marketplace, companies strive for a unique selling proposition that can separate them from the competition in the minds of consumers. Customer loyalty can be built upon those companies whose distinctive ethical values are outward-facing and stakeholder supportive. Companies like Starbucks, Patagonia, Wegman’s, and Costco have long understood the benefits of good corporate citizenship. These companies have a distinct advantage in that they were clear about what they stood for in the beginning. Companies late to the “purpose” game are wise not to overstate their commitment to social causes lest they be accused of being inauthentic and “purpose washing.”
Stakeholder Activism – Communities
Peter Drucker believed that firms were accountable to society beyond the bottom line. According to Drucker: “Free enterprise cannot be justified as being good for business; it can only be justified only as being good for society.” Drucker’s primary focus was on creating and satisfying customers and those external to the enterprise. Thus, as social issues arise creating negative externalities impacting the community, he believed business had social obligations to address them.
The recently released Edelman Trust Barometer Study found that stakeholders do not believe business is doing enough to address societal issues (52% on climate change; 49% on economic equality; 46% on workforce reskilling).
As companies attempt to position their activities as values-based and beneficial to their stakeholders, they are increasingly being challenged to put their words into action. For example, Lululemon, Canada’s official sponsor of the Olympic and Paralympic games recently faced criticism in Calgary when stakeholders pointed out that one of their stores was not wheelchair accessible. The City of Calgary was pulled into the controversy when it was disclosed that local laws prohibited changes to the heritage building that would allow wheelchairs. Situations like this, where unknowing organizations (in this case, The City of Calgary) are unwittingly pulled into a moral controversy are becoming commonplace.