Max McGraw Chair in Management and the Environment; Professor of Management & Organizations
How does activism drive corporate change?
Sometimes the mechanism is direct and easily observed. In 2011, for example, a shareholder activist group filed a resolution urging McDonald’s to replace its foam beverage cups with an eco-friendly alternative. The resolution did not pass, but it won sufficient shareholder votes to get the company’s attention. McDonald’s began using paper cups in its U.S. stores within two years.
Yet often the link between activism and reform is much more subtle. Activists might be rebuffed or seemingly ignored for years but still achieve their goals. According to new research by Brayden King, associate professor of management and organizations at the Kellogg School, activism often succeeds by influencing quiet, incremental change, or through reforms that may start as symbolic gestures and grow into more profound reforms—a slow burn that becomes a larger flame.
Check out more on The Trust Project at Northwestern University here.
“Initially, it may be that organizations want to buffer themselves from future attacks from activists,” King says. “But the result is that they end up creating a real pathway for change inside the organization.” The corporations initiate “a cycle that reinforces the values of the activists.”
To understand how activism leads to change, King and his coauthors—Mary-Hunter McDonnell of Georgetown University and Sarah Soule of Stanford University—collected relevant data on hundreds of major companies.
They found that the companies targeted most frequently by activist groups were the most likely ones to create initial responses that led to farther-reaching reforms over time.
King and his coauthors randomly chose 300 corporations that had been formed before 1990 and had appeared in the Fortune 500 between 1993 and 2009. They gathered details about activism aimed at the firms from the archive of the Interfaith Center on Corporate Responsibility (ICCR), which encompasses a variety of religious institutions, other nonprofit organizations, and institutional investors, and is a repository of information about shareholder resolutions. The researchers also used a database of articles and press releases regarding boycotts that targeted the companies.
The researchers observed that activism often led to two kinds of responses that serve as doors of opportunity for further change: establishing a committee on social responsibility and developing a report that details the firm’s commitment to social responsibility.
These reforms, though initiated as responses to activism, are usually permanent. The committee never dissolves, and the reports are issued year after year, taking on a sustained life of their own. “Two things generally happen when you do these reforms,” King says. “You create a public commitment to be more engaged with activist groups and demonstrate that you are willing to talk about these issues. That’s the public side of it. But also, internally, you create a set of champions—people who believe in the cause the activists represent. They become invested in making sure things are done right and that the voices of stakeholders are being heard.”
“The main driver of activist influence is the fact that they represent a threat to the reputation of the targets they go after.”
The social responsibility report is a particularly powerful reform vehicle. “It is a painstaking process that requires lots of expertise that didn’t exist in the firm prior to that,” King says. “The report is often a 200- to 300-page document with detailed information about the metrics that activists care about. So, to create that report, the company has to hire people who have expertise in that field. And in many cases they’re bringing in former activists.”
The idea of reform as a dynamic, evolving process differs from the traditional model, according to King, because it sees activists as creating opportunities for corporate change, rather than merely exploiting existing ones. “Scholars have thought of activists as looking around in the environment and going after those companies and political targets that seem like they would be most receptive,” he says. “Our study shows that activists are actually involved in creating their own opportunities. What they do today makes companies more receptive and vulnerable to influence next year. So their actions are actually shaping the very opportunities that they’re reacting to.”
The researchers cite Nike as a classic example. The company, which the authors wrote was “battered by activists” for much of the 1980s and 1990s for alleged sweatshop labor practices, denied any responsibility for its factories’ working conditions. But in the late 1990s a series of university campus protests motivated Nike to soften its stance on the issue. In 1999, it created a code of conduct for the factories to which it outsourced work and began auditing them to ensure compliance. In 2001, the company created a Corporate Responsibility Committee and issued shareholders its first social-responsibility report. King and coauthors note that Nike is now “arguably one of the most activist-receptive companies in the retail industry”—and one of the most admired U.S. companies, according to recent polls by Fortune magazine.
Activist-led resolutions may not yield immediate sweeping change, but they can promote longer-term reform. The resolutions the authors studied almost always failed to gain support from a majority of shareholders. But they succeeded as a means of getting issues on the corporate agenda and attracting negative publicity to company policies. People for the Ethical Treatment of Animals (PETA), for example, held stock in more than 80 companies in 2010, and, as the researchers wrote, “their resolutions are crafted to garner maximum media coverage” for the cause of animal rights. Boycotts play a similar role, though they sometimes generate larger short-term change. The researchers observed 210 unique boycotts in their study’s time frame; about 22 percent ended with the company bowing to protestors’ demands.
More significantly, activism increasingly created doors of opportunity. From 1993 to 2009, the proportion of companies that adopted a committee on social responsibility more than doubled, from about 13 percent to 28 percent. The number producing a social-responsibility report rose from virtually zero to about 26 percent.
King has a long-standing interest in how companies manage their reputation and respond to negative publicity. In previous research, he found that boycotts are powered by the threat they pose to corporate reputations. “The more we looked at it, the clearer it became that the main driver of activist influence is the fact that they represent a threat to the reputation of the targets they go after,” King says. Moreover, those in a weak position, reputation-wise, are the most susceptible to a boycott’s threat, because they already feel vulnerable.
In another project, King found that shareholder activism has a greater effect on a company’s long-term financial performance than boycotts. Though boycotts may provoke a more immediate protective response from company leadership, analysts perceive shareholders as possessing insider knowledge and thus posing a long-term risk as activists.
Boycotts and shareholder activism are hardly the only pressures that shape corporate behavior. Cultural buzz can also force companies to take activists seriously.
“One of the main functions of activism isn’t necessarily to change the way decision makers think about issues,” King says. “It doesn’t often do that. One of the main functions is just to change what issues people talk about. What social activists care about primarily is just getting people to talk about their issues.” That increased buzz can help stimulate corporate reform.
Activists for a higher minimum wage have targeted Wal-Mart, for example, by pointing out that many of its employees qualify for government assistance. That critique had particular force last year: it was a Congressional election year; raising the minimum wage has been a Democratic Party priority; and the issue was on several states’ ballots. Thus, it was much discussed in the media.
Though Wal-Mart did not take an immediate stance on hiking the minimum wage, its chief executive told protestors last fall that the company intends for all its workers to make more than the minimum wage eventually. In February, Wal-Mart announced that its base pay rate would be $9/hour by April 2015 and $10/hour by early 2016. By motivating Wal-Mart to address their issue with real action, the activists won a key victory for the broader issue of a higher minimum wage for all workers.
Minimum-wage activists and groups like PETA are usually associated with the political left, but King notes that activism is common across the political spectrum. “We found that one of the most common categories of activists were moral and religious activists—groups that represent either apolitical or right-wing politics,” he says. “The same dynamic works for them as for left-wing activists.”
Activists of all stripes have at least this much in common: they can use a variety of strategies—resolutions, boycotts, and buzz, among others—to insert their issue into corporate agendas and public debates. This can lead to small reforms that gradually grow into something much more. Change will never happen, it seems, until it does.
Theo Anderson is a writer and editor who lives in Chicago.
McDonnell, Mary-Hunter, Brayden King, and Sarah Soule. 2015. “A Dynamic Process Model of Private Politics: Activist Targeting and Corporate Receptivity to Social Challenges.” Conditionally accepted, American Sociological Review.