Managing the Reputational and Market Risks of Social Activism

In December 2012, protesters in the United Kingdom occupied more than 40 Starbucks locations to express their outrage at government cuts to public services for women and children. Starbucks global leadership could be forgiven if they were caught off guard. Since being pressured by activists in 2000 to adopt fair-trade policies for its coffee, Starbucks has engaged in a range of efforts to embrace sustainability and socially responsible practices. So why did protesters select Starbucks as their target? The fact that the company had not paid taxes in the United Kingdom since 2009 had something to do with it. More important, however, was that Starbucks offered protesters a powerful global platform for their message.

Many companies have invested in corporate social responsibility programs in part because they believe these investments will support reputation building and insulate them from potential protests. Recent research suggests just the opposite: the more active a company is in promoting its CSR efforts and the more highly regarded it is, the more likely it is that it will be targeted by social activists. In effect, protesters who seek to increase general awareness about a social issue have incentives to go after businesses that will maximize their chances of garnering media attention and creating public awareness. Top corporations are targeted regularly for this reason. Apple is far from the only company to have been accused of using sweatshop labor to fabricate its electronics devices, for example, yet its positive brand image and popularity offer protesters a useful cudgel.

Since many companies should not or cannot lower their profile to avoid scrutiny, they must develop more-effective strategies for managing the risk from social activism. Understanding the signals that the market values are an important first step.

Toward Proactive Engagement

This trend highlights an interesting paradox. Once social movement activists are aware of a company’s claims to decency and moral excellence, they actually become more critical of its practices. Conversely, less prestigious corporations with a middling record in a range of areas—sustainability, the environment, human rights—are often spared. In some instances, blending into the crowd can be a good thing.

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As executives seek to manage their image as responsible corporate citizens, they face several challenges. If publicity around CSR investments has the effect of painting a larger target on a company’s back, heightened scrutiny could dissuade executives from pursuing potentially valuable initiatives. The trick, then, is to understand the sources of potential risk and manage them accordingly. Our findings have direct implications for how companies respond to public protests. The right communications and engagement strategy can help companies avoid reputational damage.

Two Categories of Activists

Although activists use many different nuanced tactics to exert influence, they can be segmented into two categories. Primary stakeholders are individuals who either engage in economic transactions with an organization or who benefit directly from its financial performance. This group includes shareholders, employees, suppliers, or creditors. Secondary stakeholders include community activists, religious organizations, and nongovernmental organizations that lack other, more direct means to communicate their grievances to a company’s leadership. The ability of each group to affect a company’s financial performance differs significantly. While the kinds of public protests that Starbucks navigated recently grab headlines, research indicates that failing to effectively deal with the criticisms of primary stakeholders actually poses a greater risk.

To determine the impact of these two types of activism on financial performance, we examined data on environmental activism aimed at U.S. companies from 2004 to 2008. Our research  shows that activism by either category of stakeholder does not have a direct impact on financial performance. So while public protests are more likely to garner media attention and raise the specter of long-term reputational damage, they do not directly influence a company’s financial performance.

However, the activities of primary stakeholders can serve to increase a company’s perceived environmental risk, which has a negative effect on financial performance. When companies are perceived to have low environmental risks, analysts assume that they are also less likely to be fined, sued, or subject to future boycotts and lawsuits. Notably, our research suggests that investors may care less about a company’s actual environmental performance and more about its perceived environmental risk. The greater impact of primary stakeholders is due to their frequent interactions and access to company information, which give them more credibility in the eyes of risk managers. By contrast, secondary stakeholders are often seen as outsiders or fringe groups without direct knowledge of a company’s inner workings.

Managing risk from social activism

To devise effective strategies for managing the risk from social activism, companies should keep three lessons in mind:

1. Money is not a substitute for engagement. One reason that companies do a poor job is that executives, believing shareholders are already on their side, resent having to devote time to a group on nongovernance issues. While executives might hope that they can avoid engaging directly with activists—say, by directing more funds to corporate social responsibility—it is a wiser investment to acknowledge activist concerns and establish a dialogue.
2. Tap the knowledge of activists. On a fundamental level, protesters want to be heard, so giving them a channel to communicate directly with a company can be constructive. In addition, many activists are incredibly knowledgeable on their issues and can help companies to design better policies. By addressing concerns together, executives can not only reach a mutually beneficial outcome but also gain credibility.
3. Focus your CSR efforts. Many companies go too broad in their CSR strategies, in part because these efforts are often led by executives with a wealth of management experience but little sensitivity to activist priorities. By identifying a smaller number of CSR areas, companies can engage more effectively with activists.

Executives who genuinely acknowledge activist concerns and engage with them to find acceptable solutions can help reduce their chances of becoming targets of future activist attacks.