12:00 am CDT, Saturday, October 13, 2018
Photo: Mark Lennihan /Associated Press
One cannot open a newspaper or online source without increasingly encountering news related to corporate activism. Businesses that include both publicly traded and private companies, and small-business owners, seem to have decided to make themselves relevant in the political arena.
The recent Nike example of using the controversy over U.S. national anthem protests to make a provocative ad has agitated individuals who do not support the symbolism associated with former San Francisco 49ers quarterback Colin Kaepernick’s kneeling.
Other examples include Kellogg’s decision to pull some advertisements from Breitbart.com, which then called for a boycott of the company’s products. Kellogg’s immediate revenues were arguably affected by this decision.
And how about the Red Hen restaurant owner in Virginia who asked White House press secretary Sarah Huckabee Sanders to leave the establishment? As a consequence, the restaurant had to close for many weeks and protesters have frequently picketed the establishment. Is this welcome publicity for the restaurant in the long run?
And let’s not discount the public hoopla associated with In-N-Out Burger after the company donated to the Republican Party. Many threatened to boycott its products after this became public. And there are many more examples.
These activities are perhaps motivated by the great political divide in which we find ourselves. Like it or not, the United States is generally split on the political spectrum: 26 percent Republican, 27 percent Democrat and a whopping 44 percent independent, according to Gallup. And small-business owners and corporate managers are people, too, with their own political party preferences. Should they let their political leanings influence their business decisions?
Corporations and small business owners can design a marketing strategy (as Nike seems to have done) that will attract one group and hope that the fallout from the other group will not impact sales. So far, Nike’s strategy seems to be panning out: Sales have increased considerably since the advertisements made it to the airways. Higher sales can enhance the welfare of all stakeholders.
Clearly, recent corporate action on such issues transcends mere political activism. Why would Nike risk alienating a subset of its consumers? Why would Red Hen do the same? Why would In-N-Out Burger make a donation to one party over the other? In all fairness, they said they donated to both party candidates.
It could arguably be justified if the businesses happen to be in oligopolistic or monopolistic industries. But these firms are in industries subject to intense competition.
Corporations have a moral responsibility to do the right thing, but what is the right thing when they have owners and customers of diverse political views? Is this the best strategy for the owners of public and private firms? And how about small businesses such as Red Hen? Are they making money from their political stances?
Many business professors teach the mantra that the objective of the public firm (with common shareholders serving as owners) is to maximize owners’ wealth. This effectively means maximizing the price of its common stock. The operational impact of this objective is for management to do what it is paid to do: Choose the best projects at least cost. This way, the welfare of all stakeholders will be maximized. If managers choose the best projects, then they will earn revenue because customers will buy their products.
Following corporate social responsibility, or CSR, principles does the same thing since customers who value CSR will buy from firms practicing CSR. Obviously, firms that pollute rivers and the atmosphere or otherwise do not take care of its stakeholders — that includes the employees and the community — will suffer losses. And firms that only pander to a part of the community, for whatever reason, may not be maximizing shareholder wealth if it involves loss of revenue.
Public firm managers are agents of the owners and are persuaded by positive or negative incentives to take on projects that are in the best interests of companies’ common shareholders. Positive incentives include the granting of stock options to managers. Negative incentives include the possibility of being fired: Stray too far and the shareholders can remove the management team at annual shareholder meetings.
A viable strategy designed to appeal to one political group or another looks good, and still may turn out to be a brilliant strategy. The danger is that with political activism on the part of firms, they can alienate a group of individuals who may also be its customers.
It is true that Nike’s revenues increased after the ad, but many people burned Nike products and one mayor banned the sale of Nike products before retracting it. Will this revenue advantage remain with Nike over the long term? The real irony is that the wealth of all of its shareholders — whether they approve or disapprove of the political statements made by firms — may be affected if it makes a politically motivated misstep.
How firms should balance the welfare of the left, the right and the independents remains a dilemma for them in an era of increased activism on the part of shareholders and other stakeholders.
Similarly, small business and private firms may be in danger of paying a price for their activism. Red Hen may experience decreased sales if a group irritated with its political activism decides to stay away from the restaurant.
In the middle of this political hurricane, here then is a smart strategy for all firms, whether they are public, private or small businesses: Keep out of politics when it involves the welfare of its stakeholders, be it common stock holders, private firm or small-business owners. Be neutral. To maximize owners’ wealth, firms and small business owners need to attract customers from all parts of the political spectrum.
To only pander to one group is a little like trying to run a marathon on one leg. Firms that figure this out quickly may survive. Firms that don’t may be in damage control for a long time — or hope that certain groups of customers experience selective amnesia over the long term. Remember, there are other firms who can fulfill customers’ needs in competitive industries.
So don’t be political — be smart.
Prasad Padmanabhan, Ph.D.,
is professor of finance, the Myra Stafford Pryor Chair of Free Enterprise and Sam Walton Fellow at the Greehey School of Business at St. Mary’s University. The views expressed here are solely his views and do not necessarily reflect the views of St. Mary’s University.