How Investors Respond to CEO (In)Activism

CEO activism – CEOs expressing their views on social, environmental, and political issues – is growing, likely driven by popular opinion that CEOs have a duty to stand up for important issues of the day. A 2018 survey of 3,544 individuals across the U.S. found that 65 percent of respondents think “CEOs of large companies should use their position and potential influence on behalf of environmental, social, or political issues that they care about personally.”[1]

CEOs themselves recognize this pressure. Brian Moynihan, CEO of Bank of America, recently commented to the Wall Street Journal that “Our jobs as CEOs include doing what we think is right”.[2] More recently, we have seen  CEOs throwing their support behind the Black Lives Matter (BLM) movement. They include the heads of Apple, Facebook, General Motors, Microsoft, Merck, and PepsiCo.

However, BLM has been around since 2013, yet none of these CEOs took a position until recently. While supporting BLM may seem like an obvious response, given the recent shift of public opinion toward favoring the movement, there are various other polarizing social issues, such as gun control and abortion, on which CEOs engage in activism. A 2018 study found that 28 percent of S&P 500 CEOs made “public statements about social, environmental, or political issues either personally or on behalf of the company” through the news media. Additionally, of the S&P 1500 CEOs with active Twitter accounts, 68 percent “tweet[ed] at least once advocating an issue” in a recent three-year period.[3]

Yet many voices caution against CEO activism. For instance, a recent Wall Street Journal headline highlights this mindset: “You’re a CEO. Stop Talking Like a Political Activist.”[4] Furthermore, while some research has explored how consumers perceive CEO activism, we are not aware of any research on how investors view it. Accordingly, in a new working paper, we examine how investor stock purchases are influenced by 1) their agreement with a CEO’s activist position on an issue, 2) a CEO’s choice to refrain from activism (i.e., CEO inactivism), and 3) whether the issue for which the CEO is engaging in activism (or not) is relevant to the firm’s operations.

Our research utilizes a controlled experiment in which we first measure the extent to which participants acting as retail investors agree or disagree with various social issues. Participants are then randomly assigned to one of eight experimental conditions in which they learn they have a current investment in a fictitious sporting goods company. After reviewing financial and operational information about the company, participants are told the company CEO’s position on gun control. Specifically, in response to an investor advocacy group’s question to the CEO via social media about his view on stricter gun control, participants learn whether 1) the CEO supports stricter gun control, 2) the CEO opposes stricter gun control, 3) the CEO communicates that everyone should express their views on stricter gun control but does not reveal his position, or 4) the CEO stays silent on the issue. Within these four CEO-response conditions, we also vary whether gun control is more operationally relevant to the company (i.e., the company sells guns and ammunition) or is less operationally relevant to the company (i.e., the company does not sell guns and ammunition). Following participants’ review of this information, we ask them to make an investment decision. Specifically, we ask them to indicate the dollar value of shares they would like to divest or the additional dollars they would like to invest in the sporting goods company.

When the CEO supports or opposes an issue, we find that investors respond more positively if their view aligns with the CEO’s than if their view does not. Indeed, all else equal, we find that investors purchase more stock and examine more BUY analyst reports when their view on an issue aligns (versus misaligns) with the CEO’s position, even when the issue is less relevant to the operations of the firm. Yet, operational relevance is meaningful when the CEO is silent on the issue. We find that silence is viewed more negatively when the issue is more relevant to the firm’s operations. As an alternative to silence, we find that a more viable strategy is to recognize the issue and promote activism without necessarily taking a stance. We find this strategy is less sensitive to perceived operational relevance, and investor reaction is not significantly different when their view aligns with the CEO’s.

Our study informs CEOs and boards of directors about the potential pitfalls of taking an activist position from an investor perspective on polarizing issues. Results from our study might explain why CEOs are more willing to speak out on issues for which public opinion is shifting towards consensus, such as BLM and climate change, but are more likely to remain silent on more polarizing issues such as gun control and abortion.

ENDNOTES

[1] Rock Center for Corporate Governance at Stanford University (RCCG). (2018). 2018 CEO Activism Survey. https://www.gsb.stanford.edu/sites/gsb/files/publication-pdf/cgri-survey-2018-ceo-activism.pdf

[2] Walker, S. (2018). You’re a CEO – Stop talking like a political activist. Wall Street Journal. https://www.wsj.com/articles/youre-a-ceostop-talking-like-a-political-activist-1532683844

[3] Larcker, D., Miles, S., Tayan, B., Wright-Violick, K. (2018). The Double-Edged Sword of CEO Activism. Stanford Closer Look Series. https://www.gsb.stanford.edu/sites/gsb/files/publication-pdf/cgri-closer-look-74-double-edged-sword-ceo-activism.pdf

[4] Walker, S. (2018). You’re a CEO – Stop talking like a political activist. Wall Street Journal. https://www.wsj.com/articles/youre-a-ceostop-talking-like-a-political-activist-1532683844

This post comes to us from professors Michael T. Durney at the University of Iowa, Joseph A. Johnson at the University of Central Florida, and Roshan K. Sinha and Donald Young at Indiana University’s Kelley School of Business. It is based on their recent article, CEO (In)Activism and Investor Decisions,” available here.

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