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Saturday, May 15, 2021

CEO Insider

Ignoring Social Movements is Bad Business

When Senator Mitch McConnell lambasts companies for “behaving like a woke parallel government,” he may well be appealing to a small but potent group of his own stakeholders: hard line Trumpist Republican primary voters. He is apparently calculating that the intensity of that group, and the impact it can have on elections is of greater importance than the disappointment and anger his comments will cause among various other stakeholder groups.

What he may not realize is that corporations are not acting – or threatening to act – out of some misguided sense of liberal do-gooder-ism. Those that are leading this corporate move into the social and political arena are making similar calculations and recognizing that while there may be some conflicting views among their stakeholders, there is an overwhelming expectation that they move in this direction.

In his annual letter to shareholders, JPMorgan Chase CEO Jamie Dimon notes that “long-term business success depends on community success,” that making “the community a better place is both the moral thing to do and a driver of better commercial outcomes,” and that “to a good company, its reputation is everything.”

When Major League Baseball moved the All-Star Game out of Atlanta as a protest over passage of Georgia’s new voting restrictions, they recognized that while some fans might disagree, the expectations of a key stakeholder group – players – and the potential impact of that group’s anger, were the most compelling consideration.

MLB obviously had a framework in place that enable its Commissioner and owners – similar to a CEO and Board of Directors – to analyze their myriad stakeholder groups, communicate internally, and come to a decision quickly. That is a lesson learned from companies like Merck, whose CEO was first to resign from President Trump’s Business Council after Charlottesville and Dick’s Sporting Goods, which pulled military style weapons from its stores immediately following a mass shooting.

Fast action, made possible by ongoing stakeholder intelligence gathering, gave both those companies a bump in stock price and communicated to the marketplace their strong governance and reputation value.

Senator McConnell may be falling into the same trap that plagued United Airlines around this time four years ago, when a seated passenger was violently removed from a plane to make room for airline personnel – an incident that was videotaped by other passengers. The company’s response was slow and nonchalant and, at first, investors stayed calm, with the stock price recovering within a few days.

“Widespread condemnation of the dragging incident, including from politicians and consumer groups, appeared not to affect investor valuation of the stock,” said the Financial Times. “This fiasco…is a classic media-driven overreaction…we expect it will blow over,” said one analyst. United “should be able to move past its PR nightmare,” said another.

We noted at the time that short-term stock price was not an accurate reflection of reputational resilience. Indeed, it turned out that United had failed to consider other stakeholders. The passenger, a physician, happened to be Asian-American. Images circulated around the world of Caucasian security personnel literally dragging him from the plane.

In the weeks following, the broader social implications of this brutality became clear. Asian-route customers, who comprised a significant portion of United’s business, were shocked and sought out alternative transportation solutions. Once that loss in revenue became apparent, investors finally reacted. Twenty weeks after the incident, impacts that were unforeseen became very tangible. UAL was down 11% and underperforming its two main rivals, American and Delta, by around 14%. At 31 weeks, UAL was down 19% and underperforming its peers by about 26%.

This result was not unforeseeable. In fact, it was inevitable.

Today, the corporate and investment communities have seen the effects of social movements such as #metoo, #blm, #Charlottesville, and most recently #StopAsianHate, and appreciate that angry disappointed stakeholders—customers, employees, creditors, and regulators—can materially impact cash flow and enterprise value. Institutional investors like BlackRock have made the management of stakeholder interests a key plank in their proxy voting guidelines, and firms like Apollo Global Management have demonstrated how reputation risk management through stakeholder-sensitive structural and operational changes can unleash enormous investor-driven value.

Companies are heeding the demands of stakeholders to include a consideration of their values in business decisions and exercise their 1st amendment rights on issues of importance to them. Knowing and meeting the expectations of stakeholders—or financing the consequences of disappointment—is the definition of reputation risk management.

Rather than “taking cues from the Outrage-Industrial Complex,” as Senator McConnell suggests, these companies are taking a more expansive view of who their stakeholders are and what they expect. Senator McConnell fails to appreciate the broader social implications of what has transpired these past few years. Politics are important, but for businesses, their reputations and their ultimate commercial success depends on their ability to satisfy both their shareholders and their stakeholders.

Further woke behavior by corporate America is very real and inevitable.


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Dr. Nir Kossovsky
Dr. Nir Kossovsky, CEO of Steel City Re, is an authority on business process risk and reputational value. He has been an industry-wide leader in the development of indexed measures of reputational value and actuarily sound underwriting methods that deter reputational attacks, and protect companies and their leadership. He holds more than a dozen patents, including an algorithmic reputational value measurement system currently enabling insurance solutions, third party investment strategies and governance products. He has written hundreds of articles and four books, including “Reputation, Stock Price and You,” Apress 2012). He has degrees in philosophy, business, and medicine, served as a Captain in the US Navy Reserves, and early in his career was a tenured faculty member at UCLA. Dr. Nir Kossovsky is an opinion columnist for the CEOWORLD magazine. Follow him on LinkedIn.