Today’s guest post is by Ruy Diaz!
Companies that join social justice causes usually break faith with their shareholders. Under the banner of Corporate Social Responsibility, companies join causes such as environmental impact, ethical labor, and LGTB rights. The companies join controversial causes in an effort to build their public image, but those efforts tend to backfire. Joining a controversial cause is usually a bad bet, even a controversial cause with majority support. This stems from a feature of human psychology.
Loss Aversion in Social Relations
We human beings work harder to avoid loses than we work to achieve gains. Decision theorists call this psychological feature loss aversion, which applies in both the realms of economics and social relations. As a result of loss aversion, investors hold on to poor stocks to avoid the mental strain of a financial loss. Romantic partners work harder to save a marriage, even a bad marriage, than they work to find a new love. Crucially for our story, people resent a social snub more than they enjoy a social elevation.
When companies join a controversial cause, they implicitly elevate a group of people at the expense of another. That’s usually a poor bet. The companies try to bask in the glory of a trendy cause while making new friends, but that is not all that happens. Their actions create dedicated enemies. By joining a controversial cause, companies become an enemy of the opponents of said cause. And enemies hate you more than friends love you.
Some companies should ignore the problem and join one side or the other in controversial social issues. Companies born in controversy, such as Chick-fil-A or Ben & Jerry’s should continue in their paths. Their founders decided to be a certain kind of company, and they grew their brands from that mold. Changing now would probably insult their core customer base.
Companies that look to carve themselves an ideological niche are exempt from this rule too; they are using ideological division as a corporate strategy. This works as long as the niche is large enough to make a living in it. But the vast majority of companies should be aware of the asymmetry that results when friends love you less than enemies hate you.
Most corporate social responsibility resist analysis. The data tends to inconclusive, especially since so many factors affect a company’s performance in a given time period. But in some instances failed campaigns clearly stem from public relations efforts. We will examine two such cases, the bumbling efforts of Wal-Mart and Exxon-Mobile.
Sam Walton, the founder of Wal-Mart, explained in his autobiography why his company didn’t hire Washington lobbyists. He thought that when a company did right, their actions would speak for themselves. He was wrong. Leftist activists organized a vicious anti Wal-Mart campaign that caught the company unprepared. Wal-Mart began to employ lobbyists and advocates like any other large company does, albeit at a modest level for a company its size. Mr. Walton’s successors decided on a corporate strategy to fight the negative campaign. Unfortunately, they decided on appeasement.
Wal-Mart decided to modify its labor practices under the banner of Corporate Social Responsibility, by changing the compensation scale of its workers. It also tried to become a more upscale company to counter the charge its stores created social wastelands. The first effort was great for existing workers, but not so for stockholders: Wal-Mart has a happier, better paid workforce, but the cost has not resulted in gains for Wal-Mart’s stockholders. But at least the owners of Wal-Mart got something out of the investment, a more loyal workforce. Because the second effort was a disaster. Within a short period, Wal-Mart had a ‘go back to the roots’ campaign, emphasizing ample choice and low prices. Listening to ideological enemies lead to corporate underperformance.
Exxon-Mobile’s effort resulted in an even worse failure. While Exxon was busy touting its ‘sustainable energy efforts’, independent oil companies in Oklahoma and Texas developed the shale oil and shale gas techniques, gaining market share on their larger global competitors. And the ideological surrender failed to appease critics. Left-leaning activists continued to harass Exxon in a scorched-earth campaign. Just las year, Democrat Attorney Generals mulled whether to persecute Exxon over its support of researchers skeptical of global climate change.
When companies use a ‘Corporate Social Responsibility’ strategy, they do so against the interests of its shareholders. The strategy is usually ill-defined, poorly thought-out, and prone to backfire. When they adopt the recommendations of their ideological enemies like Wal-Mart and Exxon did, disasters tend to follow. To defend their public image, they would be better of answering critics and delivering excellence. Like in many other areas of life, corporate appeasement doesn’t work.