Bottom Line: Activist groups’ ideological stance, as well as a company’s own characteristics, shape the types of strategies used to effect change.
With the uncertainty that accompanies any changing of the guard in Washington, businesses and the stock market can get nervous. This year, however, the uncertainty is intensified by deep partisan discord among politicians, who have the power to alter the business landscape through policy, as well as citizens, who may turn to activism in an effort to have their voices heard.
Indeed, pundits are warning businesses that “consumer boycotts could become pervasive on both sides” of the partisan divide and that “companies should plan for widespread pocketbook protests.” Although the targeting of firms for their real or perceived political leanings is a relatively recent phenomenon, activism directed at companies is nothing new in the story of American business.
Shareholder activism has often sent a powerful signal to both investors and analysts, whose assessments of a company can have considerable economic consequences for a firm. Over time, shareholder activists can influence firms’ practices.
Activists, whether shareholders or consumers, represent the full range of the ideological spectrum. And they choose to target different types of companies, and use divergent tactics to draw attention to their causes. Letter-writing campaigns, shareholder resolutions, lawsuits, and boycotts have caused companies to incur very different costs — lost earnings, lower market cap, public-relations and legal fees, and managers’ time and resources. Some activists’ tactics may also attract attention from the media and regulators, which can in turn impact a company’s reputation and bottom line.
Amid this complex reality, the authors of a new study sought to provide managers with a more nuanced understanding of activism directed at corporations. The study aims to provide insight on which types of firms activists are most likely to target, what tactics they’re likely to face, and the implications for corporate strategy.
The authors created a database of activists’ campaigns against 331 large U.S. firms stretching back to 1971. They focused on actions pertaining to environmental issues — a cause that has generated protests from a wide range of interest groups over a substantial period of time. To obtain comprehensive information on the full range of activist tactics, they compiled newspaper articles about protests and boycotts, collected data on civil lawsuits regarding environmental concerns, and tabulated shareholder proxy voting figures from the Investor Responsibility Research Center. They also analyzed advocacy groups’ annual reports, data from the Environmental Protection Agency, and information on firms’ financial returns and governance structure.
The authors controlled for factors that can help explain why certain firms are more frequently the target of protests, including size, reputation, and advertising presence.
Organizations founded around social movements tend to rely on more confrontational tactics such as protests and boycotts, the authors found. As a result of its public nature, this brand of activism tends to draw more media attention to its cause.
Organizations founded around social movements tend to rely on more confrontational tactics.
By contrast, the actions of activist investors, pension fund managers, socially responsible investment groups, and religious organizations tend to be much less confrontational, according to the study. These groups don’t necessarily seek out press coverage — which can sour their negotiations or shut down dialogue — so their choice of particular tactics tends to be less well known. Indeed, they pursue their agendas mostly through patient persuasion, filing civil lawsuits, or instigating shareholder proxy votes in order to pressure a firm to make changes.
The findings back up previous suggestions that while different types of activists almost never coordinate with one another, they are at least keenly aware of the role others play in pressuring corporations. As companies have grown larger and, in many ways, more impenetrable, protest groups have had to more often take into account the tactics of others and specialize in their chosen strategies and goals. This falls in line with the radical flank effect, where the claims of moderate groups look more acceptable in light of more boundary-pushing demands, which nonetheless set the initial scope and agenda for change. Indeed, social-movement organizations typically turn to more extreme tactics that have less direct impact on a firm’s reputation but attract the kind of widespread attention that, over time, wins them favor in the court of public opinion, the authors found.
As far as which companies are targets, it’s commonly thought that firms that adopt a more forward-looking approach — exemplified by an R&D budget — will inherently stir up less discontent among either moderate or extreme elements. But while companies that pour more money into R&D do indeed face fewer public boycotts or protests, they’re on the receiving end of more civil suits, the authors found. While the general public may applaud R&D-intensive firms, investors might cast a wary eye on costly investments and, as a result, scrutinize other sources of potential risk.
Firms with ample resources and money on hand are also reputed to attract special attention from activists. And they do attract protests, but comparatively few lawsuits, probably because activists know they’re fighting an uphill battle to pay for legal proceedings. The authors also found that being in the public consciousness through ads and/or media coverage results in a higher likelihood of facing both boycotts and shareholder votes — actions on either end of the activism spectrum. In this respect, a lot of media attention seems to make stakeholders of all varieties sit up and take notice.
Some researchers have argued that firms should think twice before cooperating with activists, because conceding a position will only make them more open to being targeted for further action. But the authors found that this is only true for the most extreme forms of protest and boycotts. When it comes to less confrontational tactics, a firm’s prior capitulation to investor sentiment can actually serve as a protective barrier against future contentious proxy votes, presumably because further action is deemed less necessary if companies are seen as being responsive and cooperative.
Source: “Through the Mud or in the Boardroom: Examining Activist Types and their Strategies in Targeting Firms for Social Change,” Charles Eesley (Stanford University), Katherine A. Decelles (University of Toronto), and Michael Lenox (University of Virginia), Strategic Management Journal, Dec. 2016, vol. 37, no. 12