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For Floyd or Money: Why are CEOs commenting on racial injustice?

Date:16 June 2020
Author:Swarnodeep Homroy
Assistant Professor in Economics Swarnodeep Homroy
Assistant Professor in Economics Swarnodeep Homroy

US CEOs, mostly from conservative backgrounds, are widely commenting on the tragic killing of George Floyd, despite a potential for adverse reaction of the investors to these statements. In recent times, CEOs are increasingly speaking on social issues, which are not directly related to their core business interests. These issues range from racial injustice, LGBT rights, gun control, and the right to abortion. Assistant Professor Swarnodeep Homroy shares the results of his latest research.

Why do CEOs speak on social issues, and what are the consequences of these activisms for the company? 

"There are two main concerns with CEOs commenting on social issues. The first is that social problems in the United States have political connotations. For example, when the CEO speaks in favour of tighter gun controls, stronger environmental protection, pro-choice, pro-immigration, and pro-diversity, he takes a Democrat-leaning stance on the debate. Therefore, the CEO's activism statements can be motivated by their personal views on the socio-political debates.

The second concern is that taking one political stance can also deterring consumers and investors who hold the opposing view. Survey respondents of a Stanford University study were more likely to stop using a product because of disagreeing with the CEOs activism stance than start using a product because of agreement with the activism stance. 

In my recent research, I examine the motivations and economic consequences of CEOs social activism using a sample of 187 activism statements of US CEOs. I classify a statement as social activism if the CEO comments on gender equality, racial diversity, immigration, gun control, environmental issues, universal healthcare, and human rights. In 86% of the cases, the CEOs espouse progressive values that are aligned to liberal Democrat ideologies."

How do the Democrat-leaning statements relate to CEOs' personal political preference?

"I collect information on the political contributions made by US CEOs from the Federal Election Commission database to identify the partisan-preference of CEOs. Based on this data, about 70% of US CEOs are Republican-donors." 

What explains the paradox of Democrat-leaning social statements made by Republican-donor CEOs?

"Political opinions among US citizens are increasingly polarised. Political scientists have noted a distinct liberal shift in the American political views in recent years. If the political opinion of customers is polarised, the effectiveness of mass-market advertising strategy decreases. In that case, firms can benefit by catering to the preferences of one side of the political divide. When CEOs express their social concerns, they may be trying to attract customers with liberal views. CEO's social activism doesn't reflect their own moral and political views. "

How do customers and employers perceive CEO activism with predominantly Democrat-slant in a politically polarised environment?

"I find that the CEO's social activism leads to an increase in the share price and the sales revenue of the company. The economic gains are more substantial for companies headquartered in the most politically polarised states like Georgia, Maryland, New York and Texas, compared to firms headquartered in less polarized states. Also, the benefits of social activism are concentrated among firms selling consumer goods and firms in highly competitive industries. 

Following my research, the CEOs' concern about George Floyd's tragic death, endemic racism in the US, or any other social issues are driven by economic, rather than moral or political incentives. CEO activism is deliberately conspicuous to benefit from the increasing political polarization among US citizens." 

 

For more information, please contact:

Dr Swarnodeep Homroy - s.homroy rug.nl

Assistant Professor in Economics, University of Groningen

About the author

Swarnodeep Homroy
Swarnodeep Homroy
Dr Swarnodeep Homroy is an Assistant Professor at the Faculty of Economics and Business of the University of Groningen.
www.rug.nl/staff/s.homroy/research