Corporate Virtue-Signaling Can Be Bad for Business

COMMENTARY Jobs and Labor

Corporate Virtue-Signaling Can Be Bad for Business

May 8, 2017 3 min read

Former Research Fellow For Economic Freedom and Growth

James M. Roberts' primary responsibility was to edit the Rule of Law and Monetary Freedom sections of Index of Economic Freedom.
Gone are the days when you could simply buy a product without making a statement. iStock

Key Takeaways

The progressive activists who head many of the world's biggest companies like linking their products with social-justice goals.

Western corporations have historically been the backbone of economic freedom.

Progressives want to impose on companies a "triple-bottom-line" obligation.

Gone are the days when you could simply buy a product without making a statement. The progressive activists who head many of the world's biggest companies like linking their products with social-justice goals. Picking a coffee can be almost as much of a minefield as picking a candidate.

It's not mere altruism at work. As a marketing tool, identification of their products with social-justice goals can be good for the bottom line. With little more than a credit-card swipe or a click, people can feel more virtuous just by ordering online, tapping on their smartphones or sipping their lattes.

Sometimes, though, such heavy-handed virtue-signaling can be bad for business.

For example, executives at Target department stores were eager to burnish their progressive credentials about gender identity issues. Lurching headlong into the world of CSR — corporate social responsibility — they imposed a radical new bathroom policy on customers.

Apparently they didn't reckon on a widespread backlash against the policy, especially by worried parents of small children. Their decision spawned a nationwide boycott by more than 1.4 million shoppers. Several news reports ascribed Target's lower 2016 revenues and reduced share price directly to this CSR fiasco.

More recently, prioritizing CSR goals dragged down profits at another big company.

When Paul Polman became head of Unilever in 2009, he began touting the consumer-goods giant's commitment to corporate citizenship, social justice and other progressive causes. He emphasized Unilever's charitable endeavors and prioritized sustainability as a business practice.

It made Polman a media darling. The New York Times dubbed him a "sustainability evangelist." Others have called him "the George Soros of global CEOs." Polman himself has said he is "really more interested in (global) development" than profits.

It's not surprising, then, as Fortune magazine reported recently, that not all shareholders are pleased with his stewardship. Over the past year, the company's stock has dropped, while overall stock market returns have soared. Some investors blame the poor performance on Polman's intense focus on CSR at the expense of shareholder returns.

Perhaps none of these bad outcomes should come as a surprise.

A 2013 study by researchers at the University of California at Riverside and the London School of Economics found that "do-gooder" CEOs were actually more likely to engage in irresponsible actions. Having established their superior moral image through CSR policies, these executives tended to become lax in their managerial vigilance — either because they are distracted by CSR, or it is necessarily at odds with an executive's fiduciary responsibility to deliver returns for shareholders.

Take the case of Chipotle. The company's entire marketing strategy rested upon the environmentally righteous claim that they used safer and higher-quality organic and local ingredients.

When people started getting food poisoning because of Chipotle's inadequate food safety procedures, though, all that CSR goodwill was flushed down the drain. Sales collapsed and have yet to recover. In the most recent quarter, same-store sales slid 4.8%. The company's stock price dropped 15% in the past 12 months.

Chipotle talked a big game about its commitment to sustainable agriculture, but seemingly lost sight of quality control — which is what truly drives sales. Food poisoning has a way of dampening consumer enthusiasm for left-wing social causes.

Progressives are pushing for radical and aggressive new standards, principles and strategies that would basically redefine the very purpose of business. They want to dispense with the traditional focus of corporate management's responsibility to the firm's owners and investors.

Instead, progressives want to impose on companies a "triple-bottom-line" obligation: to deliver not just economic, but social and environmental "returns," to justify what they call a "license to operate" from the societal stakeholders they claim to represent.

Dr. Ryan Anderson of the Heritage Foundation has aptly summed up the progressives' modus operandi: "Big Business and Big Law using Big Government to impose their cultural values on small businesses and ordinary Americans."

In the process, they stoke alarmism about climate change, demand job-destroying minimum-wage laws, or urge the reordering of traditional morality by judicial and regulatory fiat.

The titans of Silicon Valley sell trendsetting, high-tech products. They can afford to indulge their personal political biases more easily than can CEOs in legacy sectors of the economy — such as retail, fast food, or consumer goods — where profit margins are much leaner and companies must take greater care not to offend their customers.

Western corporations have historically been the backbone of economic freedom. Their goods and services, efficiently produced and reasonably priced, have made prosperity possible for hundreds of millions worldwide.

Through the genius of the capitalist system, collective social benefits are realized when thousands of individual firms make the best widget or perform the best service they can.

In so doing, these businesses — be they startups, family farms, or large corporations — fulfill their only real responsibility to society: producing quality goods and services at affordable prices.

This piece originally appeared in Investor's Business Daily