CEO Activism As Communication to Multiple Audiences

Abstract

CEO activism refers to corporate leaders taking a public stand on issues such as race relations, gender equality or climate change not directly related to their business. In this paper, we investigate under what conditions CEO activism can create firm value. We develop a model where consumers care about the type of firm they buy from. Taking a stand raises two issues. First, not all consumers share the same viewpoint, so while some may be more eager to buy from a firm with an activist CEO, others may be put off. Second, consumers may discount CEO communications if they perceive them to be profit motivated. We show that credibility requires CEO communications to be public and sufficiently controversial. CEO activism is more likely to create firm value when competition is strong, consumers care a lot about "symbolic" value and polarization is high. CEO activism is associated with niche product market strategies and high prices, while "strategic ambiguity" (not taking a stand) is associated with mass market strategies and low prices. The model sheds light on the costs and benefits of intrinsically motivated CEOs and the limits of corporate governance.