11/10/21 9:13 CEOs Ignore Social Issues at Their Own Peril - WSJ

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BUSINESS
|
JOURNAL REPORTS: LEADERSHIP

CEOs Ignore Social Issues at Their Own

Peril
Leaders are more likely to be fired for riling shareholders about social, rather than financial, concerns,
a new study suggests

There are well-established financial metrics that can speak to how well CEOs
are fulfilling their wealth-maximization duties.
ILLUSTRATION: MIKEL JASO

By
Abhinav Gupta
Updated June 26, 2021 10:00 am ET

CEOs of major U.S. companies have reason to be worried about growing

shareholder unrest on a range of social issues.

Although shareholder complaints can come in a variety of forms, such

as boycotts and pressure through social media, shareholder resolutions
have been the primary means for shareholders to voice their concerns
and demands. Among other things, they demand that corporate leaders
improve diversity efforts, change product portfolio, reduce their
environmental footprint and speak out about politics.

CEOs ignore these shareholders at their own personal peril. According

to new research I have conducted with colleagues
Michelle Lee
of
Queen’s University (Canada) and
Don Hambrick
of Pennsylvania State
University, disappointing shareholders on these social issues can be
highly—and sometimes fatally—damaging for the career of the CEO.

In fact, our study found that CEOs who riled shareholders on social
issues were more likely to receive compensation penalties and be fired
than when shareholders were unhappy about the CEOs’ wealth-
oriented actions, such as those focused on strategy and governance.
Surprisingly, shareholders’ wealth-oriented concerns had a negligible
effect on CEOs’ compensation and dismissal prospects.

Why would this be so? Why would shareholders’ complaints about

social issues be more damaging to CEOs’ careers than those about
wealth-maximizing concerns? After all, most shareholders typically
buy the stock of a company to make money—not to change the world.

The explanation, we believe, comes from the study of “information

WSJ Investigation:
economics.”Hidden Interests that if you give people information that simply
It suggests
READ MORE
131 Federal judges broke the law by hearing cases where they disclosed a financial interest.

https://www.wsj.com/articles/ceo-social-political-issues-11624307505?page=1&cid=other-eml-ofl-mip-mck&hlkid=f33bd01af3b847b5a5bd259a49b84d4… 1/3
11/10/21 9:13 CEOs Ignore Social Issues at Their Own Peril - WSJ
corroborates what was previously known, those people would think of
the information as redundant, and wouldn’t change their opinions.

That’s why shareholder unrest focused on corporate social

responsibility is much more potent than unrest focused on wealth
maximization. There are many well-established financial metrics—such
as stock returns, net income and sales growth—that speak to how well
CEOs are fulfilling their wealth-maximization duties. Thus,
shareholders’ wealth-oriented unrest may be less consequential in the
eyes of a company’s directors, who already have incorporated those
metrics in their thinking about the CEO’s pay and future.

In contrast, measuring the degree to which a company is fulfilling its

corporate-social-responsibility obligations is notoriously tricky. There
are no universally agreed-upon metrics of a company’s social
performance. Whether a company is sufficiently reducing carbon
emissions and whether it adequately promotes diversity and inclusion
are widely debated in both academic and business circles. Shareholder
unrest focused on social issues, therefore, is new information for the
board, which may fear that the company is at risk of suffering negative
press and reputational damage.

The impact, though, goes even

SHARE YOUR THOUGHTS beyond the individual CEO.

How should CEOs balance social and

Shareholder unrest not only
financial concerns? Join the conversation may result in the targeted CEO
below. leaving the firm but also
affects the firm’s ability to hire
a suitable replacement. When
a CEO leaves in the aftermath of shareholder unrest, it conveys to all
the potential CEO candidates that they should expect to inherit some of
the predecessor’s challenges. Those candidates will likely worry about
being set up for failure.

As a result, we find, the company has to offer a heftier pay package to

the new CEO, relative to both the predecessor’s and those of other CEOs
joining comparable firms.

Findings from our study offer lessons for both CEOs and shareholders.
CEOs need to pay greater attention to shareholders’ concerns and try to
prevent shareholder unrest from arising. If shareholder unrest does
occur, CEOs should particularly take heed of corporate-social-
responsibility concerns, as they are likely to have a more significant
impact on their career than concerns related to wealth maximization.

For shareholders, it is worth keeping in mind that while shareholder

resolutions allow them to exercise power, they may also create costs
that they will ultimately bear. If the shareholder unrest escalates
substantially, it will raise the cost of executive talent for the firm and
add to what is already a pretty steep burden of hiring qualified CEOs.

Dr. Gupta is an associate professor of management at the Michael G.

Foster School of Business at the University of Washington. He can be
reached at reports@wsj.com.

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131 Federal judges broke the law by hearing cases where they disclosed a financial interest.

https://www.wsj.com/articles/ceo-social-political-issues-11624307505?page=1&cid=other-eml-ofl-mip-mck&hlkid=f33bd01af3b847b5a5bd259a49b84d4… 2/3
11/10/21 9:13 CEOs Ignore Social Issues at Their Own Peril - WSJ
Appeared in the June 28, 2021, print edition as 'CEOs Ignore Social Issues at Their
Peril.'

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This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers visit
https://www.djreprints.com.

WSJ Investigation: Hidden Interests

READ MORE
131 Federal judges broke the law by hearing cases where they disclosed a financial interest.

https://www.wsj.com/articles/ceo-social-political-issues-11624307505?page=1&cid=other-eml-ofl-mip-mck&hlkid=f33bd01af3b847b5a5bd259a49b84d4… 3/3