We have entered a world where stakeholder capitalism is on full display, and it should be no wonder when investors call for investments in a social cause. Whether through the lens of ESG, sustainability, or green-specific investments, there has been an increase in understanding and demand. However, it is important to consider not just the investment but also the investor and their needs. After all, with the rise of social media, a company could find themselves in the middle of a culture war in no time and could be trending online with millions of impressions in mere minutes! If this could have a statistical significance on stock price, it is important to consider the risk companies pose when they speak out!

CEO Activism

While there have been numerous examples in the past of companies being led by eccentric executives who seek the limelight, CEOs have had their voices greatly amplified thanks to the interconnectedness of society. A CEO might send a tweet on an issue off the cuff and millions of eyeballs could read it before it was even vetted or second guessed. When you consider the number of issues in the world where companies have taken stands even in the last few years (political issues, social and societal rights, humanitarian issues, wars, etc.), the opportunities for CEOs to speak out are aplenty.

What is more, it is also important to understand that sometimes there can even be a cost of speaking out, but a greater cost for remaining silent. The good news is that some new research highlights that CEO activism may yield positive returns. However, this is still up in the air, and studies have yet to examine the costs or benefits of speaking out on a larger level.

A Version of Corporate Social Responsibility

Some also say that when a CEO commits to activism policies, this is just another area of stakeholder capitalism, and an organization needs to do “the right thing” to maintain the goodwill and brand. This process is just another version of having a strong corporate social responsibility, which sometimes means there will be an added cost or leaving a few dollars on the table to do the right thing. While various perspectives and conflicting studies exist on this topic, HEC Paris performed a deeper dive, highlighting that more than 90% of all CSR studies show the initiative should generate a net financial benefit.

We also know some investments allow investors to align with their morals, whether they are green funds and ESG funds or a concentration of sin stocks. Investing comes down to the individual; for many, it is about more than just profits; they also need to think about what they are comfortable investing in.

In other words, if firms can “do the right thing” and still generate positive returns, this may not be a case of mission drift but of establishing goodwill and a long-term brand. So, the purpose of stakeholder initiatives still needs to be analyzed on a case-by-case basis, but it is not like this is an unheard-of action, and we have learned of this happening with positive returns as well.

Recommending Stocks vs Minimizing Risk: It Depends!

Finally, it does make sense to think about this further in the context of the purpose. After all, someone who recommends investments versus a CFP attempting to minimize risk will approach this process in a different way. After all, trying to find an event where a company announces an initiative or has a CEO engage in activism may be much more impactful on a portfolio manager or one recommending individual stocks. At the same time, a CFP who is trying to minimize risk might also find value here in considering the volatility of company announcements such as this; however, they may also want to recommend mutual funds upfront to avoid any of this volatility having a substantial impact on the client’s portfolio in the first place.

In any case, the old ways of valuing companies and having them “stick to business” do not seem to be the norm. So, it is important to consider organizations' stakeholder and activist efforts in the future.

Phil Stuczynski is an assistant teaching professor in finance at Penn State Behrend. 

This article first appeared in the 2024 Q4 Financial & Retirement Planning Section newsletter.
Editor: Greg Filbeck, CFA, FRM, CAIA, CIPM, PRM, Samuel P. Black III, Professor of Finance & Risk Management, Penn State Erie, mgf11@psu.edu