A Social-Risk Tipping Point?
By April Hall

Directors must weigh risks involved with joining social-outrage campaigns

 

In a political climate where public opinion can turn on a dime, boards of directors need to consider a new business risk – “social risk.” Case in point, Delta Air Lines. After discontinuing its one-time discount to National Rifle Association members flying to the organization’s annual meeting, the airline faced intense positive and negative feedback.

In Georgia, where the company is headquartered, legislators moved to kill a tax break on jet fuel, impacting millions of dollars the company was set to save. Still, the CEO and the board stood behind their decision, releasing statements to the public and employees.

“While Delta’s intent was to remain neutral, some elected officials in Georgia tied our deci-sion to a pending jet fuel tax exemption, threatening to eliminate it unless we reversed course,” Delta CEO Ed Bastian said in the statement. “Our decision was not made for economic gain and our values are not for sale. We are in the process of a review to end group discounts for any group of a politically divisive nature.”

One New York politician lauded Delta’s deci-sion in the face of the tax kerfuffle:“.@Delta, as one of your most frequent flyers, know that the NY LG admires your principled stance,” tweeted Kathy Hochul, New York’s Democratic lieutenant governor. “Let’s continue our great relationship. NY is open for business & ❤’s Delta – move HQ to where you’re appreciated?”The question of whether or not to weigh in on such divisive issues is challenging boards more than ever before.

“In many cases it’s the tipping point. I think that’s what happened with Parkland,” says William Klepper, a management professor at Columbia Business School and author of The CEO’s Boss: Tough Love in the Boardroom and Governance and Managing Change in the 21st Century. “In the case of societal endurance, we’ve reached it at this time. This is not going to go away.”

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The attention corporate leaders give to social outrage is becoming less of a fad and more of a trend, adds corporate adviser and Barie Carmichael, author of Reset: Business and Society in the New Social Landscape.

But to what extent should directors in the nation’s boardrooms sanction social engagement, she advises, should be assessed as a social-risk proposition.

In the case of Delta, the decision to discontinue the discount was made days after the deadly shooting of 17 people at Marjory Stoneman Douglas High School in Parkland, Fla. The shooter used an automatic assault rifle in the massacre.

Dick’s and Walmart made larger business pivots by raising the age at which customers can purchase guns. Walmart, which had already taken assault weapons out of stores went a step further and removed any product resembling an assault weapon.

A Walmart spokesman said the company does not comment publically on internal conversations, but media reports say company management made the decision on pulling all assault weap-on-like products and later informed the board.

While it looks like those decisions were made on a dime, Klepper, says he’s sure February wasn’t the first time the subject came up.

“I would make a bet that the discussion is happening in the confines of the boardroom,” says Klepper. An open and frank discussion demonstrates the close relationship the board needs to have with the CEO, who is often a member of the board, Klepper adds. Delta’s move also highlights how what intends to be a “neutral” move can court explosive contro-versy, says one specialist in corporate governance.

The airline publicized the discount cut as not taking a stance for or against gun control, but it’s the public interpretation that counts, wrote David A. Katz, a partner, and Laura A. McIntosh, a consulting attorney at the law firm Wachtell, Lipton, Rosen & Katz wrote for the New York Law Journal in March. The authors used the example of Under Armour’s CEO dropping out of the President Trump’s American Manufacturing Council last year. Under Armour was forced to release a “clarification” on the company’s position on a range of political issues that had nothing to do with their business.

“While it is management’s job to navigate between the Scylla and Charybdis of red and blue America, the board may find it necessary to intervene if it becomes convinced that management decisions in this regard are likely to be harmful to the company and its shareholders,” wrote Katz and McIntosh.

While many companies have stayed quiet on issues of gun control or the groups that support gun use, the Feb. 14 shooting has changed something in the corporate conversation.

Should directors and corporate managers even join the conversation?

There are varying views.

For Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, the choice is clear – there is no room for political discussion inside or outside of the boardroom.

“Politics and corporate lives don’t mix,” Elson says. “When you mix the two you’re going to offend people – and you don’t want to offend anyone. The mistake in Delta’s case, he notes, was giving the discounted fare in the first place. Removing it compounds the problem.

“If the company is getting involved in politics, not ordinary business, it should discuss it with the board,” he says. “But they shouldn’t delve into politics at all. That’s why we have political institutions.”

Klepper agrees to a certain extent, but finds extenuating circumstances in the most extreme socio-political events.

“Here’s the confusion,” he explains. “It’s not a question of politics, it’s a question of principle. The mistake is thinking of this as a political issue. This is about the core values of that (company).”Social risk has to be evaluated as not just a short-term issue, points out Carmichael. Take Delta. The airline leveraged its stand while leaving the opportunity open in the future to end similar discounts if other organizations prove to be politically problematic, she says.

The eventual benefits of the move will play out for months to come. Not only in the marketplace, she explains, but in the job market as well. “I think it is an arms race for the next generation of talent,” Carmichael says. “One of the reasons I think you see CEOs speaking out is they need to be ‘for something’” to attract young employees.

Millennials want to not only know how much profit a company makes, but how that profit is made, she adds. “They will look at the corporate footprint to see where they stand socially.”

Taking a social stand comes with a “laundry list of 10,000 risks to consider,” says Klepper. But, he adds, the ultimate board decision should be based on the company’s “core values” and balance that with their commitment to the bottom line and shareholders.


Issue: 
2018 Second Quarter

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