Firms, Activist Attacks, and the Forward-Looking Management of Reputational Risks

In the context of the transition towards Stakeholder Capitalism, proponents argue that environmental activists play a key role as watchdogs to push firms to make the necessary adjustments to address climate or other major issues. But are activists effective at doing so?

The answer to this question is far from obvious. On the one hand, activists’ claims in the media/internet could tarnish a firm reputation and therefore create strong incentives for firms to make their activities more sustainable. On the other hand, environmental activists might also ‘play strategic’ and choose their targets for visibility reasons rather than focusing on the worst polluters. In that case, a positive response by firms is far from guaranteed, and unproductive conflicts rather than effective environmental transformations might occur.

In this research paper (now forthcoming in Strategic Organization) Jean-Philippe Bonardi and Estefania Amer take this question to the data through a sample of the 350 largest British firms over 10 years.

Key results:

• Environmental activists do target the most visible firms;
• But these activists’ criticism are overall quite effective: improvements in criticized firms’ environmental performance are significant after two years, controlling for most other factors, suggesting that long-term changes have occurred within these firms;
• On top of this, not only do targeted firms significantly improve their environmental performance, but also do their industry peers’. And this effect is quantitatively as strong or even stronger than for the targeted firms. Activists’ influence is thus even larger than potentially expected, and should have the potential to trigger significant transformations in many industries;
• This improvement does not involve all firms, however, but only average sustainability performers. The low environmental performers do not react much to activists’ media criticism, as no investment might be enough to significantly improve their reputation, and neither do the high performers as the marginal benefits they might derive from such actions might be low as well.

Overall, in spite of their strategic targeting behaviors, the net effect of activists’ claim is thus positive and they do have a role to play in applying soft pressure on firms’ governance. But the role they can play has also limitations, as it is not effective for all firms, and is probably only one dimension in the emergence of the upcoming regulation system.