Wharton@Work

April 2023 | Management

Taking a Stand: How to Lead with Your Values

He is CEO of one of the world’s largest consulting firms, but says he is being “blindsided” by the near-daily need to weigh in on contentious issues. That concern brought him to the classroom of Wharton management professor Mary-Hunter (Mae) McDonnell. “He is humbled by the trends and expectations for corporate leaders,” she says. “Ten years ago, the standard protocol for dealing with social or political issues was to avoid them, staying to the business side of the business. But today, the business side includes social and political positions.”

The CEO told Professor McDonnell that he has been “winging it” and is very concerned that he doesn't have the training to know how to respond. “He came to Wharton to learn. He needs to be more intentional and understand the smart position for the company to take,” Professor McDonnell says.

What do we know from research and practical experience about the types of responses available to senior leaders and how their businesses are likely to be affected? Professor McDonnell explores these questions as academic director of programs like Corporate Governance: Essentials for a New Business Era, Women on Boards: Building Exceptional Leaders, and the new Wharton ESG Executive Certificate for Senior Leaders.

Start with Alignment

“Many leaders are passionate about social and political issues,” says Professor McDonnell. “But they have been trained to think that those things should be separate from their business choices. What we're telling people with today's research is that it's okay to promote your values and your leadership. It can not only be good for the business, but also good for you psychologically, to feel like you can use your leadership position as a platform to promote the greater good.”

But there’s a caveat: the values espoused by leaders must be well-aligned with the values of their company and the stakeholders that company serves. “The onus for that values-matching is on the company,” says Professor McDonnell. “They shouldn't be hiring a CEO whose values are misaligned with their stakeholders.” When values are aligned, though, leaders can “trust their heart on a lot of these matters just as much as their business acumen.”

One of Professor McDonnell’s studies looks at what happens to a company’s stock price on the day a boycott is announced. “It gets at the matter of how contentious social and political issues affect performance,” she says. “What we find is that the stock price of companies drawing fire from an activist or a social movement that is misaligned with their values actually improves.”

The reason is the “rallying effect.” “When people see you acting consistently with your values and you've attracted stakeholders who share those values, those stakeholders will rally to you all the more when you are attacked by the opposition for taking an authentic position,” says Professor McDonnell. “You don't have to be afraid of offending the other side of the political spectrum, in other words, if your company is taking a position that is aligned with its values.”

The market responds adversely, though, when a company has associated itself with a set of values and is targeted by a group that also holds those values. “The group is calling out the company for its hypocrisy,” says Professor McDonnell, “and that's when the stock market responds adversely, and we see a negative abnormal return in the market on the day of a boycott.”

“The companies that will actually benefit from being ahead of the field on environmental and social policy are the ones that are doing it because they're enlightened, because their leaders care about the issues, and because they truly want to make a difference,” says Professor McDonnell. “They understand that companies are obligated to make sure that the communities that they operate in and profit from are healthy communities.”

The Business Case Is Secondary

There are also plenty of studies that support the “business case” for taking action on environmental and social issues. Beyond generating a powerful public relations story, it can create significant economic value and competitive advantage. But although Professor McDonnell says she is sympathetic to the fact that the research says that companies benefit financially from pursuing pro-social impact, a strong focus on those outcomes often backfires. “In order for companies to really profit from being ahead of the game on these issues, their position has to be seen as authentic by the stakeholders that they serve. The more overtly they say that they're embracing social and environmental issues to make a profit, the less authentic it's going to be perceived, and so the less likely they are going to make a profit from it. You really have to be doing it for the right reasons.”

“It's literally only shareholders that want to hear about the profits generated by embracing pro-social and environmental policies,” she continues. “The more that leaders pander to shareholders by saying these things, the more that they're undermining the actual effect that their actions are going to have. Customers and employees are going to hear those arguments and become jaded, thinking the company's only in it for the buck. There's evidence of that.”

Professor McDonnell cites a study by Wharton colleague Tyler Wry, who followed the 181 companies whose CEOs signed a pledge in 2019 to stop putting shareholders’ needs first. They promised to instead lead their organizations for the benefit of all stakeholders, including employees and the communities in which they do business.

Professor Wry found that, compared to their peers, the companies that signed the pledge were more likely to furlough employees and issue greater dividends to shareholders during COVID. “Everybody's very worried that companies are all talk when it comes to environmental and social impact,” says Professor McDonnell, “and the behavior of many of those 181 CEOs shows us why. Companies need to be sure that they're ready to authentically dedicate themselves to these goals if they're going to say they care about them.”

Learning How to Stop Winging It

Leading authentically with your values, and understanding how to respond when you need to weigh in on contentious social, environmental, and political issues, can require stepping away from day-to-day responsibilities. That’s why the consulting firm CEO ended up in Professor McDonnell’s classroom. “We're working to prepare leaders. They learn how to evaluate their stakeholder pools and to understand and identify trends so that they'll know how to take positions when they're challenged.”

“There's a really strong business-as-usual bias in companies, and so I think it is really hard to break out of the mold and to think about the possibilities for committing your company to a different sort of leadership journey going forward,” she says. “In the classroom, we're talking about things like diversity and inclusion, environmental policy, and other material issues in the ESG bucket. It's clear that they're not having those discussions with their own teams or their own boards. It takes stepping outside of the boardroom and talking about your role more broadly with other like-minded people to imagine what you can do and what you can use your position to do. In that way, we are a launching pad for change, driving innovation in terms of leadership skills. The participants leave excited about the kind of direction they can take their companies in.”