Why Corporate America's Retreat From Social Activism Is Good For Everyone

Authored by Jon Miltimore via The American Institute for Economic Research,

In January, Axios reported a developing trend in corporate America: corporations across the United States were backing away from DEI, which had become a “minefield” for companies.

Following a multi-year boom in the Diversity, Equity, and Inclusion space following the 2020 death of George Floyd, corporations were pulling back on DEI initiatives.

The risks were too great — especially in what was expected to be a politically charged election season amid growing attacks from conservatives targeting “woke” corporations.

“It’s hard to imagine with the amped up rhetoric of an election year that people really want to stick out their neck more,” Kevin Delaney, co-founder of media and insights company Charter, told markets correspondent Emily Peck.

Axios wasn’t wrong about the trend, which has only picked up steam this summer.

In July, John Deere announced that it was stepping away from DEI efforts and would cease sponsoring “social or cultural awareness” events. The announcement came a week after Business Insider reported that Microsoft had laid off its entire DEI team. Microsoft’s action, in turn, had come just weeks after Tractor Supply, a Brentwood, Tennessee-based company, decided to pull the plug on its social activism efforts in the face of a social media campaign targeting the company.

The backlash against DEI has been so intense that the term itself appears to be going the way of the dodo. The Society for Human Resource Management recently announced it was ditching the word equity from its acronym.

Preaching to Consumers

DEI is just one form of corporate social activism, which comes in various forms and includes its cousin Environmental, Social, and Governance (ESG). Both ideas fall under, to some degree, Corporate Social Responsibility (CSR), the idea that corporations have a duty to take social and environmental actions into consideration in their business models.

If you’re wondering why Burger King has commercials on climate change and cow farts, and why Bud Light’s commercials went from featuring Rodney Dangerfield and Bob Uecker to trans activist Dylan Mulvaney, it’s because of CSR.

The idea that corporations should fight for social causes has skyrocketed in recent years to such an extent that activism is inhibiting companies in their primary mission: generating profits by serving customers.

“Firms leveraging situations and social issues is not new, but showcasing their moral authority despite a disinterested consumer base is,” Kimberlee Josephson, an Associate Professor of Business at Lebanon Valley College in Annville, Pennsylvania, has observed.

Bud Light’s decision to feature Mulvaney cost them an estimated $1.4 billion in sales, and it revealed the danger of corporations leaning into social activism, particularly campaigns and policies that alienate their own consumer bases.

Not very long ago, companies like Chick-fil-A faced backlash from progressive activists for supporting traditional marriage. Culture war advocates on the right have responded in similar fashion.

Conservative influencers have made a point of raising awareness around “woke” corporate initiatives — white privilege campaigns, climate change goals, LGBTQ events, etc. The most successful ones, such as Robby Starbuck who pioneered the campaign against Tractor Supply and John Deere, made a point of targeting corporations with conservative consumer bases.

“If I started a boycott against Starbucks right now, I know that it wouldn’t get anywhere near the same result,” Starbuck recently told the Wall Street Journal.

One can support Robby Starbuck’s tactics or oppose them. What’s clear is that corporations increasingly face risks for participating in social activism campaigns, and the threats now come from both sides of the political aisle.

Social Responsibility and ‘Social Justice’

The idea that businesses have responsibilities that go beyond their shareholders, workers, and consumers stretches back at least to Howard Bowen’s 1953 book Social Responsibilities of the Businessman. Bowen, an economist who served as president of Grinnell College and the University of Iowa, is widely considered to be the godfather of corporate social responsibility.

“CSR can help business reach the goals of social justice and economic prosperity by creating welfare for a broad range of social groups, beyond the corporations and their shareholders,” he wrote.

This is a version of “stakeholder capitalism,” an idea that says corporations must look beyond serving customers to generate profits for shareholders. Various other “stakeholders” must be considered.

Over time, other incantations of stakeholder capitalism emerged, including ESG, which stemmed directly from a 2004 report — “Who Cares Wins” — spearheaded by the United Nations, asset management groups, and banks. Its purpose was “to develop guidelines and recommendations on how to better integrate environmental, social and corporate governance issues in asset management, securities brokerage services and associated research functions.”

These “guidelines and recommendations” eventually morphed into a global ESG framework which graded publicly traded companies on “social responsibility.” Though ESG scoring is notoriously opaque, what’s clear is that a small number of rating firms were allowed to determine what values corporations should have, and penalized them if they deviated. A bad score could see a company cut from a trillion-dollar index fund.

This no doubt explains why companies like Tractor Supply, known for selling farming equipment and animal feed to farmers, had carved out ambitious plans to cut emissions by 50 percent by 2030 and achieve a “net zero” carbon footprint by 2040 (in addition to various other social objectives).

Those plans are now scrapped, and media outlets are aghast, pointing out that not very long ago Tractor Supply argued that these initiatives made “great business sense for Tractor Supply.”

But this analysis misses the reality that social activism now carries greater potential risks and rewards, particularly in light of the collapse of the ESG movement, which earlier this year saw an exodus of $14 trillion, as asset managers like BlackRock and Goldman Sachs fled for cover.

The Problem with Taking Sides

Many Americans likely feel that corporations should have social responsibilities. They just tend to have different views on what those values should be.

I was in church recently, and a pastor spoke of an entrepreneurial friend who was excited to realize how he could use profits from his business to spread the gospel. I suspect that many people who support CSR would be appalled at corporations using their business to spread religion, just like many religious Americans are appalled at corporations embracing what they see as “woke” agendas.

While corporations are free to inject values into the workplace and support social and religious programs, they have no societal responsibility to do so. In fact, there are compelling reasons they should not be doing so.

The Nobel Prize-winning economist Milton Friedman wrote what is perhaps the most famous rebuttal to CSR. In a 1970 New York Times article titled “A Friedman Doctrine — The Social Responsibility of Business Is to Increase Its Profits,” Friedman accused champions of CSR of “preaching pure and unadulterated socialism” and being “puppets of the intellectual forces that have been undermining the basis of a free society.”

Friedman understood that corporations don’t have a social responsibility (or a religious one) beyond serving their consumers and generating profits. This is their raison d’être, and how they best serve society. They don’t have a responsibility to spread religion or to champion diversity or to stop climate change or to promote equity. These values might be good, but it’s not the responsibility of corporations to promote them.

“[T]here is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits,” Friedman wrote, “so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

This is the most famous element of the Friedman Doctrine, but I don’t think it’s the most important one. The most important line is Friedman’s warning on the dangers of straying from this model, which he makes at the beginning of the same paragraph:

[T]he doctrine of ‘social responsibility’ taken seriously would extend the scope of the political mechanism to every human activity. It does not differ in philosophy from the most explicitly collectivist doctrine. It differs only by professing to believe that collectivist ends can be attained without collectivist means.

This is the true danger of CSR, stakeholder capitalism, or any of the alphabet soup acronyms that seek to replace capitalism with collectivist systems that seek to undermine the rights of property owners: it risks extending politics into our private lives beyond its proper scope.

One of the hallmarks of a totalitarian society is that public and private levers of power are utilized to enforce adherence to state dogmas, and Friedman wasn’t the first to recognize the potential dangers of corporate social activism.

Writing in Harvard Business Review in 1958, the German-born American economist Theodore Levitt warned of replacing the profit motive with corporate do-goodism in an article titled “The Dangers of Social Responsibility”:

The trouble with our society today is not that government is becoming a player rather than an umpire, or that it is a huge welfare colossus dipping into every nook and cranny of our lives. The trouble is, all major functional groups — business, labor, agriculture, and government — are each trying so piously to outdo the other in intruding themselves into what should be our private lives. Each is seeking to extend its own narrow tyranny over the widest possible range of our institutions, people, ideas, values, and beliefs, and all for the purest motive — to do what it honestly believes is best for society.

This is precisely what stakeholder capitalism has done, and it’s a primary reason why culture today is saturated with politics and political messaging. Corporations, by embracing Bowen’s idea that corporations have a duty to pursue “social justice,” have helped blur the line between private and public life.

Though many Americans are alarmed by corporate America’s retreat from social activism, it’s actually a sign that nature is healing.

The move likely will not only help the bottom lines of companies like John Deere and Tractor Supply, but it will allow them to serve their customers more effectively. Keeping politics and “social responsibilities” out of corporate boardrooms, charters, and messaging is likely to result in a more harmonious society.