CEO activism as communication to multiple audiences
Gaia Melloniy Andrea Patacconiz Nick Vikanderx
September 8, 2019
Abstract
CEO activism refers to corporate leaders taking a public stand on issues such as race relations, gender equality or climate change not directly related to their business. In this paper, we investigate under what conditions CEO activism can create …rm value. We develop a model where consumers care about the type of …rm they buy from. Taking a stand raises two issues. First, not all consumers share the same viewpoint, so while some may be more eager to buy from a …rm with an activist CEO, others may be put o¤. Second, consumers may discount CEO communications if they perceive them to be pro…t motivated. We show that credibility requires CEO communications to be public and su¢ ciently controversial. CEO activism is more likely to create …rm value when competition is strong, consumers care a lot about “symbolic”value and polarization is high. CEO activism is associated with niche product market strategies and high prices, while “strategic ambiguity” (not taking a stand) is associated with mass market strategies and low prices. The model sheds light on the costs and bene…ts of intrinsically motivated CEOs and the limits of corporate governance.
Keywords: CEO activism, strategic communication, corporate governance, cheap talk.
JEL Classi…cation: D21, D82, L21
We would like to thank seminar participants at Fuqua School of Business for helpful comments and advice. All remaining errors are of course ours.
1
Introduction
More and more companies expose values, missions and take public stances on socio-political issues.
Star-bucks and its former CEO Howard Schultz have been vocal in promoting marriage equality, gay rights, and
racial justice. Nike recently run an advertising campaign featuring Colin Kaepernick, a NFL quarterback
who lost his job after kneeling during America’s national anthems to protest against police racism. Many
prominent corporate leaders, including Google CEO’s Sundar Pichai, Microsoft CEO’s Satya Nadella and
Facebook CEO’s Mark Zuckerberg, have spoken against Trump’s policies on immigration. In the run-up
to the 2016 Brexit Referendum, more than 300 business leaders called for Britain to leave the European
Union, arguing that the country’s competitiveness was being undermined by EU membership. Many
others, however, urged voters to stay, while others still took no public stance on this issue.
These examples illustrate “CEO activism”, the practice of corporate leaders to sometimes take public
stances on issues such as race relations, gender equality or climate change that are not directly related to
their business (Chatterji and To¤el, 2018, 2019; Larcker, Miles, Tayan and Wright-Violich, 2018).
In this paper, we investigate under what conditions CEO activism can create …rm value. We develop
a model of CEO communications where consumers care about the type of …rm they buy from. The …rm
is personi…ed by its CEO and her values and beliefs.1 The CEO can either take a stand on an issue or
remain silent. We refer to a CEO taking a stand (on either side of a debate) as “CEO activism”, and to
a CEO not taking a stand as “strategic ambiguity”. CEO messages are modelled as cheap talk: costless
to produce and unveri…able (Crawford and Sobel, 1982; Farrell and Rabin, 1996).
From the …rm’s perspective, taking a stand raises two issues. First, because not all consumers share
the same worldview, taking a stand could make some consumers more eager to buy from the …rm, but
others may be put o¤ (Chatterji and To¤el, 2018, 2019). For instance, in response to Nike’s advertising
campaign featuring Colin Kaepernick, “[s]neakers were burnt, boycotts were threatened, Nike brand’s
favourability plunged in surveys, and the company lost 3.2 per cent of its $130bn market value in a
day” (Financial Times, 2018). However, “the company’s share price quickly rebounded and Nike’s sales
rose as millennials showed they were more than happy to buy footwear that attracted the opprobrium
1
of President Donald Trump” (Economist, 2019).2. In our model we allow for multiple audiences, in the
sense that not all consumers may agree with the CEO activist stance.3
A second issue is that consumers may discount CEO statements if they perceive them to be pro…t
motivated. We refer to this problem as thecredibility problem of CEO communications. Skepticism about
CEO and corporate communications is widespread. The term “greenwashing”refers to false or misleading
environmental claims often made with the purpose of boosting brand image or increasing sales (Cherry,
2013; Marquis, To¤el and Zhou, 2016). “Woke washing” refers to “corporations adopting the veneer of
progressive values for pro…t” (Guardian, 2019). Skepticism is often justi…ed. Volkswagen’s marketing
campaign on emission reduction was crippled since it admitted cheating emissions tests in the US. “Don’t
be evil” Google conspicuously engages in tax avoidance in many countries. ‘Activist’Starbucks has been
involved in a number of scandals, such as attempts to block e¤orts by Ethiopian government and farmers
to trademark some of their co¤ees (Cornelissen, 2017).
We show that these two issues interact in interesting ways. The presence of multiple audiences can
help mitigate the credibility problem of CEO communications. Credibility requires CEO communications
to be public and su¢ ciently controversial. The information revealed must increase the willingness to pay
of some consumers and decrease the willingness to pay of others (Farrell and Gibbons, 1989; Chakraborty
and Harbaugh, 2010). Because one demographic (e.g., liberals) may be more valuable than another
(e.g., conservatives), CEO activism will not in general be perfectly informative, but nevertheless some
information can be transmitted in equilibrium. Far from being a “bug”, controversy is shown to be a
useful rhetorical tool to facilitate meaningful communication, especially when information is nonveri…able.
We begin with a benchmark scenario where the CEO is only concerned about maximizing pro…ts. In
2
More generally, among Americans aware of CEO activism, a 2018 Weber Shandwick survey …nds that 18 percent de-cided to buy more from activist …rms, and 35 percent dede-cided not to buy from or boycotted activist …rms. An equal proportion (14%) also decided to post negative or positive comments on social media in response to CEO activism. Among employed Americans, 31% said they would be more loyal to their organization if their CEO took a public position on a hotly debated issue, and 23% said they would be less loyal. See “CEO activism in 2018: The purposeful CEO”, avail-able at https://www.webershandwick.com/wp-content/uploads/2018/07/CEO-Activism-2018_Purposeful-CEO.pdf (last ac-cessed 25/02/2019) for the full set of results.
3
this case, CEO activism is best conceptualized as a non-market strategy used to increase sales (Baron,
1995; Flammer, 2015a). Our focus is on the connection between the CEO’s communication strategy
and the …rm’s product market strategy. We characterize when CEO activism occurs and show that,
in equilibrium, CEO activism is associated with niche product market strategies and high prices. By
contrast, not taking a stand (strategic ambiguity) is associated with mass market strategies and low
prices.
In our model, communication a¤ects beliefs, and hence consumers’willingness to pay. Because
con-sumers have di¤erent views, raising the willingness to pay of one type of customers may require lowering
the willingness to pay of another type of customers. In equilibrium, the CEO takes a stand if this allows
her to charge a su¢ ciently high price to one group of customers. Because the other group will not buy
at this high price, the …rm will only be able to serve one group (a niche strategy). Not taking a stand,
by contrast, does not please or displease any group of consumers in particular. When using this strategy,
therefore, the …rm will charge a relatively low price and will serve both groups (a mass market strategy).
In an informative equilibrium, the two groups of customers with opposing worldviews must be of
similar importance, because otherwise all CEO types (liberal and conservative) would pander to the most
valuable group. In this sense, CEO activism must be su¢ ciently controversial. We show that CEO
activism is more likely to occur and be pro…table (relative to not taking a stand) when (i) competition
is strong, (ii) consumers care a lot about “symbolic” value (the type of …rm they buy from) and (iii)
polarization is high. Under these conditions, the pro…ts associated with a mass market strategy are low,
but the …rm can increase pro…t margins by creating symbolic value for some customers. Polarization
ensures that taking a stand is controversial and hence CEO activism is credible.4
The theory helps explain why CEO activism has arguably become more widespread in recent times.
Consider the evolution of Nike’s advertising strategy. In the 1980s and 1990s, Nike avoided controversy.
The “Just do it” commercial …rst aired in 1988 featured “an 80-year-old long-distance runner jogging
cheerfully across the Golden Gate Bridge. The sun shone, forgettable music plinked and nobody was
4
remotely o¤ended” (Financial Times, 2018). In more recent times, however, Nike has been courting
controversy. One possible explanation, as suggested by our model, is that greater competition and
con-sumer polarization may have reduced the attractiveness of a mass market strategy. As the Financial
Times (2018) notes: “A polarised populace [...] leaves [brands] with a choice: try to carry on catering
to a vanishing mass-market middle ground, or stake out a position that will infuriate one side but excite
the other”.5 According to our model, greater importance attached to symbolic factors, relative to more
standard economic factors such as price and quality, should also push …rms toward greater “symbolic
di¤erentiation”. This meshes well with the perception that consumers in many countries are moving up
in Maslow’s hierarchy of needs and increasingly relish brands with a “purpose”.
Next, we consider a more general model where the CEO cares not only about pro…ts, but is also
intrin-sically motivated to take a stand and reveal her type. Unsurprisingly, the more the CEO is intrinintrin-sically
motivated (relative to maximizing pro…ts), the more she engages in activism. More surprisingly, intrinsic
motivation (and thus a lower weight attached to maximizing pro…ts) can either increase or decrease …rm
pro…ts. When strategic ambiguity is very pro…table, intrinsic motivation tends to reduce …rm pro…ts
because it induces the CEO to take an activist stance instead. The bright side of intrinsic motivation is
that it improves the quality of communications. Di¤erent CEO types (liberal and conservative) can better
di¤erentiate themselves. This mitigates the credibility problem of CEO communications and, when CEO
activism is a relatively pro…table strategy, both types of …rms (those run by a liberal CEO and those run
by a conservative CEO) earn higher pro…ts. Thus, perhaps counterintuitively, having a CEO that only
cares about maximizing pro…ts can be bad for pro…ts. By enhancing the credibility of communications,
intrinsic motivation facilitates symbolic di¤erentiation and can create …rm value.6
Finally, we examine whether corporate governance can mitigate the deleterious consequences of CEO
activism. We consider a setting where boards have the power to forbid CEOs from taking a stand, for
instance by threatening dismissal. We show that, if boards have discretion as to whether use this power,
5
The Financial Times (2018) also notes that “Nike needs the attention because Adidas has been nipping at its Jordans since the German group introduced its Yeezy line with Kanye West in 2015. Nike’s North American sales fell 2 per cent last year, and Adidas has made inroads with the market’s most in‡uential buyers”.
6
their ability to prevent pro…t-destroying activism can be severely limited. The problem occurs when CEO
activism is not pro…t-destroyingfor both …rm types. Speci…cally, letting a CEO take an activist stance can
be bene…cial to one type of …rm (say the one with a liberal CEO) but not the other (with a conservative
CEO). In terms of expected pro…ts, the board may want to forbid its CEO from taking a stand. But in
the end, a …rm with a liberal CEO, with discretion to deviate from this plan, would allow its CEO to
take an activist stance. Because consumers understand that a liberal CEO would be allowed to speak
out, they would interpret not speaking out as a sign that the CEO is conservative for sure. Thus, without
commitment, a board’s power to silence a CEO can be of limited value.
1.1 Related literature
Contribution to the strategy literature. To the best of our knowledge, this paper provides the …rst
formal analysis of CEO activism. Insightful discussions can be found in Chatterji and To¤el (2018, 2019)
and Larcker et al. (2018), who also present empirical evidence about the relevance of the phenomenon.
Compared to these contributions, the present work puts greater emphasis on the issue of credibility of
CEO communications. We also examine the connection between communication and product market
strategy, the cost and bene…ts of CEO’s intrinsic motivation (as opposed to simply maximizing pro…ts),
and what boards can do to prevent pro…t-destroying CEO activism.
More broadly, the paper contributes to a literature analyzing CEO and corporate communications
(Rindova, Becerra and Contardo, 2004; Fanelli, Misangyi and Tosi, 2009; Whittington, Yakis-Douglas
and Ahn, 2016). Scholars have long emphasized that a key task of the CEO is to communicate her
strategy to a wide variety of stakeholders and to be the “public face” of the company. For instance,
Kotter (1999) argues that leadership involves the creation of organizational alignment behind a vision
and, to achieve that alignment, the CEO must engage in extensive communications. CEO and corporate
communications, however, may not be credible (Scott and Lane, 2000; Crilly, Hansen and Zollo, 2016).
This is a concern especially for corporate social responsibility (CSR) claims, where incentives to exaggerate
are strong and compliance is hard to verify (Crilly, Zollo and Hansen, 2012).7
To identify which …rms deliver on their sustainability claims (‘implementors’) and which ones do not
7An extensive literature examines the link between CSR and …rm performance. See for instance Flammer (2015b) and
(‘deceivers’), Crilly et al. (2012: 706) argue that “[s]ubtle, often subliminal, choices about grammar
provide important information about how social actors construe the world around them”. They …nd that
implementors tend to use “exclusive language” (a category of words consisting mainly of conjunctions,
prepositions, and negations, such as ‘versus,’ ‘but,’ ‘only,’ ‘not,’ if,’) when de…ning sustainability. This
language draws distinctions between ideas, quali…es statements, and sets priorities among competing
stakeholders’demands.8 Our theory provides a potential explanation for why exclusive language may be
associated with credible communications. Our theory also requires at least some stakeholders to correctly
interpret these linguistic nuances, also consistent with Crilly et al.’s (2012) empirical …ndings.
Lastly, this paper contributes to stakeholder theory. Stakeholder theory holds that …rms should aim
at satisfying the needs of all the stakeholders on which their success depends (Donaldson and Preston,
1995; Henisz, Dorobantu and Nartey, 2014). Frequently, this requires management to carefully balance
the competing needs of di¤erent stakeholder groups. Tantalo and Priem (2016) point out that value may
also be created through “stakeholder synergy”: by selecting actions that simultaneously bene…ts multiple
stakeholders without reducing value for any other stakeholders. We suggests that, in some cases, …rms
may also exploit opposing stakeholders’demands. By emphasizing alignment with one stakeholder group
and not another (that is, by prioritizing stakeholders’demands), the …rm can credibly communicate its
“purpose” and create symbolic value.
Related work in game theory and industrial organization. From a theoretical standpoint, our
analysis builds on the cheap talk literature pioneered by Crawford and Sobel (1982). This literature
studies communication between informed experts (‘senders’) and uninformed decision makers (‘receivers’).
Given potential con‡icts of interest between senders and receivers, a key question in this literature is how
credible (and hence informative) communication can be. This literature formalizes the intuition that more
congruent preferences between a sender and a receiver lead to more precise information being transmitted
(e.g., Crawford and Sobel, 1982). Other factors that can enhance the credibility of communication
include: reputational concerns (Sobel, 1985), multiple senders (Krishna and Morgan, 2001), multiple
receivers (Farrell and Gibbons, 1989), extended debate (Krishna and Morgan, 2001) and multidimensional
8By contrast, deceivers tend to be prone to exaggeration and grand claims as expressed through “inclusive language”
information (Battaglini, 2002; Chakraborty and Harbaugh, 2007; 2010).
In particular, our setting shares a number of features with Farrell and Gibbons (1989): multiple
audiences, binary sender type and receiver actions, and the distinction between private and public
com-munication. Farrell and Gibbons (1989) show that public communication can be credible, even if private
communication is not, because it can discipline the sender: a message that misleads one receiver into an
action that helps the sender may induce the other receiver into an action that hurts. A key di¤erence is
that their expert’s preferences over receiver actions are state dependent, whereas the CEO’s preferences
in our baseline model are not: the CEO simply aims at maximizing pro…ts, regardless of her type.
More-over, unlike Farrell and Gibbons (1989), we consider not just whether or not full information revelation
is possible in equilibrium, but alsohow much information can be revealed.
Our analysis is most closely related to Chakraborty and Harbaugh (2010), who consider a model
of multidimensional cheap talk. In their framework, a sender with state independent preferences can
credibly convey information by making comparative statements, which can push up receiver beliefs in
some dimensions and push down beliefs in others, and may ultimately help the sender. Although we
consider one-dimensional cheap talk, the presence of di¤erent consumer groups leads to a similar e¤ect:
the CEO can credibly convey her socio-political views by making statements that please some consumers
while displeasing others. Formally, our equilibria feature an indi¤erence condition, similar to Chakraborty
and Harbaugh (2010), which leaves di¤erent CEO types willing to send di¤erent messages despite having
identical preferences.9 Our work di¤ers from Chakraborty and Harbaugh (2010) and the rest of the cheap
talk literature in its focus on CEO activism. In particular, we shed light on how corporate communication
relates to product market strategy, when CEO activism will create or destroy …rm value, and whether
corporate boards will be able to shut value-destroying activism.
The cheap talk literature assumes (i) con‡icts of interests between agents and (ii) costless and
nonver-i…able communication. Other models make di¤erent assumptions and may therefore be more appropriate
in di¤erent settings. For instance, information processing models (e.g., Radner, 1993; Patacconi, 2009)
9
assume that agents share a common objective but information transmission is costly. These models focus
on the design of optimal communication networks. Veri…able disclosure models (e.g., Milgrom, 1981,
Patacconi and Vikander, 2015) assume that messages are veri…able. An expert may refuse to give advice
but, if she does, the message must be truthful. We assume that CEOs can lie about their worldviews
when taking an activist stance.
In signaling models (e.g., Spence, 1973, 1977), a sender takes a costly observable action to signal to
receivers that he is of a certain type. For instance, a student may enroll in a di¢ cult course to signal to
potential employers that he is smart, or a …rm may o¤er a large warranty to signal to potential customers
that its product is of high quality. Signalling is useful as a discriminating device if the cost of taking the
signalling action is lower for some types than for others. In our model, the cost of making a statement is
the same (for simplicity, zero) for all types.
A few papers explore the idea that consumers may be willing to pay more for products or services
that they perceive as socially responsible (e.g., McWilliams and Siegel, 2001; Albuquerque, Koskinen
and Zhang, 2018). Arora and Gangopadhyay (1995) and Bagnoli and Watts (2003), for instance, study
the e¤ects of competition when …rms can produce in more socially responsible ways. These models
assume that more socially responsible production methods are observable, thus the issue of credibility
of communications does not arise there. Mohliver, Crilly and Kaul (2019) examine how issue salience,
polarization and competition a¤ect the likelihood that …rms will take opposing stances on an issue. In
their model, …rms have no type: consumers simply experience higher utlity whenever they buy a product
that takes a stance they agree with. Thus, in their model as well the issue of credibility of communications
is absent.
Finally, Johnson and Myatt (2006) propose a general framework for analyzing rotations of the
de-mand curve stemming from changes in the dispersion of consumers’valuations. They show how optimal
advertising and product design, by inducing rotations of the demand curve, are related to whether a …rm
pursues a niche or a mass market production strategy. We examine how cheap talk, by a¤ecting
con-sumers’valuations, is related to the choice of niche or mass market production strategies (see Chakraborty
2
Model
A …rm serves a market with two types of consumers, T 2 fL; Cg, who di¤er in their political views or
social values. To be concrete, we will refer to typeT =Lconsumers as liberals and typeT =Cconsumers
as conservatives. Let nT >0 denote the measure of typeT consumers in the market.
The …rm is run by a CEO. The CEO is also characterized by type t2 fl; cg. For consistency, we will
also refer to a CEO of type t=l as being liberal, and to a CEO of type t=c as being conservative. A
key assumption of this paper is that liberal consumers prefer to buy from a …rm run by a liberal CEO,
and conservative consumers prefer to buy from a …rm run by a conservative CEO. Ex ante both CEO
types are equally likely, and the CEO type is private information.
The timing of the game is as follows. In period 1, the CEO makes a choice of corporate communication.
Speci…cally, the CEO sends a costless message (or messages), the contents of which we interpret as
providing support for a social or political position, or an expression of values. Let M =fL;C;Sg denote
the set of available messages, which respectively stand for ‘liberal’, ‘conservative’, and ‘stay silent’. If the
CEO sends the messageL orCin equilibrium, we will say that the CEO ‘takes a stand’and will interpret
this as ‘CEO activism’. If instead the CEO sends the messageS in equilibrium, we will say that the CEO
does not take a stand and will interpret this as ‘strategic ambiguity’.
If communication isprivate, then the CEO can send di¤erent messages to the di¤erent consumer types:
message mL2M is only observed by consumers of typeT =L, and message mC 2M is only observed
by consumers of type T =C. If communication is public, then the CEO is constrained to send a single
message,mL=mC m, which is observed by all consumers.10
In period 2, consumers observe the CEO’s message m and update their beliefs about CEO type.
Because consumers care about CEO type when making purchasing decisions, the updated (interim) belief,
1 0
P(t=ljm), also a¤ects customers’willingness to pay.
In period 3, the product’s pricepis set at the level that maximizes …rm pro…ts, given interim willingness
to pay from period 2. The …rm might estimate this willingness to pay through market research, and an
algorithm (or middle managers who do not hold private information about CEO type) might set the price.
The price is uninformative about CEO type because type does not directly a¤ects pro…ts: is just equal
to p times the measure of consumers who buy, where we normalize the marginal cost of production to
zero.11
In period 4, consumers make their purchasing decisions and payo¤s are realized. For the …rst part of
the analysis (Section 3), we will assume the CEO’s payo¤ is equal to …rm pro…ts. For the second part of
the analysis (Section 4), we will assume the CEO also cares directly about consumer beliefs regarding his
type (say because she wants to in‡uence consumers’behaviors and hence ‘make a di¤erence’). We leave
a formal description of the CEO’s payo¤ function in the latter case to Section 4.
The consumer’s payo¤ from buying is equal to an intrinsic component plus a symbolic component
which depends on consumer inference about …rm type. Speci…cally, under private communication, a
liberal (type-L) consumer’s payo¤ from buying at pricep, given messagemLis
UL(mL; p) = v p
| {z }
Intrinsic Payo¤
+ 2 L [P(t=ljmL) 1=2]
| {z }
Symbolic Payo¤
(1)
and a conservative (type-C) consumer’s payo¤ from buying at price p, given messagemC is
UC(mC; p) = v p
| {z }
Intrinsic Payo¤
2 C [P(t=ljmC) 1=2]
| {z }
Symbolic Payo¤
: (2)
The higher the probability that consumers ascribe to the …rm being liberal, the higher the symbolic payo¤
experienced by liberal buyers, but the lower symbolic payo¤ experienced by conservative buyers. Thus,
our framework captures the idea that CEO communications can a¤ect willingness to pay by a¤ecting
consumer beliefs. Since consumers have di¤erent views, raising the willingness to pay of one type of
consumer may require lowering the willingness to pay of the other. The parameters L >0 and C >0
1 1
The key assumption here is that the chosen pricepdoes not a¤ect consumer beliefs about CEO type: P(t=ljm; p) =
capture the importance that each consumer type attaches to symbolic consumption relative to the other,
whereas the parameter captures the overall extent to which symbolic consumption matters. The term
v p represents the baseline (intrinsic) payo¤ from buying at price p. As v re‡ects the maximum price
the …rm would be able to charge in the absence of symbolic value, we interpret a high level ofv as a low
degree of competition in the market. We normalize a consumer’s payo¤ from choosing her outside option
to zero.
Under public communication, given price p and message m, consumer payo¤s given by (1) and (2)
reduce to
UL(m; p) =v+ 2 L [P(t=ljm) 1=2] p (3)
and
UC(m; p) =v 2 C [P(t=ljm) 1=2] p: (4)
In our analysis, we will restrict attention to equilibria with the following features. On the equilibrium
path: (i) if consumers receive message L, then they infer it strictly more likely that the CEO is liberal,
(ii) if consumers receive message C, they infer it strictly more likely that the CEO is conservative, (iii)
if consumers receive message S, they infer it equally likely that the CEO is liberal or conservative (i.e.
they maintain their prior beliefs). This approach re‡ects our interest in equilibria where words have their
commonly understood meaning.12
Finally, we need to specify out-of-equilibrium beliefs, i.e. what do consumers believe about CEO type
if the CEO sends a message that consumers did not expect to receive with strictly positive probability
in a particular candidate equilibrium. For the benchmark analysis in Section 3, where the CEO cares
only about maximizing pro…ts, we assume that these beliefs are equal to the prior. For the subsequent
analysis, where the CEO is intrinsically motivated to take a stand, we apply a re…nement in the spirit of
the Intuitive Criterion (Cho and Kreps, 1987). The analysis in Section 3 would remain unchanged if we
applied the subsequent re…nement; thus we postpone a precise description of this re…nement until Section
4.13
1 2This approach is unrestrictive, other than that it implies the existence of at least one o¤-equilibrium-path message in
the candidate equilibria we consider.
1 3Footnote 22 explains why the re…nement in Section 4 would not alter any of the results in Section 3. Footnote 19 provides
A strategy for the CEO consists of, for each type t2 fl; cg, a choice of message(s) mT, with possible
randomization in the case of mixed strategies. A strategy for consumers of type T is a decision whether
or not to buy, for any possible mT and price p they could receive. We solve for a Perfect Bayesian
Equilibrium, where the CEO maximizes pro…ts given the strategy of consumers; consumers maximize
their payo¤ for any possible messagemand pricep, given their beliefs about CEO type; and these beliefs
follow from Bayes’Rule and the CEO’s equilibrium strategy whenever possible.
3
A benchmark where the CEO only cares about maximizing pro…ts
Throughout our analysis, we will be interested in whether CEO activism can occur in equilibrium, and
whether it can create …rm value. We begin with a benchmark scenario where the CEO only cares about
maximizing …rm pro…ts . In this scenario, liberal and conservative CEOs have no intrinsic motivation to
truthfully reveal their type, and incentives to pander to the most valuable demographic are very strong.
If, say, liberals are very valuable customers (either because nL or L or both are very high), then even
a conservative CEO may pretend to be liberal if that increases …rm sales. Even in this extreme case,
we will show that, under some conditions, CEO activism can occur in equilibrium. Some information
transmission can occur and increases …rm value; however, the possibility of pandering bounds the quality
of communication and the amount of pro…ts that the …rm can obtain.
To begin, de…ne
L=nL(v+ L ); C =nC(v+ C ) and LC = (nL+nC)v: (5)
L = nL(v+ L ) are the highest possible pro…ts from adopting a niche product strategy of serving
only liberals. To achieve this payo¤, the CEO must convince liberal consumers that it itself is liberal
for sure, which would imply a pro…t-maximizing price of p = v + L. Similarly, C = nC(v+ C )
are the highest possible pro…ts from a niche strategy of serving only conservatives. The highest possible
pro…ts from following a mass market strategy, in which both consumer types hold the same beliefs, are
LC = (nL+nC)v. To achieve these pro…ts, both consumer types must believe the CEO is equally likely
to be liberal or conservative (as given by the prior), so that they are both willing to buy at price p=v.
no loss of generality, that liberals are a more valuable demographic than conservatives. This means that
L> C.14
De…nition. We say that an equilibrium isuninformative if both consumer typesT 2 fL; Cghold beliefs
P(t=ljm) =P(t=cjm) = 1=2, for all messages m sent on the equilibrium path. Otherwise we say that
an equilibrium isinformative.
An informative equilibrium involves at least one message that leads some consumers to update beliefs
away from the prior, because it is more likely to be sent by one …rm type (e.g. liberal). This means there
must also be another message that is more likely to be sent by the other CEO type (e.g. conservative),
which leads some consumers to update their beliefs in the opposite direction. We will say that an
informative equilibrium is fully revealing if consumers are always perfectly able to infer both CEO types;
otherwise we will say the equilibrium is partially revealing. As mentioned in the model description, we will
restrict attention informative equilibria with CEO activism (with liberal messagingLand/or conservative
messagingC), and on uninformative equilibria with strategic ambiguity (with only neutral messagingS).
We …rst consider private communication.
Proposition 1. Under private communication, the only equilibrium is uninformative, and it involves a
mass market strategy: message m=S and price p =v regardless of CEO type. All consumers buy, and
the …rm earns pro…ts LC.
Under private communication, the CEO can e¤ectively only opt for strategic ambiguity and a mass
market product strategy. Consumers make no inference about CEO type, and pro…ts are the same as in
the absence of symbolic consumption (i.e., L= C = 0).
Intuitively, the only equilibrium is uninformative because private communication makes CEO activism
so attractive that it cannot be credibly used in equilibrium. If messaging did transmit information in
equilibrium, then CEO would have an incentive to pander, and always tell each consumer type what it
wants to hear. But sophisticated consumers would realize the CEO has an incentive to pander, regardless
of type, and therefore fully discount CEO messaging.
1 4
In an uninformative equilibrium, a mass market strategy of selling to both consumer types earns
the …rm the highest possible pro…ts ( LC). Strategic ambiguity is well suited to a mass market product
strategy because, if communication transmitted information about CEO type, then this information would
displease some consumers. Thus, the price at which the …rm could serve the whole market would drop.
We now consider public communication.
Proposition 2. Under public communication:
(i) An uninformative equilibrium exists. This equilibrium involves a mass market strategy, with message
m=S and price p=v regardless of CEO type. All consumers buy and the …rm earns pro…ts LC.
(ii) If LC > minf L; Cg, then the only equilibrium is uninformative. If LC minf L; Cg, then
in-formative equilibria exist, with pro…ts regardless of CEO type, if and only if 2[ LC; minf L; Cg].
All informative equilibria are partially, rather than fully, revealing. Moreover, any informative
equi-libria with pro…ts 2( LC; minf L; Cg]involves a niche product market strategy with probability
one (i.e. never selling to all consumer types).
Part (i) says that an uninformative equilibrium with strategic ambiguity exists under public
com-munication, just as it does under private communication. The CEO behaves just as it did according to
Proposition 1 resulting in pro…ts LC. Again, these are the highest possible pro…ts from following a mass
market strategy.
Part (ii) says that an informative equilibrium can exist under public communication. This equilibrium
involves CEO activism, in the sense that a liberal CEO is more likely to use liberal messaging, and a
con-servative CEO is more likely to use concon-servative messaging, which results in these messages transmitting
information. CEO activism is also associated with a niche product market strategy and creates …rm value,
compared to the case where the CEO remains silent (i.e., LC). Indeed, the mass market product
strategy is never used in an informative equilibrium with > LC, because doing so would reduce the
willingness to pay of one type of consumers (liberals or conservatives) and would give lower pro…ts than
Together, Propositions 1 and 2 show that public communication can help increase …rm pro…ts by
making CEO messaging credible. The reason is that public communication reduces the CEO’s incentive
to pander. Any message sent in equilibrium that increases the willingness to pay of one type will decrease
the willingness to pay of the other, which disciplines the CEO. That being said, public communication
does not fully eliminate the CEO’s credibility problem, as the information transmitted in equilibrium
is never fully revealing. To understand why, suppose that L > C, so liberals are the more valuable
demographic. In this case, if an equilibrium was perfectly revealing, then a conservative CEO would have
an incentive to misrepresent its type. It could mimic a liberal CEO by using liberal messaging, serve
liberal consumers, and earn higher pro…ts: L rather than C.15
Note that the possibility of misrepresentation bounds the pro…ts that a …rm can obtain in any
in-formative equilibrium: minf L; Cg. Even under public communication, sophisticated consumers
discount CEO messages. This drives down consumers’ willingness to pay and pro…ts in an informative
equilibrium, and thus makes CEO activism weakly less attractive, compared to a hypothetical situation
where the CEO could simply reveal her type. As a result, CEO activism often does not occur: The CEO
uses a mass market strategy not only when it is very attractive, LC >maxf L; Cg, but also when it
is only somewhat attractive, LC 2 (minf L; Cg;maxf L; Cg). Conversely, Proposition 2 shows that
CEO activism can only occur if the mass market strategy is very unattractive: LC minf L; Cg.
Moreover, pro…ts in an informative equilibrium are such that 2 [ LC; minf L; Cg]: therefore CEO
activism increases …rm pro…ts and creates …rm value, relative to not taking a stand.
Below we restate the necessary condition LC minf L; Cg for CEO activism to occur in terms of
the primitives of the model.
Corollary. A necessary condition for CEO activism to occur and be pro…table is that
v <min nL
nC L;
nC
nL
C : (6)
For CEO activism to occur and be pro…table, there must be both enough conservative and liberal
consumers in the market. If the size of either demographic is too small, then the left-hand of (6) is
1 5
close to zero and the condition is violated. Our interpretation of (6) that CEO activism can only help if
messaging is controversial. If messaging creates symbolic value for one group (say liberals), there must
be a substantial number of other consumers in the market (say conservatives) who react negatively to the
same message. CEO activism is not credible when either demographic is relatively unimportant.
Condition (6) also helps identify the factors that make CEO activism more likely. First, polarization in
the market (as measured byminnnL nC L;
nC nL C
o
) must be su¢ ciently large. The relative sizes of the two
consumer groups (nL nC and
nC
nL), weighted by the relative extent to which their beliefs a¤ect willingness to
pay ( Land C) cannot be too small.16 Second, both consumer types must attach su¢ cient weight to the
symbolic component of utility ( large). That is, their purchasing behavior must be signi…cantly a¤ected
by their socio-political values and beliefs. Third, competition in the market must be su¢ ciently strong
(low v). Polarization— the fact that consumers disagree about what is right and wrong— is a feature we
directly built into the model. Controversy is a condition which requires su¢ ciently many consumers to
disagree enough that CEO activism can be credible (equation 6).
We now consider a situation where CEO activism can occur in equilibrium, with parameter values
satisfying LC < minf L; Cg. Without loss of generality, we assume that liberals are a more valuable
demographic than conservatives: L > C, and construct an informative equilibrium with pro…ts C,
which are the upper bound pro…ts speci…ed in Proposition 2. This equilibrium Pareto dominates any
other, because pro…ts are at their highest possible level, and consumers always earn an equilibrium payo¤
of zero.17
Proposition 3. Suppose communication is public and that L > C > LC. Then the following
consti-tutes an informative equilibrium, with the highest possible equilibrium pro…ts, C:
(i) A type t=l CEO sends message m = L for sure, with price p =v+11+ L where 2[0;1] is
de…ned implicitly by nL(v+11+ L ) =nC(v+ C ).
1 6To see this, let
L= L and C= C denote the total extent to which the beliefs of liberals and conservatives a¤ect
their willingness to pay, and interpret = ( L+ C)=2as the average of the two. Then, interpret L= 2 L=( L+ C)and C= 2 C=( L+ C)as the relative extent to which their beliefs a¤ect willingness to pay.
1 7The Pareto dominant equilibrium is also most robust, in that it is the only informative equilibrium that survives if we
(ii) With probability , a type t=cCEO sends message m=L, with price p=v+11+ L ; and with
probability 1 , she sends message m=C, with p=v+ C .
(iii) Consumer beliefs are P(t=ljL) = 1+1 and P(t=ljC) = 0. Only liberal consumers buy conditional
on receiving m=L, whereas only conservative consumers buy conditional on receiving m=C.
Assuming the most pro…table equilibrium will be the one that is played, we can state the following.
For LC > minf L; Cg= C, the CEO opts for strategic ambiguity and a mass market product strategy,
as described in Proposition 1. For LC < minf L; Cg= C, there is CEO activism and a niche product
market strategy, as described in Proposition 3.
In the equilibrium described in Proposition 3, both CEO types engage in CEO activism but send
di¤erent messages. A liberal CEO type always uses liberal messaging, whereas a conservative CEO type
sometimes uses liberal messaging and sometimes uses conservative messaging.
Proposition 3 shows a close link between CEO communications and product market strategy. When the
CEO sends a liberal message, the …rm serves only liberal consumers. When the CEO sends a conservative
message, the …rm serves only conservative consumers. This is because the particular message sent increases
the willingness to pay of consumers in the target niche market.
However, not all CEO communications are equally credible. Conservative messaging perfectly reveals
that the CEO is indeed a conservative type, but liberal messaging leaves consumers unsure. Speci…cally,
consumers realize that a conservative CEO uses liberal messaging with probability
= L C
C nLv+nL L
= nL(v+ L ) nC(v+ C )
nC(v+ C ) nLv+nL L
; (7)
where 2(0;1)by L> C > LC.
Another implication of Proposition 3 is that CEO activism is associated with higher prices, compared
to strategic ambiguity. Direct calculations show that the pro…t-maximizing price is p = nC
nL(v+ C )
when serving liberals and p=v+ C when serving conservatives. Both of these prices are higher than
the pro…t-maximizing price following a mass market strategy with strategic ambiguity. Moreover, in the
equilibrium described in Proposition 3, the consumers paying the higher price will be those in the smaller
niche market.18
3.1 Two variants of the benchmark model
We now brie‡y discuss two variants of the benchmark model that are motivated by empirical
considera-tions.
Asymmetric responses to CEO activist stances. Our model assumes that consumers’ responses
to CEO activist stances are similar in magnitude (but opposite in sign) when they agree with a stance
and when they disagree with a stance. Consider for instance a liberal consumer. If a CEO convinces this
consumer that she is liberal for sure, then his willingness to pay increases by L . Conversely, if the
CEO convinces this consumer that she is conservative for sure, his willingness to pay decreases by the
same amount, L . Clearly such symmetry may not always hold in practice. For instance, Chatterji and
To¤el (2019) …nd that, while consumers appear to be more willing to buy from a …rm whose CEO takes
a stand they agree with, they do not seem to be put o¤ if the CEO takes a stand they disagree with.
Here we brie‡y discuss the robustness of our results to asymmetries in consumers’responses to CEO
activist stances. To capture these asymmetries, we replace T in consumers’payo¤ functions (3) and (4)
with +T 2(0;+1) if P(t =ljm) > 1=2 and T 2(0;+1) ifP(t= ljm) <1=2, where T 2 fL; Cg. We
have asymmetries in consumers’responses to CEO activist stances when +T 6= T. Chatterji and To¤el’s
results suggest that +L >0, L '0, +C '0 and C >0.
It is not hard to see that the model’s results are robust to this type of asymmetries. The reason is
that, despite the change, a message m =S and the associated payo¤ LC remain the best the …rm can
do when following a mass market product strategy. In any informative equilibrium with pro…ts > LC,
selling to both types of consumers in this equilibrium would require setting a price p < v, which would
yield < LC. Furthermore, L and C remain the highest possible payo¤s that the …rm can obtain by
following a niche product market strategy (with Land C now computed using +L and C, respectively).
for the results. Clearly, any candidate equilibria could be made (at least weakly) easier to sustain if we had instead chosen the out-of-equilibrium beliefs that make a deviation least attractive. In particular, choosing out-of-equilibrium beliefs to coincide with some beliefs induced on the equilibrium path would e¤ectively rule out any potentially pro…table deviation to an unexpected message. Doing so would expand the range of parameter values for which an informative equilibrium exists compared to Proposition 2: informative equilibria would exist that yield any pro…ts 2[max(nL; nC)v; minf L; Cg],
rather than any pro…ts 2 [ LC; minf L; Cg], where max(nL; nC)v < LC (this result follows immediately from the
Because the key payo¤s associated with di¤erent communication strategies remain essentially unchanged,
all our qualitative results go through.
This discussion highlights an important point. In selecting a pro…t-maximizing communication
strat-egy, the CEO must focus on maximizing consumers’willingness to pay in her target market, rather than
some notion of ‘average’willingness to pay. The willingness to pay of potential customers who in
equilib-rium will not buy is immaterial.19 In discussing Nike’s advertising strategy, the Financial Times (2018)
makes a similar point:
Unlike elected o¢ cials, a brand can win with far less than 50.1 per cent of the population behind it. (Nike chief executive Mark Parker told investors last year that it was looking to just 12 global cities to drive 80 per cent of its growth.) [...] Culture wars can be great for business — if you know which side of them your customers are on.
Thus, what really matters about controversy is raising the willingness to pay in the targeted niche market.
Employees care about CEO type. In many cases, CEO activism appears to be motivated by a desire
to please employees rather than customers. For instance, Disney CEO Bob Iger recently warned that it
would be “very di¢ cult” for his company to continue working in the U.S. state of Georgia if a bill which
outlaws terminations from six weeks comes into force, because “many people who work for us will not
want to work there, and we will have to heed their wishes in that regard” (Telegraph, 2019).20
Here we discuss a simple variant of the model where raising employee satisfaction is what drives CEO
activism. In this model, producing one unit of output requires hiring one worker. Price per unit of output
ispand the worker’s wage isw. There are two types of workers: liberal workers and conservative workers.
nL is the measure of liberal workers and nC is the measure of conservative workers. The fundamental
assumption we make is that liberal workers experience higher non-pecuniary utility working for a …rm
with a liberal CEO, and conservative workers experience higher non-pecuniary utility working for a …rm
with a conservative CEO (see Turban and Greening, 1997 and Kim, Lee, Lee and Kim, 2010 for supporting
evidence). Thus, the …rm may be able to reduce its labor costs by providing non-pecuniary bene…ts to
some of its employees.
1 9However, displeasing some consumers at least marginally is necessary, because if a message strictly increased the
will-ingness to pay of all consumers, then all CEO types would use it, and the message would not be credible.
Speci…cally, suppose the CEO sends a message m 2 fL;C;Sg and the …rm selects a wage w (for
brevity, we restrict attention to public communication). Then, a type-L worker employed by the …rm
experiences utility
UL(m; w) =w+ 2 L [P(t=ljm) 1=2]
and a type-C worker employed by the …rm experiences utility
UC(m; w) =w 2 C [P(t=ljm) 1=2]:
A worker’s reservation utility isu. The objective of the CEO is to maximize …rm pro…ts, which are given
by revenues minus the total wage bill.
The trade-o¤s in this setting are similar to the trade-o¤s in the baseline model of Section 3. If the CEO
stays silent (m=S), the …rm can employ both types of workers but must pay a relatively high wagew=u;
pro…ts are then LC = (nL+nC) (p u). Alternatively, the CEO may choose an activist stance that
pleases either liberal or conservative workers. If the CEO convinces the workers that she is liberal for sure,
she can hire nL liberal workers at the lower wage w=u L , earning pro…ts L =nL(p u+ L ).
Conversely, by taking a conservative stance, the CEO can earn C =nC(p u+ C ).
The same analysis as in Section 3 produces the following necessary condition for CEO activism to
occur and be pro…table:
p u <min nL
nC L
;nC nL C
: (8)
This condition is the same as in equation (6), the only di¤erence being that v is replaced by p u. The
new insight from condition (8) is that CEO activism is more likely to occur and be pro…table (relative to
not taking a stand) when employees can extract a large fraction of the surplus from production (p u is
small). Thus, other things equal, we would expect employee-driven CEO activism to be more common in
industries where workers have signi…cant bargaining power.
4
The CEO is intrinsically motivated to take a stand
In this section we assume that the CEO cares not only about pro…ts, but is also intrinsically motivated
on consumer beliefs. For a liberal (conservative) CEO, this extra payo¤ is zero under the prior, and is
strictly increasing in the ex post belief that consumers ascribe to the CEO being liberal (conservative). Our
interpretation is that the CEO wants to credibly communicate her own socio-political views to the general
public because she wants to change people’s minds and in‡uence society. An alternative interpretation is
that the CEO has social image concerns, and wants the public to perceive her in way consistent with her
own views and values.
Throughout this section we focus on public communication and assume that liberals are a more
valuable demographic than conservatives: L> C. Furthermore, we assume that, conditional on message
m and price p, a liberal CEO earns a payo¤ of
ul= + 2k[P(t=ljm) 1=2]
and a conservative CEO earns a payo¤ of
uc = 2k[P(t=ljm) 1=2]
where denotes pro…ts andk >0. The magnitude of krepresents the relative importance that the CEO
places on her intrinsic motivation to take a stand. This magnitude also captures the extent of the con‡ict
between the CEO and the …rm, assuming that the …rm (i.e., the board and the shareholders) is only
interested in maximizing pro…ts. Settingk= 0 would mean that the CEO aims to maximize pro…ts as in
the previous section.
Our focus is on how the con‡ict of interest between the CEO and the …rm created byk >0in‡uences
equilibrium outcomes. For the remainder of the analysis, we impose a re…nement on out-of-equilibrium
beliefs, in the spirit of the Intuitive Criterion, which we describe below. Given our setting with two types,
this criteria will either precisely pin down beliefs (to P(t = ljm) = 1 or P(t = ljm) = 0) or it will not
restrict beliefs at all. In the latter case, we assume consumer beliefs following an unexpected message are
given by the prior, as in Section 3.
Suppose the CEO deviates by sending messagem=S, which was unexpected in a particular candidate
for one particular CEO type, but there does not exist any P(t=ljm) = 002[0;1] that would make the
deviation strictly pro…table for the other type, then consumers believe the CEO is the former type with
probability one.
If the CEO deviates by sending message m 2 L, which was unexpected in a particular candidate
equilibrium, we apply the criterion as described in the paragraph above, but restrict attention to 0; 002
[1=2;1]. Thus, we require that, when consumers reason about whether a particular CEO type could
possibly bene…t by sending an unexpected liberal message, they do not think that this liberal message
could result in beliefs that the CEO is likely conservative (i.e., 0; 00 2 [0;1=2]). Similarly, if the CEO
chooses an unexpected message m=C, we apply the criterion as described in the paragraph above, but
restrict attention to 0; 00 2[0;1=2]. Thus, this re…nement captures the idea that consumers who observe
an unexpected message will think about what CEO type could potentially bene…t from a deviation,
but their interpretation of unexpected words will not be diametrically opposed to the words’commonly
understood meaning.21’22
We begin by examining the set of parameter values for which an equilibrium with strategic ambiguity
can exist. Recall that, in the benchmark scenario with k = 0, a strategic ambiguity equilibrium always
existed. Proposition 4 shows that, if the CEO cares enough about making a di¤erence (klarge), it is no
longer possible to sustain an equilibrium with strategic ambiguity.
Proposition 4. Under public communication, an uninformative equilibrium exists if and only if k 2
[0; k ], where
(i) k =j C LCjif LC <( L+ C)=2
(ii) k =j L LCjif LC >( L+ C)=2
2 1
If we instead considered any 0; 002 [0;1], following any unexpected messagem 2 fL;C;Sg, this would have only a limited impact on our results. The only di¤erence would be that an equilibrium with strategic ambiguity would then also exist for su¢ ciently large values ofk, as well as for the su¢ ciently small values ofkdescribed in Proposition 4.
2 2
The intuition for Proposition 4 is as follows. When the CEO is not very intrinsically motivated to
take a stand (ksmall), then both CEO types earn a similar payo¤ for any given consumer beliefs. In that
case, in a situation where one CEO type could possibly bene…t from consumers believing she is liberal, or
conservative, so could the other type. As such, if consumers observe a deviation to an unexpected message
m 2 fL;Cg, they reason that in principle it could make sense for either type (or for neither type), and
therefore maintain their prior beliefs. This in turn means that the deviation has no impact on the CEO’s
payo¤.
By contrast, when the CEO is very intrinsically motivated (k large), deviating fromm =S to some
m2 fL;Cgwill allow either a liberal or a conservative CEO to increase her payo¤. When kexceeds the
critical value in Case (i), a conservative CEO can bene…t from using conservative messaging if it leads
consumers to believe she is conservative, whereas a liberal CEO cannot. Whenkexceeds the critical value
in Case (ii), a liberal CEO can bene…t from using liberal messaging if it leads consumers to believe she
is liberal, whereas a conservative CEO cannot. Either way, the deviating CEO will reveal her true type,
resulting in both a higher price and higher non-pecuniary payo¤.23
Turning to CEO activism, we now show that when an informative equilibrium exists, it will be unique,
and it will resemble the equilibrium described in Proposition 3. The main di¤erence is that, because the
CEO is now intrinsically motivated to take a stand (k > 0), the probability that a conservative CEO
will mimic a liberal CEO is lower.
The conservative CEO’s indi¤erence condition as described in Proposition 3(i) implicitly de…ned its
probability of using liberal messaging. With k > 0, the corresponding indi¤erence condition for a
conservative CEO is
nL v+
1 k
1 + k L
k 1 k
1 + k
=nC(v+ C ) +k; (9)
2 3The range of parameter values for which an uninformative equilibrium exists, captured by the critical valuek , depends in
a subtle way on the attractiveness of a mass market strategy. When mass market pro…ts are very low, LC C< L, then
k will be quite high, so an uninformative equilibrium will often exist. A liberal CEO really needs to care a lot about making a di¤erence, in order for conservative messaging to be so unattractive for her, that such messaging allows a conservative CEO to reveal her type. But an uninformative equilibrium will also often exist when mass market pro…ts are very high,
C < L LC. A liberal CEO then really needs to care a lot about making a di¤erence in order for liberal messaging
to be so attractive for her that such messaging allows her to reveal her type. In contrast, for parameter values such that
where k denote the equilibrium probability that this CEO uses liberal messaging givenk > 0, and sells
to liberal consumers. If a conservative CEO uses conservative messaging, then consumers infer that she
is conservative with probability 1, resulting in a non-pecuniary payo¤ ofk >0. If instead she uses liberal
messaging, then consumers infer that she is liberal with probability1=(1 + k)>1=2, resulting in a
non-pecuniary payo¤ of k 1 k
1+ k < 0. The notation k makes explicit that a conservative CEO’s mixing
probability depends on the importance of her non-pecuniary payo¤k, relative to …rm pro…ts.24
By a similar reasoning, the incentive constraint for a liberal CEO, which ensures that she is willing to
use liberal messaging, is
nL v+
1 k
1 + k
L +k
1 k
1 + k
nC(v+ C ) k: (10)
We are now in a position to state the following result.
Proposition 5. Under public communication, we have the following:
(i) If LC < C, then an informative equilibrium exists for all k > 0. It is partially revealing for
k2(0; L C
2 ) and fully revealing for k L2 C.
(ii) If LC 2 ( C; L+2 C), then an informative equilibrium exists if and only if k LC C. It is
partially revealing for LC C < k < L2 C and fully revealing for k L2 C.
(iii) If LC 2( L+2 C;3 L2 C), then an informative equilibrium exists if and only if k > L2 C and is
fully revealing.
(iv) If LC > 3 L2 C, then an informative equilibrium exists if and only if k > LC L and is fully
revealing.
No other informative equilibrium exists, other than that described in cases (i)-(iv). The partially
revealing equilibrium corresponds to that in Proposition 3, but with replaced by k 2(0; ), de…ned
by (9). The fully revealing equilibrium corresponds to that in Proposition 3, but with = 0.
2 4
For the partially revealing equilibrium, the price liberals pay is increasing in k, whereas the probability
of serving liberals is decreasing in k. Pro…ts are increasing in k for a …rm with a liberal CEO, but
can be non-monotonic in k for a …rm with a conservative CEO.
Proposition 5 shows that intrinsic motivation (k >0) makes it easier to sustain an informative
equi-librium with CEO activism. When k >0, an informative equilibrium analogous to that in Proposition
3 now exists for a larger range of parameter values: not only when LC < C (< L), but also when
LC > C and k exceeds a threshold value. Moreover, if k is large, a fully revealing equilibrium now
exists, with perfectly revealing messaging and niche product market strategies.
The key to understanding how intrinsic motivation in‡uences equilibrium outcomes comes from the
indi¤erence condition (9). Conservative (liberal) messaging becomes more (less) attractive for a
conserva-tive CEO, because it suggests to consumers that she is a conservaconserva-tive (liberal) type. Thus, a conservaconserva-tive
CEO is no longer willing to randomize between serving liberal and conservative consumers at the prices
speci…ed in Proposition 3. In equilibrium, the fact that k > 0 must push down the probability that a
conservative CEO uses liberal messaging, in order to push up the price it can charge liberal consumers
when it does so. This higher price, when k > 0, e¤ectively compensates a conservative CEO enough to
use liberal messaging, even though she su¤ers from the fact that consumers believe she is likely liberal.25
While the fact that k >0 makes a conservative CEO less likely to use liberal messaging, it does not
a¤ect the behavior of a liberal CEO. A liberal CEO now wants to be perceived as liberal, and this simply
reinforces her incentive to use liberal messaging and sell to liberal consumers. The incentive constraint
(10) holds when k= 0 as shown in Proposition 3, and continues to hold for k >0. The reason is that a
liberal CEO can use liberal messaging to more clearly reveal her type, which allows her to earn a higher
non-pecuniary payo¤. It also allows a liberal CEO to charge liberal consumers a higher price and generate
higher pro…ts.
To summarize, this section shows that intrinsic motivation (k > 0) increases the likelihood that the
CEO will engage in activism. Compared to the case whenk= 0, the set of parameter values that supports
2 5For this argument to hold, we require thatkis not ‘too large’, so that the cost of the extra negative non-pecuniary payo¤
a strategic ambiguity equilibrium shrinks (Proposition 4), and the set of parameter values that supports
a CEO activism equilibrium expands (Proposition 5).
4.1 The e¤ects of intrinsic motivation on …rm pro…ts
We now address the question of whether the …rm can bene…t from CEOs’ intrinsic motivation to take
a stand. Speci…cally, we compare …rm pro…ts when the CEO is intrinsically motivated (k > 0), to …rm
pro…ts when the CEO is only motivated by pro…t (k = 0). When multiple equilibria exist, we assume
that the most informative equilibrium is selected.26 We refer to the most informative equilibrium when
k= 0 as thebaseline equilibrium.
When the CEO is intrinsically motivated, Proposition 5 characterizes the unique informative
equilib-rium (with CEO activism) for di¤erent values of k. The baseline equilibrium is either that described in
Proposition 3 (with CEO activism, when LC < C) or that described in Proposition 1 (with strategic
ambiguity, when LC > C). The baseline equilibrium yields pro…ts LC in the former case and C in
the latter, regardless of CEO type.
We have the following.
Proposition 6. Consider the values of k for which an informative equilibrium exists, as described in
Proposition 5. Then in this informative equilibrium:
(i) If LC < C, then the …rm earns weakly more than in the baseline equilibrium, regardless of CEO
type, for all such k. The result is strict if the …rm is run by a liberal CEO for all k, and if the …rm
is run by a conservative CEO for k2(0; L C 2 ).
(ii) If LC 2( C; L+2 C), then a …rm with a liberal CEO earns more than in the baseline equilibrium
for all such k; a …rm with a conservative CEO earns less for some such k.
(iii’) If LC 2( L+2 C; L), then a …rm with a liberal CEO earns more than in the baseline equilibrium,
but a …rm with a conservative CEO earns less, for all such k.
(iv’) If LC > L, then the …rm earns less than in the baseline equilibrium, regardless of CEO type, for
all such k.
Moreover, for all remaining values of k 2 (0; k ) for which an informative equilibrium does not
exist, the …rm earns the same pro…ts as in the baseline equilibrium (i.e., LC), where k is de…ned
in Proposition 4.
Proposition 6 shows that a CEO’s intrinsic motivation (k > 0) can either increase or decrease …rm
pro…ts, relative to the most informative equilibrium when the CEO is only motivated by pro…t (k= 0).
When strategic ambiguity is a relatively pro…table strategy (e.g., case (iv’)), intrinsic motivation tends to
reduce …rm pro…ts because an intrinsically motivated CEO is excessively prone to take a stand. Intrinsic
motivation leads to excessive CEO activism, from the …rm’s perspective. The …rm would prefer that
the CEO remained silent, so that it could obtain mass market pro…ts LC with strategic ambiguity (as
described in Proposition 2).
However, when CEO activism is a relatively good strategy (e.g., case (i)), intrinsic motivation can
increase …rm pro…ts. The reason is that intrinsic motivation improves the quality of communication.
Di¤erent CEO types (liberal and conservative) are better able to di¤erentiate themselves. This mitigates
the credibility problem of CEO communications and the …rm earns weakly higher pro…ts, regardless of
CEO type. This e¤ect is most transparent when LC < C andk L2 C. In this case, kis high enough
that the equilibrium is fully revealing (see Proposition 5); hence, a …rm run by a liberal CEO earns L,
and a …rm run by a conservative CEO earns C. In either case, the …rm earns pro…ts weakly higher than
C, the highest pro…t that the …rm can make when k= 0.
More surprisingly, when LC < C and k2(0; L2 C), both a …rm run by a liberal CEO and a …rm
run by a conservative CEO earn strictly higher pro…ts than in the baseline equilibrium. This is because
the pro…ts of the …rm run by a liberal CEO rise with k, and the conservative CEO mimics the liberal
CEO with some probability. In this partially revealing equilibrium, the conservative CEO obtains pro…ts
> C when she pretends to be liberal, and pro…ts C (plus private bene…ts) when she uses conservative
when k= 0, initially rise, and then return to C for all k L2 C.27
One surprising implication of our analysis is that having a CEO that only cares about maximizing
pro…ts (k= 0) can be bad for pro…ts. The reason is that intrinsic motivation improves the credibility of
communications and can increase sales and …rm value.28 More importantly, our analysis also tells uswhen
having an intrinsically motivated CEO is good for pro…ts. Pro…ts are higher with intrinsic motivation
when CEO activism is a relatively good strategy (e.g., case (i)). This occurs when competition is strong,
consumers care a lot about “symbolic” value and polarization is high. Thus, our analysis suggests that
CEOs intrinsically motivated to take a stand (i.e., ‘authentic’or ‘sincere’CEOs) may have become good
for business especially in recent times.
4.2 Preventing unpro…table CEO activism
Given that intrinsic motivation can lead to excessive CEO activism and reduce …rm pro…ts, we now
consider how corporate governance may help. We examine a setting where the board has the power to
forbid the CEO from taking a stand, for instance by threatening dismissal. This is arguably an extreme
assumption, as boards may be reluctant in practice to use this power. We show that, even in this extreme
scenario, if boards have discretion as to whether use this power, their ability to prevent pro…t-destroying
activism is quite limited.
To examine these issues, we modify our formal framework as follows. Consider the end of period 1,
after the CEO has chosen her message m 2 fS;L;Cg. We now assume the board observes CEO type,
observes the CEO’s chosen message, and then chooses an unobserved actiona2 fSilence; Allowg. If the
…rm chooses a= Allow, then consumers in period 2 observe the CEO’s chosen message m. If the …rm
choosesa=Silence, then consumers in period 2 observe the messageS, regardless of which message the
CEO chose. Consumers then update their beliefs about CEO type, and the rest of the game continues as
in the earlier analysis.
2 7
Cases (ii) and (iii’) are qualitatively similar but less clear-cut, because whether the …rm bene…ts from CEOs’ intrinsic motivation is contingent on CEO type.
2 8
