Starbucks' Shultz and When CEOs Make Non-Economic Decisions

Michael Teague |

Last week, Starbucks, Inc. (SBUX) CEO Howard Schultz once again stood by his public stance in favor of marriage equality during a contentious exchange with one of the company’s shareholders at the annual meeting in Seattle.

Tom Strobhar, the founder of the Corporate Morality Action Center, challenged Schultz in front of a large audience about his open support for marriage equality with the following remark: “In the first full quarter after this boycott was announced, our sales and our earnings—shall we say politely—were a bit disappointing.”  Strobhar was referring to a boycott against Starbucks organized by the National Organization for Marriage to punish the coffee megalith for its stance on this most polarizing social issue.

Schultz’s response was as terse as it was unequivocal: “It is not an economic decision. The lens in which we are making that decision is through the lens of our people.  We employ over 200,000 people in the company, and we want to embrace diversity”.

The CEO went on to remind his interlocutor that we live in a free country, and that he was welcome to sell his shares and invest in a different company in the event he was unsatisfied with the 38 percent return shareholders enjoyed from Starbucks last year.  That the vast majority of shareholders present at the meeting were enthusiastically in favor of Schultz’s posture was apparent in the loud rounds of applause with which his comments were met.

 

Putting aside the “for or against” way of thinking about the issue, there is a specious element to the premise of Strobhar’s complaint. After all, ideologically speaking it is very hard to differentiate between the National Organization for Marriage who initiated the boycott after which, according to Strobhar, Starbucks’ share price fell, and Strobhar’s own Corporate Morality Action Center.

On the very homepage of CMAC’s website it says, “The mission of the Corporate Morality Center is to inform people of the influence corporations have on these issues and, where appropriate, challenge companies that offend traditional moral norms.”  So not only do the National Organization for Marriage and Strobhar’s group share the same values, they also embrace the tactic of pressure through public relations campaigns.

As Schultz himself pointed out, it is indeed a free country, in which one can organize publicity campaigns for or against whatever entity one would like, for whatever reason or reasons. But for Strobhar to criticize from the stance of an investor frustrated with losses allegedly incurred by a CEO’s behavior, while posing as though he had no other significant interest in the issue aside from the stock’s performance, is disingenuous.

Be that as it may, Strobhar’s challenge has merits that exist irrespective of his methods or aims. He raises a valid question in the context of market culture: is it wise for CEOs to publicly express their views on controversial social or political issues given the possibility that shareholders, to say nothing of employees, could potentially suffer the consequences?

Asking such a question by no means implies that there is a clear-cut, one-size fits all answer- far from it. Each case has its own context.

The fast food chain Chick-fil-A, though not publicly traded, nearly ran ashore on this same issue last year. After the company’s owner took to the radio to express his disapproval of gay marriage, it was revealed that the company’s charitable arm was donating to a variety of campaigns against legalizing same-sex marriage throughout the country. The backlash was immense, and Chick-fil-A ended up having to do a 360 on its previous stance. Another example was J.C. Penney's (JCP) decision to stand by Ellen DeGeneres when threatened by the group One Million Moms boycott.

Another contentious issue has been health-care reform, or “Obamacare”. Darden Restaurants (DRI) CEO Clarence Otis was a vociferous critic of the legislation, and retaliated against the Affordable Care Act by limiting employee hours in order to avoid having to pay for health insurance. Even though many companies did this (and have been doing so for years), few if any of their CEOs have drawn attention to it in such an emotional or temperamental fashion. After a drop of 37 percent in quarterly earnings, however, Otis took responsibility and kept quiet on the issue.

In the case of Starbucks, it is not entirely clear how much of a role the boycott had in the company’s “disappointing” first quarter. Given that the company is like the McDonald's (MCD) of coffee, its effects were likely felt in parts of the country in which there is a larger religious/conservative demographic.

At the same time, the company had a great deal of trouble implementing its “Square” mobile payments processing system in its stores.  This is also the sort of thing that can drag on a company’s stock price performance.

Furthermore, the identity of the Starbucks brand is still largely affiliated with urban, liberal culture. This likely explains why Schultz’s comments were so warmly received by the other shareholders. And in this instance, there seems to be no reason to doubt the CEO’s sincerity when he says the decision was made through “the lens of our people”.  Starbucks employees are often in their teens and twenties, a demographic that is generally more open to things like marriage equality.

In other words, it does not seem as though Schultz has been or is taking much of a risk with his coming out so vocally on the subject of marriage equality.  He could even be preaching to the choir, and it would be interesting to see how vocal he would be if a larger percentage of Americans were opposed to it.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
PFSFD PFSFD n/a n/a n/a 0
MCD McDonald\'s Corporation 118.24 -0.23 -0.19 3,348,723
SBUX Starbucks Corporation 57.21 -1.30 -2.22 16,869,957
DRI Darden Restaurants Inc. 75.04 -0.75 -0.99 1,667,086
JCP J.C. Penney Company Inc. Holding Company 9.81 0.28 2.94 20,255,533

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