LGBTQ-friendly corporate policies enhance firm performance and socially progressive corporate policies and diversity management pay off and create value for businesses, says Jukka Sihvonen
Corporate social advocacy can be a tricky business. While taking a public stand on potentially sensitive social or political issues may lead to positive outcomes and competitive advantages for firms, the repercussions of social advocacy can also be detrimental if the stance taken is not aligned with the preferences and values of the firm’s key stakeholders. One particularly visible and divisive form of corporate social advocacy in the US has been firms’ engagement in the public socio-political debate related to sexual minorities.
Despite the contentious subject and the risk of potentially alienating some of their employees, customers, and other stakeholders who may share different social values, some of America’s most prominent firms have been among the most visible proponents of lesbian, gay, bisexual, transgender, and queer (LGBTQ) rights and anti-discrimination policies over the past few years. Given that LGBTQ advocacy often has no intrinsic relation to firms’ core business operations, why do firms engage in a controversial debate over sexual minorities instead of remaining value-neutral? The natural question to arise then is whether LGBTQ friendliness pays off for the firms. We aimed to answer this question in our research by examining the influence of LGBTQ-friendly corporate policies on firms’ stock market valuation and financial performance.
Corporate social advocacy: The times they are a-changin’
Firms are increasingly expected to take a stance on social and political topics as recently evidenced, for instance, by the Kantar Consulting report on Purposeful Brands (2020) and Edelman’s Trust Barometer (2021). While corporate advocacy could be sought after due to heightened political polarisation, does it achieve more than placating politically active stakeholders?
Anecdotally, big firms and prominent brands can have significant political and economic influence and may even have the power to shape the future cultural and financial landscape of their surroundings. For instance, several firms voiced their concerns over the proposal of Religious Freedom Restoration Acts as countermeasures to LGBTQ equality in Georgia and Alabama in 2016 and 2017. Walt Disney and SalesForce both withdrew project proposals and canceled employee engagement in these states, and similarly, Angie’s List abandoned their large-scale expansion plan following the news. In July 2019, the representatives of 209 major firms such as Amazon, Apple, Coca-Cola, Facebook, General Motors, Goldman Sachs, Google, JPMorgan Chase, Microsoft, and Walt Disneysubmitted an amici curia briefto the U.S. Supreme Court in support of LGBTQ rights. The brief asserted that a law prohibiting discrimination based on sexual orientation in the workplace ‘would strengthen and expand benefits to businesses, such as the ability to recruit and retain top talent.’
Beyond social activism, firms can reflect their views and stance on socio-political issues through the corporate policies they enact in the workplace. While advocacy itself could be fleeting virtue-signaling, stakeholders may differentiate the firms that truly invest in the cause by studying their behavioral history with their employees and customers. And perhaps the firms themselves can expect multitudinous returns on their investment in social capital.
Does LGBTQ friendliness lead to better financial performance?
Research suggests that firms that adopt LGBTQ-friendly policies experience benefits on multiple levels, ranging from greater employee commitment, improved job satisfaction, and increased employee productivity to more altruistic workplace behaviour. Furthermore, LGBTQ friendliness may foster the firm’s ability to attract, recruit, and retain talented employees. LGBTQ-inclusive corporate policies may also advance customer relations and improve the firm’s reputation as a socially responsible corporate citizen. Taken together, the evidence suggests that LGBTQ-friendliness may help firms to accumulate and develop intangibles related to human capital, stakeholder relations, and firm reputation.
There are various reasons why LGBTQ friendliness may influence firm performance. In general, corporate social advocacy such as the adoption of LGBT-supportive policies or taking a stand on same-sex marriage can be broadly considered as an element of corporate social responsibility (CSR). Consequently, the theoretical arguments for a link between CSR and firm performance are largely applicable also in the context of LGBTQ advocacy. In the CSR literature, the stakeholder theory has become the central paradigm for rationalising why social responsibility may pay off by enhancing firm reputation, customer relationships, accumulation of human capital, and access to resources and financing. Thus, if LGBTQ friendliness is not conflicting with stakeholders’ expectations and values, the stakeholder theory predicts a positive relationship between LGBTQ-friendly policies and firm performance.
Loosely parallel with the stakeholder view, the human resource management theories regarding employee satisfaction and diversity management provide an alternative motivation for hypothesising a positive relationship between LGBTQ-friendly policies and firm performance. These theories recognise employees as the firm’s key asset and a focal source of competitive advantage and value creation. An extensive literature has documented that employee-friendly practices and organisational diversity management policies benefit firms, for instance, by advancing employee motivation and productivity and by improving the firm’s competitiveness in the labor market.
Given that LGBTQ friendliness is to a large extent conjoined with inclusive and non-discriminatory employee policies and embracing diversity in the workplace, the concomitant favourable HRM outcomes are a potential mechanism through which LGBTQ-friendly corporate policies can improve firm performance. Nevertheless, analogously to the stakeholder view, a prerequisite for value creation is that LGBTQ friendliness does not alienate the firm’s employees or other stakeholders who may have different social values.
In our study, we examined the influence of LGBTQ-friendly corporate policies on firms’ stock market valuations and financial performance. For this purpose, we utilised the Corporate Equality Index (CEI) constructed by the Human Rights Campaign to measure the LGBTQ friendliness of individual US firms over the period 2003-2016. The CEI provides a comprehensive assessment of a firm’s LGBTQ friendliness in terms of corporate policies and practices that pertain to LGBTQ employees as well as public advocacy related to the rights of sexual minorities. Although both the stakeholder theory and the HRM arguments can be used to predict a positive association between LGBTQ friendliness and firm performance, both mechanisms also suggest that the linkage is likely to depend on stakeholders’ preferences and socio-political values.
The adoption of LGBTQ-friendly policies may lead to stakeholder alienation and backlash if the policies conflict with the social values of the key stakeholders. Therefore, we also investigated how local social norms and attitudes potentially moderate the link between LGBTQ-friendly policies and firm performance by exploiting regional differences in social conservatism across the U.S. states.
The bottom line: LGBTQ friendliness pays off
Our study demonstrates that LGBTQ-friendly corporate policies pay off. Specifically, we found that firms with more LGBTQ-friendly policies are more profitable and have higher stock market valuations. The positive relationship between LGBTQ friendliness and firm performance can be considered economically significant as our findings suggest that a one standard deviation increase in the firm’s CEI is associated with a 7 percent increase in stock market valuation and approximately 0.5 percentage point increase in profitability as measured by the firm’s return on assets.
With respect to the influence of socio-political norms and attitudes towards sexual minorities, our study suggests that regional differences in the religious and political leanings moderate the relationship between LGBTQ-friendly policies and firm performance. In particular, we found that the positive effect of progressive LGBTQ policies on profitability and market valuation is more pronounced for firms located in more liberal states while being weaker or non-existent for firms located in more religious and decisively Republican states. Nevertheless, it is worth emphasising that even for firms located in more socially conservative states, the effect of LGBTQ friendliness on firm performance is positive or at worst neutral, suggesting that the adoption of LGBTQ-friendly policies does not generally have detrimental repercussions.
Taken as a whole, our study provides strong evidence to suggest that LGBTQ-friendly corporate policies enhance firm performance. These findings can be considered to support the view that socially progressive corporate policies and diversity management pay off and create value for the firm.
Jukka Sihvonen is Assistant Professor at Aalto University School of Business
