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Tuesday, June 4, 2013

Starbucks Takes a Hit for Supporting Gay Marriage

In January 2012, Starbucks joined Microsoft and Nike in publicly supporting the same-sex marriage bill in the U.S. state of Washington. Two months later, the National Organization for Marriage began a “Dump Starbucks” boycott as a result of Starbucks' support of gay marriage. David Barton, whose sermon on May 19, 2013 on “pious caffeine consumption” was posted on the internet, said, “The question is, ‘Can a Christian give money to a group he knows will use it to attack what God supports?’ . . . You can’t drink Starbucks and be Biblically correct on this thing. It’s just a real simple principle.”[1] Barton had earlier likened being gay to smoking and gay marriage to dogs marrying horses. In spite of these rather extreme claims, the boycott gained some traction. At the next Starbucks’ stockholder meeting in March 2013, Tom Stauber, a stockholder, suggested that the company’s sales and earnings were a “bit disappointing” in the quarter after the boycott had begun precisely because of the issue. Whereas the stock and dividends had risen 38% from October 2011 to September 2012, the rise was only 7.6% from March 2012 to March 2013.[2]  If indeed the causal attribution is correct, then it can be asked whether the management (and/or board) of a company taking a political stand on a controversial societal issue that is not expected to save the company money and in fact could result in lost revenue breaches the fiduciary duty to the stockholders unless a majority of shares are voted in support of the position.

In general terms, is corporate social responsibility ethical when it can be expected to have, or actually have, a net negative impact on earnings? Should a company, through its management or board, take a stand and even expend resources on a controversial political issue that, even though important to the CEO personally, has little if any positive financial implications for the company and in fact may be so controversial that a significant number of customers go elsewhere? Even if taking the position has no financial downside, should a company’s management even take a stand on an  issue that does not have a close bearing on the bottom line?

At Starbucks' annual stockholder meeting, Tom Sauber complained that the company’s stock price had underperformed the S&P 500 over the preceding twelve months. “Until January a year ago, we existed without making gay marriage a core value of our company,” he said. “Hence we did quite well.” The company’s CEO, Howard Schultz, reminded the stockholders of the 38% return they had received. In effect, he was arguing that any financial hit from the company’s support of gay marriage could be justified by the preceding high rate of return.

I beg to differ with the CEO on this point. Management has a fiduciary duty to get as high a return for the stockholders on an ongoing basis. Saying, in effect, “we took you out on a nice drive last time so we’re going to indulge ourselves at your expense just a bit this time around,” is not the same as reducing the returns today in hopes of even higher returns resulting tomorrow. Without first obtaining the approval of the stockholders, Schultz breached his fiduciary duty in having the company take the stand in spite of the likelihood that sales would suffer.

Moreover, Sauber’s criticism that Schultz had made gay marriage a “core value” of the company implies that the stand is not significant enough in terms of the company’s business to warrant being a core value. Were the company in the business of wedding planning, for example, the CEO would have had a stronger case for adding gay marriage to the company’s core values. Of course, the company could then be perceived by the public as self-serving rather than acting from principle in its social “responsibility.” That is to say, the credibility of the stand would be compromised.

In a memo dated January 24, 2012, to employees in the United States, Kalen Holmes, the executive in charge of Starbucks' human resources department at the time, states that the proposed gay marriage bill before the Washington (where Starbucks is based) legislature “is core to who we are and what we value as a company.”[3] Can a specific bill not bearing directly on a company’s products really be “core to who we are?” Perhaps advocacy of more general principles would be more appropriate. At the stockholder meeting in 2013, for example, Schultz argued that because the company employs 200,000 people, “we want to embrace diversity of all kinds.”[4]  In his reply to Sauber, Schultz explained that the company's endorsement of marriage equality is about the principle of diversity itself, rather than making money.[5]  In her memo, Holmes concludes by stating, “We are deeply dedicated to embracing diversity and treating each other with respect and dignity.”[6]  Perhaps the company should have kept it at that level rather than wading in on a specific piece of controversial legislation. The company would still have been standing on principle—for a specific principle in fact—and without the financial downside from the boycott.

According to Schultz, the company's stand was not about making money.[7] Because Americans were “deeply divided” on gay marriage—a Huffpost/YouGov poll showing 41% in favor (of DOMA) and 45% opposed—Starbucks risked losing customers by taking any stand on gay marriage.[8] It is not just the fact that 45% oppose gay marriage; the intensity with which that position is held is highly significant here.  In fact, it might be wise to consider controversial issues off-limits for corporate social responsibility in general. Even if the polls on a given issue show lop-sided support, even a relatively small opposition could inflict major damage if the controversy itself is very emotional. Where a controversial issue portends to weigh mightily on a company’s finances, hiring a lobbying or issue-advocacy firm to avoid direct publicity on the matter would protect a company from the risks in a CSR-based campaign. Going the indirect way may also be prudent even in cases in which a company stands to profit handsomely from its position on an issue, controversial or not, due to the toll that a self-serving impression can take on the credibility of the stand as well as the company itself.

In terms of human resource management, Starbucks had already been offering domestic partner benefits for twenty years.[9] Even though it could be argued that the proposed law would mean that other coffee companies in Washington would have to cover domestic partners too and thus match Starbucks in its expenditures, Starbucks would lose the extra-coverage advantage that may have played a role in attracting good employees.  Additionally, the higher employee morale from the benefits could translate into better service and thus more revenue. However, the financials here do not seem significant enough to be the driving force behind making gay-marriage legislation a “core value” of the company.  If so, then how can a company’s management justify getting involved at all, particularly given the opportunity costs involved in managing the company. That is, the time and effort spent on making and defending a very public stand on a tangential issue cannot be spent on other projects, “closer to home.” This point is particularly important in terms of the management’s fiduciary duty to act in the stockholders’ financial interest. Stockholder representing a majority of shares may not agree with Schultz’s priority on what is a tangential and controversial issue.

In taking on the CEO at the meeting, Sauber was essentially suggesting that Schultz’s priorities had gone askew. The stockholder could have pointed to the attention needed to get the company to the point at which only 50% of its sales revenue will come from the coffee shops. Another worthy candidate for more managerial attention is the expansion in China. At one point, 400 new coffee shops were being planned. Still another alternative for executive attention is reducing the difficulties within the company in holding store managers and employees accountable.

       Starbucks typically relies on young adults to both work in and manage the stores. Even an excellent vetting process in hiring does not mean that effort is not needed to fortify the mechanism of accountabilitySource: wikimedia.  
From my own experiences at Starbucks, I have noticed a pattern of weak or faulty accountability from the corporate offices directed to the store level. With both regional- and a district-level managers as conduits, the message from the customer to the customer service employee is not likely to survive intact with its nuances, which carry vital information about the attitude found among employees at the store in question. Furthermore, the two intermediate mid-level managers may have their own personal or company agendas that can obstruct accountability. For instance, a district manager may happen to like the particular employee or store manager at issue. Additionally, middle-managers may not have the “best interests of the company” sort of common sense that intuitively knows how important it is to nip an attitude problem in the bud (i.e., to catch it at its first known occurrence).

At one store, I was shocked that the entire shift of employees had absolutely no idea what a pour-over is. An employee sternly ordered me, “You have to take whatever we are brewing.” They had to ask the store manager. As she was doing the pour-over (though not with the correct roast), the employee standing at the cash register in front of me asked the manager, “Can we charge more for that?” I returned a week later to find that the employees, who by the way reflected a particular application of “diversity” that is racially homogenous, still did not believe me when I insisted that there really is such a thing as a pour-over! I called Starbucks’ customer service department once again. The employee on the line was astonished as well. “You’re right,” she whispered, “that is beyond the pale.” The store manager had apparently had not gotten the memo. Perhaps the regional or district manager had dropped the ball. Lest it be thought that common sense dictate that the customer service employee simply pick up the phone and call the store manager right away, bypassing the “proper” channels is not allowed even when they are obstructed with self-serving sludge and muck.

A few months later at another location in another city, a store manager told the cashier to charge me sixty cents more to have a little milk (i.e., less than 4 oz) added to a cup of brewed coffee. “I’ve decided against the milk,” I told the cashier as the manager stood like a hawk behind her. The milk thermoses over at the condiment area were free, so I figured I would use one of those even though the cold milk tended to cool the coffee too soon. It was because I had regularly asked for steamed skim, sometimes on pour-overs, that the manager decided to ignore the company’s policy that milk under 4 ounces is complimentary, whether warm or cold.  I suspect she believed she and her staff had been putting too much effort into my cups of coffee for the regular price to stand, even for a regular. In spite of calling “customer service” twice (one employee got the company’s policy wrong), I could sense from my next visit to that store that the manager was secure in her position, at least from the standpoints of her district and regional managers, as long as she could make the trains run on time and bring in the revenue. Her unapologetic attitude of implicit exclusivism was confirmation enough, and that in itself was enough for her employees’ demeanor to follow suit.

I would wager that Starbucks' management has put so much money, time, and effort into the vetting process in hiring new managers and employees that the assumption has been that not much would be needed in terms of accountability. If you hire good people, they will hold themselves accountable. This fallacy is undermined by human nature itself, both in regard to the humans doing the vetting and the humans who work in the stores. No hiring system is perfect. Even good employees or managers can eventually sour and treat customers rudely or even unfairly. Store employees, including managers, can develop a sense of impunity from not only good technique with the drinks or a long tenure, but also the knowledge that the company's management has been relying so much on its vetting process that they have let the process holding store-level employees and managers accountable slide. Even if Starbucks has an excellent hiring process, both the lopsidedness the its undergirding assumption are problematic, managerially speaking. Having a good hiring process does not justify or excuse the assumption that accountability won't be a problem and thus does not need to be watched like a hawk and acted on in a timely and sufficient manner.

Let’s just say that Schultz could do worse than make both attitude beneath the scripts and following company policy “core values.” Were the executives in Seattle to look inward, within their own company, I reckon they would find plenty to do just in fortifying the procedures to keep store-level employees accountable once a customer complaint has been lodged. In fact, making accountability itself a core value wouldn’t hurt either. The principle could be: Accountability is a core value even when it is not immediately convenient for the company or the particular store manager. 

Given the eminently worthy “core value” candidates I have ventured to propose here, I can understand why Tom Sauber was perplexed at the stockholder meeting as to how something as tangential and specific as gay marriage could viably serve as one of the company’s core values. Even though managing the same company day after day can admittedly become rather banal, drifting away from the core business involves opportunity costs—those things inside the business that need attention but are being overlooked as attention hoists onto societal issues. To be sure, the responsibility of businesses to contribute to society beyond what is in the businesses’ own immediate and intermediate financial interests is justifiable in terms of not only the value of an improved business environment to the businesses themselves in the long term, but also the social contract in which businesses are allowed to exist and operate in societies. Even so, a company’s management can go too far even in good will at the expense of the company and its stockholders.

The virtue is perhaps realized in avoiding both the public positions that are easily grasped as shrill reflections of a company’s own financial interests and thus bound to suffer a want of credibility, and those stands that are too tangential to mount the opportunity costs and so controversial as to be rather risky to the company. Of the latter point, the social contract does not make a company duty-bound to put itself at risk or even compromise its main task in society, which is to effectively produce goods or services of high quality. In terms of advocacy in the public square, neither staying too close to home, as in publicly supporting a bill exempting the company from being regulated, nor wading too far into distant controversial waters at the expense of the company’s own business and reputation is optimal. Corporate Social Responsibility may actually be a balancing act—one to be managed by managers taking into account both the short-term and long-term interests of the stockholders.  Duties to society are likely to dovetail with those long-term interests.  

[1] Meredith Bennett-Smith, “Christians Can’t Drink Starbucks Because Company Supports Gay Marriage, Evangelical Says,” The Huffington Post, June 3, 2013.
[2]Aaron Smith, “Starbucks CEO Holds His Ground on Gay Marriage,” CNN Money, March 28, 2013.
[3] Kalen Holmes, “Starbucks Supports Same Sex Marriage,” Starbucks, January 24, 2012.
[4] Aaron Smith, “Starbucks CEO Holds His Ground on Gay Marriage,” CNN Money, March 28, 2013.
[5] Hunter Stuart, “Starbucks Gay Marriage Stance: CEO Puts Smackdown on Anti-Marriage Equality Shareholder,” The Huffington Post, March 22, 2013.
[6] Kalen Holmes, “Starbucks Supports Same Sex Marriage,” Starbucks, January 24, 2012.
[7] Hunter Stuart, “Starbucks Gay Marriage Stance: CEO Puts Smackdown on Anti-Marriage Equality Shareholder,” The Huffington Post, March 22, 2013.
[8] Emily Swanson, “Marriage Equality Survey Finds Sharp Division Over DOMA Case,” The Huffington Post, June 6, 2013.
[9] Kalen Holmes, “Starbucks Supports Same Sex Marriage,” Starbucks, January 24, 2012.