Managing Corporate Legitimacy and the UN Global Compact

In this article, we explain why managing legitimacy is vital for corporations and how business firms can employ strategies to maintain their legitimacy. We then discuss the organizational capacities that each legitimacy strategy implies and point out their inherent tensions. Based on the results of an empirical study, we show how two large corporations have handled these tensions and successfully introduced organizational prerequisites for managing legitimacy. In the final part of this article we elaborate on how participants of the UN Global Compact can use the initiative to strengthen their legitimacy.

Corporations can no longer easily control their public image by means of public relations and marketing. Clearly defined corporate reporting requirements, rigorous third-party monitoring processes, and multiple media resources of watchdog organizations help to shed light on actual business practices. The increased transparency with regard to corporate conduct has also enabled a larger and more diverse group of corporate stakeholders to voice opinions and formulate demands. In particular, large brand name companies in sensitive consumer goods industries (like food or textiles) are now constantly under public scrutiny. For corporations, this situation creates new management challenges. To ensure the social acceptance of their business (corporate legitimacy), heterogeneous and often contradictory stakeholder demands need to be managed.

Discussing “legitimacy” with corporate practitioners is tricky because the term itself is not widely used by business people and typically provokes a spontaneous defensive reaction. However, in the business context, legitimacy refers to the corporate “license to operate” – this license is potentially threatened by many critical topics (i.e., corruption, social issues, environmental depredation) to which practitioners have to respond.

The management literature uses the legitimacy terminology to describe the social acceptance of an organization. Legitimacy is considered an essential resource for the survival of the organization. Thus, the legitimacy of a corporation is challenged when their operations are perceived as inappropriate and undesirable within their respective social context. Our interviews with corporate practitioners showed that today the majority of legitimacy challenges have their roots in the sustainability context. So, while some corporations refer to their “corporate responsibility / sustainability program,” and their “reputation management,” they are in fact more broadly managing corporate legitimacy.

According to Mark Suchman, corporations can respond to legitimacy challenges in three ways: They can (1) provide benefits to their constituencies, or at least give the impression of being beneficial by way of manipulating the perceptions of the audiences with impression management and PR (pragmatic legitimacy); they can (2) adapt to the social context, that is, meet the expectations of their most important stakeholders (cognitive legitimacy); and (3) they can engage in dialogue with the corporate critics and search for a consensus-based solution to the issues that cause the legitimacy challenges (moral legitimacy). All three strategies are employed to maintain corporate legitimacy or to restore it after a crisis. Research suggests that to manage legitimacy successfully, corporations must be able to activate multiple legitimacy strategies simultaneously. Greater flexibility in the application of different legitimacy strategies allows the corporation to develop better responses to the constantly changing, multi-layered, socially complex corporate environments of large multinational corporations that operate in various jurisdictions and cultural settings, as well as helping them to face the demands of a multitude of different stakeholders.

However, each legitimacy strategy is associated with a specific set of organizational capacities (e.g., organizational structures, procedures, and competences), and combining different strategies may require seemingly incompatible organizational capacities. For example, a manipulative PR strategy requires concerted efforts of all corporate functions. Particularly the corporate communications function must be closely aligned with all other activities in order to effectively shape public perceptions. To simultaneously engage in a dialogue with critics (moral legitimacy) or to silently adapt to social demands (cognitive legitimacy) might undermine the effectiveness of manipulation because these activities dilute the strategy’s uncompromising focus. By contrast, companies that highlight their stakeholder dialogue-orientation risk undermining the dialogue’s credibility should their manipulation strategies become public. Media reports have recently exposed the extensive lobbying activities of companies that have built their public image around a dialogue-oriented corporate CSR program. The contradicting objectives of the lobbying strategy called the sincerity of their corporate promises in the context of CSR into question and resulted in a severe (legitimacy) crisis. 

Given the obvious difficulties of creating organizational capacities for different legitimacy strategies simultaneously, we asked how organizations that are highly exposed to public scrutiny design organizational structures and procedures to manage these tensions. We therefore selected two large brands that produce consumer goods in sensitive industries and analyzed how they manage heterogeneous stakeholder demands. Company A (a German sportswear company) and Company B (a Swiss coffee company) operate in highly competitive business environments and they are both in the spotlight of critical watchdog organizations. Interviews were conducted with the department heads of both companies to learn how their functional subunits respond to the specific stakeholder expectations of their department, and how they coordinate their responses with other departments. Furthermore, we were interested to learn how corporate representatives assess the adequacy of their responses (e.g., What kind of organizational platforms exist to monitor and discuss changing social expectations?) and how the assessment results are taken into consideration in internal decision-making (e.g., What kind of inter-departmental platforms exist to coordinate response strategies?).

At both companies under review, we observed a high level of activities that organizational literature has termed “boundary spanning.” Boundary spanning means expanding the corporate perspective by reaching out to organizations or individuals outside of the corporation (“external boundary-spanning”) in order to absorb and process new challenges, solutions, views, or ideas. Boundary spanning can also take place inside the organization by increasing inter-departmental coordination (“internal boundary-spanning”). Both dimensions of boundary spanning (internal and external) are critical for managing legitimacy. External boundary-spanning enables the corporation to monitor shifting societal trends in various regions and audiences. Internal boundary-spanning ensures that societal expectations are discussed with members from other departments, the adequacy of various response options are assessed jointly, and actions are coordinated.

Boundary spanning is a concept that was developed in the context of innovation management and the diffusion of knowledge. This theory suggests that organizations vary in their intensity and direction of boundary-spanning activities. We apply the theory to the study of the influence of boundary-spanning activities on legitimacy strategies and their organizational design requirements. We suggest that the supportive organizational capacities for boundary spanning also help corporations to flexibly respond and adjust to legitimacy challenges in the most appropriate way and to cope with heterogeneous environmental demands.

The literature differentiates between two types of boundary spanning. Some boundary spanning activities serve to “buffer” from the external environment; other activities serve to “bridge.” This means that some corporations monitor societal expectations to better shield the organization from societal expectations (buffering), whereas others do so to truly engage with these stakeholders (bridge). In the context of managing legitimacy, we expect that with respect to both internal and external boundary spanning, bridging is preferred to buffering because it enables the organization to switch legitimacy strategies seamlessly when appropriate, without appearing inconsistent.

The analysis of both empirical cases shows increased boundary-spanning activities, yet major differences exist with regard to the type of boundary spanning on the internal and external dimension. Company A uses boundary spanning to bridge between external organizations and to buffer from internal critique; Company B focuses on external buffering, that is, the company tends to avoid interactions with external stakeholders, while emphasizing internal bridging. We explain these differences with the different leadership styles and different corporate histories. Company A’s leadership continuously pushes the company to adopt a collaborative approach in order to advance the company’s sustainability strategy. This includes regular exchanges with critical external stakeholders. The CEO of Company A argued: “Well, first of all, I think that you need to have dialogue in order to understand what the critical issues are. If you don’t engage with your critics, you will never find out what their point of view is.”

The CEO’s vision also drives the sustainability agenda. Internally, organizational structures and procedures were set up to ensure the proper implementation of the leader’s vision. These implementation structures, however, are centralized and designed to support the top-down strategy. They leave little room for critical reflection or decision making by subordinate organizational members. The leadership’s vision is fully supported, however, because past experiences with legitimacy crises have proven that the engagement with external stakeholders is most effective for repairing and maintaining legitimacy.

Company B, in contrast, only reluctantly opens up their decision-making processes to critical external stakeholders. Their sustainability strategy was defined internally by key managers and presented to a friendly audience of consultants and experts for feedback. The CEO endorses the process but does not publicly appear as a leader on sustainability topics.

When asked why their sustainability strategy does not feature more prominently in corporate communications, corporate representatives refer to their “humble Swiss business culture.” They also point to corporate scandals from the past that still haunt the organization. Internally, however, multiple platforms provide forums for interdepartmental exchange on how best to respond to heterogeneous stakeholder requests.

The table below summarizes the differences between Company A and B. In our academic work, we further discuss the theoretical and practical implications of these research findings.

Companies that are exposed to public scrutiny are typically aware of the risks associated with losing their corporate legitimacy. They develop antennas sensitive to societal expectations and engage in boundary-spanning activities to better assess the adequateness of their actions.

Participating in the Global Compact provides ample opportunities for boundary spanning. However, to avoid a backlash for corporate legitimacy, corporations need to respond to the Global Compact’s critics who argue that the initiative allows for “blue / green washing.” To benefit from participation in the Global Compact, corporations must show full engagement with the initiative’s learning platform, contribute to its further development, and engage with its stakeholders (bridging). 

Public trust in business is at a low point, and engaging in isolated CSR projects or polished PR campaigns as a quick fix to appease stakeholders will not suffice to restore it. Establishing the organizational prerequisites for managing corporate legitimacy, however, provides a basis for juggling conflicting stakeholder demands in highly complex business environments.