CHAPTER 1
Table of contents
Introduction
1 From corporate social responsibility to managerial social irresponsibility
1.1 The antecedents of corporate social responsibility
1.1.1 The contextual level antecedents of corporate social responsibility
1.1.2 The organizational level antecedents of corporate social responsibility
1.1.3 The individual level antecedents of corporate social responsibility
1.2 The nexus between corporate social responsibility and firm performance
1.3 Value chain engagement as a driver of sustainable social impact
1.4 From low corporate social responsibility to managerial social irresponsibility
1.5 The scope of managerial social irresponsibility
1.5.1 Managerial social irresponsibility at the corporate level
1.5.2 Managerial social irresponsibility at the business level
1.6 The antecedents of managerial social irresponsibility
1.6.1 The contextual level antecedents of managerial social irresponsibility
1.6.2 The organizational level antecedents of managerial social irresponsibility
1.6.3 The individual level antecedents of managerial social irresponsibility
1.7 The economic consequences of managerial social irresponsibility
2 The perception of socially irresponsible managerial actions
2.1 From social structures to individual perceptions
2.2 The factors underlying individual perceptions of managerial social irresponsibility
2.2.1 Observer rational judgement and inference
2.2.2 Observer biases and cognitive limitations that influence individual perceptions
2.2.3 Information framing by the culpable corporation and third parties
2.3 The conditions limiting individual perceptions of managerial social irresponsibility
2.3.1 Conditions related to the industry context
2.3.2 Conditions related to the socioeconomic context
2.3.3 Conditions related to the geographic context
2.3.4 Conditions related to the cultural context
2.3.5 Conditions related to the regulatory context
2.4 The organizational capabilities and managerial actions that mask socially irresponsible actions
2.4.1 Exploiting and insulating capabilities
2.4.2 Sustaining and shaping capabilities
2.5. Moving from individual perceptions to corporate audiences
3 Restoring legitimacy in the aftermath of managerial social irresponsibility
3.1 The effect of managerial social irresponsibility on corporate legitimacy
3.1.1 The content and role of corporate legitimacy
3.1.2 The microfoundations of legitimacy evaluations
3.1.3 The microfoundations of changes in legitimacy evaluations
3.1.4 The effect of managerial social irresponsibility on corporate legitimacy evaluations
3.2 The loss of legitimacy and the creation of a self fulfilling prophecy: the withdrawal of audience support
3.2.1 The spillover effects and the “rule like” nature of delegitimizing evaluations
3.2.2 The sparking of a downward spiral of organizational crisis
3.3 Restoring damaged legitimacy: a stage model
3.3.1 The discovery and disclosure of managerial social irresponsibility
3.3.2 The explanation of what occurred
3.3.3 The acceptance of equitable punishments
3.3.4 The consistency of internal and external rehabilitative organizational actions
3.3.5 Comparing cases: the loss and restoration of legitimacy at Enron and Parmalat
3.4 The necessary and insufficient role of legitimacy restoration for firm survival
4 The drivers of audience support in the aftermath of managerial social irresponsibility
4.1 Audience judgments of managerial actions
4.1.1 The variety of corporate audiences
4.1.2 The distinction between corporate legitimacy and corporate reputation
4.1.3 The microfoundations of reputation evaluations
4.1.4 The microfoundations of changes in reputation evaluations
4.1.5 The criteria underlying audience judgment form selection
4.1.6 The sequencing of audience judgments following managerial social irresponsibility
4.2 Maintaining the support of resource dependent audiences: a resource dependency view
4.3 Maintaining the support of socially dependent audiences: an institutional fitness view
4.4 Maintaining the support of free audiences: leveraging corporate reputation to pivot firm survival
4.4.1 Leveraging reputation following managerial social irresponsibility scandals at the corporate level: the cases of Enron and Parmalat
4.4.2 Leveraging reputation following managerial social irresponsibility scandals at the business level: the cases of Nestlé and Nike
4.5 The basis of audience support and the sustainability of firm survival: the role of corporate reputation
4.6 Value chain engagement and managerial social behavior: a multiplying effect
Conclusions
References
A Nicolò Ernesto,
mia gioia e speranza
Introduction
This study is focused on the analysis of the factors that underlie managerial social irresponsibility scandals and the dimensions that influence the possibility to pivot the company back to success after a social scandal. Three characteristics distinguish organizational crises due to social scandals: (a) they often have such a significant negative impact on corporate performance to pose the very survival of the firm at risk; (b) social evaluations of the firm determine both the emergence and the possibility to resolve these corporate crises; and (c) time is crucial, as the rapidity of the effective management of the crisis enhances the chance of its successful outcome. Thus, indications regards the relevant dimensions to analyse and the types of actions to take following social scandals may improve the rapidity and effectiveness of the management of these corporate crises, increasing the chances of their success.
The thesis proposed in this study is that the capacity to pivot the company back to sustainable survival in the aftermath of social scandals depends on the interplay between legitimacy loss and restoration, on the one hand, and the reputation of the company, on the other hand. Whilst legitimacy signals the firms’ alignment to cognitive, moral and pragmatic social norms and expectations, reputation signals the firms’ capacity to create value. Though these social evaluations are distinct, the argument made in this volume is that they are interconnected, as social irresponsibility scandals trigger an active process of overall re-evaluation of both aspects by all firm observers. The positive judgment of legitimacy restoration and firm reputation are both necessary to restore or maintain the relationships on the basis of which firms may sustainably draw resources and support from their environment. In this view, therefore, the social and the competitive dimensions of corporate action influence each other mutually and are critically connected to the possibility to pivot culpable firms back to success in the aftermath of a social scandal.
As the capacity to maintain or restore the relationships with its constituent audiences is “coin of the realm” for the firms’ post-scandal survival, the perspective adopted in this study leverages the most recent research regarding the microfoundations of social evaluations. These studies emphasize that rational reasoning is part of a more complex cognitive and social process which is subject to the influence of biases, framing, heuristics, social pressures and path dependencies that influence the outcomes of social evaluations. By understanding the specific role and dynamics of the elements that contribute to social evaluations, managers called to tackle organizational crises caused by social scandals may base their choices and actions on a more precise picture of the critical aspects underlying the success of their endeavor.
The motivations underlying the choice of theme of this research stem from both its empirical and its theoretical relevance. From en empirical perspective, the pervasiveness of managerial social irresponsibility, the economic and social harm that derives from corporate wrongdoing and the availability of many examples of post-scandal management to analyze, contribute to the salience of the theme chosen. In the first place, in fact, the large number of scandals that rocked the corporate world since the end of the twentieth century have fueled a considerable body of research regarding the antecedents that drove company elites to adopt socially irresponsible behaviors and the proposal of institutional remedies which may discourage the repetition of such episodes, whilst analyses focused on the post-scandal challenges to management are not as numerous.
Notwithstanding the efforts that have been made to reform corporate governance models, the design of effective compensations systems, the institutionalization of codes of conduct, the enhancement of the effectiveness of whistle-blowing actors, and the approval of legal norms and sanctions to curb socially irresponsible actions. There is a growing realization that white-collar crime and unethical corporate behaviors are still very diffused and even more widespread than previously believed (Zhara et al., 2005; Ashforth et al., 2008).
Furthermore, corporate socially irresponsible actions are just one manifestation of the widespread adoption of unethical and illegal behaviors that is increasingly present in all organizational forms. Mass media reports are a litany of cases of socially irresponsible behaviors that emerge in organizations such as nonprofit firms, public institutions, government, sport, and even religious organizations (Zuckerman, 2006). Part of the processes that undergird corporate survival of social crises will be applicable, by analogy and with the necessary variations due to their specific role and nature, also to other types of organizations.
The economic and social consequences of corporate social irresponsibility are far reaching. In fact, though the antecedents of single instances of managerial social irresponsibility are usually not systemic, their consequences are. The breach of trust that is entailed by unethical and illegal corporate behaviors spills-over and negatively influences the other companies belonging to the same industry and network of the culpable firm (Barnet & King, 2008; Jonsson et al, 2009; Bitektine, 2011). More crucially, the crisis of confidence that follows repeated social scandals (Gioia, 2002) has a systemic effect that results in the significant reduction of the social capital in the wider economic system. As Fukuyama (1985) shows, social capital is key to the fluidity and competitiveness of economic systems and its destruction has long lasting effects as trust is quickly destroyed, but is reconstructed slowly. Consequently, the analysis regarding the reintegration of the culpable firm after a social scandal illustrates the mechanisms that undergird the intentional reconstruction of the trust relationships between the focal organization and its constituent audiences and, in time, with the wider social system. Successful turnaround processes following social scandals are, therefore, a contribution towards the recreation of the social capital of the firms’ context.
Not all firms survive social scandals, the spectacular liquidation of Enron following its financial meltdown in 2001 is just one example of organizations that have been wiped away as a consequence of social disapproval. A large part of the companies involved in social irresponsibility scandals are prominent economic players and their demise can modify the competitive landscape of the ecosystems in which they operate, and profoundly harm the economic wellbeing of their stakeholders and of entire territories. The comprehension of the factors and mechanisms underlying the possibility to successfully leverage the “healthy” parts of the organizations that have committed socially irresponsible actions is therefore in the interest not only of the company’s stakeholders, but also of the territories and the ecosystems in which the firm operates.
The possibility to conduct rigorous research on the aftermath of social scandals has increased in recent years. In fact, the time lag since the upsurge of social irresponsibility scandals allows to shift attention towards the post-scandal consequences and the factors that influence the capacity of culpable corporations to survive the crises these scandals ignite (Pfaffer et al., 2008; Goodstein & Butterfield, 2010; Hurley et al., 2013; Zavyalova et al., 2013).
Though the many reasons that justify the empirical relevance of theme regarding the management of the culpable firms’ turnaround in the aftermath of a social scandal have stimulated the development of fervent research in this direction, a number of theoretical gaps still remain. A first relevant limit that has characterized many studies is the use of a poorly defined notion of managerial social irresponsibility. In part, this weakness stems from the persistent unbalance between the focus on socially responsible actions, rather than socially irresponsible managerial actions that has continued to characterize management studies. The consequence is that irresponsibility has often been intended as “low social responsibility” or the failure to act responsibly. Yet, socially irresponsible actions entail a degree of managerial intentionality and pro-activity, and a pervasiveness of negative effects that are much more far reaching and influential than this perspective would suggest. Therefore, the analysis of social irresponsibility requires the elaboration of a specific interpretative framework, in order to account for its numerous distinctive traits. This limit has only recently been underscored and begun to be addressed (Lange & Washburn, 2013; Crane, 2013).
The exact consequences of the widespread perception of corporate social irresponsibility are also an open theoretical issue. In particular, extant literature largely takes for granted that the consequences for the corporation of being perceived as socially irresponsible is the loss of its legitimacy and, consequently, of the support of its main audiences (Salancik & Meindl, 1984; Strachan et al., 1983; Davidson et al., 1994; Baucus & Baucus, 1997; Haunschild et al., 2006; Karpoff et al., 2008). Recently, different studies have advanced the idea that legitimacy and audience support may be restored, provided the firm engages in an effective and substantial trust reconstruction process with its constituent audiences (Pfaffer et al., 2008; Goodstein & Butterfield, 2010; Hurley et al., 2013; Zavyalova et al., 2013). According to the latter view, however, the restoration of audience support is an implicit automatic consequence of legitimacy reconstruction. In this view, thus, firm survival after a social scandal depends uniquely on the capacity to engage in an effective legitimacy restoration process. This position, however, leaves unexplained how come there are similar firms, that have conducted similar irresponsible behaviors, caused similar harm, and have engaged in parallel legitimacy reconstruction processes, that have had very different audience reactions.
The key question, therefore, becomes whether the loss and reconstruction of legitimacy is the only social evaluation that guides audience decisions following corporate wrongdoings, or existing theoretical frameworks are missing part of the picture. By focusing on the diverse aspects that undergird audience post-scandal decision processes, this study responds to the repeated calls in management studies for the necessity to shed light on the under-researched theme of the main dimensions underlying the processes of the loss and recovery of social approval (Jonsson et al., 2009; Pollock et al., 2008; Westphal & Deephouse, 2011).
Though social irresponsibility attributions emerge as a consequence of illegal or unethical behaviors that create a dissonance between expected social behavior and perceived corporate actions, triggering cognitive, moral and pragmatic legitimacy reassessments, there are different forms of social evaluation observers may express regarding organizations. Each form of social evaluation has cognitive and social specificities that imply a different strategy underlying its increase, maintenance, loss and restoration. This implies the possibility that firms maintain and manage diverse social evaluations contemporarily. Though the relevance and complexity of managing different forms of social evaluation has recently been underscored (Bitektine, 2011; Deephouse & Carter, 2005; Mishina et al., 2012), it has not constituted the focus of specific research and remains to be further clarified. The scrutiny of the aftermath of managerial social irresponsibility scandals highlights the effects of one social judgment on the other, and the combined influence they may exert on the sustainability of firm survival.
The continuation of this study is structured as follows: in the first chapter, extant literature regarding the antecedents and consequences of the firm’s social behaviour is systematically reviewed. The findings of years of corporate social responsibility studies are synthesised and particular emphasis is given to the idea that social engagement connected to the company’s value chain has a more pervasive and sustainable positive effect for both the society and the focal firm. The shift from the idea of social irresponsibility as “low” responsibility to the identification of its distinctive traits is underscored, and the content and scope of the notion referred to in the present study is clearly defined. Extant literature regarding the antecedents and consequences of managerial social irresponsibility is reviewed in order to clarify the state of current knowledge on the theme.
On the basis of the general idea that firms are considered socially irresponsible only to the extent that individuals perceive them as such, the second chapter shifts attention from broad structure reasoning to the scrutiny of the cognitive and social processes that undergird the perception of managerial wrongdoing. The chapter leverages and integrates two recent studies that regard the factors that enhance the perception of managerial social irresponsibility (Lange & Washburn, 2012), on the one hand, and the factors and managerial capabilities that may render the latter more arduous (Crane, 2013), on the other. It is argued that understanding the dimensions underlying individual perception allows to distinguish instances of managerial social irresponsibility that at a first glance seem similar. The importance of being able to single out the nuances underlying different cases of corporate wrongdoing is underscored and, in parallel, so is the importance of being able to aggregate individual perceptions of firm attributes into shared organization images. The criteria for moving from individuals to audiences is sketched, and the distinction between company audiences and stakeholders is made.
In the third chapter, the focus is shifted to audience evaluations of the firms’ social behaviour. Central to the chapter is the notion of legitimacy. The latter indicates the conformity of entities to formal and informal social norms and expectations and, as such, is considered the driver of social reactions to corporate wrongdoing. In order to comprehend the processes underlying legitimization and de-legitimization on which company crises and survival rest, the research leverages recent studies that integrate institutional legitimacy studies (Suchman, 1995) with the teachings of socio-cognitive studies that shed light on: (i) the evaluator’s perspective (Bitektine, 2011); and (ii) on the intra-individual dynamics underlying the aggregation of individual evaluations (Tost, 2011). The effects connected to the loss of legitimacy and the way it often sparks a downward spiral of organizational crisis is illustrated. Studies regarding the restoration of corporate legitimacy are integrated within a coherent framework based on Pfarrer, DeCelles, Smith and Taylor’s (2008) stage model. The dimensions underlying legitimacy loss and restoration are confronted with two widely documented cases of managerial social responsibility: the Enron and Parmalat cases. This comparison is particularly telling due to the stark similarities that characterize the cases along all the dimensions identified as relevant for the loss and restoration of legitimacy, nonetheless their post-scandal management have had opposite results. Enron was wiped away, whilst Parmalat constitutes one of the most successful cases of company turnaround after a severe social scandal. This comparison suggests that audiences decisions whether to maintain or withdraw their support for the culpable firm are not limited to an assessment of the firms’ ability to restore its legitimacy, rather it seems based on a more complex set of evaluations.
The puzzling outcome of the comparison between the cases of Enron and Parmalat spark the research conducted in the last chapter of this volume. Its contents regard the different forms of social evaluation of the firm. In particular, the notion of firm reputation is introduced and its distinctive traits are defined. Whilst legitimacy signals the firms’ conformity to social expectations, reputation signals’ the firms ability to create value. The socio-cognitive dynamics underlying all social evaluations are depicted, and then the specificities that distinguish the creation, maintenance, loss and restoration of firm legitimacy and reputation are scrutinized. The form of evaluation on which audiences base their decisions is significant because the two criteria may lead to different evaluations. On the basis of Bitektine’s (2011) and Mishina, Block and Mannor’s (2012) contributions, the mechanisms underlying evaluation form selection are reconstructed. On the basis of the mechanisms identified, initial suggestions regards the effects of managerial social irresponsibility on the sequence and interaction between the different forms of social evaluation are made. These intuitions foster the idea that the perception of corporate wrongdoing triggers an active process of re-evaluation of all the aspects underlying audience support (not just the legitimacy of the firm), and spreads form the victims of the firms’ actions and the ethically sensitive observers to all the audiences of the firm. The deductions made from theoretical research are confronted with the description of two cases of corporate level (Enron and Parmalat) and two cases of business level (Nestlé and Nike) managerial social irresponsibility. These “vignettes” vividly illustrate how legitimacy and reputation assessments are sequenced and interconnected. Furthermore, the cases inductively suggest an intriguing connection between social and competitive behaviour that lies at the basis of the capacity of the firm to sustainability survive corporate social irresponsibility scandals.
1 The path from corporate social responsibility to managerial social irresponsibility
Though the number and relevance of scandals due to corporate social irresponsibility have been consistent and growing worldwide over the last decades, there is still an imbalance in prevalent literature in favor of the issue of corporate social responsibility and the benefits that accrue to the organization and the society as a result. In this perspective, social irresponsibility is considered as a “low level so social responsibility”. In fact, however, corporate social irresponsibility implies a degree of managerial pro-activity and a process of trust and legitimacy destruction that may not be appreciated fully if scrutinized through the lenses traditionally deployed to interpret phenomena of corporate social responsibility. In the pages that follow, the extant literature regarding the social behavior of the firm is recalled and re-conducted within a systematic review. In particular, the antecedents of corporate social responsibility are illustrated according to their level of analysis (contextual, organizational and individual) and the influence of such social behaviors on firm performance are identified. Particular emphasis is accorded to the issue of the link between corporate social behavior and its sustainability and effectiveness when it is connected to the company’s value chain. Thus, not all corporate socially responsible actions are equally as incisive. This perspective recalls Porter and Kramer’s (2006, 2011) idea of shared value, and underscores how social engagement connected to the company’s value chain not only puts the firm in a position to contribute more effectively to widespread social and economic wellbeing, but may also be the source of new competitive advantages.
The final sections are dedicated to social irresponsibility as a distinctive phenomenon that needs to be analyzed through specific interpretative lenses. The boundaries of the socially irresponsible actions that are the object of the present study are defined and the focus on managerial social irresponsibility is justified. Furthermore, the importance of nuances in the scope of corporate social irresponsibility is underscored, and the criteria followed in the continuation of the study to distinguish cases and search for common and distinctive traits is clarified. In particular, the criteria followed in this study is the distinction between corporate and business level managerial social irresponsibility. The existing literature on corporate and managerial social irresponsibility is recalled in a parallel fashion to that of corporate social responsibility. Therefore, the antecedents of social irresponsibility are reported according to their level of analysis (contextual, organizational and individual) and the economic consequences of such social behaviors are pin pointed.
1.1 The antecedents of corporate social responsibility
In his foundational contribution, Kenneth Andrews (1971) underscored that one of the three pillars of corporate strategy is the firms’ contribution towards the wider society. In Andrews’ view, firms have the responsibility to take on a social role in the contexts in which they operate as they have capabilities and a pervasiveness that are unique and complementary to those of non-profit organizations and public institutions in sustaining societal wellbeing. Andrew’s view, that implies the private provision of public goods, was contrasted intellectually by positions such as that of Friedman (1962; 1970, p. 122) who affirmed that “the social responsibility of business is to increase its profits”. According to this second perspective, engaging in corporate social responsibility (CSR) entails sustaining costs that decrease the firms’ profit rate and, therefore, violates the contractual relationship with shareholders. The academic interest for CSR was further hampered by the prevalence of quantitative research in major management journals and the difficulty to measure social performances of the firm, given their qualitative and multifaceted nature.
During the 1980s there was, however, a return to social issues in the filed of strategy. In particular, Freeman (1984) introduced the stakeholder theory according to which, in defining strategic choices and actions, companies should take into specific account not only the issues of the shareholders, but also those of a wider set of stakeholders – i.e., of all those agents who are tied to the firm by an interdependent relationship and that, therefore, have the interest and the power to influence the firms’ actions. Several extensions of stakeholder theory have enriched the interpretation of the relationship between CSR and the firms’ strategy. Jones (1995), in particular, introduced the “instrumental stakeholder theory”, according to which CSR efforts are a vehicle through which it is possible to obtain resources and support from stakeholders that are necessary for the firms’ survival and performance. In this view, CSR is primarily a way to gain positive brand image, to create trust in the firm and a positive reputation that may be leveraged in transactional relationships in order to sustain positive financial performances (for a review see Orlitzky et al., 2003).
In the more recent years, there has been a substantial upsurge of interest in CSR (Caselli, 1995; Serenko & Bontis, 2009; Sciarelli, 1998, 1999, 2002, 2007; Perrini & Tencati, 2006, 2008; Pivato et al., 2008; Velo, 2003). Social engagements of corporations and their effects on performance have been studied through different conceptual lenses, producing a rich but fragmented body of research, both relative to the levels of analysis considered and the specific aspects focused on (Aguinis & Glavas, 2012; Peloza & Shang, 2011; Wood, 2010). In order to comprehend the role of social engagement for the firm, it is therefore of interest to systematically scrutinize prior research in order to identify both the multilevel factors and mechanisms leading to CSR, on the one hand, and the outcomes of CSR, on the other. The rest of this section is focused on the antecedents and mechanisms that undergird CSR, whilst the outcomes of CSR will be treated in the following section. In conducting this analysis, the concept of CSR is defined as «context-specific organizational actions and policies that take into account stakeholders’ expectations and the triple bottom line of economic, social and environmental performance” (Aguinis & Glavas, 2012, p. 2). This definition is wide enough to encompass contributions from varied perspectives, such as the different nuances of the stakeholder view (Freeman, 1984; Jones, 1995), the competitive strategy view (Porter, 1991), the natural resource-based view of the firm (Hart, 1995), the literature of sustainability in business (Berchicci & King, 2007; Flammer, 2013). Furthermore, though the definition focuses on organizational actions and policies, the later are influenced and implemented by actors at different levels of analysis (i.e., institutional or contextual, organizational and individual).
The antecedents of CSR identify factors or mechanisms that act as catalysts for the social engagement of the firm. These factors may be distinguished into types by combining two criteria: (a) whether they spur a reactive or a proactive social engagement on behalf of the firm. In the first case, they identify reasons why firms feel they must engage in CSR (mostly involuntarily), whilst in the second case they pin point reasons why firms voluntary chose to engage in CSR; and (b) whether the element considered refers to the contextual, the organizational or the individual level of analysis. In the first case, they include elements that belong to the firms’ external context and that often address at least one of Scott’s (1995) three aspects of institutions: normative, cognitive and cultural. In essence they embrace aspects like norms, laws and regulations, as well as constructs that are shaped by society, consumers and stakeholders of the firm. In the second case, they include both elements that regard the organization as a whole and individuals when they are conceptually treated as the drivers of the entire organizations’ actions: such as the studies of the strategic role of boards and top management teams. In the third case, we refer to studies conducted in the micro-organizational behavior, micro-human resource management and industrial organizational psychology studies.
1.1.1 The contextual level antecedents of corporate social responsibility
Contextual antecedents tend to spur reactive CSR actions and policies. In essence they may be distinguished between stakeholder pressures and normative institutional pressures. Following the stakeholder perspective, it has been shown that different stakeholders have different expectations, take on different roles and engage in different activities in the attempt to push firms to engage in CSR. The main reasons that undergird stakeholder pressures towards CSR are: (i) self-interest – when the stakeholders connect their own utility functions to the social engagement of the company; (ii) relational – when stakeholders are concerned with the relationships among group members; (iii) moral – when stakeholders are motivated by ethical and moral values. The more salient stakeholder groups in this respect can be shareholders (David et al., 2007), consumers (Christmann & Taylor, 2006; Sen & Bhattacharya, 2001), the info-mediaries (Weaver et al., 1999a, 1999b), local communities (Marquis et al., 2007), and interest groups (Greening & Gray, 1994). In general, stakeholders exert pressure by impacting potential revenues and resources of the firm or by influencing the latter's reputation. For example, stockholder pressures are seen mainly as a negative antecedent to social engagement of the company, whilst customers may pressure the firm towards the adoption of CSR policies and actions through purchasing choices (Sen & Bhattacharya, 2001) or simply through monitoring and threatening purchasing sanctions (Christmann & Taylor, 2006). Interest groups act through public statements (Greening & Gray, 1994) and, in a similar vein, infomediaries frame information and influence public opinion regarding a company.
Further contextual pressures include institutional aspects such as regulations (Buehler & Shetty, 1974; Fineman & Clarke, 1996), standards and certifications (Christmann & Taylor, 2006). Though these institutional aspects often impose the adoption of certain types and extents of CSR policies and actions, it has been argued that these antecedents often lead to symbolic actions in order to comply to the formal requirements of the norms, rather than substantive social engagement on behalf of the firm (Tenbrunsel et al., 2000).
1.1.2 The organizational level antecedents of corporate social responsibility
The organizational level antecedents of CSR tend to highlight factors underlying a more proactive stance of the firm to social engagement. In part, these factors include instrumental motivations based on the idea that CSR increases the firms’ legitimacy that may, in turn, be leveraged to sustain firm competitiveness (Bansal & Roth, 2000). Other factors are connected to the moral values of the organization and its leaders, and are entrenched in the sense of social duty and responsibility (Bansal & Roth, 2000) and in the idea of stewardship (Davis, Schoorman & Donaldson, 1997). Firm missions and values and their alignment to CSR principles have also proved to be reliable antecedents of the social engagement of the organization (Bansal, 2003). Also characteristics of corporate governance structures have been cited as antecedents of CSR. In particular, aspects such as the role of institutional investors, their activism and the medium/long-term horizon over which they evaluate performance (Neubaum & Zhara, 2006) have been cited as positive antecedents of the social performance of companies. Johnson & Greening (1999), for example, identified management ownership of equity and the inclusion of outside directors as indicators of the degree of openness of a firm, and found that the more open firms are to the society, the more they tend to adopt CSR policies and actions.
1.1.3 The individual level antecedents of corporate social responsibility
The individual level of analysis drives the antecedents of CSR down to individual decision-making processes and team interactions. The factors identified at this level mainly catalyze a proactive social involvement of firms. A first relevant antecedent at this level of analysis is the commitment of supervisors to CSR (Greening & Gray, 1994). For example, it has been showed that strong signals of commitment to social issues by firm leaders foster employee development and implementation of creative ideas of CSR. On the other hand, Weaver, Treviño and Cochran (1999a, 1999b) illustrate how formal CSR implementation by firms, as a consequence of institutional pressures, that are not backed up by substantial managerial commitment often lead to “decoupling” – i.e., to a disconnect between social engagement and core activities of the firm, which reduces the impact of these social policies. A second stream of research, concerns the role of individual values. The basic idea guiding these pieces of research is that individual values (consciously or unconsciously) orient agent decision-making processes and, therefore, it becomes important to realize how they influence firm engagement in CSR. Bansal (2003), for example, underscores the role of the congruence between individual and organizational values, and Bansal and Roth (2000) focus on the issue of individual concern for social issues. Others have focused on more pragmatic aspects underlying individual commitment to CSR, such as the awareness of CSR guidelines and the attendance of CSR conferences (Weaver et al., 1999b), and CSR training (Stevens et al., 2005). Finally, following a more psychological perspective, Rupp (2011) illustrates why employee decisions are driven by motives other than self-interest such as relational and moral motives. Also, Rupp uses self-determination theory to illustrate how decisional contexts that foster employee competence, relatedness, and autonomy may also drive CSR engagement.
1.2 The nexus between corporate social responsibility and firm performance
An overview of research in the management field regarding the nexus between the adoption of CSR initiatives and the firms’ performance allows to uncover three main theoretical issues: (a) the outcomes obtained by the firm thanks to the engagement in CSR; (b) the mediators of the nexus CSR-performance outcomes (i.e., the identification of those variables that explain the underlying processes and mechanisms of why CSR initiatives lead to the outcomes observed); and (c) the moderators of the CSR-performance relationship (i.e., the variables that influence the intensity of the relationship between CSR and performance outcomes).
A large part of research regarding the performance of CSR initiatives has regarded their impact on financial outcomes. In his review of 128 studies regarding the aforementioned relationship, Peloza (2009) found that 59% of the studies found a positive relationship, 27% found mixed or neutral correlations and 19% found a negative relationship. However, the author underscores that much of the variance in results may be ascribed to the variety of sampling techniques applied and to the use of different methodological and statistical artifacts in the conduction of empirical research. A second meta-analysis of the research on the nexus between CSR and financial performance conducted by Orlitzky, Schmidt and Rynes (2003) showed a positive influence of the former on the latter, especially when reputation of the company was used as a proxy for the intensity of its CSR engagement. A second part of CSR performance research focuses on non-financial outcomes. In this vein, various positive outcomes connected to CSR initiatives have been identified, such as improved competitive advantage (Greening & Turban, 2000) and the attractiveness to institutional investors (Graves & Waddock, 1994). Furthermore, the enhancement of a number of firm capabilities have been connected to the social engagement of the firm, such as management practices and perceived quality of management (Waddock & Graves, 1997a, 1997b), product quality (Agle et al., 1999; Johnson & Greening, 1999), operational efficiencies (Sharma & Vredenburg, 1998). Finally, Johnson & Greening (1999) also demonstrated that CSR engagement resulted in improved demographic diversity.
The mediators of this relationship may be found mainly in the other two levels of analysis considered. In particular, Surroca, Tribo & Waddock (2010) found that the CSR-financial outcome relationship was fully mediated by the creation (or enhancement) of intangible resources, in the first place firm reputation and goodwill with external stakeholders. This result is fully coherent with the results obtained by Orlitzky, Schmidt and Rynes (2003). In this perspective, a large role has been given to the effects of positive reputation and brand image with consumers following CSR (Arora & Henderson, 2007). In particular, it has been shown how the financial effects of CSR are mediated by positive customer satisfaction (Lev et al., 2010; Luo & Batthacharya, 2006), customer-organization fit (Sen & Batthacharya, 2001) and customer trust (Vlachos et al., 2009). These intangible resources imply that consumers respond through favorable evaluations of the company and its products (Brown & Dacin, 1997) as well as through increased loyalty (Maignan et al., 1999).
The positive outcomes connected to CSR initiatives may also be mediated through their effect on internal stakeholders. In fact, micro-level outcomes of CSR engagement highlight that working for socially responsible companies leads to increased organizational identification (Carmeli et al., 2007), organizational pride (Jones, 2010) and the perception of company managers as visionary (Sully de Luque et al., 2008). The generation of these perceptions and sentiments on behalf of the employees influneces their extra-effort and leads to results such as employee engagement (Glavas & Piderit, 2009), employee retention (Jones, 2010), organizational citizenship behavior (Jones, 2010) employee commitment (Maignan et al., 1999), in-role performance (Jones, 2010), employee creative envolvement (Glavas & Piderit, 2009) and improved employee relations (Agle et al., 1999; Glavas & Piderit, 2009). Furthermore, it has also been shown that CSR engagement increases the firms’ attractiveness to prospective employees (Turban & Greening, 1997). The influence of CSR initiatives on internal stakeholders’ motivation, effort and relational interactions may, therefore, be considered an important mediator between the social involvement of the firm and the enhancement of its operational capabilities. In sum, therefore, the nexus between CSR and financial performance may be connected to both increases of the firms’ capabilities and of its intangible reputational resources (such as brand image, trustworthiness and reputation) by intersecting the values of internal and external stakeholders respectively.
A number of moderator variables have been found in the relationship between CSR and financial performance. In the first place, David, Bloom and Hillman (2007) found that the more the stakeholders interested in the CSR initiatives of the firm were salient (i.e., powerful and legitimate), the higher the positive effects of social involvement for the firm. At the industry level, CSR tends to have greater performance effects when industries are highly visible to stakeholders (Chiu & Sharfman, 2011). At the organizational level, research suggests that when firms have redundant or available resources the effects of CSR on their performance tends to be higher. In fact, authors have found mediators such as slack resources (Bansal, 2003; Graves & Waddock, 1994; Waddock & Graves, 1997a) and lower debt levels (Waddock & Graves, 1997 a, 1997b). Other firm level moderators investigated include the positive effect of firm exposure and visibility (Fry et al., 1982) and of firm size (Graves & Waddock, 1994; Greening & Gray, 1994; Waddock & Graves, 1997a, 1997b).
1.3 Value chain engagement as a driver of sustainable social impact
In the strategy field, Michael Porter proposed a different view to the connection between social issues and the performance of the firm. In his writings, he has progressively stressed the possibility for firms to place social issues at the core of their activity, rather than at the margin, and has argued that this change in perspective is capable of unleashing a new wave of value creation and growth, able to push economic systems towards a “higher order capitalism” (Porter & Kramer, 2011, p. 15). In particular, in the 1990s, Porter argued that profitability and pollution production may not be mutually exclusive goals, and the firms’ efforts to reduce its environmental footprints (through improved products or processes) might be a way not only to reduce the negative externalities it produced, but also strengthen its competitiveness (Porter, 1991; Porter & van der Linde, 1995). A growing literature on sustainability in business has extended Porter’s initial intuitions and further analyzed the ways through which firms reaching to become “green” can also improve their balance sheets (Russo & Fouts, 1997; Berchicci & King, 2007).
More recently, Porter and Kramer (2006; 2011) have extended the initial intuition on the role of the intersection between society and corporate performance and they have introduced the notion of shared value. Shared value «involves creating economic value in a way the also creates value for the society by addressing its needs and challenges” (Porter & Kramer, 2011, p. 4). By posing social issues at the core of corporate operational activities, the shared value perspective is distinct from corporate social responsibility, philanthropy and, even, sustainability. The corporations’ contribution to societal wellbeing is no longer seen as the internalization of a social cost or as the re-distribution of the value it has created through its operational activities – that may be motivated by moral, normative or instrumental motivations –, rather the focus on social issues is considered as an essential part of the value creating process, an avenue able to open up the perception of new potential markets to serve, new products to offer, new production processes and new ways of connecting to the surrounding communities. The focus on social harms and constraints is seen, therefore, as a way to foster virtuous firm innovations in technology, operational methods and management approaches.
Operationally, creating shared value implies focusing on the social instances that are connected to the company’s value chain. In particular, there are three distinct ways to create shared value: (a) reconceiving the firms’ products and markets; (b) redefining the productivity in the value chain; and (c) building a supportive industry cluster connected to the company (Porter & Kramer, 2011, pp. 7-15). An initial point in the adoption of this perspective is the focus on basic unmet societal needs, both in advanced economies and in developing countries. In the former, many societal needs arise from issues connected to healthy foods and products, to a more rational use of energy and natural resources, as well as to a more cautious use of financial resources (such as the access and management of credit and debt). As for the latter contexts, C. K. Prahalad (2009) was the first to underscore the enormous potential profits that companies could gain by serving developing Nations and the disadvantaged communities in advanced economies, such as those in the poor urban areas in the United States of America. Until the provoking concept of the potential of the “bottom of the pyramid” had been effectively articulated by Prahalad, and further developed by the works of authors like the cumulative purchasing power of these communities had been underestimated and they had not been considered viable markets. Today, examples like Microfinance show that focusing on the poorer segments opens up huge possibilities for firm development and financial performance not only in the initial poorer contexts, but that the products and services elaborated may address unrecognized desires also in more advanced settings.
Creating shared value may also imply re-conceptualizing and re-designing the company’s value chain. In fact, company value chains touch many fundamental societal issues, such as the use of natural resources, working conditions, health and safety, equal treatment in the workplace and so on. By addressing social weaknesses along the value chain firms may not only reduce long term costs, but also increase the productivity of the various phases of the value chain. The investments sustained to reduce the environmental footprint of firms, for example, imply innovations in firms' processes that often yield net costs savings (often over the medium-long term) through increases in the efficiency of resource deployments, process efficiency and product/service quality. The main dimensions along which firms are focusing on social engagement connected to the value chain are: (a) the reexamination of the use of energy throughout the value chain in the production process, logistics, the company buildings, throughout the supply chain, distribution systems and support services. Marks & Spencer, for example, improved its vehicle routing to reduce energy consumption and carbon emissions and gain impressive cost reductions as a consequence; (b) better resource utilization, as a consequence of both environmental concerns and improving technology, will increase efficiency and reduce costs. Wal-mart, for example, rerouted its trucks and changed its plastic packaging to reduce its environmental impact and, as a result, also substantially reduced its costs; (c) investing in the evolution of quality procurement: providing access to inputs, sharing technology and providing financing, companies are fostering increases in the quality and efficiency of their suppliers, while ensuring themselves increases in quantity and quality of inputs, trumping the low short-term costs of less efficient suppliers; (d) reexamining distribution practices that may penetrate rural areas or reducing the use of natural resources. Hindustan Unilever’s Shatki project, regarding direct home-distribution networks based on female entrepreneurs is an example of ways in which it is possible not only to increase the income of poor households, but also to consent the access to life-altering products to people living in distant non-urban areas; (e) employee productivity, investing in a living wage, safety, wellness and health care coverage, and opportunities for advancement. Leading companies have learned that the productivity increases connected to employee wellbeing off-set the cost reductions of off-shoring and reducing wages and benefits; and (f) location of production activities. Partly as a result of energy costs and partly as a consequence of the complexity and costs connected to highly dispersed value chains, companies are beginning to move many activities closer to home and have a smaller number of major production locations.
Also connected to the value chain of the company, is the third way of creating shared value: enabling cluster development. There is wide consensus on the supportive role the context may play for the firms’ performance. There is a large literature regarding the fundamental role played by the geographic concentration of supportive industries, infrastructures and institutions for firm effectiveness (D’Allura et al., 2012). Deficiencies in the framework conditions surrounding company activities create internal costs for firms. By addressing external environment and framework conditions, companies can therefore also enhance their own productivity. Efforts to develop or attract capable suppliers, and enable the development of fair and transparent markets, not only increases procurement quality and efficiency, but also substantially improves the income and the purchasing power of the local community, feeding into the sustainability of the company’s performances in the long-run. In this way, companies tie their success to the communities’ success. Their growth spills over to the surrounding firms and communities and has a multiplying effect for the system overall. Often the development of framework conditions goes beyond activities that single firms are equipped to influence directly and, therefore, it is more effective to try to enlist partners to share the costs, win support and leverage complementary capabilities. Often, effective cluster development programs involve the collaboration between private sector firms, public institutions and NGOs.
The social impact and sustainability of company efforts tied to their value chains is much more consistent than CSR or philanthropic projects disconnected from company operational activities. Often the latter projects take on too many areas of intervention without focusing on value. Furthermore, the social activities invested in are frequently chosen on the basis of the predicted impact of external reporting to salient stakeholders and the personal preference or moral concerns of company leaders. Social agendas of companies are, therefore, often not connected to the distinctive capabilities of the company and, as a consequence, tend to be less pervasively and effectively attended to by companies than they would have been if they’d been activities connected to their own value chains. It is in connection with the firm’s value chain that the firm may deploy significant resources and where its scale and market presence equip it to have a meaningful impact on the social system. Not only will value chain engagement result in more effective company contributions to the social wellbeing, but it will also be more sustainable. Firms will make effective contributions and tackle social issues with significant force when they treat social issues as a productivity and performance driver, rather than a “fell-good” response to external instrumental pressures (or to the leaders’ personal values). The social harms or weaknesses which represent the most fertile opportunities for the company to contribute to will be those closely related to the company’s core business and to the phases of the value chain that are most crucial for those businesses. In fact, it is in these areas that the company can gain most economic benefit from investing in social purpose and, therefore, in which it can sustain its commitment over time.
1.4 From low corporate social responsibility to managerial social irresponsibility
In spite of the demonstrated significance of the performance rewards consequent to CSR, there is a growing realization that the number and relevance of scandals due to corporate social irresponsibility is more widespread than previously believed (Daboub et al., 1995). Ever since Enron collapsed because of a series of fraudulent activities, headlines have continued to report a litany of accounts regarding corrupt or unethical organizational practices. More generally, socially irresponsible behaviors seem to be emerging in all types of organizations, afflicting for-profit, not-for-profit, political, governmental and even religious organizations. Furthermore, corporate social irresponsibility is very diffused also geographically. In recent years, corporate scandals have rocked the U.S.A. (starting from the cases of Enron, Tyco, Global Crossing, World Com etc.), Asia (Ferguson & Majid, 2003), Europe (with cases like Parmalat, Cirio, Monte dei Paschi di Siena, IOR etc.) (Jayne, 2003), Latin America (Organization for Economic Cooperation and Development, 2005), Africa and Australia (KPMG Fraud Survey, 1999).
Not withstanding the relevance of the phenomenon, «corporate social responsibility literature has continued to focus on the meaning of and expectations for responsible behavior, rather than on the meaning of irresponsible behavior. Irresponsibility, distinct from responsibility, is often not discussed explicitly (…), but the implication is that irresponsibility is the opposite of responsibility – that is, the failure to act responsibly» (Lange & Washburn, 2012, p. 300). In other terms, CSR literature has in large part treated corporate social irresponsibility as “low” CSR. The analysis of corporate social irresponsibility cases and the specific literature on issues such as corporate corruption, corporate illegalities, corporate wrongdoing, unethical behavior, top management fraud, white-collar crime and modern slavery in disciplines such as economics, political science, criminology, sociology and management, reveal a rich array of elements and dimensions underlying the definition of such phenomena. The scrutiny of such elements and dimensions therefore constitutes a necessary starting point for the continuation of the present study.
A first distinction that is useful in order to draw the boundary around the phenomena on which the present study focuses is made by Pinto, Leana and Pil (2008). In their study on organizational corruption, these authors distinguish between two different manifestations of corruption at the organizational level: an organization of corrupt individuals and a corrupt organization. In the former, a significant portion of an organizations’ members act in a corrupt manner primarily for their personal benefit (typically at the cost of the organization). Corruption, in this case, ceases to be a personal issue and becomes an organizational phenomenon when a “corruption threshold” is reached – i.e., «a point at which corruption has become so widespread that it characterizes the organization as a whole» (Pinto et al., 2008, p. 688). The latter case, instead, is enacted by groups (often belonging to the top management of the company) and has been defined as «a type of white-collar crime, that is enacted by collectivities or aggregates of discrete individuals in the context of complex relationships and expectations among boards of directors, executives, and managers, and among parent corporations, corporate divisions, and subsidiaries» (Baker & Faulkner, 1993, p. 842). Therefore, in the second case, «organizational corruption is usually a top-down phenomenon in which a group of organization members – typically the dominant coalition, the top managers or the corporate elites – undertake, directly or through their subordinates, collective and coordinated corrupt actions that primarily benefit the organization» (Pinto et al., 2008, p. 689). In this case, therefore, the organization is not only the primary beneficiary, but also the primary entity culpable (though the individual actors remain culpable for their wrongdoing). In a parallel way to this distinction, in the study that follows the kind of organizational level wrongdoing considered will be that of the socially irresponsible organization, rather than the organization of socially irresponsible individuals.
A second relevant aspect of the present study regards the nature of the wrongdoing phenomena analyzed. In particular, it becomes necessary to distinguish corruption and fraud, on the one hand, and social irresponsibility, on the other. Corruption has been defined as «the misuse of authority for organizational gain» (Ashforth & Anand, 2003) and as a «conduct by an organization that is proscribed and punishable by criminal, civil, or regulatory law» (Braithwaite, 1984). The related concept of fraud has been defined also as «the deliberate actions taken by management at any level to deceive, con, swindle, or cheat investors or other key stakeholders» (Zahra et al., 2005, p. 804), or «intentional misrepresentations of amounts or disclosures in the financial statements» (Apostolou et al., 2000, p. 181). Corruption and fraud, therefore, imply «the absence of physical violence, the existence of strong financial motivations, and the involvement of individuals who are otherwise considered respectable members of the society» (Zahra et al., 2005, p. 805).
Unethical behavior, instead, includes «all organizational actions that are deemed immoral according to societal norms or general standards of conduct» (Sharpe, 1993). In this sense, corporate unethical behavior is a wider concept that does not appear only as a consequence of the firms’ actions crossing the line that separates the legal from the illegal actions, according to the formal rules of the contexts in which the firm operates, nor is it focused on the misuse of the financial resources invested in the company. Unethical behavior relates to the moral values and the shared perception the communities with which organizations interact have of what is ethically correct behavior and how ethical issues should be handled (Treviño et al., 1998). A related concept is that of wrongdoing, Zavyalova, Pfarrer, Reger and Shapiro (2012, p. 1080) define this concept as «firm behaviors that place a firm’s stakeholders at risk and violate stakeholders’ expectations of societal norms and general standards of conduct». This idea of wrongdoing touches two aspects that were absent in the previous definition of unethical behavior: that organizational wrongdoing must cause a social harm and it poses a boundary around the actors that deserve to be considered as “victims” of the wrongdoing, limiting them to the stakeholders of the firm.
Moving from the definitions above, in the present study we adopt a definition of managerial social irresponsibility as corporate elite actions that bring organizations to «cause a social harm, for which the organizations are deemed at least somewhat culpable and for which the affected party is regarded as at least somewhat non complicit» (Mocciaro Li Destri et al., 2013). This definition, therefore, embraces the legal and the moral aspects of company wrongdoing and includes both corruption and fraud, on the one hand, and unethical behaviour, on the other. Furthermore, it does not exclude issues in which physical or psychological harm is inflicted (as occurs in cases of modern slavery (Crane, 2013), for example). As for the “victims” considered, this definition goes beyond the notion of stakeholder – that implies a specific inter-dependent relationship between the organization and the agent considered –, and includes all potential individuals or societal groups that may be influenced by the company’s actions. Though this definition extends the type of actors who may be considered “victims” of corporate social irresponsibility, it requires victims to be “non complicit”, i.e. to be “innocent” and truly unable to perceive, predict, foresee or avoid the harm they were inflicted. Finally, it is important to underscore the role of “intentionality”: socially irresponsible actions are taken wilfully in order to “help” the firm and possibly gain a private benefit too, even though it entails breaking formal laws or socially accepted moral and ethical values.
The idea of managerial social irresponsibility adopted in this study is parallel to the idea of corporate social irresponsibility that emerges from the work of Lange and Washburn (2012), but places the accent of the role of company elites. This choice may be justified on the basis of the particular relevance of managerial social irresponsibility in management studies. In particular, managerial social irresponsibility is often highly consequential for a firm’s shareholders and employees and has often resulted in the very demise of corporations. Furthermore, company leadership has been argued to be a key driver of corporate ethics, contributing to a firm’s overall engagement in the social sphere (Weaver et al., 1999a, 1999b). Treviño, Brown & Hartman (2003) claim corporate ethical tones are set by company elites. In fact, given the role played by the firms’ management, their attitudes and behaviors may rapidly diffuse, promoting similar behaviors in others throughout the firm (also through institutionalization processes). Further, socially irresponsible actions by company elites are often truly shocking to observers and company stakeholders as they represent a serious betrayal of trust by those who supposedly have been selected specifically for their integrity, leadership, ability and character. Finally, Sutton and Callahan (1987, p. 420) underscore that beyond the actual existence of a role in the specific case of corporate wrongdoing, «one of top management’s primary functions is to maintain exchange relationships between an organization and key individuals and groups (…). Moreover, leaders are expected to keep others from denigrating their companies. Top managers are also expected to be able to keep their companies alive (…) Thus, members of organizational audiences interpret firms’ problems as personal attributes of their leaders (…). Moreover, since managers are socialized to believe that they should be able to control the fate of an organization, they may view their firm’s financial troubles as a personal failure regardless of the expectations of audience members».
. 1.5 The scope of managerial social irresponsibility
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. The phenomena that fall into the wide category of managerial social irresponsibility include, but are not limited to, instances of embezzlement, insider trading, self-dealing, lying about facts, failure to disclose facts, corruption, cover-ups, land flips, nominee loans, reciprocal lending, linked financing, siphoning off funds by thrift insiders, hiding insolvency, use of child labor, human trafficking tied to the workplace, the underpricing of labor through illegitimate means, pollution, the supply of faulty products and so on. Managerial social irresponsibility also varies substantially in duration – some cases can go on for years before they are discovered, whilst others can be short lasting – and in scope, with some instances being limited to one or a few transactions, whereas other cases encompass multiple ongoing activities across many organizational functions and units. For instance, consider the difference in the cases reported by Zahra, Priem & Rasheed (2005, p. 805) «Adelphia Communications’ founding family was accused of fraud when it collected $1.3billion in off-balance-sheet loans that were backed by the company. The family also was accused of overstating the company’s financial results by inflating capital expenditures and hiding debt (…) Enron, on the other hand, developed an elaborate “pyramid”-like scheme of new businesses that supposedly generated new revenues and profits but that did not actually exist».
. In the research that follows, instances of managerial social irresponsibility will be distinguished mainly regards their scope. In particular, the criteria that will be used to analyze the common and distinctive aspects of the cases under scrutiny will be whether the managerial wrongdoing has occurred at the corporate or at the business level of the company. And, in the former case, whether the corporate level wrongdoing has infringed upon the company’s resources, competences and competitive positioning at the business level or not.
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. 1.5.1 Managerial social irresponsibility at the corporate level
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. The distinction between the corporate and the business level of the company is strictly connected to the distinction made in strategy literature. In particular, corporate level strategy has been defined as the «way a company creates value through the configuration and coordination of its multimarket activities» (Collis & Montgomery, 2005). Corporate strategy, therefore, is aimed to create value for the company’s stakeholders and fundamentally includes decisions regarding: (a) the multimarket (product, geographic, vertical) scope of the firm (i.e., the configuration of the firm), and (b) how the firm manages the activities and businesses in the corporate hierarchy (i.e., the coordination of the resources and businesses within the firm). The corporate level within a company, therefore, includes the organizational units and activities connected to the formulation and the implementation of the corporate strategy and, furthermore, the resources and capabilities that allow to create value at the corporate level. The bases underlying the creation of value at the corporate level are either financial or strategic. In the first case, the main logic underlying the creation of value at the corporate level is the maximisation of stakeholder value, the reduction of the firm’s overall weighted cost of capital and the creation of a financial equilibrium that renders the firm as independent as possible from external sources of capital. The main ways to create value at the corporate level in this perspective are: (i) through the management of a portfolio of activities, the scouting of undervalued companies and their sale at substantially higher prices; or (ii) through the acquisition of badly managed companies, their restructuration and the sale of the resulting businesses at a higher price. In the second case, the creation of value at the corporate level is focused on the resources of the firm (i.e., the tangible and intangible assets and the capabilities of the company) and the capacity to generate synergies between the businesses of the company. The main ways to create value at the corporate level according to this perspective are to transfer or to share strategically valuable competences or resources between the firms’ businesses.
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. 1.5.2 Managerial social responsibility at the business level
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. Business level strategy (or competitive strategy), instead, is the way a company creates value through the use of its resources and competences to create an advantage via-à-vis its competitors in a specific business. In order to create a competitive advantage in the business(es) in which a firm engages it is necessary to possess or develop key valuable, rare and distinctive resources and capabilities, and to deploy them in order to position the company in an advantageous way relatively to competing firms in the industry (Grant, 2010). The capacity to compete in a specific business, therefore, regards not only the single resources and competences the firm controls, but also the way they are combined within the company’s value chain and connected to other firms’ value chains through market transactions or other more collaborative ways of interacting with complementary firms. The business level of a company, therefore, includes the organizational units (often coinciding with the business units in multimarket companies), the activities connected to the formulation and the implementation of the business strategy and, furthermore, the resources and capabilities that allow to create value from each strategic area of affairs (or product/market/technology combination) of the firm.
Independently form their scope, instances of managerial social irresponsibility have been analyzed in the attempt to identify the individual motivations or framework conditions that provide the driving force or that influence the decision making process that leads to corporate wrongdoing. Though relatively less explored, there has also been research that pin points the social and economic consequences that are created directly or that spill over from corporate illegal or unethical behavior. The paragraphs that follow are focused on these two issues respectively.
1.6 The antecedents of managerial social irresponsibility
Managerial social irresponsibility is often brought about by highly successful people who have much to loose from being caught up in scandals tied to wrongdoing. The question therefore becomes: “why should accomplished managers risk being discovered and ruining the success they have built over years?”. Although the individual level motivations to commit socially irresponsible actions have been typically emphasized by much research, several fragments of evidence – such as the temporally concentrated historic periods of corporate social scandals up-surges, the tendency of irresponsibility scandals to be associated with multiple individuals in each company, and the propensity for social irresponsibility to continue undetected over significant periods of time – point to the presence of more systemic factors (Golinelli, 2000). As reported in Grant and Visconti’s article (2006, p. 365) «The root cause (of the recent wave of corporate scandals) was not that many executives suddenly decided to be crooks, but rather lies with the system in which they were working».
Research regarding the antecedents of managerial and corporate social irresponsibility is fragmented. This fragmentation may be justified on the basis of: (i) the many different forms of managerial social irresponsibility and the fact each form may have idiosyncratic antecedents; and (ii) the fact that managerial social irresponsibility is not only a state but also a process. Therefore, it is an emergent phenomenon, whose genesis, growth, and evolution are very difficult to predict a priori. Notwithstanding these reasons underlying fragmented indications, this section is dedicated to the systematic scrutiny of existing literature in order to identify the factors and dimensions that have been identified as antecedents of managerial social irresponsibility at the contextual, organizational and individual levels of analysis.
1.6.1 The contextual level antecedents of managerial social irresponsibility
Various studies have found systematic ties between two contextual characteristics and phenomena of corporate social irresponsibility: (a) environmental scarcity; and (b) industry traits. Environmental scarcity (or hostility) refers to the negative characteristics of a firms’ main industry competitive conditions (including strong competition, oligopolistic competition, low product differentiation, frequent price negotiations, high cost of capital, low or decreasing demand levels, low profit margins, a high rate of organizational failures and so on) have been indicated as strong external pressures pushing towards organizational wrongdoing (Daboub et al., 1995; Finney & Leisure, 1982). These factors provide the motivation for managerial social irresponsibility by restricting the legitimate means of acquiring resources or attaining desired levels of performance (Sethi & Sama, 1998). For example, the upsurge of corporate scandals in the 1990’s in the U.S. financial services, telecommunications, energy and health care industries has been interpreted as an effect of the increase in competition that followed the deregulation of these industries and the consequent increase in the pressure to meet bottom-line demands, especially for public companies and the more prominent actors (Ashforth et al., 2008, p. 674). Hostile environments also reduce any slack resources the firm might have and reduces its ability to absorb any adverse effects on its operations, therefore when scarcity conduces to cutthroat competition firms promote unethical behavior to try to compensate for poor performance, creating a vicious circle of unfair competition and unethical conduct at the system level (Robertson & Anderson, 1993).
At the industry level, numerous different aspects have been pin pointed as relevant antecedents of managerial social irresponsibility. In particular, there are significant differences across industries in legal structure, regulation and government monitoring. The opportunity for wrongdoing and differences in the levels of social irresponsibility may be connected to such aspects (Daboub et al., 1995). In highly regulated industries, regulators may be bribed to “look the other way” or external controllers may drift into protecting the firms they were meant to oversee. The building construction industry is reported as an example of a structurally vulnerable industry (Black, 2004).
Industry norms, cultures and histories are described as «taken-for-granted assumptions which most describe a cohesive industry’s character» (Huff, 1982, p. 125). Various authors have posited that if the behavioral norms that firms in an industry share allow for illegal acts, firms in the industry are more likely to engage in wrongdoing (Baucus & Near, 1991). This may be interpreted in the light of Becker’s (1964) study that shows how individuals who are self-interested usually weigh the potential cost connected to the discovery of their wrongdoing against the potential benefits they may gain through it. The extent to which prior wrongdoings in the industry (and Nation) have not been severely punished might play a role in managers’ contemplation and evaluation of committing socially irresponsible actions. Furthermore, it may be extremely penalizing for a company in such an industry to avoid prevalent irresponsible actions (Waters, 1978).
Expectations regarding industry payback periods, time horizons, acceptable financial return rates also vary from industry to industry. These expectations influence stock analysts’ forecasts of a company’s financial performance which, in turn, pressure managers to cut costs, smooth the company’s earnings or, worse, to boost the company’s revenues and earnings. In some industries, infomediaries, analysts, investors and managers themselves may mature irrational expectations (Shiller, 2001; Grant & Visconti, 2006, p. 367). These expectations indicate the belief that new technology or new economy-type industries generate much higher returns than traditional businesses and foster the emergence of exaggerated expectations of much higher profits than would be reasonable. Irrational expectations also contribute to the pressure felt by managers and push them to mismanage resources in order to modify the relationship between means and ends, or to manipulate financial reports. Finance literature offers evidence that there are incentives to avoid negative earnings surprises as this would, in the first place, increase the perceived rate of risk connected to investing in the company’s equity, raising the cost of capital for the firm. Furthermore, research has also shown that CEOs gain personal benefits from exceeding earnings expectations (Boschen et al., 2003).
1.6.2 Organizational level antecedents of managerial social irresponsibility
At the organizational level of analysis, aspects of the firms’ structure, of the executive compensation systems and of the firms’ culture have been identified as significant antecedents of managerial social irresponsibility. In general, elements connected to the organization structure identify opportunity related antecedents – i.e., influence the possibility for managers to act irresponsibly and the probability of being caught. A first set of organizational antecedents are connected to the adaptation of the firms’ structure to modifications in its strategy and the consequent effects these changes imply for managerial opportunities to conduct wrongdoings. In particular, when firms are engaged in diversified growth strategies and try to generate high profitability rates by creating new businesses or acquiring companies in current or new industries, they invest heavily in creating the infrastructure necessary to exploit them. These infrastructures tend to lower financial performances of the firm for a while, but most of all they tend to increase the degree of specialization of the company’s key personnel. As the firm expands its span of activities, it tends to create units or divisions that work independently. The increased independence and specialization of the company’s units increases the opportunity of concealing socially irresponsible act (Hill, Kelley et al., 1992). Buacus and Near (1991) noted that diversification leads companies to spread responsibilities between different individuals, and no single individual has enough information to spot or stop managerial irresponsibility. Connected to the effects of diversified growth strategies is also the heterogeneity of business environments that the company must engage in and the complexity of the organizational structure. In these complex multi-business structures exposure is limited and it becomes hard to fully comprehend the various transactions a firm might undertake. Therefore, managers have greater opportunities of engaging in socially irresponsible actions without being noticed or to be “willfully blind” to others’ wrongdoing.
Other structural aspects of the organization regard its corporate governance structure and, in particular, aspects tied to board composition, auditor oversight and executive compensation. At the basis of the agency theory view of corporate governance (Fama & Jensen, 1983; Grossman & Hart, 1980) is the idea that absent close monitoring by stockholders, managers have the opportunity to engage in opportunistic behaviors, for personal gain or foregoing long-term value-creating activities such as investing in intangible resources and distinctive capabilities. The absence of close control over managerial action in companies in which there is a separation between ownership and control leaves open the opportunity also for managerial social irresponsibility. The primary structure responsible for monitoring managerial actions rest with the board of directors. Agency theorists propose that boards that have a significant presence of outside directors who are independent from the company’s management are better positioned to monitor company elites and reduce instances of opportunism or managerial social irresponsibility (Beasly, 1996). The authority, the operational and financial competence, the independence and the autonomy of the external board members is also an important aspect. Furthermore, agency theory underscores the importance of separating the individuals who play the role of board chairman and the CEO of the company. Internal audit committees and external auditing companies and rating agencies also play a role in defining the degree of controls over managerial action and may, therefore, be included in the aspects that can influence managerial social irresponsibility (Grant & Visconti, 2006: 363; Zhara et al., 2005, pp. 812-813).
Another firm level antecedent of managerial social irresponsibility may be found in the executive compensation systems adopted by an organization and the resulting orientation that they entail (Baucus, 1994; Daboub et al., 1994; Johnson et al., 2009). This type of antecedent influences the motivation, rather than the opportunity, to commit managerial socially irresponsible actions. Grant and Visconti (2006, p. 364) report that «the average remuneration (at 2002 constant dollars) for the CEOs of the S&P 500 firms increased from about $850,000 in 1970 to more than $14 million in 2000 (…) Stock options accounted for the biggest part of the increase». Remuneration schemes that use stock options or other performance related incentives for managers were intended to realign the goals of managers with those of stockholders, however, in practice, it has often produced a powerful incentive to smooth company results or, worse, boost them through socially irresponsible actions.
Also the culture that characterizes each organization influences the framing of situations and the decision-making processes of its members. Organizational cultures evolve norms that guide employees and managers in practice. If the culture within an organization serves mainly to sustain the competitive interests of a company at any cost, it runs the risk of shouldering aside other norms that might serve the interests of other stakeholders, including those of the larger society. When this occurs the organizational culture may be considered socially irresponsible (Pinto et al., 2008).
By posing the question of how come organizational cultures can descend into social irresponsibility, different authors have pointed towards the role of corporate elites (Ashforth & Anand, 2003; Clinard, 1990). In this view, the ethical climate of an organization is set, or significantly influenced, by the actions of top managers, especially the CEO. When leaders fail to follow ethical values, corporate social irresponsibility is often more widespread. Even when the CEO does not directly engage in wrongdoing, he or she can still encourage socially irresponsible actions by fixing unrealistic financial goals, rewarding, condoning, ignoring, or covering up the means used to achieve them (Baucus, 1994). Ashforth and Anand (2003) underscored the role of charismatic leaders. These types of leaders, in fact, are often able to build coalitions of followers who do not question their actions or fail to probe their leaders’ failings. When socially irresponsible actors are also charismatic leaders it is hard for others in the company to blow the whistle on their leaders’ behaviors.
There is, however, an intriguing part of research that underscores that corporate wrongdoing may be generated even if company elites are not motivated by direct personal financial gain or by low moral values. In various ways, these authors all point to the cognitive limitations of top managers and the creation of situations that pressure morally integer managers to adopt high risk-seeking attitudes, that eventually fail and give way to irresponsible actions to make up for dwindling performance. Jensen, Murphy and Wruck (2004, p. 44) focus on the stock market in the 1990s and 2000s to analyze the context in which executives were taking-decisions. They note that overvalued share prices encouraged managers to «(…) make increasingly aggressive accounting and operating decisions (…) When these fail to resolve the issues, managers, under incredible pressure, turn to further manipulation and even to fraud». In a similar vein, Mishina, Dykes, Block and Pollock (2010) highlight that a company’s high performance relative to the performance of its industry peers may be considered a strong antecedent of managerial wrongdoing. In particular, they argue that, contrary to extant research that had identified strong disincentives for prominent and high performing companies to engage in socially irresponsible actions, high-performing firms may engage in corporate wrongdoing in order to maintain their performance relative to unsustainably high internal aspirations and external expectations, and that pressures may be greater for prominent firms. A growth performance that exceeds managerial expectation and/or market expectations pushes company elites to re-frame the risks associated to disappointing firm constituents by not maintaining the high performance targets obtained previously, on the one hand, and to being caught in irresponsible actions, on the other.
In connection with these positions, Grant and Visconti (2006) identify weak strategic planning and the implementation of inappropriate strategies as an antecedent to corporate wrongdoing. In particular, their analysis focuses on the extent to which the strategy pursued is consistent with the requirements of the company’s area of business and with its resources and capabilities. They underscore that when the company’s strategy does not fit external and internal environments, the result is likely to be declining company performance. Therefore, given the time lag between strategic decisions and performance outcomes, dysfunctional strategies may be one source of overvalued equity.
1.6.3 Individual level antecedents of managerial social irresponsibility
Though contextual and organizational characteristics may motivate or facilitate socially irresponsible actions, ultimately committing corporate wrongdoing at the highest levels in organizations involves individual decisions to participate or acquiesce. At the basic level, scholars have used demographic information to attempt to predict corrupt behavior. The use of demographic variables in company elite research is based on the argument that they are proxies for other underlying managerial traits (Hambrick & Mason, 1984). For example, variables such as age, experience, education and gender have been studied in relation to corporate social irresponsibility This path, however, has been increasingly criticized as it produces inferences based on unmeasured variables, is unable to indicate actionable prescriptive conclusions and relies entirely on archival data (for a review of the demographic antecedents literature and the criticisms to it see Zhara et al., 2005, pp. 815-817).
Notably more interesting are the studies that connect social irresponsibility to personal traits and individual predisposition, including low self-control (Hirschi & Gottfredson, 1987; Marcus & Schuler, 2004), lack of integrity (Frost & Rafilson, 1989), low levels of cognitive moral development (Treviño, 1986; Treviño & Youngblood, 1990; Weber & Wasieleski, 2001). This micro-level reasoning suggest that one “bad apple” (Treviño & Youngblood, 1990) or small faction within an organization is responsible for the organizations’ wrongdoing and, therefore, that it may be eliminated if only organizations can root out and keep out unethical individuals.
As mentioned above, research has argued that often “good companies do bad things” (Mishina et al., 2010). In these cases, corporate wrongdoing are not motivated by company elites seeking direct personal financial gain or by their low moral values, but rather by cognitive limitations of top managers and the creation of situations that pressure morally integer managers to adopt high risk-seeking attitudes. The situations seen above include: inappropriate strategy, overvalued share prices and high-relative performance. Leveraging research conducted in the fields of behavioral economics and psychology, Mishina, Dykes, Block & Pollock (2010) identify three individual-level cognitive biases that can explain why, in the situations mentioned above, morally integer managers may engage in socially irresponsible corporate actions. These cognitive processes are: (i) loss aversion; (ii) the house money effect; and (iii) executive hubris.
Loss aversion is connected to prospect theory research (Kahneman & Tversky, 1979). According to prospect theory, individuals frame the decision-making reasoning according to whether they frame themselves as being in a win or in a loss position, and will behave in a risk-averse way to protect sure gains, whilst they’ll behave in a risk-seeking way to avoid sure losses (Kahneman & Tversky, 1979). Transposing these principles to top management decision-making, implies that when firm performances increase rapidly, or are however overvalued, aspiration levels increase and it becomes difficult just to maintain the status quo. Given that the costs of losses are perceived more than the benefits of gain, unexpected negative performance (relative to the expected level, not necessarily negative in absolute terms) tends to generate over-reactions of firm constituents (La Porta, 1996). As Mishina, Dykes, Block and Pollock (2010: 705) put it: «Taken together, these points suggest that firms with high expectations are the most likely to face costly negative future market reactions owing to the combination of shifts in reference point (…), difficulties in maintaining high performance (…), and the punitive nature of market judgments (…). Consequently, the CEOs and managers of firms experiencing high external expectations are likely to frame the future as a choice between an almost certain loss if they fail to make changes or a chance to stave off the loss if they engage in riskier behaviors».
A second individual cognitive level framing process that can contribute to explain risk-seeking attitudes in high performing firms is the “house money effect” (Thaler & Johnson, 1990). This effect is based on the accounting idea of mental processes according to prospect theory, and predicts that prior gains tend to lead to higher levels of risk seeking. The reason for this effect is that individuals tend to perceive prior gains as the profit from winning bets – or the “houses’ money” – that they may gamble with, rather than framing these resources as “their own capital” (Mishina et al., 2010, p. 705).
Finally, prior success can also foster managerial hubris (Hayward & Hambrick, 1997; Dagnino et al., 2012). Extended periods of success, or performances that outdo expectations can make organizational managers believe in their own infallibility, leading them to be more risk seeking. As successful managers believe they cannot fail, they ignore the negative consequences of a risky activity and consider only the potential benefits of its success. Therefore, hubristic managers will be more likely to think they will outsmart the market or regulatory authorities and will manage to escape internal or external audits and controls. This way of framing the risks and benefits tied to their activities increases the likelihood that successful company elites will engage in risky corporate wrongdoing in response to high aspirations and expectations.
1.7 The economic consequences of managerial social irresponsibility
The economic consequences of managerial social irresponsibility manifest themselves at the system level, at the firm level and at the individual level. In order to comprehend the system level effects of managerial social irresponsibility, it is necessary to underscore that even if their antecedents are not systemic, their consequences are. To appreciate the systemic consequences of managerial social irresponsibility it is necessary to focus on the role trust plays in the functioning of the market system. The market infrastructure is based on trust or “faith”: faith that the reports for-profit and non-for-profit organizations publish are real, that organizations and institutions are being run honestly, that stakeholders are not being swindled and that the institutions or agents whose role is to monitor the behaviors of others are playing it straight. Unfortunately, trust is built up slowly but is lost quickly. There is a documented current crisis of confidence in much of the capitalist economic system (Gioia, 2002). The tangible economic effects of trust and confidence corrosion are long lasting and pervasive. In fact, the trust broken through corporate scandals is very quickly diffused within the wider economic system, resulting in significant losses of social capital. Social capital, however, is key to the fluidity of economic systems and, as authors like Fukuyama (1985) have shown, the economic success of capitalist societies is based on the level of trust between actors and the resultant cooperative behavior that emerges between them. The economic costs connected to the loss of trust following managerial social irresponsibility is not only intangible and indirect, but also direct as many Nations have adopted legislations that impose significant compliance costs on corporations to reduce the opportunity to engage in wrongdoing or dissuade managers from misconduct through the imposition of fines and jail punishments.
A culture of social irresponsibility seems to diffuse through processes of institutionalization. As Ashforth, Gioia, Robinson and Treviño (2008, p. 675) put it in their review of Zuckerman’s report (2006), «the many locations of cheating and scandal gives an idea of the immense scale and scope of the phenomenon we are challenged by». Furthermore, this challenge is rendered more insidious due to its extension beyond the corporate world to include the wider society spanning sports, government, religious institutions, house holds and so on. These data suggest that in many nations a culture of tolerance towards social irresponsibility is maturing – i.e. a culture that not only fosters more social irresponsibility, but also one that makes it appear less harmful. This culture, therefore, feeds into a vicious circle in which organizational wrongdoing progressively becomes more accepted and more diffused.
The entity of the systemic harm caused by corporate scandals and breakdowns to local communities include phenomena like layoffs and tightening budgets, loss of employees’ pensions, loss of taxes to the surrounding communities, decreased demand for secondary businesses, company bankruptcies. The trust of many stakeholders is harmed as a consequence: investors feel burnt, employees feel their contracts have been violated (Love & Kraatz, 2009), and public opinion becomes cynical as governments spend billions of tax payers’ money bailing out and saving organizations that have been reputed too big to fail.
The first stakeholders to suffer the consequences of corporate social irresponsibility tend to be the company’s shareholders. Once the wrongdoing is communicated though infomediaries to the wider public, the sock market value of the companies involved immediately falls (Davidson & Worrell, 1988). Also bondholders and other creditors of the firm often pay the consequences of corporate crises following social irresponsibility scandals. The decrease in the company’s credit rating is lowered when the crisis emerges and, as a consequence, the bonds issued by the company loose value. As for creditors, in instances of corporate social irresponsibility scandals, banks often find that the value of the collaterals or cash-flow projections underlying their money loans falls rapidly. This not only renders the recovery of loans more difficult but, when the sums involved are high, the damage may also spill over to the shareholders of the financing banks through a reduction of the value of the share prices of the bank itself.
Amongst the main stakeholders to be damaged by severe episodes of managerial social irresponsibility there are also the employees of the culpable company, even though often they are totally unaware of the wrongdoing that has taken place in the organization they belong to. Employees not only risk loosing their jobs and, often, their retirement savings (when they are tied to the share prices of the company), but also their reputations get tarnished. The fact that a person has worked for a company who’s legitimacy has been destroyed by committing socially irresponsible actions has often been reported as a reason that made it difficult to find new jobs. To reduce the risks for employees following episodes of managerial social irresponsibility, many organizations are developing firm-specific systems to encourage their labor force to anonymously signal and whistle-blow instances of suspect socially irresponsible managerial actions (Zahra et al., 2005, p. 820). The socially irresponsible managers themselves have also often paid for their actions by being forced to resign, or terminated. Also their personal reputation is harmed by widespread negative communication and, as a consequence, their future job and economic possibilities are significantly reduced. Finally, culpable managers have also paid for their illegal actions through fines and even jail time.
The scrutiny of cases of corporate scandals following instances of corporate social irresponsibility show that, for the corporation, being perceived as socially irresponsible implies the loss of its legitimacy and, consequently, of the support of its main audiences (Ashforth & Gibbs, 1990; Lange & Washburn, 2012; Meyer & Rowan, 1977; Pfarrer et al., 2008; Pfaffer et al., 2010; Zimmerman & Zeitz, 2002). In turn, the loss of critical firm constituent support leads to damaged firm performances (Baucus & Baucus, 1997; Davidson & Warrell, 1988), slower sales growth rates (Baucus & Baucus, 1997), loss of access to important resources, raised capital costs (Komisarejevsky, 1983) and severely tarnished company reputations (Weiselfeld et al., 2008). Furthermore, it has been argued that firm wrongdoing leads stakeholder to doubt about a firm’s ability to create value over time (Kang, 2008). In the medium and long term, therefore, companies trying to recover from scandals due to corporate social irresponsibility incur in increased costs connected to acquiring capital, alleviating employee concerns, and attempting to stop the exodus of customers. Indeed, the costs incurred, and at times the very demise, of corporations following corporate social irresponsibility scandals are well known. Examples like those of Enron (Sims & Brinkmann, 2003), WorldCom, Tyco, Nestlè (Pagan, 1986), Nike (DeTienne & Lewis, 2005) BP and its oil spill on the Gulf of Mexico in 2010, Ford Corporation’s Pinto “death trap” (Schwartz, 1991), Exxon’s Valdez accident (Brinson & Benoit, 1999; Coombs & Schmidt, 2000) are all cases to the point.
Finally, recent organizational research suggests that firms may suffer negative reputational spillovers at the industry level by belonging to industries in which one or more members incur in scandals following socially irresponsible actions (Barnett & King, 2008, p. 1160). Seeing as cognitive limitations push individual actors to stratify objects (including organizations) into categories (Porac & Thomas, 1990), companies may be seen as “guilty by association” (Lange et al., 2011, p. 181) or “categorically delegitimized” (Jonsson et al., 2009). These spillovers may also be a consequence of confusion, due to stakeholders’ incorrect recollection of the name of the firm engaged in wrongdoing but a correct memory of the industry involved (as this last recollection is usually easier). Such generalizations may contribute to a mistaken attribution of guilt to an innocent firm whose only guilt is to belong to the same industry as one or more wrongdoers. Though the bases of these judgements are faulty, their consequences can be heavy, bringing to the withdrawal of audience support and the shrinking of company earnings (Barnett & King, 2008; Jonsson et al., 2009).
2 The perception of socially irresponsible managerial actions
Widespread views of socially irresponsible actions on behalf of corporate elites reflect badly on the company for which they are agents and implies a number of costly negative consequences. The tendency in research until recently has been to analyze firm wrongdoing in terms of the mutual adaptation between the firm and its environment, in general, and in relation to broad social structures, in particular. In this chapter, on the basis of the idea that the environment in which firms operate are socially constructed and that, therefore, companies are socially irresponsible only to the extent that individuals perceive them as such, the importance of driving research down to the motor of organizational identity creation is highlighted. In particular, individual cognitive processes that undergird the perception of firm attributes are scrutinized. Two theoretical models elaborated recently are illustrated and mutually integrated to form a framework that highlights the factors and mechanisms that enhance the perception of managerial social irresponsibility, on the one hand, and those that hinder such perception, on the other. The first model refers to the study of Lange and Washburn (2012), elaborated on the basis of attribution theory developed in the field of social psychology and later transferred to management studies. This model takes into consideration how a basically rational process of perception is then systematically influenced by subjective biases and third party framing of information. The second model is the work of Crane (2013) on “modern slavery”, that is extended to elaborate a more general consideration of the factors that help company elites to avoid the perception of the organizations’ socially irresponsible actions. Furthermore, it allows to discuss the capabilities managers may deploy to actively maintain the firm as a “liminal” organization (Lindsay, 2010) that creates and maintains an institutional niche in which its wrongdoings are not perceived. Finally, the methodological importance of being able to aggregate subjective perceptions of firm attributes into shared organizational images is underscored. In order to systematize the nuances between observers, the criteria of “shared interests” between individuals is introduced and the distinction between corporate audiences and corporate stakeholders is clarified.
2.1 From social structures to individual perceptions
Much of the research conducted on the relationship between the social engagement of the firm and the antecedents and performance consequences of corporate social responsibility or irresponsibility is rooted in the broader perspective that aims to comprehend the firms’ adaptation to its environment and the environments’ reactions to firm actions. Indeed, the overview regarding the antecedents and the consequences (as well as the mediating and the moderating factors) of corporate social responsibility and managerial social irresponsibility contained in the first chapter of this study conform to the tradition of reasoning in terms of broad social structures, such as institutions, value systems and stakeholder relations. These broad societal structures are implicitly considered to exist as an objective reality in the firms’ environment, whilst little attention has been given to how observers subjectively understand corporate social behaviors.
Notwithstanding this general trend, there is a recent attention of research towards the consideration of how social understandings of the appropriateness and legitimacy of corporate behaviors are formed. These social understandings are ultimately driven down to the knowledge and cognitive processes underlying individual actor perceptions (Basu & Palazzo, 2008; Bitektine, 2011; Lange & Washburn, 2012). This view follows Zimmerman & Zeitz’s (2002, p. 416) recognition that «legitimacy ultimately exists in the eye of the beholder». In fact, though companies and situations have objective qualities that exist independently from the observer, individuals’ perceptions of reality are based on the attention and cognitive processes leading to the interpretation of the information regarding a given company and situation. This process is intended as a rational process, however seeing as it depends on the way individuals gather, frame and interpret information of specific time and space situations, the perceptions reached are highly subjective.
The subjective nature of these cognitive processes does not limit their relevance to abstract theoretical reasoning, rather the way individuals perceive the firms’ behavior is of importance also for practice. In fact, cognitive processes are the basis for individual decision-making. As Pfeffer (2005, p. 128) put it «What we do comes from what and how we think» or, in other terms, «individuals act based on perceptions, not on objective reality» (Wry, 2009, p. 156). In a similar vein as to what Suchman (1995) underscores about legitimacy, Lange and Washburn (2012, p. 301) note that «as a driver of consequences for the firm, especially in terms of the firm’s relationship with the environment, corporate behavior is socially irresponsible only to the extent that observers perceive it as such». Therefore, seeing as the subjectively constructed perceptions contribute to the formation of the real-world external environment that firms must interact with and gain support from, it becomes important also for practitioners to begin to understand how those perceptions come to be.
Diagnosing the cognitive processes underlying individual perception might, therefore, shed light on the variance of reactions to cases of corporate social responsibility that, at first sight, seem very similar. In other terms, the analysis of the microfoundations of social reactions may help shed light on the different outcomes and consequences of superficially similar corporate wrongdoings. Lange & Washburn (2012, p. 301), for example, ask why the BP oil spill in the Gulf of Mexico created a much more violent and persistent reaction on behalf of firm constituent audiences than that directed towards the Royal Dutch Shell following years of oil spilling in the Niger Delta? Or why Ford Motor Corporation had such a negative reaction to its Pinto model release relative to other compact car producers that in the same period had equal track records of occupant deaths? Shifting focus from a content-driven analysis to the analysis of individual perceptions, may help to move away from the vagaries connected to statistical correlations and foster the elaboration of a more reliable basis for inferring the nature and possible outcomes of the interactions between the firm, its main audiences and, more in general, its environment. Also, the focus on individual perceptions may allow to shed light on the main variables underlying the connection between the variety of outcomes following different types of corporate social wrongdoings.
From an epistemological point of view, the focus on individual-level perceptions is consistent with organizational theories based on sociological perspectives that highlight individual agency within social constructivist frameworks. Thus, in line with the writings of Berger and Luckman (1967), and of Giddens (1984), in this view social structures are considered as produced, maintained and changed as a consequence of knowledgeable actions of human agents, and they constrain and enable human actions. Individuals simultaneously react to and shape the environments they perceive as constituting a social reality. As a consequence, individual evaluations of the firms’ social responsibility or irresponsibility are not only subjective, but also changeable as they are a product of the interaction between multiple influences that affect individual perceptions. Therefore, a single firms’ social activity may be evaluated differently: (a) by the same individual if the personal or situational circumstances change over time; or (b) by distinct actors at the same moment in time.
2.2 The factors underlying individual perceptions of managerial social irresponsibility
In order to render the study of individual perception useful for practice and for the advancement of theory, it becomes important to indentify a number of specific characteristics of the situations, of the culpable firms and of the external observers that predictably skew individual perceptions of the managers’ responsibility. Recent contributions in this perspective have moved towards the aforementioned objective. In fact, given that instances of corporate wrongdoing present specific firm and situation characteristics, the models advanced in literature indentify theoretical mechanisms that influence the observers’ attention to and the interpretation of the qualities of the firm and the situation that lead to formulate specific perceptual judgments.
In the pages that follow, the analysis of the factors that underlie the subjective perception of managerial social irresponsibility refers to the recent descriptive model proposed by Lange and Washburn (2012). Their model rests on attribution theory which, in reality, is a group of theories (Kelley & Michela, 1980) developed in social psychology and later imported in the organization theory field. The aim of this theory is to indentify the cognitive mechanisms and the consequences of subjective attributions made by individuals. An attribution is «an observers’ explanations of the firms’ behaviors and outcomes in terms of firm and situational characteristics» (Lange and Washburn, 2012, p. 302). Therefore, for the single observer, the attribution of social irresponsibility to corporate management is an element of the cognitive structure of an individual that defines the abstract expectation the observer matures about how a specific company and its elites operate.
As Lange and Washburn underscore (2012, p. 303), typically attribution theory represents the targets of attributions as individuals, not groups of individuals or as organizations. Nonetheless, when groups of individuals possess a high degree of “entitativity” (Sherman & Percy, 2010, p. 149) they are seen as a coherent, unified, and meaningful entity and, therefore, may become targets of unique attributions. Given the focus of this study on what we have termed “socially irresponsible organizations” rather than on “organizations of socially responsible individuals”, it is possible to extend the theoretical mechanisms elaborated within attribution theory to entire organizations, and to the firm elites who are responsible for the elaboration and implementation of the decisions underlying corporate social irresponsibility.
In the analysis of managerial social irresponsibility conducted in the rest of this study, the point of view adopted will be that of the firms’ external observers, rather than the one of the cognitive processes that characterizes company elites. This is due to the fact that the main focus of this study is on the reactions of firm constituents to managerial social irresponsibility, not on the subjective processes that lead corporate managers to adopt socially irresponsible actions. To model managerial social irresponsibility attributions, Lange and Washburns’ (2012, pp. 302-303) model starts «by assuming a knowledgeable and reasonable observer, albeit subject to typical human cognitive limitations, biases, and spontaneous reactions». Starting from this basis assumption, they identify the following theoretical mechanisms affecting observer attention and interpretation of the objective characteristics of firms and situations leading to judgments of corporate and managerial social irresponsibility: «(1) observer rational judgments and inference, (2) observer biases and perceptual limitations that skew perceptions of the firm and situation, and (3) the sensitivity of observer assessments to the ways that observers have filtered and framed information about the firm and the situation». In the pages that follow, each class of theoretical mechanisms underlying individual perception will be described in further detail[1].
2.2.1 Observer rational judgement and inference
Given the definition of managerial social irresponsibility introduced in the first chapter, an external observer makes an attribution of social irresponsibility if he or she perceives the firm to have caused a social harm and concludes that the corporation has a moral responsibility for the harm that has been caused and should be held in contempt for the harm. The cognitive processes underlying such a judgement, therefore, are of two types: causal judgments and moral judgments. In particular, causal inferences imply distinguishing causes that emanate from the actor and causes that emanate from the situation the actor is in (i.e., external to the firm). Amongst the external aspects considered, a particular aspect considered is whether the “victim” of the corporate harm was complicit or not in the negative event, and eventually how strong he or she was complicit. Moral judgments imply that perceiving actors behave as “intuitive lawyers” and elaborates social irresponsibility attributions by trying to understand whether the company (and its management) is to be held in contempt for the harm caused according to moral standards. This judgment takes into consideration the entity of the harm inflicted, the possibility for the firm to avoid generating the harm and third party non complicity. In sum, therefore, the primary factors underlying corporate social irresponsibility attributions are: (1) an assessment of the degree of effect undesirability; (2) an assessment of corporate culpability for the harm inflicted; and (3) an assessment that the affected party has a low level of complicity in the effect (Lange & Washburn, 2012: 305-310).
Assessment of the degree of effect undesirability. The undesirability of the effect caused by the firm depends on the perception that «corporate behaviour or actions may be personally threatening, may trigger moral impulses, and/or may violate strong norms of corporate outcomes» (Lange & Washburn, 2012, p. 304). The perceptual refusal of personally threatening events is connected to mechanisms of human self-preservation, whilst moral judgements depend on deep-seated negative categories of stimuli that may include perceptions of suffering, unfairness, violations of in-group/out-group boundaries, disrespect and impurity (Appiah, 2009). Further, moral judgments are based on “hypernorms” that identify «principles so fundamental to human existence that they serve as a guide in evaluating lower level moral norms» (Donaldson & Dunafee, 1994, p. 265). Norms of corporate outcomes refer to legal standards and industry norms.
Assessment of corporate culpability for the harm inflicted. The perception of a nexus between a corporation and a harmful outcome triggers the perceptual process that begins the attributional activity. The perceiver, therefore, begins to collect further information in order to gain the available evidence and begin to judge the corporate behaviour. The judgement of the perceiver is based on the double aspect that the organization was both the cause of the perceived harm and that it was morally responsible for the negative effects caused. Leveraging various studies in attribution theory, Lange and Washburn (2012) explore both the causal reasoning and the moral judgment processes underlying this phase of the attribution process. In particular, they underscore that causal reasoning is based on knowledge and information gathered regarding the firm and the negative events created, and on commonsense explanations about why and how the events have occurred. In this process, as mentioned above, a fundamental issue to be resolved is to what extent the source of the negative behaviour is internal or external to the firm. When there are also external possible explanations for the effects under scrutiny, the responsibility of the organization may be diminished or totally ruled out. For example, automobile manufacturers are rarely perceived as culpable for car accidents given that the latter may depend on a myriad of alternative causes, such as road or weather conditions, driver skill and attentiveness and so on. The research for causal ties between the firm and the negative event caused by the firm may include, but are not limited to, considerations regarding the covariation between firm behaviours and negative events, temporal order of firm actions and harmful effects, size congruence between organization and harmful effect, distinctiveness of focal firm behaviour vis-à-vis other firm behaviours, and so on.
Attributions of social irresponsibility require that a corporation is also perceived as morally responsible. Thus, the judgment is based on «whether the focal organization could have done otherwise. Moral responsibility judgements are therefore associated with beliefs that the firm had reasonable foresight of the negative outcomes and was not coerced into the action or driven by strong moral justifications» (Lange & Washburn, 2012, p. 306). Therefore, two conditions are necessary for this negative moral judgement: awareness of the harm caused and the will to carry the actions on. On the other hand, if the perceiver concludes that there is a positive causality connection between the harmful event and the firm, but that there is a low moral responsibility, the resulting assessment of culpability will be low. Therefore, for example, the organization may be perceived as distanced form its culpable harmful actions if the responsible managers or employees are identified and fired from the company.
Assessment that the affected party has a low level of complicity in the effect. The third factor underlying corporate social irresponsibility attributions in Lange & Washburn’s (2012, p. 307) model is an affected party (individuals or groups) perceived as “victims”. The authors leverage attribution theory studies that show that «affected parties who are perceived to have more control over a negative effect are, in turn, perceived to be more blameworthy and therefore less likely to elicit sympathy from observers. The more the affected people or groups are perceived as complicit in the negative effect, the more the perception of company irresponsibility is reduced». Two characteristics play a role in assessing the degree of victim complicity: (a) the power to prevent or avoid the effect; and (b) the possession of knowledge or foresight of the effect.
The rational judgement and inference of social irresponsibility depends on the combined presence of the three factors described. Thus, there must be the perception that there have been actions that have caused a social harm, for which the organization is deemed at least somewhat culpable and for which the affected party is regarded as at least somewhat non complicit. Lange and Washburn (2012, p. 308) further hypothesise that «if all three factors are present to some degree, then a higher level of any one of those factors will result in a higher level of corporate social responsibility attribution». Furthermore, the authors hypothesise that there is a mutual influence between the factors identified and posit that «assessments of high corporate culpability can reduce assessments of affected party complicity and, in a complementary fashion, that assessments of high affected party complicity can reduce assessments of corporate culpability» (p. 308).
2.2.2 Observer biases and cognitive limitations that influence individual perceptions
As discussed above, according to Lange and Washburn’s (2012) model, individual agent perceptions are based on the assessment of effect undesirability, corporate culpability and affected party non complicity. Though these assessments are made following a rational cognitive process, they are nonetheless influenced by mechanisms such as observer cognitive biases, individual attention levels and social identification. The influence exerted by the distorting cognitive mechanisms within the assessment process implies that an observer can perceive two firms’ social behaviour differently, even if objectively there was no difference between the two. These distorting cognitive mechanisms influence each of the elements underlying corporate social responsibility attribution, therefore in the pages that follow each element will be considered in a piece meal fashion.
Effect undesirability. Social harm is assessed in consideration of the fact that it is threatening or against moral standards or strong norms. The cognitive filtering of information influences the extent to which an effect of corporate actions are perceived as threatening, immoral or against strong norms. According to Lange and Washburn (2012, p. 311), there are two characteristics of the effect that will influence observer «attention to and consideration of the undesirability of the effect: (1) unexpectedness, and (2) concentration in time and space». Both characteristics render events salient – i.e., they make the events stand out against the background – and, therefore, they increase the perceived importance and prompt the further research for information that may support the idea of causality and responsibility. Unexpectedness leads to salience because it draws attention to the novel or strange event. This happens because novel or strange events do not fit into existing cognitive categories and observers must re-elaborate or expand their existing set of cognitive categories. This mental process attracts attention to the event and tends to enhance the initial feeling of threat, immorality or norm violation. Concentration in time and space also increases the degree of perceptual salience of the event. Leveraging the work of social psychologists, Lange and Washburn underscore how humans are programmed to be more attentive to immediate threats rather than more subtle and lasting negative effects. Therefore, it follow that when negative events are dispersed through time and space they simply become less salient and alarming to the observer.
Corporate culpability. Also the assessment of corporate culpability is influenced by biases and filtering of information. In particular, the aspects that are most influential on the evaluation of corporate culpability are three characteristics of the observed firm; «perceived disposition, size, and prominence» (Lange & Washburn, 2012, p. 312). Furthermore, observer social identification is a factor that may have an influence on the assessment of this, as well as the other, aspects.
Perceived disposition refers to the idea observers have matured regard the passed behaviours of a firm and their consistency in time. The firms’ perceived disposition has a “halo effect” in that its effect spills over onto the interpretation of present and future events. When the firm has a negative perceived disposition, it tends to serve as a cognitive anchor, therefore even when the context changes, the observer tends to attribute the cause of the behaviour as internal to the firm rather than external. When a company’s perceived disposition is positive the direction of the effects is unclear. According to the idea of cognitive “anchoring” and the “halo-effect” it should push observers to continue to perceive the causes of the negative effects as external to the firm even if they are internal. However, reactance theory (Brehm & Brehm, 1981) would suggest that positive prior experiences clash with the negative impression that emerges from the perception of culpable firm behaviour, and this violates expectations of firm behaviour rendering the event more salient and the reaction more violent.
The firms’ size and prominence also influence the assessment of corporate culpability. «Firm size, because of the perceptions that size is associated with abundant options for action and enhanced capacity to scrutinize those options and their possible harmful side effects, may lead observer impressions that the firm caused the negative effect, that it had foresight of the consequences of its behaviour, and that it had no moral justification for its actions» (Lange & Washburn, 2012, p. 313). Prominence contributes to render the organization salient for observers. This condition, in turn, makes prominent firms perfect targets for issue advocates and, furthermore, it increases the tendency to consider the firm culpable for negative events connected to its actions.
Observer social identification. Observer social identification is a cognitive process that leads an individual to see him or herself as part of a social category and who draws critical self-concept-relevant information, value, and feelings from his or her perceptions that he or she is a member of that category. Social identification pushes the observer to see his or her own interests aligned with those of the category with which there is a social identification. In the context of the model under analysis, observers (both inside and outside the focal organization) may socially identify with the affected party or with the firm. This cognitive bias, therefore, influences the attribution of social irresponsibility because the observer has a “hedonistic” interest – i.e., a vested interest in the attribution. Social identification contributes to enhance observer attention to the event, but also prompts consideration of its personal impact.
Observer social identification with the implicated firm tends to reduce the observers’ evaluation both of the event undesirability and of the firms’ culpability. As Lange and Washburn (2012, p. 315) put it «When observer identification with the implicated firm is higher, the observer is more likely to be sceptical of evidence suggesting the firm’s causality, more likely to search for and find plausible, alternative explanations that challenge the firm’s causality, and less likely to accept third-party claims that position the firm as causal. In addition, an observer who has a higher level of identification with the firm is less likely to see it as morally responsible with respect to the negative effect».
Affected party non complicity. Social identification may also bias the assessment of the affected party’s complicity. If the observer identifies with the firm, the search for plausible alternative explanations to the firms’ culpability is likely to include also the search for information sustaining the idea that the affected party was not totally innocent with respect to the effect. In this respect, any fragment of information that supports the evaluation that the affected party could have had the power to prevent the negative event or at least to foresee it will be amplified. Instead, when the observer identifies with the affected party, parallel hedonistic needs imply that the observer will reduce, rather than enhance, the information that suggest there is victim complicity.
2.2.3 Information framing by the culpable corporation and third parties
Observer assessments of effect undesirability, corporate culpability and affected party non complicity are based on information regarding the events occurred and the interpretation of the information gathered. Third parties may filter and frame the information observers are exposed to, influencing the inference and judgment processes underling the attribution of corporate social irresponsibility. The actors who play a role in the filtering and framing of information are typically the firm itself or third parties. As for the firm or its advocates, one first class of information management that may influence the perceptual process of observers includes the use of accounts and apologies. Accounts embrace both excuses and justifications. Through the communication of excuses the focal firm is represented as not in control of the causes of the harmful event. Instead, through justifications the events are defended on the basis that the positive outcomes connected to it are more than the negative consequences tied to the event. Whereas accounts may influence the inference the assessment of both causality and moral responsibility, the use of apologies acknowledges the causal connection between the focal firms’ actions and the harmful outcome, but tries to reduce the connection between the actor and the intent of the harmful action. Apologies are aimed to reduce the judgements of moral responsibility of the firm in the eye of the observer. Therefore, through apologies the focal firm expresses the belief that the rule broken is a correct rule and communicates that in the future it intends to abide by it. Self-castigation is also considered a way to induce a sense of forgiveness and reduce the moral judgment of the focal firm.
These techniques of impression management represent the intentional selection and presentation of information in order to highlight different aspects of the harmful event, its causes and effects and even to describe the victims of the harmful outcomes. Frames are accounts that typically include a culpable organization, an undesirable effect, and a non complicit victim. These types of frames, therefore, identify a problem, and attribute the responsibility and the blame to a focal organization. Therefore, frames can influence the way observers infer and judge any of the basic elements underlying the assessment of social irresponsibility. Of course, frames become particularly influential when information regarding firm culpability is ambiguous or incomplete.
Frames may be elaborated both by the focal firm (and its advocates) and by third parties. In the second case, a large role is played by the media (or infomediaries). Zavyalova, Pfaffer, Reger and Shapiro (2012), for example, analyze the role of infomediaries on the perception of corporate social irresponsibility in depth. They underscore how the media shapes public opinion and influences stakeholders’ impressions of firm behaviour by choosing which aspects to emphasise and framing issues with care. When frames are provided by third parties such as issue advocates, scientists, and media often the result is to make a relatively unnoticed event salient. Therefore, frames can make events look unexpected and they can cognitively aggregate events that are temporally or geographically dispersed. As Lange and Washburn (2012, p. 318) put it «frames can directly influence observer assessments of (…) effect undesirability, corporate culpability, and party non complicity. Frames can also influence those factors affecting the way observers perceive the effect and firm characteristics, as well as by affecting observer social identification with the affected party or implicated corporation. Further, frames can appeal to an observer’s cognitive schema of corporate social irresponsibility by providing a story line that links a culpable corporation with an undesirable effect as inflicted on innocent victims».
Whilst these sections have regarded the factors and the cognitive mechanisms underling external observers’ perception of corporate wrongdoing, the next sections are dedicated to the analysis of the factors and characteristics of the environment that limit the visibility and the scrutiny of managerial social irresponsibility on behalf of observers that are both internal or external to the focal organization and, furthermore, the managerial capabilities directed towards the active protection of the status quo against institutional challenges.
2.3 The conditions limiting individual perceptions of managerial social irresponsibility
Managerial social irresponsibility aims to bring organizations to become a form of what Lindsay (2010) defined «liminal organizations» as, to continue their wrongdoing, they must occupy a niche within institutional fields. In this sense, socially irresponsible firms neither adopt broader institutional norms nor do they seeks to create new alternative institutions, rather they occupy an ambiguous position that requires a careful positioning to take advantage of institutional spaces that can be strategically exploited to sustain illegitimate practices. The positioning on the fringe of the institutional fields in which the firm operates also requires an ongoing activity of institutional deflection on behalf of the firm, in order to maintain and reinforce the position occupied. The aim of both firm positioning in institutional niches and the active management of the firms’ legitimization and of the maintenance of the niche are aimed to preserve the status quo over time, despite ongoing legitimacy challenges. The sections that follow leverage the model elaborated by Crane (2013) relatively to the practice of modern slavery management and extend it to corporate social irresponsible actions in general. In particular, they are dedicated to the analysis of the contextual characteristics that contribute to the creation of favorable institutional niches, whilst the managerial capabilities that contribute to the active management of the firms’ institutional deflection is treated successively.
2.3.1 Conditions related to the industry context
The industry conditions considered here are not intended as antecedents that push towards managerial social irresponsibility, rather they are characteristics that create the humus in which corporate wrongdoing may emerge and thrive. Amongst these conditions, low technological development and industries using unskilled labour often have low margins and this tends to push towards illegitimate actions to cut costs. In this sense, value distribution along supply chains can single out stages associated with low value capture that are more pressured to adopt illegal practices aimed to reduce company expenditures. The same effect is produced when the market for the firms’ products or services is characterised by a high elasticity of demand.
Firms operating in low-legitimacy industries (such as pornographic industries, drugs, gambling, and so on) are more likely to adopt illegitimate practices as the fact that they are part of a stigmatized sector implies that they already seek to operate beyond the oversight of regulators and other formal institutional forces. As Crane (2013, p. 54) notes «industries in the renegade economy that are judged socially unacceptable by both formal and informal institutions (i.e., as illegitimate and illegal) have little opportunity for gaining legitimacy by their means of operation. Their standards of operation are governed by the institutional norms of their fellow renegades» and, thus, managerial social irresponsibility is less probably scorned upon.
The limits to rendering socially irresponsible actions visible, along with their incompatibility with existing social norms implies that the benefits tied to them tend not to be communicated and diffused. Therefore, information regarding such practices and their eventual benefits tend to be communicated only to agents to whom managers are connected by means of trust relations, often supported by geographic proximity. Thus, industries that have a tendency towards regional clustering have the conditions to allow for the spreading of illegal or illegitimate practices.
A moderating role of industry conditions is played by the major actors of the supply chain, those actors who gain the most rewarding economic margins and that have higher degrees of visibility. These companies may, alternatively, reduce the tensions – for example supplying new technology, schooling and paying higher prices –, or increase the pressure – for example by reducing prices paid or introducing new layers in the supply chain – towards the adoption of socially irresponsible actions in other phases on the supply chain.
2.3.2 Conditions related to the socioeconomic context
Poverty has been identified as one of the most fertile conditions for managerial social irresponsibility because it offers wrongdoers the conditions to use coercion, persuasion and deception in order to coopt others or, at least, to avoid observer negative reactions. Connected to poverty there is also the presence of high degrees of unemployment. Structural unemployment that is connected to the lack of skilled workers and limited job opportunities accentuate and feed into vicious circles of poverty. The lack of employment alternatives, creates a protective barrier against negative reactions towards employing companies, even though their behaviours may create social, environmental or economic negative spillovers.
Often low degrees of education are connected to the reduced levels of awareness of the illegality or illegitimacy of the company’s practices and increases the vulnerability of the potential victims. These conditions, therefore, contribute to inhibit the reporting of potential incidents and to maintain the status quo untouched.
The effect of these characteristics may be hampered by the availability of affordable credit. Innovations like that of microcredit are typically associated with the promotion of social and financial inclusion, the reduction of the vulnerability of the poor and the creation of entrepreneurial opportunities for the weaker sections of the society (Yunus, 2007; Mocciaro Li Destri, 2012).
2.3.3 Conditions related to the geographic context
A large part of the illegal or illegitimate firm activities are conducted in the informal economy located in remote or distant places, both in developing and more advanced nations. Geographic isolation of entire companies, or of units of companies, increase the capacity to insulate socially irresponsible actions from outsiders’ observation, law enforcement, support groups, trade unions and the media that could help protect harmed victims. Furthermore, geographic isolation may contribute to the normalization of socially irresponsible actions for the participants and the internal and external observers of the organization, reducing the risk of reactions or whistle-blowing actions.
2.3.4 Conditions related to the cultural context
The possibility for firms to occupy niches in the institutional setting and, thus, perpetuate socially irresponsible actions may also derive from the clash or incongruence between formal and informal institutions of the context in which the firm operates. Accommodating cultures may provide an effective barrier for institutional niche positions. Amongst the cultural aspects that may play a role are the traditions of specific ethnic groups or nations. Traditions, in fact, represent repertoires of community norms that may go against the formal rules of the context in which the firm produces or supplies its products or services. Also entrenched inequalities – such as embedded forms of taken-for-granted exploitation or discrimination, notably against women, racial minorities, or children – may hinder reactions to corporate wrongdoings when their victims belong to these categories of actors.
Finally, religious beliefs may at times also provide a basis of legitimacy for otherwise scorned upon behaviours. Crane (2013, p. 57) uses the example of sex slavery in Thailand and a research that reports how a sixteen year old prostitute was resigned to her “job” and justified this on the basis of her karma. Therefore, such cultural beliefs provide a supportive context for the rationalizations necessary among victims of corporate wrongdoing to adapt to their situation without protesting or searching for support.
2.3.5 Conditions related to the regulatory context
Formal institutional contexts manifest a wide variety of different contents from one nation to another. Nonetheless, most national institutional elements include internationally agreed upon “hypernorms” that rest on wide-spread ideas of basic human rights and moral standards to be guaranteed globally. Notwithstanding such variations, another related aspect to be considered regarding regulations is the degree to which coercive sanctions are applied to trespassers of formal institutions. This aspect refers to the strength of governance in the region, intended as government effectiveness, quality of the formal rules, political stability, rule of law, control of corruption, and accountability to citizens (Kaufmann et al., 2010). These indicators of poor governance can undermine the validity of the formal institutions in a specific context. The possibility to bribe or pay-off officials, internal and external monitoring agencies, or even judges greatly hinders the effective influence of formal norms.
In higher governance Nations, corporate wrongdoing may be maintained though it goes against formal norms because of issue attention deficits. Countries (and regions within countries) differ respect to the resources and effort deployed to monitor and enforce formal norms which could impede corporate socially irresponsible practices. When public institution fail to impose widely held moral values, private corporations or NGO may complement or substitute the void by adopting and promoting codes of conduct or enhancing public attentiveness and opinion around social issues.
2.4 The organizational capabilities and managerial actions that mask socially irresponsible actions
As mentioned above, socially irresponsible organizations may be intended as a form of “liminal organization” (Lindsay, 2010). Social wrongdoing requires managers to identify and position the firm in institutional niches that are, at least to some degree, insulated from attentive observers and the rigorous application of moral and legal standards. Furthermore, the positioning on the fringe of the institutional fields also requires an ongoing activity of institutional deflection on behalf of the firm, in order to protect the position occupied. In fact, socially irresponsible firms must aim to exploit contextual characteristics that are favorable to the persistence of wrongdoings, and insulate themselves from hostile settings. To be able to diachronically perpetuate corporate illegitimate or illegal activities, firms need to maintain and reinforce the characteristics that are supportive to its wrongdoings, and shape the hostile environmental elements. The sections that follow are dedicated to the analysis of the managerial capabilities that contribute to the active management of the firms’ relationship with the institutional context and, further, of the elements that characterize the context itself.
2.4.1 Exploiting and insulating capabilities
Exploiting and insulating capabilities are managerial skills and process that enable organizations to take advantage of the conditions illustrated above. In particular, they include the capability to access and deploy violence, debt management, accounting opacity and supply chain management. The access or potential to deploy violence is a strong capability able to enforce corporate wrongdoings on victims by “enforcing” contracts to obtain resources under conditions that would not be ethically or legally enforceable otherwise. Also, in informal factor markets the possibility to menace violence poses the company in a strong position vis-à-vis resource owners because the latter have limited or no possibility to resort to legal protection mechanisms. In actual fact, organizations do not actually have to exert violence if they are able to build up a “reputation” of being violent. The credible threat of violence may be sufficient to lead to contract self-enforcement.
Debt management capabilities include both rapid debt accrual and debt transferral. All corporate wrongdoing activities that leverage the opportunities for wrongdoing connected to socioeconomic conditions, such as poverty and poor education, are exasperated though ruthless debt management practices. Indebtedness, in fact, makes resource owners feel morally obliged to the lending organization and the latter may leverage these sensations and enforce contracts with them through coercion. Debt accrual are mechanisms through which an initial debt is greatly increased in a short space of time, locking the debtor in and rendering it difficult (if not impossible) to access alternative sources of capital that could dampen the dependence of the ruthless managers. Debt transferral are mechanisms that establish clear (though often unwritten) protocols on debt transferral (for example, to members of the debtors’ family in cases of severe injury, death or other causes of impossibility to pay the debt back) as a way to avoid the risks of default of the debtor.
Accounting opacity is a way to occult wrongdoings to outside observers, internal auditors and monitors of corporate operations. Furthermore, accounting opacity may hinder legitimate firms connected up-stream or down-stream to the focal organization from understanding and reacting to the corporate illegal or illegitimate activities and practices.
Network management capabilities may be necessary when corporate wrongdoings imply the supply of resources through a network or the support of other external organizations. In such cases, the focal firm must set up and nurture the relational connection between a supply and/or support network of actors. These networks need substantial coordination but also trust and cooperation. A strong support for these networks may be found in the creation of shared identities or enthnicity. The latter may often substitute formal institutions and, furthermore, often have a set of informal yet effective enforcement mechanisms. Furthermore, shared identities and common ethnicity may render the network opaque and difficult to penetrate by external actors and law enforcers.
2.4.2 Sustaining and shaping capabilities
In order to render corporate wrongdoing less perceivable by external or by non complicit internal observers, firms must not only leverage the opportunities posed by the existing socioeconomic and institutional contexts, rather they must also actively manage their environment, sustaining the characteristics that favor their irregular activities and shaping the unfavorable ones.
The capabilities that may be used for this aim are first of all directed towards internal non complicit audiences and the external observers in direct contact with the company (clients, local communities, connected firms and so on). One such capability resides in storytelling practices and other forms of communication, as well as forms of socialization and culture management. These practices are effective when they provide rationalizations that justify the illegal or illegitimate organizational practices (Ananad et al., 2004) by neutralizing individual feelings of regret about their bad behavior. When rationalizations are repeated socially irresponsible actions tend to be normalized and individuals begin to reframe it as less morally relevant. As Crane (2013, p. 62) notes «a capability for moral legitimization represents a form of institutional work that enacts boundaries of membership and fosters normative alignment within those boundaries».
Finally, corporate wrongdoing is subjected to law enforcement or public opinion sanctions if discovered, therefore a critical capability referred to external audiences is to challenge the threats posed by such actors. This set of skills and processes refer to the “domain maintenance capability” (Crane, 2013, p. 62), and include practices such as «informal lobbying, bribery, threats, and other forms of influence and cooption». The main targets of such activities are law enforcement agents, politicians, judges and so on.
By deploying domain maintenance capabilities the socially irresponsible company obtains a second objective, that reinforces its relevance. In particular, the side effect of protecting the firm from the application of governance systems by buying non market favors against legal rules, managers are creating an interdependence link between agents that brings them to share risks with the actors responsible for monitoring or enforcing formal or informal rule following.
2.5 Moving from individual perceptions to corporate audiences
This chapter has focused on the importance of comprehending the subjective cognitive models of information processing underlying the perception, evaluation and interpretation of the attributes of corporate social behaviours, and has leveraged the recent contributions in the corporate social irresponsibility field to identify both the theoretical mechanisms that underlie managerial social irresponsibility perception, and those that hinder the perception of corporate wrongdoings on behalf of both internal and external observers. However, in concluding this section, it is necessary to underscore that subjective evaluations of firm actions become relevant to the extent that they contribute to the objectively held image of the firm and to the real world environment with which the firm must interact. As illustrated above, in fact, individuals interpret their environment based on attributions, which build up into socially constructed realities and shared generalities. Subjective assessments of corporate attributions, therefore, aggregate to form organizational identities. The latter are described by Scott & Lane (2000, pp. 44-45) as «the set of beliefs shared between actors about the central, enduring, and distinctive characteristics of an organization (…) in that they differentiate one organization from other organizations (…) When beliefs about organizational attributes become so widely accepted in the public arena that they are largely taken for granted (e.g., 3M is an innovative company), we can speak of this as organizational reputation.»
Though the mechanism through which individual-level attributions of social irresponsibility correlate across observers forming the structural influences highlighted in the studies recalled in the first chapter of this study still need to be fully clarified (Lange & Washburn, 2012, p. 319), some initial contributions have begun to pave the way towards a better comprehension of the interface between subjective and objective organizational images (Scott & Lane, 2000). If it were possible to assert that individual perceptions of organizational behaviour tend to be similar, there would be no real issue connected to aggregation of individual perceptions. In reality, though, a single case of firm wrongdoing may be perceived differently on behalf of different individuals. The models described above, for example, do include a number of aspects that may influence the way a same event is perceived differently by two or more observers (perceptions of threat, moral and value standards, degree of identification with the victim and so on). The question therefore becomes whether there is a way to systematize the nuances among observers that may help give order to the different perceptions and reactions to organizational behaviours. In this respect, two notions of aggregations among individuals may be of aid. These notions are those of corporate audiences (Schlenker, 1985) and of stakeholders (Freeman, 1984). Key to these ways of aggregating subjective perceptions within specific groups of individuals, in order to form distinct collective images of organizations, is the idea of shared interests. The existence of shared interests between individuals may be considered as rooted in similar relationships with an organization and may help understand why events are perceived according to specific cognitive schemas.
Organizational audiences and stakeholders are overlapping concepts, but they do not coincide. In particular, audiences are groups of individuals who are (actively or passively) targets of a message (visual, oral or other type). As Schlenker (1985) underscores, audiences may be interaction partners, reference groups and even the self. Audiences cue or “tag” information that they find relevant for the particular time and place at hand, making events salient. Furthermore, audiences set the standards according to which images will be evaluated and the potential consequences of actions, generating foreseeable favourable or unfavourable reactions to corporate messages and decisions. Not all audiences are equally important to communicators. In particular, the notion of “reference others” identifies audiences that play a fundamental role in the self-definition process of individuals or of organizations. Reference others may be individuals (such as parents, teachers, role models and so on) or groups (such as political parties, religious groups, social movements and so on) and they set a standard for the definition of the “self” as part of a given group or as abiding to given standards. Some audiences may play the role of “reference others” for the organization itself (imagine blue chip companies or fortune 500 companies and so on) but, more importantly, some audiences my refer to a focal firm as a “reference other” when they perceive an overlap between organizational attributes and their own personal attributes. Therefore, some audiences may be more closely tied to the organization that others or, further, the specific common attributes between a focal firm and its different reference audiences may vary.
Stakeholders, instead, refer to single individuals, to groups of individuals (such as employees, suppliers, shareholders, managers, patrons, board members and so on), or to a subset of an identifiable group of individuals (e.g., blue collar employees). In general, stakeholders include all those who have expectations of gain from the organization’s successful operation (Donaldson & Preston, 1995). More specifically, however, stakeholders identify those sets of actor that have both a stake in the company and the power to influence organizational actions. This, more restrictive, definition of stakeholder (Freeman, 1984) implies that there is a node of interdependence between the actor and the firm. This type of node emerges when the actors have an interest to influence corporate decisions as the value of their resources or capabilities may be fully appreciated if deployed appropriately in the specific company (firm-specific resources or capabilities), on the one hand, and they have the power to influence firm decisions because the success of the company is influenced by the access to the use of the actors’ resources or capabilities, on the other. In this perspective, therefore, corporate stakeholders are a subgroup of a firms’ audiences and, more specifically, they identify the most salient organizational audiences (Clarkson, 1995) because they have a direct influence on organizational performance and survival.
In the continuation of this study, the level of analysis considered will span from the individual actors’ attribution to the aggregation of individual perceptions based on the idea of “shared interest” due to characteristics of the relationship between the actors and the focal firm. In particular, the issue of moral restoration following managerial social irresponsibility will be treated considering the individual level of analysis, given the general moral and value standards that define a given context in which companies operate. Instead, the analysis of the decisions to support a company in the aftermath of managerial social responsibility will be analysed at the level of corporate audiences. This choice is due to the structurally different relationships that tie diverse internal and external actors that interact with the organization and that play a role in the selection of which companies (or parts of companies) survive managerial social irresponsibility scandals and which fail. Though stakeholders are generally intended as the crucial actors of the corporate rehabilitation process, this study widens the lens to include other audiences (as, for example, the infomediary and the “free audiences” – i.e., not tied to the firm by a node of interdependence) that may also play a critical role for the turnaround of an organization in the aftermath of a social irresponsibility scandal.
3. Restoring legitimacy in the aftermath of managerial social irresponsibility
The analysis of the dimensions underlying subjective perceptions of socially irresponsible actions constitute an important base for the comprehension of the way social assessments of corporations take shape. Nonetheless, in order to comprehend the consequences for a company of being perceived as culpable of socially irresponsible actions it is necessary to link it to the notion of legitimacy. Traditionally, legitimacy has been studied as the conformity of organizations, actors or actions to legal rules or informal social norms. Nonetheless, in order to be able understand how companies loose their legitimacy and how their management may act intentionally to restore harmed organizational legitimacy, it is necessary to move one step further and scrutinize the socio-cognitive processes that lead to the aggregation of individual perceptions to form widespread audience judgements of legitimacy or illegitimacy of corporate behaviours. In fact, the latter drive social behavioural reactions towards the firm and, therefore, are “coin of the realm” in determining which firms (or units of a firm) will maintain, loose or restore the support and trust of their internal and external audiences. The recent elaboration of studies regarding legitimacy, that enrich the findings of traditional institutional theory (for a review, Suchman, 1995) with teachings from social psychology studies, allow to shed light on the evaluator’s perspective (Bitektine, 2011) and on the intra-individual dynamics of legitimacy judgments (Tost, 2011) that lead to widespread legitimization and de-legitimization processes.
In the sections that follow, the concept of organizational legitimacy is defined and the socio-cognitive mechanisms underlying the processes of legitimization and of de-legitimization of an organization in the eyes of its audiences are illustrated. The theoretical framework regarding the formation of social judgments of an entity are leveraged to clarify how the subjective perception of managerial social irresponsibility affects the legitimacy of a firm, diffuses among audience members and, ultimately, risks sparking a downward spiral of organizational crisis. The studies regarding the actions firms may take in order to restore harmed legitimacy are integrated within a coherent stage model based on the study proposed by Pfarrer, DeCelles, Smith and Taylor (2008). The taken for granted consequence of legitimacy reconstruction in this view is the restoration of audience support and, as a result, of the conditions for firm survival. This “taken for granted” consequence is confronted with the cases of Enron and Parmalat.
The comparison of the Enron and Parmalat cases is particularly telling because of the very stark similarities between them. In fact, they are similar along all the dimensions of the attribution of social irresponsibility in Lange and Washburn’s (2012) model, and along the actions taken to restore their harmed legitimacy, yet the former firm experienced the classic audience support withdrawal that is reported in broad structure studies regarding the economic consequences of corporate social irresponsibility, whilst in Parmalat’s case one business unit maintained audience support and was pivoted back to success after the scandal. This comparison[2] suggests that the variety of audience reactions following apparently similar cases of corporate wrongdoing is not entirely captured by the dimensions underlying the subjective cognitive attribution process, nor by the legitimacy restoration process, but may depend on further evaluations on behalf of constituent audiences. Shedding light regards the dimensions underlying the “further evaluations” of corporate audiences is the focus of the final part of this study.
3.1 The effect of managerial social irresponsibility on corporate legitimacy
3.1.1 The content and role of corporate legitimacy
Whilst the capacity of a society to correct illegal behavior though the elaboration and enforcement of laws and regulations is well known, the processes undergirding the self-correcting or policing power of society to pressure and reform the transgressing firm is less apparent. Central to the idea of social control of organizational actions is the notion of legitimacy. The latter notion has become the anchor-point of many different perspectives in organizational studies (as for example in the institutional, resource dependence and organizational population theories) and in more managerial- strategic perspectives (such as the resource based view). In his extensive analysis of the theme, Suchman (1995, p. 574) concluded that legitimacy may be intended as «a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs and definitions». Or, in other terms, an organization is said to be legitimate «to the extent that its means and ends appear to conform with social norms, values, and expectations» (Dowling & Pfeffer, 1975). In this view, corporations considered legitimate are perceived to be not only more worthy of active and passive support by constituent audiences, but also as «more meaningful, more predictable and more trustworthy» (Suchman, 1995, p. 575).
The notion of legitimacy refers to a property that is conferred on an organization (or person) by its audiences. In essence it is an “umbrella evaluation” because it is an overall evaluation that, to some degree, transcends specific negative instances, though it is built on the perception and evaluation of a history of events. In this sense, when an organization has gained legitimacy it has earned a social “goodwill” from its constituent audiences that may reduce the sensibility of audience reactions to occasional deviations from social norms – provided that such deviations are dismissed as “unique”(Suchman, 1995, p. 574; Ashforth & Gibbs, 1990, p. 189). Legitimacy, therefore, is a social evaluation that justifies the organization’s role in the social system and helps attract resources and audience support. This is why it is often intended as an intangible resource of the organization. Therefore, by conferring legitimacy, social actors sustain and promote those organizations and practices that they perceive to be beneficial to themselves, their social group or their entire society. On the other hand, if social judgement is negative, audience behavioural reactions may take the form of verbal or non verbal sanctions, withdrawal of support, boycott and so on.
3.1.2 The microfoundations of legitimacy evaluations
Much of the research conducted within the institutional perspective has focused on the content of legitimacy – intending it (as above) as the conformity of organizations (or actors or actions) to social norms or laws –, and the behavioural consequences of legitimacy (or illegitimacy) judgments. Nonetheless, legitimacy is an attribute that is socially constructed through a process of legitimization. Neilsen and Rao (1987) observed that organizational leaders are typically intended as producers of meanings, and their internal and external audiences are portrayed as passive absorbers of meaning. They underscored that this way of representing image construction neglects the interactive and iterative process of social construction and labelling that characterizes the social judgment process underlying legitimization. Bitektine (2011) illustrates both cognitive and social process that lead to legitimization.
The role of subjective cognitive processes and perception is of paramount importance, as corporations will be considered legitimate or illegitimate only to the extent that observers perceive them as such. Thus, though legitimacy becomes an objective attribute of the organization, it is nonetheless created subjectively (Wry, 2009). Therefore, legitimacy (or the lack of it) becomes a driver of firm performance, sustaining (or interfering in) the relationship between a firm and its main audiences, only to the extent that the responsibility (or irresponsibility) of its actions are perceived by relevant observers. This, for example, helps explain how come firms whose socially irresponsible actions go unnoticed may comfortably continue to maintain positive relationships with their external environment and their main audiences without suffering the effects of a negative scandal (Crane, 2013).
The dimensions of the organizations perceived and judged have been intended in various ways. Suchman (1995), for example, identified a series of features that emerged in the extant literature as key to legitimacy judgments. These features include: (i) the soundness of the organizations’ procedures and processes; (ii) the outcomes of the organizations’ activity; (iii) the structure of the organization; (iv) the charisma and actions of the organizations’ managers; (v) the linkage to highly legitimate (or illegitimate) actors in its social environment.
Above and beyond the single dimensions evaluated, it has long been recognized that legitimacy judgments are multifaceted social evaluations and, as such, a single organization may possess more than one type of legitimacy. The types of judgement that may be identified within the “umbrella” concept of organizational legitimacy differ on the basis of the information used to perceive the firms’ legitimacy, the criteria employed to judge social conformance and the different analytical processing necessary to obtain the subjective evaluation. In particular, we follow Bitektine’s (2011) distinction between cognitive and socio-political legitimacy, and, further, the sub-distinction of socio-political legitimacy in: (i) moral and (ii) pragmatic legitimacy. In a cognitive legitimacy judgment «the organization is categorized as belonging to a certain known organizational form, based on a set of recognizable organizational characteristics» (Bitektine, 2011, p. 156). Therefore, cognitive legitimacy arises as a consequence of the capacity to typify an organization as belonging to a pre-existent category. Thus cognitive process renders the organization understandable and taken for granted by its audiences and spares it from further scrutiny and questioning. In actual fact, cognitive legitimacy implies an absence of substantive content to legitimacy evaluations.
In a socio-political legitimacy judgment, instead, «the observed features of an organization, its structural attributes, and outcomes of its activity are benchmarked against the prevailing social norms: the actor renders a judgment as to whether the organization, its form, its processes, its outcomes, or its other features are socially acceptable and, hence, should be encouraged or are unacceptable such that the organization should be sanctioned, dismantled, or forced to change the way it operates» (Bitektine, 2011, p. 157). From the evaluators’ perspective, socio-political legitimacy judgements require an act of normative and cultural evaluation and an active search for information on which to base such judgments. For the organization, therefore, the latter form of legitimacy entails being subjected to scrutiny and questioning in order for their audiences to be able to comprehend whether their existence and actions are beneficial for the audiences, their social groups and the wider society to which they belong.
The latter form of legitimacy may be further distinguished on the basis of whether the benefit of the organization’s existence and activities are diffused or concentrated. In particular, when the evaluating audience perceives an organization to sustain its constituents’ self-interest or provides them with favourable exchanges then its elaborates a judgement of pragmatic legitimacy. Instead, when the organization and its activities are considered beneficial for entire social groups or the wider society, then the former gains moral legitimacy in the eyes of its evaluating audiences.
These different evaluations of social legitimacy are not mutually exclusive. Therefore, organizations (or actors or actions) may be evaluated on all three dimensions or on some subset of the dimensions. Following the main teachings of social psychology, both Bitektine (2011) and Tost (2011) emphasize the different cognitive demands placed on individuals for the evaluation of the distinct types of legitimacy. In particular, these authors recall “dual-process models” that identify two modes of conducting cognitive operations: one that is effortful, controlled, and self aware, and one that is effortless, automatic, and quick (Kahneman & Frederick, 2002). Both authors underscore that, due to an attempt to maintain cognitive efforts low, the process commences with evaluators proceeding to a category based evaluation. The information research and evaluation effort implied by socio-political legitimacy evaluations will be performed only if category based assessment fails or if other conditions render further scrutiny necessary. There are two social and cognitive factors that represent cognitive shortcuts and, therefore, influence the deployment of a passive evaluative mode: (i) the availability of social cues regards the legitimacy of an entity; (ii) the degree to which the entity conforms to cultural expectations. The social cues that are able to trigger the aggregation of individual level evaluations into a collective-level legitimacy judgement are essentially: (a) the endorsement of the entity by peers; and (b) the authorization of the entity by regulative, auditing or monitoring agencies. These two social cues allow bounded rational agents to rely on others’ judgements as heuristics for individual-level evaluation. Though the passive evaluative mode tends to be preferred and predominates social evaluations of organizational and managerial behaviour, if these social validity cues are absent or the entities do not conform to basic cultural expectations, agents tend to shift towards the deployment of active evaluative modes. In that case, a more intense feature-based evaluation is engaged in, as the agent assesses whether the entity is beneficial to him or her, to its social group and to the wider society.
3.1.3 The microfoundations of changes in legitimacy evaluations
«Delegitimation is the process by which some rules or actions lose their legitimacy (…) it can be understood as an outcome of (…) process of social contestation between audiences, with the result that the organization is no longer found legitimate» (Hudson, 1987, p. 255). In general, once the firm has gained legitimacy, it has a certain degree of “goodwill” that buffers it against negative signals regarding its social behaviours (Suchman, 1995). However, multiple contradictory negative information signals or one significant negative cue will trigger a substantial revision of the firms’ legitimacy evaluation. In their study, Mishina, Block and Mannor[3] (2012, pp. 466-467) argue that, over a certain threshold, negative signals regarding firm legitimacy tend to be considered very salient by firm audiences as they indicate failures to fit to the minimal level of socially acceptable behaviours. Furthermore, given their damaging effect for the firm, negative signals tend to be interpreted as reliable indications of the true nature of the character of an organization. In particular, they specify «When a negative cue breaks through the goodwill levels of idiosyncrasy credits, the consequences will be severe. In these cases, the character cue is not considered in isolation, but instead the overall evaluation of the organization may be reorganized to be consistent (Reeder & Coovert, 1986)» (Mishina et al., 2012, p. 467).
The process underlying the diffusion of a negative evaluation throughout one or more audiences may be comprehended leveraging studies regarding institutional entrepreneurship studies. Institutional change has traditionally been considered a consequence of a precipitating or destabilizing jolt to the social system. The destabilizing jolts considered typically embraced different types of macro level phenomena. Consider, for example, scientific progress that demonstrates the harm connected to smoking and the stigmatizing effect this new knowledge has on the tobacco industry. The mental alarm that triggers destabilizing changes in societal-level legitimacy evaluations of entities may, however, also originate at the individual-level. Single individual reconsiderations of the legitimacy of existing social entities may be formed and diffused through to the societal-level. The individual catalyst of societal-level changes of legitimacy evaluation has been identified in literature as an “institutional entrepreneur” (Dacin et al., 2002; Misangyi et al., 2008; Tost, 2011). Institutional entrepreneurs are individuals who: (i) perceives institutional contradictions relative to one or more social entities; (ii) is motivated to examine the questions raised by the institutional contradictions perceived; (iii) persuade others of the illegitimacy of existing social arrangements and the legitimacy of alternatives.
The motivation to examine the contradictions perceived derives from the fact that it interferes with the pursuit of the individuals’ desired outcomes or with the promotion of the values in which the agent believes. As for the effectiveness in persuading others to follows suit, on the basis of the teachings of social psychology studies, it seems possible to imagine that: (a) the institutional entrepreneur will be more effective in diffusing a re-evaluation of an entities’ legitimacy if the target audiences are already trying to actively evaluate the social entity. Therefore, the effectiveness of institutional change depends on the capacity of the institutional entrepreneur to trigger a sensation of mental alarm in their target audiences, pushing them into an evaluative mode too. If the institutional entrepreneur is highly regarded by the audience(s), then launching the message in which the legitimacy of an entity is questioned is often sufficient. Otherwise, the effectiveness of the persuasion process may be enhanced by creating or underscoring institutional contradictions that may be perceived as personally relevant for the target audience; (b) the institutional entrepreneur, furthermore, may influence the process of legitimacy re-evaluation by signalling which social entity to focus re-evaluation on. Therefore, they may contribute to societal re-evaluations by pin pointing specific social entities as the source of the problem or contradictions underling the mental alarm perceived, thus affecting which entities become targets of re-evaluation; (c) in the case of conflicting judgments between different types of legitimacy (for example, when entities have a low cognitive legitimacy, and a low moral legitimacy, but a high pragmatic legitimacy), an institutional entrepreneur can have an impact by persuading audiences of which dimension of legitimacy should be prioritized in determining the generalized judgement and by acting as a source of validity endorsement.
3.1.4 The effect of managerial social irresponsibility on corporate legitimacy evaluations
In the context of managerial social irresponsibility scandals, the factors and mechanisms that stimulate or hinder cognitive process leading to a “mental jolt” on behalf of individual evaluators have been illustrated in detail in the previous chapter. The studies reported above help to shed light on the cognitive and social microprocesses underling the aggregation of individual perceptions that lead to the real world consequences of managerial social irresponsibility. First, the perception of socially irresponsible actions crates a mental jolt that triggers wider level reactions when the evaluator has a reason to be motivated towards the diffusion of a re-evaluation of the social status of the organization for which managers are acting as agents. Therefore, managerial social irresponsibility must infringe upon the possibility for the individual agent to reach his desires or on his entrenched values. Given that managerial social irresponsibility is intended in this study as corporate elite actions that bring organizations to «cause a social harm, for which the organizations are deemed at least somewhat culpable and for which the affected party is regarded as at least somewhat non complicit» (Mocciaro Li Destri, 2013), there is a high probability that one or more individuals should be motivated to act upon their perceptions of the social harm created by the culpable company and its elites. The institutional entrepreneur may, in these cases, arise at any power level within the internal or the external audiences of the organization. Further, the trigger actor may belong to the “victims” or may be an external observer whose values are challenged by the organizations’ actions. The attribution of irresponsible behavioural traits to the organization will, at that point, generate a process that aims to diffuse a sense of mental alarm in other target audiences in order to activate the social verbal and non verbal reactions that pressure the transgressing firm to reform its social behavior. As illustrated above, two main issues become relevant in this process: (i) the influence of the agent of change; and (ii) the relevance of the institutional contradictions for the audiences of the organization. Influential agents, because of their recognized social standing or their formal role, have an easier time creating a sensation of mental alarm and cueing the contents of the social re-evaluation of an organization. Less influential agents must make more effort to obtain the attention of others and shift audiences from a passive to an active evaluation mode. The persuasion and activation of other key, highly regarded and influential actors or professional information framing and diffusing agents may be an effective mechanisms to diffuse social re-evaluation processes and to direct the contents of the re-evaluation and reaction phases.
3.2 The loss of legitimacy and the creation of a self fulfilling prophecy: the withdrawal of audience support
Given that corporations considered legitimate are perceived to be not only more worthy of active and passive support by constituent audiences, but also as «more meaningful, more predictable and more trustworthy», there is wide consensus in literature that the social pressures consequent to the loss of legitimacy should lead key organizational audiences to change both enacted relationships and espoused evaluations of the firm. Such changes imply a high risk of giving way to a self-fulfilling prophecy, as the effectiveness of any organization depends on the continued participation and support of its organizational audiences (Baucus & Baucus, 1997; Cameron & Whetten, 1983; Davidson et al., 1994; Fombrun, 1996; Freeman et al., 2008; Haunschild et al., 2006; Karpoff et al., 2008; Salancik & Meindl, 1984; Strachan et al., 1983; Sutton & Callahan, 2008).
In the sections that follow, rather than enumerate the consequences and the social sanctions that follow the loss of legitimacy, the social and cognitive processes that play a critical role in aggregating individual perceptions at the societal level and stabilizing (or worsening) negative images are analyzed. In particular, the sociocognitive processes underling the institutionalization of legitimacy re-evaluations and the influence of the distinctive traits of image crises on managerial restorative capabilities are pin pointed.
3.2.1 The spillover effects and the “rule like” nature of delegitimizing evaluations
The specific nature of the social sanctions following the loss of legitimacy and their influence on corporate performance have been illustrated in the review of the literature regarding the economic consequences of managerial social irresponsibility contained in the first chapter of this volume. Though the social and cognitive microprocesses underlying the trigger and diffusion of delegitimization have been outlined above, there remains to underscore the socio-psychological foundations that tend to reinforce the process underlying the diffusion of legitimacy re-evaluations and the “rule like” status that new evaluations may gain.
The initial hypothesis in that individual rationality is bounded by real-life constraints on time, concentration and effort poured into perceiving and evaluating events (March & Simon, 1958). This entails that people tend towards cognitive economies, or in other terms they resort to cognitive heuristics and shortcuts that reduce the effort needed to gather and elaborate information. Cognitive economy and institutional conformance are two mechanisms that imply that external actors may influence a focal individuals’ judgments. According to the principles of cognitive economy (as seen above), when the costs of information search and processing are high, individuals “borrow” judgments of others. Social interaction plays a role in exchanging opinions, that transfers opinions from one individual to another, helps validate each individuals’ opinion in the light of other evaluations and, in the end, produces common understandings of events. The richness and variety of social entities individuals are called to judge today has made the demand for readily available credible social judgments that evaluators can easily adopt. This demand has led to the emergence of socially recognized suppliers of such judgments: mass media provide information and opinions that guide general public opinions, specific accredited journals or entities provide rankings, entities like rating agencies or auditing firms are supposed to give expert endorsement of organizational legitimacy, and so on.
As common understandings disseminate among social groups they take on a “rule like” status, and evolve into «institutionally prescribed judgements» (Bitektine, 2011, p. 166) that members of an audience (or more than one audience) apply to a given entity. The conformance of evaluators to the new “institutionally prescribed judgement” can, itself, be socially enforced through social sanctions. Therefore, audiences that do not conform to the prevailing evaluations with consistent verbal or non verbal behaviours risk social control mechanisms being enforced on them. Empirical studies have, in fact, highlighted that organizations engaging in exchange relationships with low legitimacy firms may loose some of their own status (Podolny, 2005) and that low legitimacy may spillover to the members of the same industry (Zavyalova et al., 2012) or to firms possessing the same core-attributes (Hudson, 2008, p. 262). Furthermore, research has shown that organizations that audiences (first of all the media and stakeholders) link to a guilty firm will avoid being “dragged down” (Greve et al., 2010) by cutting of all ties to the wrongdoer (Jensen, 2006; Sullivan et al., 2007). Pressures towards social conformity, therefore, may apply to audiences in a parallel fashion as to the culpable organizations.
In sum, when social entities are socially questioned and audience attention is drawn to them, evaluators (especially the more prominent and visible ones) face a dilemma. They are forced to ask themselves how their behavioural reactions towards an entity whose legitimacy is questions will be judged by external audiences. Thus, the anticipation of possible sanctions for having taken the “wrong” decision and may either prompt the evaluator to reconsider his or her position and conform to the prevailing opinion or to abstain from expressing it in his or her behaviour.
3.2.2 The sparking of a downward spiral of organizational crisis
From a managerial perspective, the loss of legitimacy leads to an organizational crisis that presents distinctive traits that distinguish it from other instances of organizational decline. Social sanctions following the loss of legitimacy create the pre-conditions for organizational costs and, in the worse cases, for the very demise of the company. Usually, though the sociocognitive processes of delegitimization may necessitate a substantial time period to build up, once a threshold (or tipping point) level of social diffusion of the re-evaluation is reached, the institutionalization of loss of legitimacy manifests itself in a short time span. This temporal characteristic implies that the loss of legitimacy may be intended as a source of organizational crises, rather than analyzed as belonging to the phenomenon of organizational decline. In fact, whilst the latter occurs «when a firm’s performance or resource base deteriorates over a sustained period of time» (Bruton et al., 1994; Trahms et al., 2013, p. 1278), crises are «low probability, high impact events that pose threats to organizations» (Pearson & Clair, 1998). Crisis events are marked by ambiguity in relation to their genesis and resolution and an urgency to fix what has been damaged (James & Wooten, 2010).
The loss of legitimacy following managerial social irresponsibility generates an image deterioration and a crisis that needs to be managed in an active and timely fashion to be effective, but may actually be repaired before it affects the financial performance of the company significantly. The amount of organizational and environmental resources managers may deploy to restore the company’s image may therefore non necessarily already be significantly depleted, but it certainly is either dwindling or risks being reduced after a short period of time. Therefore, repairing the corporate social image must be more resource conscious and efficient that operations aimed to increase corporate performance in non-crisis situations. A distinguishing aspect connected to the crisis following managerial irresponsibility scandals, it the central role played by loss of legitimacy and the centrality of the restoration of a positive image and relationship with the firms’ audiences.
Audiences play a critical role for all organizations, and the importance of their role increases following the widespread perception of managerial social irresponsibility. The reconstruction of harmed legitimacy in the evaluation of corporate audiences presents a series of difficulties relative to the initial creation of a positive social image from scratch. In particular: (a) negative events attract more attention than positive ones. In fact, novel and unusual events, such as the institutional incongruence that emerges as a consequence of the perception of managerial social irresponsibility, are perceived as more salient. As such, these events become more prominent and attract increased attention and enhanced scrutiny from observers and from infomediaries; (b) seeing as the loss of legitimacy is related to a pre-existing entity, that has accumulated a history of passed images, structures and actions, and these passed characteristics may pose a boundary on the variety of actions and the ability of managers to respond substantively to the social challenge; (c) a social scandal may increase the salience of the entity for all constituent audiences, rendering more difficult the de-coupling of activities and the strategic management of the firms’ actions and images for multiple audience groups; (d) stakeholders, and more generally audiences, who have relevant resources and are able to control the interaction and resource flows with the organization are likely to have a large influence on firm survival after a social scandal. However, even for the audiences who do not identify with the victims of corporate wrongdoing, the stigmatization than follows culpable evaluations of firms may influence them to curtail their support, limiting the flexibility and capacity of management to invest in the re-structuring of the substantial characteristics of the organization; finally (e) to the extent that the legitimacy challenge was unexpected, it catches management off-guard, leaving little time for planning and executing effective responses. Stress often limits critical thinking and startles management into reflexive and rigid reactions. Ashforth and Gibbs (1990, pp. 184-187), for example, underscore that management’s reflex is often to defend the status quo through denial, accounts, or counterclaims rather than to engage in dispassionate problem-solving and substantive change. Low legitimacy firms mainly do not have the capacity (neither the substance, nor the style) to take appropriate substantive actions to restore legitimacy and recur to symbolic actions that often result in: (i) clumsy reactions; (ii) nervous actions; and (iii) over reactions. Such symbolic responses may only exacerbate the crisis sparked off since constituents are more likely to demand substantive change rather than assurances. In a similar vein, Zavyalova, Pfarrer, Reger and Shapiro (2012), demonstrate that symbolic reactions such as “ceremonial actions” aimed to give a positive image of the firm and deflect media attention away from the causes of wrongdoing – e.g. donations to charities, investments in social structures and so on – are usually perceived as inconsistent with their image of the firm following social wrongdoing[4]. This incongruence may “backfire” generating a sense of suspicion, distrust and skepticism in observers that generates evaluations of superficiality and, worse, of hypocrisy (Sutton & Callahan, 1987). These negative evaluations worsen the firms’ image and tends to render it “stickier” (Skowronski & Carlston, 1987).
Studies on crisis and impression management suggest that when firm legitimacy is harmed it undergoes enhanced scrutiny. Managers can attempt to influence audience response by providing coherent public responses and substantive actions. Symbolic actions, therefore, are often insufficient or harmful, whilst substantive actions have a higher chance of being perceived positively and contributing towards the reconstruction of the firms’ legitimacy (Hurley et al., 2013). Taking actions that signal a firm is in control and addressing the problem is effective in helping the firm recover from wrongdoing. The limelight that managers work under and the limitations exposed above render the effectiveness of these actions particularly difficult. Furthermore, if organizational communications and actions are not in line with audience expectations they may “backfire” and worsen the position of the company. Therefore, it is possible to underscore that harmed legitimacy following social irresponsibility scandals may not simply be intended as the absence of positive legitimacy, but is a pathological situation, that may be intended as the spark of a potential “downward spiral” (Hambrick & D’Aveni, 1988) of vicious cycles.
3.3 Restoring damaged legitimacy: a stage model
Leveraging studies regarding stakeholders, image management, organizational justice and crisis management, Pfarrer, DeCelles, Smith and Taylor (2008) argue that it is possible to give normative indications regards appropriate actions that culpable organizations may take to restore their image in order to be reintegrated with their main audiences. Their reasoning takes into consideration: (a) that non all audiences are equally important for the organization and active towards gathering and elaborating information regards a focal entity. Thus, audiences may be important (elite) and attentive; less crucial to the firm and attentive; passive (latent and inactive). A specific audience may, further, change its role during the rehabilitation process; and (b) time and speed play important roles. The aim of the reintegrating process is to reduce the time spent for each phase as the time spent under suspicion and scrutiny may reduce the firms’ capacity to acquire or leverage resources and therefore may ultimately lead to corporate failure. In sum, the model elaborated hypothesizes that legitimacy restoration is more effective the more the firm is able to answer appropriately the requirements and concerns of its most salient audiences and the less time it takes to complete each phase of the legitimacy restoration process. Restoring justice implies repairing and restoring relationships damaged through unethical behavior (Goodstein & Butterfield, 2010, p. 453; Hurley et al., 2013).
It seems important to underscore that amongst the elite and attentive audiences it is usually transversally possible to include infomediary actors (mass media, auditors, whistle-blowing institutions and so on). These actors, as underscored in chapter two, play a significant role in framing and transmitting information to individual observers. Thus, firms must focus resources and must learn to “manage the message” in order to restore the positive tenor of media coverage after violation takes place (Zavyalova et al., 2013). The communications towards these actors follow the same phases as those directed towards all other audiences included in the model that follows.
The model proposed is a “stage model”, in that it identifies four different stages that imply diverse actions that organizations should take in response to audience demands and questions in different stages of the reintegration process. Each phase implies a process of socialization and discourse that is instrumental to gain a common understanding between the members of the target audiences of the focal organization. Therefore, the authors underscore that, for the organization, there is a sequential progression through the phases and they posit that it is unlikely that firms may complete more than one phase at a time because stakeholders must reach a common understanding and be satisfied with the answers provided in one phase in order to pass to the next. Therefore, the necessity for stage completion implies that the model illustrates a sequential process of reintegration (Pfarrer et al., 2008, p. 740). The model identifies the following stages of the reintegration process: (i) discovering the transgression; (ii) explaining the wrongdoing; (iii) serving penance by accepting punishment, and (4) internally and externally rehabilitating and rebuilding the organizations’ processes and features. The single phases will be described in the sections that follow.
3.3.1 The discovery and disclosure of managerial social irresponsibility
The model starts by taking into consideration observer cognitive concerns when they begin to perceive a clash between corporate behaviors and social norms of legality or morality. The initial phase is usually characterized by a high degree of uncertainty surrounding wrongdoing. This phase is essentially aimed to gather information in order to understand “what happened?”. Active audiences will pose questions and engage in the search of information in order to answer this question. Social processes of discourse and confrontation of opinions will take place in order to reach a common understanding of events. If the members of elite audience are unable to reach a satisfying common understanding they will signal to the organization under scrutiny that they require more information. The model represents this phase as an iterative phase that will continue until active and attentive audience members reach a satisfying answer to their question.
The culpable organization may facilitate this reiterative process. Verbal accounts simplify the research of information by evaluating individuals and third parties and may be used to influence evaluators’ perceptions of the appropriateness of the organizations’ actions. These actions may include voluntary disclosure of the illegitimate actions, engaging in open investigations regarding the root causes of events (Hurley et al., 2013, p. 80) and cooperating openly with regulatory officials. Organizations that come forward and disclose their errors obtain two main positive results: (a) they, implicitly, communicate to audiences that those driving this process are in control of the company (Sutton & Callahan, 1987, p. 429), and (b) they facilitate a faster completion of this phase.
As highlighted in the work of Ashforth and Gibbs (1990), some organizational actions in this phase may create cognitive dissonance in observers and generate negative effects. Reactions like downplaying the incident to avoid embarrassment, denial of the wrongdoing, or the elaboration of accounts that depict transgressions in a favorable light rather than engage in a full fact-finding endeavor are typical reactions that risk creating negative observer reactions. These firm reactions create dissonant perceptions and observers tend to react by requiring further information and clarifications, creating delays in the completion of this phase and a sense of reduced trust between the focal firm and its audiences.
3.3.2 The explanation of what occurred
Once salient audiences have reached a sufficient understanding of what happened, they want to learn why it happened. Leveraging studies regarding explanations, trust, sincerity and forgiveness (in the western culture), the authors of the stage model propose that the organization may guide this phase in a similar way to the precedent one – i.e., it can supply information and explanations able to speed this phase up and guide the interpretation of events by offering an appropriate explanation of events. In this sense, explanations are considered appropriate when they are perceived as «adequate and sincere – that is, honest, forthcoming, and free of guile» (Pfarrer et al., 2008, p. 737; Goodstein & Butterfield, 2010).
Amongst the actions organizations can adopt to supply adequate explanations there are the acknowledgement of their culpability, the expression of regret, the acceptance of responsibility, the offer of amends or of apologies. «Apologies serve to: (1) convey management’s understanding and concern regarding the consequences of the event, (2) garner sympathy from constituents, (3) reaffirm at least the appearance of managerial control and, implicitly, that management has learned from the event, and (4) maintain some managerial credibility» (Ashfotrh & Gibbs, 1990, p. 181; Sutton & Callahan, 1987, p. 429) Appropriate explanations have the further effect that they improve perceptions of trustworthiness among stakeholders and reduces the negative stance mature against the culpable corporation. Therefore, Pfarrer et al. (2008) underscore how adequate explanations are able to communicate concern for the corporations’ wrongdoing, can attract sympathy and understanding from audiences, and can reassure audiences that the organization has learned from its mistakes.
In this phase, just like in the previous one, inappropriate communications may backfire and render the restoration process slower and less successful. The use of rhetoric measures such as excuses and justifications may be problematic. Excuses attempt to deny or minimize one’s responsibility for a given event. Justifications, instead, attempt to reduce the negative impact of a given event. Further, apologies risk prompting audiences to confirm their negative opinion of the organization and its managers, this risk often pushes towards defensive behaviors that are then perceived as incongruent by audiences. The excessive focus on technical and rational frames of reference may also hinder the success of this phase, as firms often appear insensitive to the social repercussions of their actions. Answering social concerns with technical, legal or financial details risks making the organization seem callous regards the social harm and suffering caused by the firms’ actions. Dogmatic responses through which the management affirms the firms’ importance to society and its indignation, legal interpretations of organizational actions (e.g., that they meet legal standards) and their righteousness, or side-stepping legal or moral judgments by settling issues out of court (or away from public scrutiny) are all tactics that «avoid open dialogue on the validity of the charge of wrongdoing, ignoring underlying moral and ethical issues and pre-empting substantive changes (…) such tactics make the organization appear evasive and render legitimacy even more problematic» (Ashforth & Gibbs, 1990, p. 190).
3.3.3 The acceptance of equitable punishment
According to Pfarrer and his coauthors (2008), once salient audiences have reached an acceptable level of concurrence of the explanation for the culpable behavior, they pass to the penance stage in which the main aspect becomes finding an adequate punishment for the organization. By accepting an adequate punishment the organization validates an appropriate explanation and avoids audiences considering its explanations as void of real intentions to reconstruct a trust relationship with them. In fact, accepting a punishment is judged as a more tangible demonstration of the will to reconstruct a positive relationship with audiences and maintain it in the future. The punishment accepted should reflect the gravity and the scope of the harm caused. Stakeholders usually require transgressors to accept a punishment for their behavior, the authors of this stage model argue that the way an organization reacts to the attempts to punish it will influence the rapidity and the success of the restoration process.
Therefore, by accepting an equitable punishment, the organization implicitly communicates the intention to invest in reconstructing the damaged relationship with its audiences. As Pfarrer, DeCelles, Smith & Taylor (2008, p. 738) out it, «the organization that accepts its verdict, acknowledges that it is equitable, and serves its time without resistance will facilitate stakeholder concurrence at this stage and, thus, increase the speed and likelihood of its reintegration. These actions likely will lead stakeholders to believe that the organization has learned from its mistakes, intends to change its ways, and now has good intentions».
Resistance to punishment, instead, signals the lack of a disposition towards taking observer concerns at heart, it is dissonant to social expectations. In the long run, the firms’ resistance to accept punishment may render this phase longer and may actually increase the punishment deemed equitable. These consequences, of course, render the successful completion of this phase more costly and perilous.
Punishments may include the enforcement measures of formal laws and norms (such as fines, jail for corporate elites, delistings and so on), as well as social sanctions for unacceptable behavior. Social sanctions, as mentioned above, may take on different forms. Amongst these, there are also verbal reactions such as shaming and non verbal retaliatory reactions. Shaming implies the public embarrassment of the transgressor that stigmatizes it to a degree that makes it feel the sting of public disapproval. This kind of social enforcement doesn’t bring to severe economic consequences for the firm, rather it pushes the organization to change behavior in order to avoid further audience pressures. Retaliation, instead, includes all public punishment that is deemed of equal intensity to the harm caused by the culpable firm. Punishments are deemed equitable when the sum of formal and informal penalties are considered to be of the same entity of the damage caused by the organizational wrongdoing.
3.3.4 The consistency of internal and external rehabilitative organizational actions
Once observing audiences are content with the punishment inflicted on the culpable organization, their last concern is to evaluate whether adequate actions have been taken, both internally and externally to the firm, in order to guarantee that similar transgressions will not be repeated. Observing audiences tend to evaluate the single internal and external prevention measures, but also their mutual coherence.
Internal actions include changes in the technical, human, infrastructural, normative and social aspects of the organization that were directly or indirectly connected to the company wrongdoing. Structures, systems and processes may quite easily be changed and re-designed, whilst modifications of the organization’s culture, basic strategy and leadership style are much more difficult (Hurley et al., 2013, p. 80). Nonetheless, such changes signal the will to engage in substantially different behavior patterns in the future, rending the company’s image more trustworthy. These actions may include aspects like the re-design of governance mechanisms, board composition, reward systems and codes of conduct.
Particular relevance, in this setting, has been assigned to the practice of “stigmatization” of corporate elites. Leveraging the work of Meindl, Ehrlich and Dukerich (1985) and Pfeffer (1977) stigma studies explain that key audiences tend to interpret the corporations’ problems as personal attributes of their elites, independently from the fact that they have intentionally created the socially irresponsible act(s) or not (Goffman, 1963). This occurs because there is a widespread assumption that corporate elites have the function of maintaining healthy relationships with key audiences, should prevent others from denigrating their firms and are responsible for keeping their organizations alive (Sutton & Callahan, 2008, p. 420). Thus the perception of corporate wrongdoing implies that either corporate elites have contributed actively to the events that lead to the scandal or they have lost control of the corporation. Either way, organizational social scandals harm the personal legitimacy of corporate elites.
Though the stigmatization of organizations is usually intended as a negative process that threatens corporations’ survival (Hudson, 2008), it has been underscored that the stigmatization of corporate elites «can promote the long-term survival of organizations with their legitimacy intact» (Paetzold et al., 2008, p. 191). Weisenfeld, Wurthmann and Hambrick (2008), for example, demonstrate that by “singling out” the elites of the organization as responsible for corporate failures, arbiters of organizational legitimacy (like journalists, legal representatives and industry analysts) satisfy the desire of key audiences for simple explanations of what has occurred and for the identification of a responsible to punish. This process is described as attaching the “mark” of stigma to (or stigmatizing) the corporate elites. This process also implies a strategic restructuring of the corporation as it creates a symbolic distance between the “healthy” part of the organization and “bad influences” (Weisenfled et al., 2008, p. 243). Finally, stigmatizing corporate elites not only preserves the legitimacy of the remaining part of the organization, but it also helps preserve the idea that leaders maintain control of their organizations’ actions. This implies that the replacement of executives, following the stigmatization and the firing of the “bad” elites, should further help organizations to regain the confidence of the arbiters of legitimacy and of the firms’ key audiences.
In order to reinforce the rehabilitation process, organizations may adopt a series of external actions that portray a renewed image and communicate the commitment to change to constituent audiences. Such actions may include a «focus on renewal, charitable giving, and implementation of corporate social responsibility measures» (Pfarrer et al., 2008, p. 740), as well as the communications made to render internal actions and changes visible to external audiences. According to the model proposed, the efficacy of the rehabilitation phase depends on the degree of coherence between internal and external actions of the organization. When this coherence is low it tends to generate cognitive dissonances in the audiences and, in turn, this reduces the image of trustworthiness of the firm and hinders the successful and rapid conclusion of this phase.
The stage model proposed illustrates the phases underlying an effective process of legitimacy rehabilitation and firm reintegration. The basic idea underlying this model is that, «to the extent that the transgressor organization completes each of the four stages (i.e., concurrence among stakeholders is reached, meaning that their demands have been met), it is more likely to regain stakeholder support, restore its legitimacy, receive access to critical resources, and return to profitability» (Pfarrer et al., 2008, p. 740).
4. Comparing cases: the loss and restoration of legitimacy
at Enron and Parmalat
The theoretical framework that emerges from the sections above, regarding the emergence of a scandal following managerial social irresponsibility and the issue of loss and restoration of company legitimacy, may be applied and tested by confronting it with the analysis of longitudinal data regarding specific cases of corporate wrongdoing. In this section, two very notorious cases of managerial social irresponsibility are compared and contrasted. The significance of this particular comparison emerges from the stark similarities between the cases (similar antecedents of managerial social irresponsibility, similar degree of perceived culpability of the company elites, similar media attention and framing, similar victims and similar harm inflicted on them), but, surprisingly, the different outcomes obtained from their parallel legitimacy restoration processes. The case vignettes that follow are: the Enron and the Parmalat cases. The social scandals that exploded in 2001 and 2003 respectively have had very different finales: the first brought to the demise of Enron, but the second did not eliminate Parmalat. Today, Parmalat has returned to be a strongly competitive company in its core business, and is a target firm for foreign investors in Italy.
Enron
The Enron scandal is often remembered as the "September 11" of financial markets, because of its significant impact on the world economy. When it filed under Chapter 11 of the USA bankruptcy code on December 2nd 2001 (New York Times, 3/12/2001; CBS news, 23/10/2006), Enron was the seventh largest American company, with 21,000 employees, had recorded a turnover of over $100 billion and had assets for $63.4 billion. Enron was named "America's Most Innovative Company" by Fortune magazine between 1996 and 2001. Enron’s problems became apparent on October 16, 2001, when the corporation announced it was reducing its after-tax net income by $544 million and its shareholder equity by $1.2 billion. Shortly after, on November 8 of the same year, Enron gave the financial community a second larger shock: it was forced to acknowledge it had hidden losses in the Special Purpose Entities (SPE) and limited partnerships that it should have consolidated within its primary financial statements. As a consequence, it restated its previously reported net income for the years from 1997 to 2000. These restatements reduced overall shareholder equity by $508 million (Benston & Hartgraves, 2002: 105-106). Arthur Andersen was also involved in the scandal for covering the real conditions of the company and, worse still, for destroying Enron-related documents (Financial Times, 10/03/2002; 14/03/2002; 17/03/2002; The Wall Street Journal, 11/01/2002; 14/03/2002).
Enron’s crisis lead to massive labor lay-offs and dragged its stock’s value down from a high of $90 per share in mid-2000s to $0.26 by the end of 2001 (Bartley, 2002). The stock was in part held by Enron employees who had invested their tax-deferred retirement plans in the company’s equity. Thus employees and many small investors saw their savings’ value go from hundreds of thousands (or even millions) of dollars to almost nothing (New York Times, 22/11/2001). The prominence of the company and of the wrongdoing that implied the widespread destruction of the wealth of thousands of innocent “victims” attracted a huge amount of attention and was widely reported, commented and studied in popular, financial and expert media, as well as generating a series of formal investigations and legal actions.
Enron was founded by Kenneth Lay, who created it through the merger of Houston Natural and Internorth of Nebraska, and was originally a vertically-integrated “asset heavy” energy company. Soon after the deregulation of the natural gas, utilities and local distribution markets, Jeff Skilling (a previous McKinsey partner and an Enron elite from 1990) convinced Lay to transform the company into a trading company. Enron became a market maker and its main competence was to manage the risks connected to mismatches between sourcing and marketing contracts. Enron successfully deployed its risk management competency in the North American electricity market, then it expanded into the European energy markets. The success obtained in the basic energy markets pushed Enron elites towards fostering a rapid growth strategy. This orientation towards rocket growth was mirrored in Skilling’s idea that «the purpose of a firm is to create options» (Chatterjee, 2003). As a consequence, the company diversified in trading (and partially also production) within a series of industrial markets (such as pulp, paper, textiles, metals, lumber and so on), expanded into energy industries in third world Nations, invested in the retail electricity market and the supply of broadband capacity and created an electronic transaction platform for commodities (Chatterjee, 2003; Grant & Visconti, 2006).
Unfortunately, as mentioned initially, this rapid growth was not entirely successful and many of these ventures destroyed substantial amounts of shareholder wealth. Though a significant portion of Enron’s failure was due to strategic errors (Chatterjee, 2003; Grant & Visconti, 2006; Gavetti et al., 2005), managerial hubris (Cruver, 2002; Dallas, 2004; Dagnino et al., 2012) and its aggressive incentive system (Deakin & Konzelmann, 2003), Enron’s case falls within the phenomenon of managerial social irresponsibility because company elites deliberately acted to cover up financial losses, had disproportionate personal and financial gains from the company, did not maintain independence of perspectives and made recurrent mismanagement acts that, in the end, lead to the destruction of wealth illustrated above. Amongst the main wrongdoings that emerged in the Enron case there are: «(1) The accounting policy of not consolidating SPEs that appear to have permitted Enron to hide losses and debt from investors. (2) The accounting treatment of sales of Enron’s merchant investments to unconsolidated (though actually controlled) SPEs as if these were arm’s length transactions. (3) Enron’s income recognition practice of recording as current income fees for services rendered in future periods and recording revenue from sales of forward contracts, which were, in effect, disguised loans. (4) Fair-value accounting resulting in restatements of merchant investments that were not based on trustworthy numbers. (5) Enron’s accounting for its stock that was issued to and held by SPEs. (6) Inadequate disclosure of related party transactions and conflicts of interest, and their costs to stockholders»[5] (Benston & Hartgraves, 2002, p. 108).
The entity and prominence of the scandal connected to Enron’s financial losses and restatements triggered an attempt to manage the crisis. As a result, a number of actions were taken: (i) the investigation and explicit explanation of the causes underlying frauds committed by Enron; (ii) the identification of who was to hold responsible for the fraud and their punishment; and, furthermore, (iii) the implementation of a rapid strategic restructuration to distance the company from previous “bad” leaders. The former Enron Chairman and CEO Kenneth Lay was replaced by Stephen F. Cooper, who was named the week after Mr. Lay’s resignation (January, 22nd, 2002) as interim CEO and chief restructuring officer to lead Enron’s recovery (IlSole24Ore, 25/01/2002). Although the new management was perceived as a good signal for the company’s survival (Financial Times, 30/01/2003), the process underlying legitimacy reconstruction was not sufficient to keep key audiences from withdrawing their support for the firm, leading to the final demise of the company.
Parmalat[6]
The scandal that hit the Italian dairy giant Parmalat in December 2003 has been described as the most “spectacular” corporate failures and massive shareholder losses in Europe (Grant & Visconti, 2006, p. 362). At the time in which it was declared officially insolvent (Corriere della sera, 27/12/2003) in December 2003, Parmalat was a huge multinational company whose activities covered 139 industrial plants spread across 30 different countries (Il Sole 24Ore, 11/12/1994, 31/05/1995, 22/03/1997) and had over 36,000 employees. Parmalat’s equity was listed on the Milan Stock Exchange since 1990 and, right up to the explosion of the financial scandal, it counted on the support of well regarded institutional investors, the banking system, creditors and solid credit ratings. Parmalat’s strong industrial and financial reputation was paralleled by a very positive social image. It had earned the image of being a “good corporate citizen” (Malagutti, 2004) through significant donations to local causes, such as the restoration of Parma’s City Cathedral (Parmalat’s home town monument), and its regard for the environment (also widely communicated through the diffusion of environmental impact reports issued by the company). Internally, Parmalat had elaborated and adopted a self-disciplining internal code of governance and conduct to enhance socially responsible behaviours on behalf of its employees. The financial meltdown of the company and the arrest of Mr. Tanzi, who was once the symbol of Parmalat’s unlimited success, on the basis of accusations of financial fraud, accounting misrepresentations and money laundering in December 2003 gained widespread national and international media attention and were a huge shock for all Italians.
Parmalat’s financial fragility began to emerge in mid-December 2003, when rating agencies started downgrading its bonds to junk status (La Repubblica, 09/12/2003; Il Sole 24Ore, 11/12/2003; 12/12/2003; 13/12/2003 ) as a consequence of a general mistrust in the firm’s ownership and management. Very shortly after, on the 19th of December, Parmalat concretely manifested its financial crisis as it was unable to refund a €150 million bond obligation that had become due. The Bank of America, who according to the documents produced by Parmalat held company reserves that had guaranteed the financial capacity of the firm to issue and refund the bonds, announced that the Epicurum €3.95 billion account (belonging to Parmalat) didn’t exist, creating panic in financial markets and the plummeting of corporate stock values. A few days later, the company was declared officially insolvent (Corriere della Sera, 27/12/2003).
Thousands of investors were afraid of losing the savings they had invested in Parmalat bonds (Financial Times, 18/11/2005); thousands of employees started worrying about their jobs, and creditors began to worry that Parmalat would not be able to refund the money it owed them (Il Sole24Ore, 19/12/2003). In a videotaped interview diffused by the Italian newspaper la Repubblica’s website, Parmalat debtholders' lawyer, Carlo Federico Grosso, described the typical “victims’ identikit” as retirees who had invested their severance pay to ensure a peaceful future, workers who had trusted a historic brand and other small savers. An analogous description was made by international mass media, the Financial Times’ article on March, 5th, 2005, titled “Parmalat sting hits Italian pensioners” is a case to the point. As widely reported by the media, debtholders and employees were not in a position to suspect the company’s true financial situation and state of insolvency and, as such, were “victims” of the company’s intentional wrongdoing. About 110,000 small investors held Parmalat bonds or shares when the company collapsed, and many of these investors had bought Parmalat bonds only months before the roof fell in (Financial Times, 05/10/2004).
Parmalat’s success is connected to its founder, Mr. Calisto Tanzi. In the 1960’s Parmalat was a family-run regional Italian milk company, that built solid bases of competitive success in its business based on strong innovation and differentiation competences. When, in the 1970’s, the Italian municipal centres of milk distribution were suppressed, Parmalat rapidly increased its production capacity in order to access and leverage the benefits of large-scale retail chains. As a result, the company extended its market to the whole of Italy and grew rapidly. Revenues grew from 260 million Italian Lira in 1962 to 289 billion Lira in 1980. In the wake of the 1980s, and fostered by the huge success of the previous years, Tanzi’s vision for Parmalat was “grow to compete”. In order to grow, the company began to diversify and invested into other dairy products (Il Sole 24Ore, 18/03/1988; Mondo Economico, 21/09/1987), food and drink industries (Il Sole 24Ore, 19/01/1988; 01/03/1988; 09/06/1988; 21/06/1988). By the end of the 1980’s Parmalat had a portfolio of 250 different products that it distributed under five different brand names (Il Sole 24Ore, 19/01/1988; 01/03/1988; 21/06/1988; Mondo Economico, 13/05/1996). During the period between the end of the 1980’s and through all of the 1990’s, Parmalat increased it’s geographical and product/market diversification strategy in order to feed into the fast growth strategy. As a result, Parmalat invested in industries that ranged from tourism to football teams.
All through the following decade, Parmalat increased its debts in order to build new plants and maintain strong product branding (Il Sole24Ore, 11/03/1994). It acquired over 200 companies spread across 30 countries (Il Sole24Ore, 11/12/1994, 31/05/1995, 22/03/1997). Parmalat’s growth strategy was to finance acquisitions through debt. Unfortunately, most of the investments and acquisitions the company made were not as profitable as expected. Though a significant part of Parmalts’ financial misfortune was due to faulty strategic planning (Grant & Visconti, 2006) and managerial hubris (Dagnino et al., 2012), the Parmalat case falls within the phenomenon of managerial social irresponsibility because company elites deliberately acted to cover up financial losses, had disproportionate personal and financial gains from distracting funds away from the company, did not maintain independence of perspectives and made recurrent mismanagement acts that, in the end, lead to the financial meltdown of the firm. Among the main wrongdoings that emerged in the Parmalat case there are: (i) the systematic overstatement of company revenues and profits in order to deliver acceptable returns on its investments; (ii) the adoption of fraudulent accounting practices to underreport its debts; (iii) the recurrent creative practice of transferring company funds abroad to subsidiaries, limited companies and funds that were owned by the Tanzi family, detracting them from the company equity (La Repubblica, 20/01/2004; 21/04/2004; Il Sole 24Ore, 30/12/2003).
The prominence of the company and the extent of the economic harm connected to the failure of Parmalat attracted huge media attention and triggered an attempt to manage the company crisis. Corporate elites were immediately singled out and stigmatized by legitimacy arbiters such as journalists and industry analysts (ANSA, 19/12/2003). In fact, Calisto Tanzi (the CEO of the company) Fausto Tonna, Alberto Ferraris and Luciano del Soldato (the CFOs of the company during 2003) were “marked” as the elites responsible for the intentional fraud and for cooking the books leading to the company’s financial crack. Legal actions were immediately filed by Milan’s court against Mr. Tanzi. The founder of the company and more than a dozen other former Parmalat employees and advisers were charged weeks after the collapse (Corriere della Sera, 28/06/2005; The New York Times, 26/07/2007)[7].
Furthermore, two strategic restructuring measures were taken: the replacement of the company’s CEO with a manager – Mr. Bondi – who had gained a positive reputation due the ability he had manifested in managing the turnaround of the Montedison and the Lucchini groups; the corporate governance of the corporation was restructured, as former bond holders were transformed into shareholders of the company (Financial Times, 3/10/2005). Thus, the harmed small investors’ role was changed from external financers of the company to part of the company’s ownership. This substantial change in corporate governance was due primarily to the necessity to “re-pay” harmed company investors in a way that did not involve immediate cash outflows. However, it also changed the role assigned to the former bond-holders that, as a result, became entitled to exercise an active control on future firm actions.
Though the Parmalat corporation as a whole was accused of the corporate social irresponsibility scandal and the journalistic framing of the fraudulent issue recurrently recalled and leveraged Parmalat’s long standing image of quality and innovation in the milk industry (the products for which it was best known and most appreciated by all readers), audience support was not maintained evenly throughout the entire firm. In fact, the dairy business unit of the firm was the only one to maintain the support of all constituent audiences of the organization: the new CEO Mr. Bondi’s, the Italian State through the Prodi-bis decree, and Parmalat’s consumers. The other businesses of the Parmalat corporation experienced the classic withdrawal of audience support that is largely reported in corporate social irresponsibility literature.
3.5 The necessary and insufficient role of legitimacy restoration for firm survival
Though there has been a general tendency to correlate managerial social irresponsibility to audience withdrawal and, in many cases, to the very demise of culpable organizations[8], a significant number of studies have argued that harmed organizational legitimacy may be restored and that the company may be reintegrated with its main audiences. Following the positions of these authors (e.g., Hurley, et al., 2013; Paetzold et al., 2008; Pfarrer et al., 2008; Sutton & Callahan, 2008; Suchman, 1995; Weisenfeld et al., 2008), companies may restore their harmed legitimacy by engaging in a process of sincere relationship reconstruction with their main audiences – searching for the causes leading to corporate wrongdoing, explaining what happened with transparency, accepting equitable punishment and taking the measures necessary to modify internal structures and process in order to prevent the repetition of social wrongdoing and coherently manifest this change of social orientation to external audiences. The taken for granted consequence of legitimacy reconstruction in this view is the restoration of audience support and, as a result, of the conditions for firm survival (for example, Pfarrer et al., 2008, p. 740). The Enron and Parmalat vignettes reported above show that the outcome of the legitimacy reconstruction process following severe cases of managerial social irresponsibility may not be connected mechanically to the correct execution of a crisis management plan and a legitimacy reconstruction process. On the other hand, however, they also illustrate that it is not possible to take for granted that managerial social irresponsibility automatically leads audiences to withdraw their support for the culpable company once a scandal emerges, as sustained in the corporate social irresponsibility studies based on broad structure reasoning. In fact, the cases above illustrate that there are a variety of possible outcomes of very similar legitimacy reconstruction processes, following parallel cases of managerial social irresponsibility scandals.
The question, therefore, regards which further evaluation criteria are taken into consideration by audiences once legitimacy reconstruction processes have been undertaken with success following instances of managerial social irresponsibility. The research regarding the audience evaluations that follow and complement legitimacy reconstruction in order to decide whether to maintain or withdraw their support for the culpable organization will be the focus of the following chapter of this volume.
4. The drivers of audience support in the aftermath of managerial social irresponsibility
The adoption of a socio-cognitive perspective has allowed to adopt an evaluator’s perspective and, as a consequence, has fostered the clarification of many crucial aspects that influence the effects of managerial social irresponsibility on firm survival. A first set of factors influences the very perception of the socially irresponsible actions taken by corporate elites – these include all the dimensions reported in the first chapter as elements that enhance or, on the contrary, reduce the observers’ ability to perceive instances of managerial social irresponsibility (Lange & Washburn, 2012; Crane, 2013). Other aspects considered influence the possibility and ease for the firm to manage its legitimacy restoration process – aspects such as the number of different salient audiences with dissimilar agendas to satisfy in the reconstruction process or repeat transgressions, are examples of such elements. Also the timing of the scandal relative to other transgressions of a similar type can impact the difficulty to restore the firm’s harmed legitimacy (Pfarrer et al., 2008, p. 741-742). In his study on “stigma”, Hudson (2008, p. 253) distinguished between event stigma and core stigma: the first results from a discrete anomalous, episodic event, whilst the second is central to who the firms is and what it stands for. In his view, firms may recover from the first type of stigma, but core stigma is not recoverable, at least in the short term.
Aimed to further shed light on the puzzling results of the comparison between the cases of Enron and Parmalat, in the chapter that follows the analysis is focused on the interplay between different types of audience judgments of a given firm that are triggered by a single negative cue regarding managerial social practices. The focus of the present chapter is, therefore, neither on the characteristics of the single trigger events, nor on of the culpable organization, nor on the management of the legitimacy restoration process following the social scandal, rather it is the interplay between different forms of social judgments and its effect on audience reactions to managerial social irresponsibility scandals.
4.1 Audience judgments of managerial actions
As illustrated in the last chapter, societies discipline of actors and firms both through the enforcement of laws and formal standards of conduct and through decisions to maintain or withdraw their support following social judgments of their behavior. In general, social judgment of a firm may be defined as «an evaluator’s decision or opinion about the social properties of an organization» (Bitektine, 2011, p. 152). As recalled in the last chapter, a relevant part of management and organization literature has referred to legitimacy as the main concept capturing the essence of social assessments of individual and organizational behaviors. As highlighted before, legitimacy is a multifaceted concept that includes cognitive, moral and pragmatic dimensions of social evaluation. Each of these dimensions has specific characteristics and will tend to be more relevant for a part of the firm’s audiences and less for others. To this effect, Suchman (1995, p. 578) underscores that «real world firms have various dimensions (…) The distinction between the behavioral dynamics that sustain each dimension of legitimacy renders it difficult for firms to satisfy all audiences, but it creates opportunities connected to the strategic maneuver of communication and of the firms’ cultural environment». Notwithstanding the multiplicity of aspects captured within the legitimacy concept, it is necessary to underscore that there are other concepts relative to social evaluations of organizational behavior that have emerged in economics, strategy, marketing and management literatures. A second largely studied concept connected to the social evaluation of the firms’ actions is the notion of reputation (Bitektine, 2011; Fombrun, 1996; Fombrun & Shanley, 1990). Though the nature of each concept and the borderline between them will be clarified further ahead, it is of relevance at this stage to underscore the common traits that characterize all socio-cognitive processes underlying social evaluations of firms.
Research regarding social judgment formation leverages findings from the field of social-psychology in order to elaborate the evaluator’s perspective of social assessments of firm actions. Mishina, Block and Mannor (2012, p. 462) underscore characteristics of the dynamics underlying all social evaluations of organizational actions that are of relevance also for the present study: (i) prior beliefs seem to influence both the attention levels towards specific information regarding an entity and the interpretation of such information (Darley & Fazio, 1980). In other terms, social judgments are path dependent (Arthur, 1989); and (ii) the salience of the information regarding a given entity will influence the way it is incorporated in subjective evaluation processes. The degree of salience of a specific piece of information depends on the type of social judgment it is relevant for and the fact that it is considered a positive or a negative cue relative to existing opinions (Wojciszke et al., 1993).
The path dependency of social judgments is due to the fact that prior beliefs about a given aspect of an entity will influence what observers expect and what they pay attention to, as well as how they will interpret what they perceive (Friske & Taylor, 1991). If an observer has no prior belief relative to an entity, or this belief is neutral, then path dependence doesn’t play a role. If, however, there is a prior positive or negative belief regarding an entity then observers tend to maintain evaluative consistency and, therefore, will interpret equivocal or weak cues as confirmatory to their initial opinion or will attribute contrasting cues to situational factors (Darley & Fazio, 1980).
Single perceived cues are aggregated through a process of «cognitive algebra to form an overall assessment» (Mishina et al., 2012, p. 462), but each cue will have a specific weight in the evaluation process according to the aspect it is significant for and whether it is positive or negative. If the information perceived relates to the operational and competitive characteristics of a firm, then positive cues are more salient than negative ones. In fact, a positive indication regards the competences of an entity communicate the possession of the ability to obtain a particularly positive result (Wojciszke et al., 1993). Instead, negative cues related to an entity’s operational and strategic competences, indicating that the entity is unable to perform as expected, tends to be attributed to situational characteristics or a lack of commitment of the firm on the particular aspect considered (Mishina et al., 2012, p. 462). When considering judgments regarding the social engagement of the firm the reverse occurs. In this case, in fact, positive cues are less salient as they communicate that firms are conforming to the societal moral, normative and cognitive expectations observers have for all firms. Instead, negative cues relative to the societal expectations for organizations becomes salient as it signals discrepancies relative to the “base line” of acceptable social behaviors for firms. Furthermore, this information tends to be interpreted as a reliable indication of the true underlying nature of a firm.
The distinction of these fundamentally different ways of assessing the social behavior of a company is important because the cognitive biases and heuristics underlying the attention towards specific cues and their interpretation is not homogeneous. From the evaluator’s perspective, different forms of social judgment seek to answer a diverse set of questions regarding a specific entity. Therefore, it is presumable that the situations in which each type of social evaluation is most relevant will probably be different. Furthermore, the cognitive requirements that undergird each form of social assessment will likely play a role on which one (or ones) is deployed, also in consideration of the specific evaluative interests and needs the observers express in a given situation and social context. Therefore, for the organization, legitimacy and reputation will have different relevance and diverse strategies underlying their increase, maintenance, loss and restoration.
Connected to the diversity of the nature and relevance of the different forms of social judgment, is the issue raised by different authors lately (Bitektine, 2011; Deephouse & Carter, 2005; Mishina et al., 2012) regarding the possibility that firms maintain and manage diverse social evaluations contemporarily. Though the relevance and the complexity of managing different forms of social evaluation contemporarily has been mentioned in the studies indicated above, it has not constituted the focus of specific research and remains to be further clarified. In the pages that follow, the effects of one form of social judgment on the other, and the combined influence they may exert on the sustainability of firm survival in the aftermath of a social scandal, will be investigated in more detail.
4.1.1 The variety of corporate audiences
Both legitimacy and reputation are multifaceted concepts (Suchman, 1995; Fombrun & Shanley, 1990), as they involve an array of dimensions, each of which tends to be more salient to specific audiences (Rhee & Valdez, 2009). In this sense, firms have multiple evaluating audiences, each of whom will choose a specific criteria according to which it will evaluate the social behaviors of the firm. The criteria chosen will depend on the distinctive characteristics that undergird its relationship with the focal organization and the goals it is pursuing through the relationship (Wojciszke, 1994, 2005). In fact, the objectives that guide the interaction between individuals and a focal organization will influence which information is considered salient and the interpretation given to it. For example, «while current and potential customers might care most about an organization’s ability to produce high quality products; current and potential employees might be primarily interested in the organization’s trustworthiness; analysts and investors, the financial health of the organization; and competitors, the organization’s research and development capabilities» (Mishina et al., 2012, p. 464). Typical audiences more extensively researched have included the social endorsement by the media (Pollock & Rindova, 2003), by regulators (Deephouse, 1996; Rao, 2004), by investors (Certo, 2003), by organizational insiders (Kostova & Zaheer, 1999), and by consumers (Castaldo, 2002; Vicari et al., 2000).
The fact that there are multiple audiences who evaluate the firm at any given moment in time implies that, when considering social evaluation and endorsement, it is necessary to ask «endorsed by whom?», «legitimate to whom?», well reputed by whom? (Hudson, 2008, p. 262). As the same cues may have heterogeneous influences on audiences who have distinct values and interests in their relationship with the firm, a given organization’s social evaluation may be very different from one audience to another. Though some authors have argued that it is more significant to research the net assessment across different audience evaluations (Fombrun, 1996; Fombrun & Shanley, 1990), in this study the focus will be at the single audience level as many specificities and assumptions made relate to the relationships and interests that characterize the single audiences. The choice to focus on this level of analysis does not, however, exclude that all audiences of the firm may have a convergent image and opinion of its social behavior. Furthermore, though it still needs to be further researched, in principle the evaluations made by one audience of the firm may influence the way other audiences perceive and assess the same organization (Mishina et al., 2012, p. 473).
From the firm’s perspective, the variety of audience evaluations becomes particularly relevant, as it must be underscored that not all audiences are equally important (Pfarrer et al., 2008; Rhee & Valdez, 2009). This implies that corporate management must identify and analyze the firms’ audiences, in order to chose the audiences to attend to most and leverage the possibility to manage the firms’ relational environment strategically (Suchman, 1995, pp. 578-582).
4.1.2 The distinction between corporate legitimacy and corporate reputation
Corporate legitimacy and corporate reputation are two concepts that represent assessments of an organization by a social system. These concepts are similar as they both result from social construction processes and both have an influence on the ability of the firm to acquire new resources from its environment (Deephouse & Carter, 2005, p. 330). Leveraging the studies that have systematically compared and contrasted the two forms of social assessment of firm behavior (Bitektine, 2011; Deephouse & Carter, 2005; Mishina et al., 2012), in the lines that follow the distinguishing traits of each concept are outlined.
As illustrated in more detail in the third chapter of this volume, the notion of legitimacy introduced in this study recalls the extensive review and re-elaboration of the concept conducted by Suchman (1995). In particular, legitimacy is intended as «a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs and definitions» (Suchman, 1995, p. 574). Therefore, it is a concept that emphasizes social acceptance resulting from the adherence to social norms and expectations (Deephouse & Carter, 2005, p. 329). As illustrated in the third chapter, legitimacy is a multifaceted concept that includes a cognitive, a moral and a pragmatic dimension.
The concept of reputation has been defined as the «collective, stakeholder group-specific assessment regarding an organization’s capability to create value based on its characteristics and qualities» (Rindova et al., 2007; Rindova et al., 2005). Corporate reputation depends on the judgment regarding the capabilities underlying the quality and the performance of the firm’s activities. Reputations signal the firm’s commitment to deliver desirable product or service features, like quality or reliability, to its consumers and the managements’ commitment to act in reputation-consistent ways towards investors (Fombrun & Van Riel, 1997, p. 6). In a context in which observers have insufficient information to analytically assess corporate behaviours, reputation is used as a cognitive shorthand or heuristic to make inferences about the soundness of the bases of company success. Reputation, therefore, allows to infer «what the company is, what it does, what it stands for. These perceptions stabilize interactions between a firm and its publics. (…) reputations are information signals that increase observer’s confidence in the firm’s products and services» (Fombrun & Van Riel, 1997, p. 6).
Therefore, whilst legitimacy focuses on the similarity between firms, reputation highlights the differences between organizations (Bitektine, 2011, p. 160). In other terms, reputation «in essence indicates the company’s relative position amongst its counterparts» (Deephouse & Carter, 2005, p. 331). Furthermore, whilst both social judgement forms are based on past investments and behaviours, legitimacy signals the social acceptability of the firm at present, whilst reputation leverages past experience to signal likely future behaviours of the organization, including the reliability of its products and services, its vigour in competitive response and the soundness of the bases underlying its market and financial performance. In essence, it answers questions like «How will the organization perform/behave in the future relative to other organizations in the set?» (Bitektine, 2011, p. 163).
4.1.3 The microfoundations of reputation evaluations
Reputation evaluations are elaborated by corporate observers in order to tackle the uncertainties they face in deciding if and how to interact with the firm. In particular, the uncertainties reputation signals address stem from the impossibility to acquire direct information relative to the quality and reliability of the firm or its products and, furthermore, to predict the competitive actions or reactions it will adopt in the future (Mishina et al., 2012, p. 461).
Underlying firm reputations are prior investments of resources in first-order operational activities, the development of distinctive and valuable firm capabilities and the capacity to leverage them in order to position the firm coherently with the competitive requirements of the industries in which it operates. These aspects, in fact, signal a reliable and predictable image of the firm and its bases of behaviour to customers, employees, competitors, investors, the media and to the general public.
From the evaluator’s perspective, a firm’s reputation is built mainly on the basis of positive cues. Mishina, Block and Mannor’s (2012) study argues that individuals build their perception of the capabilities a firm possesses to create value on the basis of the historical accomplishments it has obtained. Once the ability to perform in a certain way has been proved, the resources and capabilities that typically undergird such performance are assumed to be possessed by the firm and audiences begin to take such abilities as a given and replicable.
4.1.4 The microfoundations of changes in reputation evaluations
Mishina, Block and Mannor’s (2012) study argues that, from a dynamic perspective, the modification of observer evaluations follows different logics according to whether the information signals regarding a firm are positive or negative and whether the existing reputation is high or low. In general, given an initial reputation evaluation, observers will tend to be more receptive to confirmatory information and will tend to interpret ambiguous or complicated information in a way that does not create cognitive dissonance (Darley & Fazio, 1980).
In particular, if a firm has a positive reputation further positive cues tend to be picked up with more rapidity and tend to be granted wider attention. Thus, positive cues feed into up-grades of reputation perceptions, but the entity of these increases tend to be positively correlated to the existing level of firm reputation. For example, Pfarrer, Pollock and Rindova’s (2010) empirical study showed that positive earning increases had a larger effect on firms with a high prior reputation than on the firms with a lower initial reputation.
Once a firm has built a positive reputation, negative cues have a weaker influence on observer evaluations. Unless negative performance cues are very significant, weaker signals tend not to be interpreted as an indication of organizational capability decline, but rather of alternative explanations that avoid infringing on the basic evaluation of the abilities of the firm. Thus, when the company’s reputation is positive, negative performance signals tend to be interpreted as a consequence of environmental or external factors that have influenced the outcome of the firm’s activity temporarily – such as a general “bad economic phase” or temporary input price increases –, or they may be attributed to internal factors – such as an indication that the company has a weak motivation to invest in the low performing activity. Thus company reputation tends to be based on the positive performances obtained by the firm in time and, further, it tends to be “sticky” towards positive confirmation of prior evaluations.
4.1.5 The criteria underlying audience judgment form selection
The issue of judgment form selection is important as the results each form comes to may not always be aligned with the outcomes of the others for a given focal firm in a specific time and space. Thus, the form of assessment used by each of the company’s audiences may influence the outcome of the process underlying the decision to maintain or withdraw their support to an organization and, as a consequence, concur to determine its very survival. As such, there is the need to comprehend the criteria underlying the choice of the assessment modes that will be used by the firm’s audiences and, furthermore, to allow for mixed or sequential judgment forms (Bitektine, 2011, p. 167; Deephouse & Carter, 2005, p. 351; Mishina et al., 2012, p. 473).
From the evaluator’s perspective, the different type of legitimacy and reputation evaluations may be distinguished on a functional basis. In fact, each of these forms of social assessments answers a distinct type of question regards a focal organization. In particular: «Does the organization belong to any familiar class or category? (cognitive legitimacy judgment); Does the organization have the right to exist? And/or is the organization beneficial or hazardous to me, my social group, or to the society in which I live? (sociopolitical legitimacy judgment); How will the organization perform/behave in the future relative to other organizations in the set? (reputation judgment)» Bitektine (2011, p. 173). In principle this would suggest that the choice of the form of assessment observers engage in depends on the circumstances and the factors that render one type of judgment more useful than the others in a given space and time.
In his model of social judgment formation, Bitektine (2011) proposes that various factors will influence the judgment form selected by audiences of a focal firm. A part of these factors influence the rational choice of an assessment mode, but other factors (related to the principles of cognitive economy and to the social context) influence the adoption of heuristics and cognitive shortcuts. The model begins by considering the task characteristics of the judgment to make. Given the efficiency of cognitive legitimacy judgments, this form of judgment will probably be used often and in those cases that require a low-involvement decision in which the evaluator can be satisfied by any member of a given class of firms. When the observer wants to express his or her social values through actions and support decisions, the form chosen will tend to be a sociopolitical judgment (e.g., decisions to buy fair trade goods). When the evaluator wants to solve the uncertainty about the future behavior of a potential exchange partner, the form used will most likely be a reputation judgment that uses information signals from the past as a predictor of future behaviors of the actors.
The form chosen also depends on the evaluator’s individual properties and the time and resources he or she is willing to engage in the research of information and the elaboration of a detailed assessment. When the information available to observers is little and there is not a specific interest to engage in the research and elaboration of more cues, then cognitive judgments should prevail. Some observers tend to be intrinsically more prone to the research and elaboration of further details regarding the moral and legal stances of firms. These individuals are typically socially conscious “activists” and tend to engage more easily in sociopolitical assessments. Finally, Bitektine identifies low-trust individuals as observers who will tend to be triggered to adopt active reputation evaluations particularly easily.
Individual motivation also plays a role in selecting one form of social judgment rather than another, high motivation towards the adoption of an extensive analytical evaluation of the firm will be connected to aspects such as «high economic and social stakes linked to the outcome of the evaluation, the intensity of social pressure to have and express a judgment, the low psychological tolerance of uncertainty (...) and, finally, the availability of resources (…) promote an extensive evaluation (…) The opposite contextual characteristics would favor the use of cognitive heuristics» (Bitektine, 2011, p. 170).
More than one social evaluation form may, however, be used contemporarily or in sequence if necessary. Hirsch and Andrews (1984, pp. 173-174) suggest that low performance reputations tend not to threaten the organization’s continued existence as long as its legitimacy remains unchallenged. They do, however, underscore that particularly low performances may affect the firms’ legitimacy. In particular, the authors note «Performance challenges (to legitimacy) occur when organizations are perceived by relevant actors as having failed to execute the purpose for which they are chartered and claim support. The values they serve are not at issue, but rather their performance in “delivering the goods” and meeting the goals of their mission are called into question. (A performance challenge) places the target in an inherently more unstable situation than is addressed in a comparative or longitudinal examination of administrative efficiency». Therefore, their study illustrates how significant negative cues regarding the abilities underlying performance may trigger de-legitimizing perceptions as the very nature of the firm is posed into question.
Deephouse and Carter (2005, p. 351) recall Hirsch and Andrew’s (1984) research and call for studies regarding the complexities underlying the management of legitimacy and reputation simultaneously, and suggest that «future research could examine the degree to which losing legitimacy and/or reputation will interfere with a firm’s ability to operate effectively». The authors further specify that «A case study of a legitimate and highly reputable organization that deviated so far as to lose legitimacy could inform practice and theory».
4.1.6 The sequencing of audience judgments following managerial social irresponsibility
The model introduced by Bitektine (2011), on the one hand, and the indications regarding the salience of positive and negative information cues for legitimacy and reputation judgments, along with the path-dependent nature of social judgments highlighted by Mishina, Block and Mannor (2012), on the other, allow to draw some initial intuitions regards the possible sequencing of audience judgments following managerial social irresponsibility scandals. In particular, the firms referred to in this study tend to be prominent companies, that possess both high legitimacy and high reputations, as it is their notoriety that determines the emergence of a «scandal» following the perception of illegitimate actions taken by their management ( in accordance with Brehm and Brehm’s (1981) reactance theory.
In order to comprehend the sequence of social judgments that follow instances of managerial social irresponsibility scandals, it is necessary to start by underscoring that cognitive psychology suggests that individuals are not always pro-active towards meaning construction. Real life constraints such as incomplete availability of information about the organization (March & Simon, 1958), time constraints and a short attention span, imply that the resources dedicated to the active scrutiny of organizations is limited. Thus, according to the principles of cognitive economy (Rosch, 1978), individuals tend to base their actions on a series of cognitive shortcuts and heuristics. This implies that there is the concrete possibility that audiences interact with many companies on the basis of «incomplete or missing assessments» and that there is a «pool of un- or underevaluated organizations whose legitimacy and reputation in undetermined» (Bitektine, 2011, p. 164). Asforth and Gibbs (1990, p. 183), for example, argue that once firms attain a certain threshold of legitimacy endorsement, its constituent audiences tend to «relax their vigilance and content themselves with evidence of ongoing performance vis-à-vis their interests and with periodic assurances of “business-as-usual”. (…) In short, once conferred, legitimacy tends to be taken largely for granted (…) Reassessments of legitimacy become increasingly perfunctory if not mindless (…) and legitimation activities become increasingly routinized».
In a similar vein, Bitektine (2011, p. 165) proposes that «an organization with unknown socio-political legitimacy is likely to be regarded as legitimate until proven otherwise». Thus, unless a company breaks the law (e.g., the company has evaded taxes) or does not conform to compulsory standards (e.g., it exceeds the allowed pollutant emission levels) it is treated as legitimate. According to the author, the same applies also in the domain of informal social and moral norms, as well as for reputation judgments.
Conditions that foster active scrutiny of firm legitimacy have been listed by Ashforth & Gibbs (1990, p. 182). More generally, however, social psychology studies on attention levels indicate that the salience of negative events is higher than the salience of positive stimuli (Skowronski & Carlston, 1989). Bottom, Gibson, Daniels and Murnighan (2002), for example, underscore that transgressors are more closely evaluated for evidence of an additional violation than non transgressors due to the fragility and uncertainty that characterizes damaged relationships between an entity and its audiences. However, as recalled above, Mishina, Block and Mannor (2012) introduce an intriguing distinction between the salience of negative cues for reputation and legitimacy evaluations. Negative cues tend to be disregarded in reputation evaluations unless they are macroscopic deviations from expected performances, but tend to generate strong reactions in legitimacy evaluations.
It follows that, negative cues relative to the firm’s behavior will most probably be perceived and paid attention to from a legitimacy perspective, but will probably be disregarded in terms of reputation evaluations. Therefore, weaker negative signals of illegitimacy will tend to by picked up by audiences more rapidly than similar signals of falling value creation capabilities. The perception of managerial social irresponsibility – that, by definition, entails the negative moral evaluation of the actions taken – is an event that will trigger audiences out of a passive evaluation mode and into a pro-active assessment of all the aspects and dimensions underlying the decision to maintain their support for the organization. The delegitimizing effect of the social scandal, in fact, will increase the individual and social motivation towards performing an analytical revision of the more time consuming forms of legitimacy and reputation evaluations. The burden of taking on more extensive evaluations of the firm’s behaviors is usually reduced in part by an upsurge of infomediary interest in the culpable firm, that implies a rapid increase in the information available to make (or revise) a more analytical social judgment of the focal company.
Furthermore, not only does the trigger event of a social scandal imply all aspects underlying the survival and success of an organization are questioned, but the increased attention will also spread beyond the victims of corporate wrongdoings to all constituent audiences.
The deductions that stem from the theoretical models recalled seem useful to shed light on the questions that remained unanswered relative to the divergent results of the similar legitimacy reconstruction processes following the parallel cases of managerial social irresponsibility scandals at Enron and Parmalat. Following the reasoning above suggest that, in the empirical examples described in the third chapter, corporate audiences seem to consider the moral legitimacy that has been harmed by the acts underlying the managerial social irresponsibility scandal and the processes undertaken to reconstruct it at the overall firm level, but then proceed to evaluate the maintenance of their support for the company also on other bases and at a more fine-grained level of analysis of the organization and its activities. The loss of legitimacy that follows managerial social irresponsibility scandals attracts audience attention also to the sustainability of each part of the company and to the solidity of the reasons for each ones’ survival. Therefore, the reconstruction of the corporations’ harmed legitimacy does not lead automatically to the reintegration with its audiences and to their support for all (or part) of the organization.
The criteria underlying the evaluations of the “solidity” of the reasons underlying audience support after legitimacy restoration processes are the focus of the following sections of this chapter.
4.2 Maintaining the support of resource dependent audiences: a resource dependency view
In their foundational study The External Control of Organizations, Pfeffer and Salancik (1978) introduced the idea that all corporations are critically dependent on other organizations for the provision of vital resources and, furthermore, that this dependence is often reciprocal. Thus, firms are viewed as embedded in networks of interdependencies. As such, they integrated and codified preexisting ideas about the management of interorganizational interdependencies.
Among the various studies that have stemmed from the resource dependence view, Oliver (1991, p. 945-946) has underscored various theoretical mechanisms that justify the positive influence of organizational autonomy on performance. In particular: (i) firm autonomy allows for a more effective capacity to meet the demands of multiple resource providing audiences simultaneously. The capacity to meet multiple audience requirements makes it more probable that they will jointly continue to make the resources under their control available to the focal organization at favourable conditions; (ii) strong firm autonomy can foster the flexibility to react to unforeseen contingencies. Such responsiveness can help focal organizations maintain their relationships with important exchange partners when these relationships are threatened by salient issues; (iii) the more the firm is autonomous from its suppliers and counterparts, the less it will risk its resource providers adopting free-riding or hold-up behaviours to its detriment (Drees et al., 2013, p. 8).
In the context of the present study, resource dependency may play yet another role if, rather than there being a power imbalance between powerful resource suppliers and a dependent firm, or the organization gaining independence from key external actors, the resource suppliers become dependent on the focal firm. In the latter case, in fact, the nature and importance of transactional interdependencies between the organization and its main audiences may “flip” the coin, awarding the former a degree of power (Blau, 1964; Emerson, 1962) in the relationship. This resource dependency power may, in turn, be used to constrain the choices of presumably independent audiences ( like firms, banks, suppliers, buyers, public agents, and so on (, and push them to take decisions they would not otherwise take following pure moral and/or pure rational efficiency based logics.
Given the insufficiency of the legitimacy reconstruction process to capture all the variables underlying the explanation of audience reactions to managerial social irresponsibility scandals, the moderating role of power based on transactional resource interdependency and the location of the corporation in social space should be considered in the analysis of specific empirical cases. As, in cases in which there are resource interdependencies that confer power to the culpable firm, audiences may maintain their support for an organization after a social irresponsibility scandal because their own wellbeing depends on the latter’s survival. In such a case, provided that the firm restores its harmed legitimacy, the dependent audiences’ decision to maintain their support for the organization is justified by the importance of the survival of the culpable firm has for their own performance.
4.3 Maintaining the support of socially dependent audiences: an institutional fitness view
In their seminal contribution Permanently Failing Organizations, Meyer and Zucker (1989) draw from economics and sociology to analyze how come there are poorly performing firms that persist in time. They leverage the fact that a relevant part of existing firms fail to achieve their proclaimed goals in a structural and permanent way, to underscore that efficiency is only one determinant of organizational performance. According to the authors, organizations may fail permanently because they attract multiple operative goals. At least in part, these goals diverge from the official mission of the organization and are pursued by internal and external constituencies who use organizations to advances their own agendas. In many cases, it is argued, firms (and also nonprofit or public organizations) might be able to sustain public wellbeing and the public interest better by responding to the informal goals pursued by internal and external constituents than they would if they were efficiently meeting their official objectives. In some kinds of firms, more general societal objectives prevail over strict economic performance aims. In some cases, the societal aims underlying firm activities can be such as to justify governments direct or indirect subsidies in order to stay afloat. Firms focused on producing advancements in knowledge, schools, social services or sanitary and medical assistance, are examples of firms whose very mission is imbued with values and aims that transcend strict financial returns for equity owners.
Thus, wider values and services for the society may characterize firm activities and actually prevail over strict performance criteria. Myer and Zucker (1989, p. 53) illustrate this general situation as follows «Because multiple constraints replace the single imperative of efficiency maximization in these models, the constraints posed by environments are specified explicitly. In place of organizations pursuing the undifferentiated objective of efficiency in environments that are likewise undifferentiated (…), variation in objectives both within and across organizations in response to diverse external influences is posited».
In this perspective, firm constituent audiences decide to maintain their support for a focal firm once its legitimacy has been reconstructed not simply because they are dependent on the transactions with the focal organization for their own survival, rather because they pursue wider societal aims through the operations and activities of the rehabilitated firm. Also this decision is based on “dependency”, but rather than resource dependent audiences, they are socially dependent audiences because they value the firms’ contribution to wider societal objectives worthy of their support to its persistence.
4.4 Maintaining the support of free audiences: leveraging corporate reputation to pivot firm survival
Not all audiences are dependent on firm survival for the realization of their own performance or social objectives, in many cases firms interact with audiences that are free to chose between a focal organization and other competing ones. For free audiences, the decision to withdraw or maintain their support for the culpable firm once its legitimacy has been rehabilitated will depend on the outcome of a re-evaluation of the very rational for the survival of the firm. Each audience will adopt a specific set of criteria for this evaluation on the basis of the distinctive traits of its relationship with the firm. In general, however, free audiences will decide to maintain their support for the rehabilitated firm on the basis of its capacity to fulfill the fundamental aim for which it was initially founded: the creation of value.
The evaluation of the firms’ capacity to create value in the future becomes “coin of the realm” in the decision to maintain audience support, as the different objectives pursued by the various audiences may be reached in relationships with organizations that prove their efficiency and capacity to satisfy market requests through the creation of value. This ability essentially stems from the satisfaction of customers desires and the favorable positioning vis-à-vis competitors. As recalled above, in conditions of uncertainty and lack of information, observers use signals and cues to elaborate evaluations of the characteristics of firms. Amongst the various social evaluations made regarding firms, reputation is a «collective, stakeholder group-specific assessment regarding an organization’s capability to create value based on its characteristics and qualities» (Rindova et al., 2007; Rindova et al., 2005). Corporate reputation depends on the judgment regarding the capabilities underlying the quality and the performance of the firm’s activities.
The criteria guiding non dependent (or free) audience decisions to maintain or withdraw their support for a culpable organization that has restored its harmed legitimacy, therefore, may be based on a revised and analytical assessment of the firms’ reputation. In fact, as mentioned above, an organizations’ reputation uses information cues from the past to indicate future performance outcomes of the firm and, therefore, seems a naturally suited social evaluation on which to base the decision to support the full rehabilitation of the firm and its survival or not.
In the sections that follow, the cases of Enron and Parmalat are further analysed. In particular, the aspect focused on is the comparison of the bases underlying their reputation before and after the social scandals that hit them. Enron and Parmalat are both cases of managerial social irresponsibility scandals that originate at the corporate level. In order to enrich and complete the analysis on the interplay between legitimacy and reputation for the survival of the firm after severe instances of managerial social irresponsibility, two notorious cases of managerial social irresponsibility at the business level will be considered too. In particular, these cases regard two very prominent multinationals: Nestlé and Nike.
4.4.1 Leveraging reputation following managerial social irresponsibility scandals at the corporate level: the cases of Enron and Parmalat
Aimed to distinguish the effects of a managerial social irresponsibility scandal on the culpable firms’ perceived legitimacy and reputation, this section is dedicated to the scrutiny of the strategic changes that occurred at Enron and Parmalat during their evolution. The evolutionary phases analyzed cover from the creation of the firms’ initial success, to the reassessment of the companies’ standing by constituent audiences triggered by the social scandals. The aim of this analysis is to understand whether the changes that occurred in these companies, above and beyond leading to the damage of their legitimacy, also infringed upon their capacity to create value. In the latter case, in fact, it is plausible to infer that the company had not only harmed its legitimacy but also its reputation. The comparison between the cases that follow may, therefore, offer suggestions regarding the interplay between legitimacy and reputation in the aftermath of a social scandal.
Enron
Enron’s remarkable strategic evolution may essentially be scrutinized over the period from 1990 to 2000, in which the company transformed itself from a gas pipeline company into a widely diversified firm that was essentially a derivatives trading company. Enron’s initial success was obtained in the US gas industry soon after its deregulation. In the turn of the first years of 1990, Enron passed from applying Kenneth Lay’s initial vertically integrated energy company strategy, to adoption Jeff Skilling’s vision of creating a gas bank instead of investing heavily in its own gas production capacities. As a consequence, over a three year period, Enron hired commodity trading and gas industry experts to develop the capability to hedge the risks of the volatile cash flow emerging from the matching of gas sourcing and marketing requirements. In order to support weak gas producers, Enron created its first SPE, which turned out to be critical for the success of the business and highly rewarding from a financial point of view. Enron leveraged its trader business model and its risk management capability to entre the North American post-deregulation electricity market. It therefore added the wholesale electricity business, which replicated the logics underlying its initial success in the gas industry, to its portfolio of activities. There were also synergies between these two business units, as gas could be used to produce electricity in order to buffer peeks in supply requests. This replication logic brought Enron to expand in the EU electricity markets in anticipation of their de-regulation, but this choice was not particularly rewarding. After the success gained in the wholesale gas and electricity markets, Enron formally indicated its risk management and its trading capabilities as its “asset light” strategy.
The asset light strategy leveraged well established hedging and portfolio management techniques to compete in the energy wholesale markets. This strategy also implied that once the imperfections of the market had been smoothed out sufficiently and distribution had become efficient, the assets used to set the distribution system up could be sold. Enron’s control of the switchboards between suppliers and buyers was sufficient to dominate the market. Given the increased stability of the industry the assets were sold at a substantial profit[9]. These profits generated significant capital that could be invested to transform a new market in need of efficiency. Enron’s business model changed from energy trading to industry transformation. Skilling and Lay agreed on the idea that Enron should focus on rapid growth. In Skilling’s view, Enron had to incentivize decentralized entrepreneurial spirits within the company in order to invest in options for growth. Enron knew that not all options would be fruitful, but thought that the successful ones would largely out weigh the unsuccessful ones. Unfortunately, this was not so.
Several of the investment and growth strategies of the company proved strategically weak or destructive. In particular, the investments made in trading of industrial commodities were mostly unsuccessful, principally because the industry characteristics were significantly different to those of the energy sectors, and the trading and risk management capabilities that distinguished Enron were not deployable in the same way in these new settings. Enron’s trading capabilities proved to be of no use at all in the retail electricity distribution business, as clients were not sufficiently price sensitive to value Enron’s distinctive ability to supply energy on more favorable terms. Not even AOL’s marketing support managed to invert Enron’s failure to attract a sufficient number of clients in the electricity retail market and the business turned out to be a huge failure.
Enron’s strategy also evolved in a generally inconsistent direction as it adopted an “asset heavy” strategy to entre the broadband industry, in the Dabhol project in India, the energy asset acquisitions in Latin America and the Azurix water venture. These businesses were all examples of strategic confusion and the misfit between the key strategic factors necessary to compete with success in these industries and the trading and risk management capabilities Enron possessed. As Grant and Visconti (2006, p. 376) highlight, «In the asset-intensive part of the business, the values and short term horizons associated with Enron’s trading businesses encouraged an emphasis on deal-making in short-term profits which stunted development of relationship management and asset management capabilities. In energy projects in India, Brazil and other emerging countries Enron lacked political risk management and government relations capabilities (…) conflicting strategic directions resulted in a failure to link strategy to the requirements of individual markets and business sectors».
Thus, by the beginning of the new century, in 2000, Enron had invested in many business units in which there was a misfit between the company’s core competences and the key strategic factors necessary to compete with success. Further, the policy of unregulated expansion had brought to a dimension and a degree of complexity that stretched beyond Enron’s capability to coordinate and control the different businesses in its portfolio. Consequently, Enron was unable to create either the financial or the strategic synergies at the basis of corporate level value creation. Furthermore, given the degree of diversification the company had reached, its source of value creation at the corporate level should have mainly been its capacity to govern its financial resources favorably, creating financial synergies (Collis & Montgomery, 2005; Porter, 1987; Picone, 2012). Thus, by failing to effectively choose new projects in which to invest successfully, Enron was failing to fulfill the core of its value creation strategy at the corporate level.
Though Enron had been committing strategic errors and destroying substantial value, the initial success had lead to arrogance and to a simplistic formula for success (Chatterjee, 2003, p. 145). Even external strategy gurus were praising Enron’s capacity to create value. Professor Gary Hamel was quoted to have affirmed that «as much as any company in the world, Enron has institutionalized a capacity for perpetual innovation… (it is) an organization where thousands of people see themselves as potential revolutionaries» (London, 2001, quoted from Chatterjee, 2003, p. 145). Therefore, though Enron’s objective performance indicators had been deteriorating since 1996 – its return on assets and return on equity had been declining significantly and its cash flow was substantially negative for the entire period -, public opinion and stock market listings had not perceived the reduction in the firm’s capacity to create value. To reduce the signal of corporate strategic failure to company audiences, Enron manipulated its accounts and, even more crucially, it sold many of its most successful business units, such as Enron oil and gas. Many of the company’s “jewels” were sold before the company’s default in the attempt to cover up the increasing strategic weaknesses that were plaguing the firm’s capacity to create value.
Given the company’s inability to create value at the corporate level and the financial meltdown it incurred in 2001, the essential question that remains to be answered is "What valuable businesses did Enron possess at the moment of its social scandal?”, "What businesses could have been used to pivot the company back to success?”. According to Chatterjee’s (2003) detailed strategic analysis of Enron’s evolution from success to failure, right up to its financial meltdown Enron possessed a couple of businesses that were still very successful: its energy trading for large corporate clients business in the US and the EnronOnline electronic transaction platform business that it had launched in 1999. If the company had well performing businesses, “How come these were not leveraged to pivot the company back to success?”. The answer to this question depends on the analysis of the key strategic factors of these industries and Enron’s distinctive resources and capabilities to outperform competitors in these businesses. For both of these units, Enron’s business model implied buying the energy or commodity from the seller and in turn sell it to the buyer, instead of matching buyers and sellers. Enron’s capacity to create a ready market, its reputation and credibility, and its credit rating ensured the necessary market liquidity to sustain its very competitive business model. It is self evident that the financial meltdown of the company destroyed all the distinctive competitive resources and capabilities that Enron had based its competitive success on in these businesses. Therefore, though the company still possessed business units that had huge potential, the social scandal had wiped out the core strategic capabilities necessary to compete with success in such settings. These units, that had been profitable right until the social scandal, were sold in the open market after Enron’s bankruptcy. UBS Warburg, for example, bought the EnronOnline transaction platform.
Parmalat[10]
Parmalat’s strategic evolution may be traced back to its founding years in the 1960s. In 1961 Calisto Tanzi founded the company, its success was based on the high quality of its product and on two revolutionary innovations: the TetraPack packaging and the ultra high pasteurizing process. These innovations allowed milk to maintain its high quality unrefrigerated for at least six months. In addition, Parmalat differentiated its product to fit consumer tastes (for example, it developed its “Vita 7” milk, that was enriched with vitamins). Parmalat’s innovations, aggressive marketing, packaging and impactful communication campaigns were greatly leveraged when the Italian Municipal Centers of milk distribution were closed in 1973. Since then, Parmalat took advantage of the access to large-scale retail chains and extended its production and distribution to the whole of Italy. For the first two decades, Parmalat focused on innovation, quality and differentiation to achieve a competitive advantage, and its financial performance grew from 260 million Lira in 1962 to 289 billion Lira in 1980.
In the 1980’s Tanzi aspired to make Parmalat the «Coca-Cola of the milk world» (La Republica, 02/01/2004; Financial Times, 21/11/2004), and his vision became “grow to compete”. In order to grow, the company began to diversify and invested into other dairy products (Il Sole 24Ore, 18/03/1988; Mondo Economico, 21/09/1987), food and drink industries (Il Sole 24Ore, 19/01/1988; 01/03/1988; 09/06/1988; 21/06/1988). By the end of the 1980’s Parmalat had a portfolio of 250 different products that it distributed under five different brand names (Il Sole 24Ore, 19/01/1988; 01/03/1988; 21/06/1988; Mondo Economico, 13/05/1996). During the period between the end of the 1980’s and through all of the 1990’s, Parmalat increased it’s geographical and product/market diversification strategy in order to feed into its fast growth strategy. Later, the acquisitions extended the company’s portfolio of businesses beyond the food and drink industries into non-related activities. As a result, Parmalat invested in industries that ranged from the broadcasting business by acquiring Odeon TV (Il Sole24Ore, 5/09/1987; 5/01/1988; 13/01/1987; 18/04/1988; 10/05/1988; 19/10/1989), the tourism business by acquiring Parmatour (Mondo Economico 7/04/1997; Il Sole24Ore, 16/10/1998, 29/12/1998), and the football business by acquiring the Parma football team (Il Sole24Ore, 16/01/1998). All through the following decade Parmalat increased its debts in order to build new plants and maintain strong product branding (Il Sole24Ore, 11/03/1994). It acquired over 200 companies spread across 30 countries (Il Sole24Ore, 11/12/1994, 31/05/1995, 22/03/1997).
Parmalat’s growth strategy throughout its expansion was to finance acquisitions through debt. Unfortunately, most of the investments and acquisitions the company made, were not as profitable as expected (Grant & Visconti, 2006). In fact, most of the businesses it had acquired over the years were running significant losses (Il Sole24Ore, 23/04/2001), often due to the high degrees of macroeconomic instability of the countries which it had expanded into (Il Sole24Ore, 29/01/1998, 12/02/1998, 13/02/1998, 09/04/1998, 05/06/1998, 01/09/1999). Furthermore, the conglomerate diversification strategy followed was failing to produce financial or strategic synergies between businesses, thus Parmalat was also proving unable to create value at the corporate level (Collis & Montgomery, 2005; Porter, 1987; Picone, 2012).
In order to deliver acceptable returns on its investments, Parmalat began to overstate its revenues and profit margins. It ‘corrected’ its net earnings upwards and underreported its debts (La Repubblica, 21/04/2004). These distorted accounting practices, along with the rerouting of funds from Parmalat into limited off-shore companies connected to the Tanzi family (IlSole24Ore, 27/12/2003) gave way to the social scandal described earlier in this volume.
Surprisingly, during the overall period in which the scandal emerged, constituent audiences continued to sustain Parmalat. As reported by the press, during the first 20 days of 2004, though the company’s investments in communication and publicity had been cut, there was actually an increase in the consumption of Parmalat’s products. Parmalat reported sale increases of juices (+18%), yogurt (+2%) and UHT milk (+8%) compared to the same period in 2003, whereas there was a substantial stability of fresh products (ANSA[11], 22/01/2004).
Though the Parmalat corporation as a whole was accused of the social scandal, audience support was not maintained evenly for the entire firm. In order to generate a strong cognitive discrepancy and enhance the salience of the event for readers, the framing of the social scandal leveraged the long standing image of trustworthiness of the brand that families around the world turned to daily. Nonetheless, the dairy business unit was the only one to maintain the support of all constituent audiences of the organization: the new CEO Mr. Bondi’s, the Italian State through the Prodi-bis decree, and most of all, Parmalat’s consumers. The other businesses of the Parmalat corporation experienced the classic withdrawal of audience support that is largely reported in corporate social irresponsibility literature.
The maintenance of audience support for Parmalat is indeed partly compatible with a resource and social dependency explanation. After all, the demise of any large company is a threat to the social wellbeing of the territory in which the company operates. Actually, the Italian government applied an existing decree-law (better known as the “Prodi-bis” decree) intended to support the turnaround of large firms for which there were concrete prospects of recovery of value. This decree-law placed the group under an extraordinary administration procedure and it was decided that the economic and financial restructuring of the firm should be completed within two years. Unless the turnaround proved successful, after the two year period the firm’s assets would have been liquidated. The application of the Prodi-bis decree underscores the importance of Parmalat for the Italian context and for the company’s workers, though the reported primary reason given by the Italian government was to prevent the destruction of the lifetime savings of many noncomplicit small investors (Financial Times 3/10/2004).
A resource and social dependence explanation to audience support, however, is insufficient to offer a full explanation of audience support in the Parmalat case. In fact, two major issues remain unexplained. Firstly, the logics above are unable to explain how come audiences withdrew their support for all but one of Parmalat’s businesses, as the same legitimacy reconstruction processes and resource dependency conditions applied throughout the corporation. Secondly, customers of Parmalat’s dairy products reacted in a way that does not sustain a pure resource or social dependence logic (Pfeffer & Salacik, 1978; Meyer & Zucker, 1989). In fact, Parmalat’s customers are a fully independent audience as, though the company’s dairy products were much appreciated by the market, there were many well known and well regarded alternatives for them to choose from (i.e. Centrale del latte, Danone, Galbani, Muller, Yomo and so on).
Parmalat’s consumers withdrew their support from all of the company’s businesses except for in the dairy and food market. The analysis that Parmalat commissioned from Ipsos[12] regarding consumer reactions to the social scandal in this market is very revealing. The interviews conducted on a sample of 522 consumers between 14 and 74 years of age, shows that the consumers who affirmed they had reduced their consumption of Parmalat’s dairy products were mainly not prior clients and, therefore, had no significant existing relationship with the firm. Further, the vast majority of the regular and occasional clients of the company maintained their consumption routines. Finally, a small part of consumers, mainly composed of clients that had a pre-existing relationship with the company, actually increased their consumption of Parmalat dairy products.
More in depth, the vast majority of the customers interviewed responded that they had not perceived any differences in Parmalat’s dairy products and the quality of products had not changed. Similarly, a significant group of consumers argued that Parmalat’s products were of good quality and that they trusted Parmalat. Furthermore, a large group of consumers chose to purchase Parmalat’s products, to support the company and, in particular its employees.
Conversely, this survey data shows that negative perceptions were much less frequent than the maintenance of positive perceptions of the company and of its products. Further, negative perceptions were mainly based on mistrust towards the company and a loss of moral esteem for it, whilst very few negative opinions were based on a deteriorated opinion of the quality of the company’s products. Positive perceptions, instead, were in large part focused on the high quality and the trust for the company’s products, whilst a smaller percentage focused on the necessity to sustain the post-scandal survival of the company. Actually, the attention of the customers’ community turned more on the employees that would have lost their jobs if the company had not overcome the financial crisis. After the financial meltdown a sort of “solidarity case” emerged, to support the company and avoid damage to its employees (La Stampa, 22/01/2004).
In accordance with the biases introduced in Lange and Washburn’s (2012, p. 314-315) model, social identity theory (Haslam & Ellemers, 2005) may help explain how the loss of the company’s legitimacy influences a part of customer reactions. The direction of the practical effects of social identification with the affected party, however, are unclear. On the one hand, in fact, social identification with harmed audiences (principally the small investors) should enhance the negative attribution of irresponsibility to the firm. However, contemporarily, identification with the dependent audiences should push audiences to maintain their support for the survival of the company in an attempt to help the victims of the social scandal (principally the employees and supply firms). This explanation is, therefore, not sufficient to clarify audience decisions to maintain their support for Parmalat’s dairy business.
A more plausible explanation for the maintenance of support for the firm on behalf of the dairy product consumers, may be traced to the multiple dimensions underlying social evaluations of organizations (Bitektine, 2011; Deephouse & Carter, 2005; Mishina et al., 2012). In particular, the data suggest that this audience has two relevant assessments that guide its relationship with corporations: legitimacy and reputation. Whilst the first dimension is based on moral judgements of the social harm caused, reputation rests on the perception of the capacity of the firm to produce value in the future, and is based on the existence of a sound competitive advantage in a specific business. Product quality, the innovation capability of the corporation, the capacity to deliver value for money and cherish the relationship with its consumer, demonstrating concern and knowledge for its customers’ desires, is at the basis of this type of social evaluation.
The last analysis released by GPF&A concerned the setting of the competitive arena in the dairy industry, including Parmalat and its competitors. As reported during the interview with Francesco Potenza (the marketing manager of Parmalat since 1989)[13], the survey consisted of a multiple choice test concerning product quality, price, brand image, and so on. By asking questions like: “Which company makes the best quality, healthy and genuine products?”, “Which company better satisfies consumer needs?” or “Which is the company you can trust?”, the company could better understand the image public opinion had of Parmalat and its direct competitors. The research showed that Parmalat was perceived to have a broader product portfolio and generally, the best quality and healthiest products amongst competing firms. This supported the relevance of innovation, research and technology as key elements for business success. Furthermore, public opinion considered Parmalat as the company that cared the most about consumer needs and expectations.
In sum, corporate reputation, based on the existence of a sound source of competitive advantage in a specific business was the main reason that consumers referred to when asked how come they had decided to maintain their support for Parmalat though it had behaved unethically and illegally. The Parmalat case, therefore, suggests that independent audiences will maintain their support to a business (or a organization) after a social scandal if its reputation is preserved. On the other hand, if reputation is feeble independent audiences will not sustain the weak business (or organization) even though the company’s legitimacy has been restored.
4.4.2 Leveraging reputation following managerial social irresponsibility scandals at the business level: the cases of Nestlé and Nike
Nestlé
Nestlé, the world’s most prominent nutrition, health and wellness multinational (Pagan, 1986) founded in the 1960s, was hit by a strong boycott between 1978 and 1984. The interactions between the company and the social movements that contested its social behavior have been extensively described and analyzed in literature (Johnson, 1986; Sethi, 1994; Kädtler, 2003). Nestlé based its competitive success on its strong orientation to technical and scientific excellence in product development and high product quality. Indeed, Nestlé’s contested behavior did not regard the quality of its product, Infant formula, but rather its aggressive marketing policies in third world countries. To promote its product, Nestlé had distributed Infant formula artificial milk for free in hospitals in poor countries and broadcasted misleading advertising that induced mothers to think that artificial milk was identical to “breast-milk”. The substitution of artificial milk in place of breast-milk was an irreversible choice, as once mothers interrupted breastfeeding they stopped producing milk altogether. By promoting artificial milk through free samples donated to doctors and sanitary employees, Nestlé violated the rules defined in the World Health Organization International Code, according to which breastfeeding should have the priority over artificial milk. After an initial promotion period, however, Nestlé begun to charge a hefty price for its infant formula. Families in these contexts could not afford to pay for instant formula and, as a consequence, resorted to diluting the milk in order to make it last. This practice contributed to cause infant malnutrition. Furthermore, infant formula did not possess the antibodies that natural milk contains, fostering a substantial weakening of child immune systems.
Based on the scientific quality of its product and the lack of conclusive proof of the causal link between the company’s product and infant malnutrition and mortality, Nestlé repeatedly contested the criticisms voiced by the social movements. Nestlé’s attitude was counterproductive and increased the momentum of the negative evaluation of the company’s moral legitimacy. Further damaging reactions to social movements were the choice to engage in a defamation charge against the editors of Nestlé kills babies (Kädtler, 2003, p.226) in Basel, as well as an opinionated and intransigent testimony of company representatives at a hearing at the U.S. Senate in 1978. The company’s reactions increased the sensation of its social irresponsibility and contributed to the substantial increase in the company’s negative social assessment.
Social confrontation was de-escalated through a significant change of strategic orientation. Nestlé shifted its stance from resistance and confrontation, to the activation of an open communication and interaction with those who were concerned with the ethical and humanitarian problems of child nutrition in poor countries. Its aim became to find a mutually satisfying solution in these contexts. The issue of social confrontation began to be treated as a core corporate strategic issue, and changes made in the company’s leadership rendered the change in orientation credible. Concretely, Nestlé supported the foundation of two new auditing and control institutions: the Nestlé Coordination Centre for Nutrition (NCCN) and the Nestlé Infant Formula Audit Commission (NIFAC). The NCCN was external to the main stream of command, reported directly to the company’s top management and had ample autonomy. The objective of these experts was to find mutually satisfying solutions with external activist audiences. The NIAFC was lead by a highly reputed Senator, Edward Muskie, and was authorized to conduct enquiries, investigations and publish the results. Sethi (1994, p. 222) argues that the solution to Nestlé’s problems was reached once it presented itself as «part of the solution rather than part of the problem». After the company managed to realign its social behavior to external audience requests and restore its harmed legitimacy, it dismantled the NCCA. The NIFAC, instead, survived until the 1990s, when it was replaced by the ombudsman of the Infant Food Manufacturers business association (IFM). In 2008 Nestlé employed 283.000 people and recorded sales for 110 billion Swiss Francs. The economic performance of Nestlé since the end of the boycott campaign against it, suggests that it managed to restore widespread moral legitimacy with its constituent audiences and returned to full competitive success.
Nike
Founded as Blu Ribbon Sports in 1964 by Phil Knight and Bill Bowerman, the firm began by importing Japanese running shoes in the U.S., today its is known as Nike and is the world leader in athletic footwear, apparel and equipment. In a very rapidly growing global market for athletic footwear, in which two of the main players (Adidas and Reebok) merged, Nike still controlled over 33% of the market in 2005 (Petrecca & Howard, 2005). Today its is known as the global leader in the design, distribution and marketing of athletic footwear.
Nike’s initial business model based its competitive success on the design and marketing of high performing athletic shoes in the U.S., but outsourcing production to lower cost Japanese factories. This business model was very successful and revenues grew to $2 million at the beginning of the 1970s. In the pursuit of low labor costs, Nike shifted its supplier relationships from Japan to Korea, Thailand, China and Taiwan. By 1982, 86% of Nike’s athletic footwear was sourced from Korea and Taiwan (Locke et al., 2007, p. 7). Over the years, the costs of producing shoes in Korea and Taiwan also rose, and Nike urged its suppliers to shift their locations to lower cost settings, such as Indonesia, China and Vietnam. Nike actively supported its suppliers in the creation of extended networks of factories in Southeast Asia. «By 2004, Nike’s products were manufactured in more than 800 factories in 51 countries, employing over 600,000 workers. Nike has only 24,291 direct employees, the vast majority working in the United States (Nike, 2005, pp. 3-4)» (Locke et al., 2007, p. 7). The very same sources of Nikes’ competitive strength in the global footwear market, created serious challenges to the company’s legitimacy in the 1990s. Already in the 1980s the company had been criticized for sourcing from factories located in countries in which low wages, poor labor conditions and weak human rights prevailed. In the 1990s, however, specific factories became targets of detailed reports regarding labor policies. In 1991 the Asian-American Free Labor Association (AAFLI) published a terribly critical report that documented poor working conditions in Indonesia. One year later, Harper’s magazine published an annotated pay-stub from an Indonesian factory and compared it to the value of Michael Jordan’s endorsement contract. The result was that Indonesian workers would have had to work 44,492 years to earn the equivalent sum of Jordan’s contract (Spar, 2002). Nike was also accused of child labor in Pakistan and Cambodia, and poor working conditions in China and Vietnam.
As a result of these information campaigns, a strong antisweatshop activism mounted against Nike. Its effects were devastating. In the period between August 1997 and January 1998, Nike’s stock on the market fell from $66 per share, to $39 per share. In May 1998, after a progressive reduction of sales confirmed that Nike’s products had become a symbol of slave wages, forced overtime work and infant abuse. The tarnished company image was critical in the company’s crises. In fact, company brand name legitimacy is key to competing with success in buyer-driven commodity industries such as the athletic footwear one. In these industries, the key strategic success factors are the control over and heavy investment in the initial and the final stages of the production process – i.e., on the product concept creation and design, on the one hand, and on the marketing, advertising, product display, and consumer relations, on the other.
Nike changed its communication strategies progressively from avoidance of accusations until the early 1990s, to a denial of the existence of the problem between 1993 and 1996, to a symbolic reaction between 1996 and 1998. In 1998, Nike’s CEO at the time, Phil Knight, took the issue on seriously and begun to take substantial measures to change labor conditions in the company’s sourcing network. Nike became a chartered member of the Fair Labor Association (FLA), whose foundation rendered explicit the fact that sweatshops were a social issue to be resolved through open interaction, voluntary company codes of conduct, monitoring and public accountability. Furthermore, Nike managed its sweatshop challenge publicly through the establishment of its own NGO-like association in collaboration with Mattel, the toy producer, and the International Youth Foundation. Nikes leadership position in the global athletic footwear, apparel and equipment industries are a tangible signal of its success in restoring its legitimacy and the support of its constituent audiences.
4.4.3 A comparative analysis of the corporate and business level social irresponsibility scandals described
The cases described above are cases of managerial social irresponsibility that overlap partially (Tab. 1). In particular, Enron and Parmalat are cases of corporate level social irresponsibility that emerged as cases of gross fraud and financial misrepresentations that destroyed the lifetime savings of many small investors. Though the origins of the company elite mismanagement had, in both cases, been faulty strategies excessively focused on growth, the expert observers of the companies and the whistleblowing institutions (such as audit firms, financial analysts and strategy gurus) had failed to pick up and react to the evident signals of decreasing company performance. In both cases, the bases for company reputation had been infringed upon well before the social scandal emerged, but no observer had revised the reputation evaluation of the firm. The trigger event for social reactions were, in both cases, a moral and pragmatic cue due to the destruction of financial resources and the harm created to the many small investors of the companies’ equity and debt. Both companies adopted similar legitimacy restoration and crisis management processes, but the outcomes were significantly different: Enron never re-emerged from the crisis, its assets and businesses were liquidated once the firm was filed under chapter eleven; Parmalat was placed under extraordinary administration, it liquidated all assets and businesses except the dairy business. Parmalat’s dairy business never manifested a market or financial performance crisis, as customers first, and all other audiences after, maintained and actually reinforced their support for the company. The brand equity of the company in this business was the pivot that allowed the new manager (Mr. Bondi) to bring the company back to producing substantial value for all stakeholders of the company.
The Nestlé and the Nike case are directly comparable. They are both instances of business level managerial social irresponsibility. Their scope was to enhance value chain performance more that they would have managed if they hadn’t resorted to unethical behaviors. Both companies had harmed victims in distant third world Nations in which the legal context allowed for behaviors that were considered unethical in the western world. In both cases, social sanctions of firm practices were triggered by “activists” who contested the moral legitimacy of the companies. The central features of activist social pressures are that their motivation is primarily ethical, they have a decentralized network form of organization, and deploy a reflexive tactic of judo strategy (Knight & Greenberg, 2002). In essence, activists are audiences who defend the interests of geographically and economically marginal victims. They represent these interests by framing and diffusing information that tarnishes the prominent companies’ image and urging key audiences to sanction culpable firms through boycott. This action has an impact on two powerful audiences who are able to punish the firms with their boycott behaviors: customers and investors.
Tab. 1. The comparison between corporate and business level managerial social irresponsibility scandals at Enron, Parmalat, Nestlé and Nike.
|Company |Enron |Parmalat |Nestlé |Nike |
|Type of negative |Fraud, accounting |Fraud, accounting |Aggressive |Sourcing from |
|cue that triggered|misrepresentation |misrepresentation |marketing harming|sweatshops |
|the scandal | | |infants in poor | |
| | | |nations | |
|Scope of the |Corporate level |Corporate level |Business level |Business level |
|social scandal | | | | |
|Link between the |Weak value creation from|Weak value creation |Directly linked |Directly linked to|
|negative cue and |faulty business and |from faulty business |to the infant |the athletic shoes|
|the company’s |corporate strategy |and corporate |milk value chain |value chain |
|value chain(s) |sparks fraud |strategy sparks fraud| | |
|Activation of |Yes |Yes |Yes but |Yes but |
|legitimacy |Immediately after the |Immediately after the|after years |after years |
|restoration |scandal |scandal | | |
|processes | | | | |
|Company reputation|Low - key strategic |High in dairy |High – key |High - key |
|after the scandal |resources and |industry, |resources and |resources and |
| |capabilities destroyed |low in others |capabilities |capabilities |
| |by the scandal | |unaffected by the|unaffected by the |
| | | |scandal |scandal |
|Post-scandal |Company demise |Dairy business |Company pivoted |Company pivoted |
|survival of the | |pivoted back to |back to success |back to success |
|company | |success | | |
In both cases, though the moral dimension of the firm’s legitimacy was seriously harmed, their reputation to produce high quality products that met customer desires, maintaining high value creation capabilities at the business level, was not modified. The companies restored their legitimacy, after a period of ineffective communication and interaction with critical audiences, thanks to the demonstration of their commitment to take substantial actions to rectify their contested social behaviors also in the future.
Following the reasoning above suggest that, in the empirical examples described, corporate audiences seem to consider the moral and pragmatic legitimacy that has been harmed by the acts underlying the managerial social irresponsibility scandal and the processes undertaken to reconstruct it at the overall firm level, but then proceed to evaluate the maintenance of their support for the company also on other bases and at a more fine-grained level of analysis of the organization and its activities. The loss of legitimacy that follows managerial social irresponsibility scandals attracts audience attention also to the sustainability of each part of the company and to the solidity of the reasons for each ones’ survival. Therefore, the reconstruction of the corporations’ harmed legitimacy does not lead automatically to the reintegration with its audiences and to their support for all (or part) of the organization, rather it depends on the linkages and effects of legitimacy destructive actions on the foundations of the culpable firms’ reputation.
4.5 The basis of audience support and the sustainability of firm survival: the role of corporate reputation
The severe consequences of social irresponsibility scandals for firm survival have been broadly documented in management literature, as recalled in the first chapter of this volume. By shifting attention from broad structures to the socio-cognitive bases underlying individual perceptions and their diffusion through social groups, it has been underscored that firms may effectively restore their harmed legitimacy. In the latter view, successful legitimacy restoration implies an automatic rehabilitation of the firm with its key audiences and access to their support and resources.
The empirical examples recalled above suggest that audience reactions following severe cases of social irresponsibility scandals are more nuanced than proposed by the aforementioned literatures, and the variation in their outcomes do not seem to be justified entirely by the capacity to engage in an effective legitimacy restoration process. Rather, they suggest that, by harming the company’s legitimacy, the negative cues that sparked the emergence of the managerial irresponsibility scandal actually trigger a more complex process of social re-evaluation of the company. Once audiences have been pushed out of the passive mode of social approval of a company, they begin to search for a rational reason to justify why they should maintain or renew their support for a company that has breached their trust. This study proposes that the criteria adopted for such evaluations are threefold: (a) the audience is resource dependent, as its own performance or wellbeing depends on the survival of the culpable firm (e.g., workers, specialized suppliers, and so on); (b) the audience is socially dependent, as it values the social objectives obtained though the culpable firm more than its mere financial performance (e.g., Government concern for wider societal issues such as knowledge creation and diffusion, health, safety and so on); and (c) the audience is an independent, as it may freely chose to direct its support and resources to the culpable company or to other direct or indirect competitors (e.g., consumers in competitive markets and investors). Though each audience will tend to perform its re-evaluation following the criteria that most reflects the nature of its relationship with the firm, the decisions of some audiences will result more crucial that those taken by others. Furthermore, it is plausible to hypothesize that the decision made by one or more key audiences will influence the outcomes of the evaluations made by the members of other audiences. The identification of the pivotal audiences – i.e., the audiences whose decision to maintain or renew their support is key to tipping other audience decisions -, depends on the resources they are able to direct towards the organization and how critical the latter are for the survival of the firm.
The Enron and Parmalat cases suggest that, though resource and socially dependent audiences may pose the premises to grant the culpable organization a period in which they maintain their support for the organization in the hopes that the management of the post-scandal crisis may restore legitimacy and the bases for its survival, this support may only be temporary. Mr. Cooper’s restructuring phase in Enron, and Mr. Bondi’s activities following the application of the Prodi-bis decree law in Parmalat, both had this “temporary” nature. In the medium-long term, culpable firms must be able to return to an appreciable economic performance (or at least to an equilibrium, or acceptable controlled negative performance, if it serves higher social values that transcend the sole interests of equity owners). In fact, the capacity to create value and gain appreciable economic and financial performance is the very basis underlying the economic and social function of the firm.
Managerial social irresponsibility scandals do, however, create a performance crisis for the culpable firm. Market sales and stock market quotations are often strong indicators of the immediate costs and the risks connected to the nervousness created in key audiences as a consequence of perceived widespread social disapproval of the culpable company. Audiences are therefore called to evaluate and foresee whether the economic downturn of culpable organizations is temporary or not. In this sense, audiences are urged to express a judgment regards the future economic viability of the firm. Company reputation re-evaluations are, by definition, an indication that uses information regarding passed managerial choices and company investment decisions to predict the future value creation capabilities of the firm. These evaluations will focus on whether the managerial choices that lead to the legitimacy crisis also affected one or more of the firms' key strategic resources or capabilities to compete in its businesses. In essence, “coin of the realm” for audience decisions to maintain or withdraw their support for the organization is the perception regarding the maintenance of the strength of the firms’ attributes that inform their present and future value proposition to the markets. Key questions for these evaluations of company reputations will be “To what extent have the managerial social irresponsible activities infringed upon the bases of the firms’ competitive success?”, “How have the firms’ choices influenced their resource and capability set and its coherence with the business environments in which they are deployed?”.
By nature, the audience who bases its support decision primarily (if not exclusively) on the value creation capabilities of the culpable firm is non-dependent customers. Amongst the various free audiences (e.g., investors, non-dependent suppliers, and so on), customers are the primary independent audience. Their choices to continue to buy the firm’s products will influence investor confidence, and in turn all other audiences’ evaluations, of the firms’ chance to survive the crisis created by the scandal and pivot the company back to success. Thus, the effects of managerial social irresponsibility on the bases of company reputation, and the capacity to communicate and leverage such reputation in the very short time span that is conceded by independent audiences to prove the “solidity” of the reasons for which they should maintain their support for the rehabilitation of the firm become critical.
4.6 Value chain engagement and managerial social behavior: a multiplying effect
In the first chapter of this volume, it was underscored how managerial social irresponsibility is often caused by weak strategic planning rather than by instinctively and innately unethical company elites. Grant and Visconti’s (2006) focus on the extent to which the strategy pursued is consistent with the requirements of the company’s area of business and with its resources and capabilities as a significant cause of the upsurge of corporate scandals that characterized the end of the last century and the beginning to the new one. The idea of weak strategic planning and the implementation of inappropriate strategies proposed by Grant and Visconti, captures many contributions that point towards specific strategic error types that lead to a loss of alignment between the value creation potential of the firm and its quoted stock value as antecedents of corporate social irresponsibility. This misalignment exerts a significant pressure on managers towards high risk-taking behaviours that, in the end, lead to unethical or illegal outcomes.
If the degree of strategic soundness may be identified as a significant antecedent of managerial social irresponsibility (Grant & Visconti, 2006), on the one hand, this study suggests that it may also significantly influence the consequences of managerial wrongdoings for firm survival. The cases analyzed differ regards the influence of irresponsible managerial actions on the sources of the firms’ competitive advantage in its principal business units, and the fit between the internal and external determinants of competitive success. The variety of the cases treated, allow to sketch some initial intuitions (given the small size of the sample and the circumstantial nature of our evidence) regards the relationship between managerial social irresponsibility, the bases of the firms’ competitive sources, and its consequences for the firms’ capacity to survive the social scandal.
In fact, though the effective legitimacy restoration process managed by Mr. Bondi after Parmalat’s huge financial meltdown was a necessary precondition for the survival of the firm, this alone is unable to explain the extraordinary successful turnaround of the company. In particular, it doesn’t explain how come only one business unit of the company was pivoted back to success, whilst the others experienced the classic audience support withdrawal that is typically taken for granted effect of the loss of legitimacy following social irresponsibility scandals. Furthermore, it doesn’t explain how come the customers’ reaction was an actual increase in sales after the scandal. The insufficiency of legitimacy restoration to automatically gain audience support renewal is also underscored and reinforced by the Enron case.
The inductive research for further distinctive factors underlying the post-crisis management, suggests that the different degrees and ways in which the actions underlying the managerial social irresponsibility influence the set of strategic resources and competences of the firm, and the fit between them and the key success factors in the environment in which they operate at the business level, is a crucial aspect for the survival of the scandal. The distinction between corporate and business level managerial irresponsibility is key, as the more the latter harms (directly or indirectly) the bases of the firm’s competitiveness in the business(es) it operates in, the more it appears to be difficult to turn the company back to positive market and financial performances. Furthermore, the identification of the key strategic resources and capabilities available to the firm after the scandal represents a fundamental starting point from which to manage the selection of the business units to leverage in order to pivot the company back to success and those to abandon.
More specifically, it seems appropriate to underscore that the unethical corporate action may be carried out directly within the firms’ core business in order to cut costs or sustain revenues beyond the results correct ethical behavior would consent (like in the Nestlé and Nike cases), or that it may be adopted at a corporate level through accounting manipulations or diverting financial resources away from productive investments for example (like in the Enron and Parmalat cases).
In turn, socially irresponsible actions conducted at the corporate level may or may not weaken or destroy the distinctive capabilities the firm needs to compete successfully in the business(es) it invests in and whether it manages to balance and integrate the businesses in its portfolio. The extent to which the negative consequences of managerial social irresponsibility may be overcome, provided there is an effective management of the legitimacy restoration process, seems to depend on the degree to which the firm maintains sound sources of competitive advantage in its core business(es).
Enron’s irresponsible actions were certainly the fruit of a mixture of managerial hubris, weak strategic planning and low ethics. When the massive financial meltdown hit the company, Enron was running many businesses at significant losses and it was unable to create value through financial or strategic synergies at the corporate level. Nonetheless, it still had a couple of businesses that were extraordinarily high performers until the scandal emerged. As mentioned earlier, these businesses – the wholesale trading of energy for corporate clients and the EnronOnline trading platform – required high trustworthiness and solid credit ratings for the company to be able to sustain the liquidity necessary for its business model to work. The social irresponsibility scandal, however, wiped these immaterial resources of the company out completely and immediately, and Enron lost the credibility and the strategic resources it needed to maintain the outstanding performance it had generated until the day of the scandal. Thus, the destruction of the company’s key strategic resources and capabilities was a consequence of the fraud and accounting manipulation scandal and, therefore, in the aftermath of the scandal, there was no particular productive branch to leverage the firms turnaround on. Not surprisingly, the social scandal lead to Enron’s spectacular demise.
The Parmalat case has many analogies to the Enron one, given the common tension towards corporate level errors (multiple acquisitions, international expansion, diversification with limited analysis of how new and old business would be affected). However, in the former case these errors eroded the firms’ competitive capacity at the business level, whilst in the latter case the firms’ key strategic resources and capabilities necessary to compete in the dairy business with success remained unaffected. Not surprisingly, the dairy business was used as the cornerstone to bring about one of the most successful post-social scandal corporate turnarounds that have taken place in the recent years.
The social scandals of both Nestlé and Nike also illustrate that the link between social irresponsibility and the bases of business level success are crucial. Both companies’ instances of managerial social irresponsibility were connected directly to their value chain and were directed to increase the market and financial performance of their business units above the levels they would have reached if they’d maintained strict ethical attitudes. Though the moral legitimacy of their practices were criticized by activists and by a wider set of ethical conscious observers, these companies had continued to maintain high business coherence, a strong belonging to their industry and the key strategic resources and competences necessary to compete with success in their contested business units. The fact that their unethical behavior touched aspects tied to their core business has had very severe consequences on their customer and stock market performance, though the quality of their product was not doubted. Boycott activities from ethic conscious customers and investors, and the connected nervous reaction of the other audiences, reduced firm performance and forced the companies to adopt substantial legitimacy restoration processes before they were able to bring the firm back to being industry leaders. In this case, therefore, the reputation re-evaluation was positive, justifying the maintenance of support from a part of the companies’ audiences and the possibility to adopt a slow legitimacy restoration process without incurring in bankruptcy. Nonetheless, had the illegitimate actions occurred at the corporate level, most probably the companies would have suffered no performance consequences in their business units, just as happened in Parmalat’s dairy business.
Consequently, the relationship between the firms’ competitiveness in the management of its business unit value chains and the responsibility of the firms’ action seems complex and multifaceted. Those who adhere to the idea that corporate responsibility and competitiveness are interconnected, argue that ethical actions become more sustainable and have a more pervasive effect on society when they are connected to the value chains of the firms’ business units, on the one hand, and feed into the perception and realization of the new value creating opportunities for the firm, on the other (Porter & Kramer, 2006). In turn, this study suggests that the more irresponsible managerial conduct negatively affects the sources of the firms’ competitiveness in the value chains within its business unit(s), the heavier the consequences of such conduct are on the possibility to set the firm back into a positive evolution path. Combined, these considerations seem to suggest the existence of a multiplying effect of the relationship between corporate social responsibility/managerial social irresponsibility and the strategic sources of competitive advantage in its business value chains.
Conclusions
The study proposed in this volume focuses on the management of the post-scandal crisis that emerges as a consequence of the widespread perception of the firm as culpable of socially irresponsible actions. In particular, it identifies the factors underlying the emergence of managerial social irresponsibility scandals and the main dimensions that affect the possibility for culpable firms to survive the crisis generated by such scandals.
Social evaluations of the firm on which audiences base their decisions to maintain or withdraw their support to the culpable firm are “coin of the realm” for the survival of social irresponsibility scandals. Extant literature has taken for granted the loss of legitimacy and, consequently, of audience support following widespread perception of corporate social wrongdoing. Nonetheless, the empirical variety of the degrees of social sanctions towards culpable firms is such that there is the necessity to understand how come apparently similar instances of managerial social irresponsibility generate very different audience reactions. The comprehension of the mechanisms that undergird the damage and the restoration of the relationships between the firm and its constituent audiences becomes the key aspect to successfully overcome the crisis that widespread social disapproval generates. By moving from broad structure reasoning to the scrutiny of the socio-cognitive processes underlying observer evaluations, this study responds to the many calls for a more detailed scrutiny of the theoretical mechanisms underlying the loss and restoration of the firms’ social approval (Jonsson et al., 2009; Pollock et al., 2008; Westphal & Deephouse, 2011).
By adopting the evaluator’s perspective, recent studies have pointed towards characteristics of the transgressor, of the transgression, of the victims (Lange & Washburn, 2012; Crane, 2013) and of the management of the legitimacy reconstruction processes (Pfarrer et al., 2008; Goodstein & Butterfield, 2010; Hurley et al., 2013; Zavyalova et al., 2013) that may influence the loss and restoration of firm legitimacy following managerial social irresponsibility. Though these studies offer a substantial contribution towards the comprehension of the aspects that influence the loss and reconstruction of the social approval at the basis of the emergence of, and recovery from, the crises generated by managerial wrongdoing, they leave unanswered the question of how come similar firms, that have engaged in similar managerial wrongdoings and parallel procedures of legitimacy reconstruction have had different capacities to recover from the social scandal that hit them. The question, therefore, becomes whether the only aspect of social approval that is considered as a consequence of illegal or unethical firm behaviours is the loss and recovery of legitimacy.
By leveraging: (a) Bitektine’s (2011) idea that real life cognitive constraints imply that audiences interact with many companies on the basis of «incomplete or missing assessments» and judge them as socially neutral or positive until proven otherwise; and (b) Mishina, Block and Mannor’s (2012) suggestion that negative cues regarding the social acceptability of firm behaviours are more salient than those that signal the operational capabilities of the firm, this study proposes that the observer evaluation of the firm following social wrongdoing is multidimensional and extends beyond cognitive, moral and pragmatic legitimacy assessments.
In particular, the thesis of this volume is that managerial social irresponsibility scandals, by harming firm legitimacy, trigger a more extensive re-evaluation of the “validity” of all the reasons underlying audience support. Thus, in contrast to the state of the art regarding legitimacy reconstruction and post-scandal rehabilitation of the company, effective legitimacy reconstruction is not seen as the final stage of the culpable firms’ successful crisis management, rather it is considered part of a more complex process of relationship reconstruction between the focal firm and its audiences. The capacity of the firm to survive the crisis following a social scandal and return to rewarding market and economic performances depends on its ability to obtain a positive overall assessment leading to audience support decisions.
The criteria audiences may use to decide whether or not to maintain their support for the firm, once legitimacy has been restored, depend on the nature of the relationship that ties each audience to the focal firm and the interest structure that undergirds each type of relationship. Drawing on previous studies, in this volume three criteria are identified according to whether the audience considered is: (a) a resource dependent audience; (b) a socially dependent audience; or (c) an independent (or free) audience. The argument is made that firm survival is truly sustainable in time (for all audiences and for the wider economic system) only when it is justified by the firm’s capacity to create value. Of the audiences considered, the free audiences are typically those that decide whether to maintain their support for the firm on the basis of its value creation potential. The assessment of the firms’ value creation potential refers to yet another form of social evaluation, known as “reputation”. In fact, reputation signals the firms’ capacity to create value, based on its resources and capabilities and the managerial choices made to support the quality and performance of its activities in time. Therefore, the firms’ survival of a social irresponsibility scandal entails the complex management of both the organizations’ legitimacy and its reputation.
Though the research is mainly theoretical, the confrontation of the socio-cognitive mechanisms identified conceptually with the comparative analysis of a select number of empirical cases of managerial irresponsibility scandals and their consequences, has allowed to infer stimulating nuances that have contributed to further develop the conceptual framework emerging from this research. In particular, two cases of corporate level (Enron and Parmalat) and two cases of business level (Nestlé and Nike) managerial social irresponsibility scandals are considered. These comparisons vividly highlight the role, sequencing and interplay between legitimacy and reputation in the emergence and management of the post-scandal crisis.
Thus, the study also contributes towards the call for studies to shed further light on the possibility for firms to maintain and manage diverse social evaluations contemporarily and the complexities it entails that has been made by various authors recently (Bitektine, 2011; Deephouse & Carter, 2005; Mishina et al., 2012).
Furthermore, the confrontation between the cases and the theoretical arguments developed in this study indicates that the more irresponsible managerial conduct negatively affects the sources of the firms’ competitiveness in the value chains within its business unit(s), the heavier the consequences of such conduct are for the firm. If connected to Porter and Kramer’s (2006, 2011) argument that ethical actions become more sustainable and have a more pervasive effect on society when they are connected to the value chains of the firms’ business units, these considerations seem to suggest the existence of a multiplying effect of the relationship between social responsibility/ irresponsibility and the strategic sources of competitive advantage.
Multiple issues that emerge or are connected to this research remain to be further analysed in the future. In particular, from a conceptual point of view, though deductively we have argued that the sequence of judgment forms that characterizes these specific cases of corporate crises, implies a legitimacy evaluation first and a reputation assessment after (unless the audiences are resource or social dependent audiences), in principle legitimacy scandals could be triggered by negative reputation cues. Whether a different sequencing of judgment forms is possible and indicative of differences in the ways social scandals should be managed is open to debate.
Another aspect of interest, is whether nuances in the product characteristics influence the strength of reputation's role in maintaining audience support for the corporation after social scandals. The case we studied considered absolutely non problematic products: undifferentiated energy, dairy products, infant milk and athletic shoes. However, would the role of reputation have been equally sufficient to maintain customer engagement with the firm if its products had been more durable and/or part of a modular system of interconnected components. In the later cases, would the fear of remaining with an “orphan” product hinder or put off the intention of customers to buy the company's products and other audiences to support the corporation before they gain confidence in its capacity to survive the social irresponsibility scandal?
Furthermore, in consideration of the theoretical nature of this research, the empirical cases treated were “vignettes” against which the theoretical arguments made were benchmarked and some initial intuitive suggestions could be drawn. However, given the reduced number and the circumstantial nature of the empirical cases analysed, the conduction of more in-depth process studies of specific instances of managerial social irresponsibility may foster further comprehension regarding the interplay between legitimacy and reputation in the management of the aftermath of a social scandal. The conduction of more comparative case studies could include firms that manifest other combinations between reputation and legitimacy at the business and at the corporate level relative to those analysed in this volume. For example, both our cases of business level social scandals were firms with unquestionably high reputations in these businesses; it would be of interest to scrutinize cases in which boycott activities and legitimacy challenges at the business level brought to the demise of companies and search for the nexus between legitimacy and reputation in such cases. Finally, conducting wider scale quantitative deductive analyses would allow to test the relationships proposed in this study, such as the nexus between the existence of a reputation to pivot firm survival on and the sustainability of the corporate turnaround in time, or the multiplying effect consequent to managerial social irresponsibility that infringes on the firms’ value chain(s).
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[1] The description that follows largely refers to Lange and Washburn’s article published on Academy of Management Review in 2012.
[2]The same reasoning, however, applies also to the focused consideration of the Parmalat case on its own. This case may, in fact, be considered by analysing the performance of the single business units after the social scandal. In this perspective, the analysis of Parmalat’s crisis allows the study of polar cases (i.e., the single business units) following a nested approach (Mocciaro Li Destri et al., 2013).
[3] These authors actually distinguish between capability reputation and character reputation, but the latter largely overlaps with our notion of legitimacy and the cognitive heuristic processes underlying its evaluation may be interpreted as significant also for changes in legitimacy evaluations.
[4] However, ceremonial messages have proven to be an effective mean to interrupt the negative spillover effects onto innocent firms. In particular, they help a company distance itself from the category of the culpable organizations and help shift the focus towards the focal firms’ positive attributes (Zavyalova et al., 2012, p. 1084)
[5] For a detailed illustration of Enron’s wrongdoings and the accounting distortions connected to company cover-ups of strategic errors and personal unethical behaviours see Benston & Hartgraves, 2002; Deakin & Konzelmann, 2003.
[6] The Parmalat case draws extensively from the analysis conducted in Mocciaro Li Destri, Minà & Picone (2013).
[7] Specifically, the Parmalat board members Francesco Giuffredi and Domenico Barili, Stefano and Giovanni Tanzi – respectively Calisto’s son and brother –, Parmalat’s CFOs Mr. Tonna, Mr. Ferraris and Mr. Del Soldato, Parmalat’s former treasurer Franco Gorreri (la Repubblica, 03/03/2004), the lawyer and close associate of Calisto Tanzi, Giampaolo Zini (The New York Times, 1/01/2004) and Parmalat SpA executives Gianfranco Bocchi e Claudio Pessina (BBC news, 5/10/2004).
[8] As illustrated in the literature review reported at the end of the first chapter of this volume.
[9] Part of the accounting distortions used by Enron’s elites to sustain the company’s stock was to book these asset sales as recurring profits, rather than extraordinary profits.
[10] This section draws from Mocciaro et al., 2013.
[11] ANSA is the acronym for Italy’s leading news agency.
[12] [pic]"#pˆ
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5uÃèAÖïðõù "/09ñáÒÂÒáÒµñµ¨µ¨µñµ—µñµñ?Š?umaUKhåPèh?c`:?CJThe data reported in this section was rendered available by Parmalat’s marketing department and is fully reported in Mocciaro Li Destri et al. (2013).
[13] For further details of the interview with Francesco Poternza concerning the post-scandal market reactions and Parmalat’s strategy to resurge after the scandal see Mocciaro Li Destri et al., (2013).
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