“Wall Street vs. Main Street: Firm Strategies for Defending Legitimacy and Their Impact on Different Stakeholders” by Anna Lamin & Srilata Zaheer
Producing in developing countries is not illegal per se. Nevertheless, being accused of using international sweatshops can seriously threaten the reputation, or more specifically, the legitimacy of a firm. Lamin and Zaheer (2012) investigated how strategies to defend legitimacy are perceived by the public (“Main Street”) and the investment community (“Wall Street”).
Typical defense strategies
In their study the authors identified four strategies that firms typically employ when their legitimacy is threatened: denial, defiance, decoupling, that is distancing itself from the source of the problem, e.g. a supplier or a person, and, finally, accommodation, that means to admit that the allegations are true, and to change the firm’s policies accordingly. These strategies were then tested for their effectiveness in restoring a company’s legitimacy across the two audiences. Specifically, Lamin and Zaheer looked at news releases and articles from the mass media on accusations of the use of international sweatshops by U.S. firms as well as stock price reactions between1990 and 2002.
Wall Street quite unimpressed
One of the core findings was that none of the defense strategies, not even the seemingly decent accommodation strategy, helped to improve the public impression. In contrast, denial and defiance had a negative effect on Main Street. Wall Street, on the other hand, was quite unimpressed by most of the efforts companies made to regain their legitimacy. Interestingly, only the morally questionable decoupling strategy was viewed favorably among investors. The authors suggest that the public and the investor community represent different “thought worlds” and are driven by separate moralities privileging either profit or fairness.
Put differently, this shows that once a firm’s legitimacy has come under attack, possibilities to regain trust are very limited. Following this study, the challenge rather seems to be trying not to cause even more damage, especially with the general public. There may also be a questionable incentive for scapegoating to keep Wall Street happy.
Lamin, A., Zaheer, S. (2012). Wall Street vs. Main Street: Firm Strategies for Defending Legitimacy and Their Impact on Different Stakeholders. In: Organization Science, 23, 47-66.
Summary by Laura Janz