By Rolf Brühl, Johannes Jahn, & Melanie Eichhorn

“We invest heavily in the development of renewable energy. We commit to climate protection targets … We strive for value-enhancing growth and continuously increasing the company‘s value.” When a coal-mining company, like the energy giant RWE in Germany, communicates that it will invest sustainably, how do customers, investors, and other individuals who are interested in the company react? In our paper, we look at how these so-called stakeholders judge such announcements, with reference to legitimacy. Individuals judge companies as being legitimate if their actions are seen as appropriate in terms of stakeholders’ rules, values, and norms. Two factors are important in judging legitimacy: the motives people attribute to corporate behavior and the credibility that is assigned to the company. For instance, if individuals accuse the company of selfish motives, this has a negative impact on the credibility and legitimacy of the company.

The communication trap of the business case
The fact that companies have a social responsibility, as well as an economic responsibility, can be considered as common knowledge in many societies. However, companies are still perceived as genuine economic organizations and, therefore, economic efficiency is also required for investments in sustainable projects, for instance, investments in renewable energy technology or water preserving technologies. This is often called the business case of corporate social responsibility (CSR). Within the company, managers legitimize themselves through the business case to demonstrate that responsible investments, although not linked to the core business, are still profitable. Institutional investors, for example, can then be convinced to invest in sustainable companies. But if companies make economic and social reasons for their sustainable investments known, they run the risk of their legitimacy being called into question. Our study shows that when individuals assume that a company’s sustainable investments are strategically motivated and driven by economic interests, they will assess companies’ credibility and legitimacy negatively.

Do saints fare better?
Companies face a dilemma—it seems they cannot get it right whether they openly inform about the financial benefits of sustainable investments or withhold such benefits. On the one hand, the communication of company-serving motives leads to judgments of lower legitimacy. However, on the other hand, as companies are perceived as economic actors, it is not advisable to give only social reasons for investing in sustainable projects. Our results suggest that at least part of the audience accuse the company of egoistic motives and evaluate credibility and legitimacy negatively. This is simply because individuals become skeptical when companies overemphasize social reasons and often assume companies are greenwashing. They suspect that the company is only pretending to be sustainable. Previous research has shown that this skepticism is especially pronounced towards contested industries, for instance, companies producing weapons, alcohol, or cigarettes. Therefore, overall, it is advisable for companies to communicate transparently about economic and social benefits. For this to be successful, the company’s business strategy must match its sustainability strategy. Likewise, a consistently applied sustainability strategy is able to create legitimacy as it creates economic and social benefits at the same time.

To sum up, we reveal that judgments about companies’ legitimacy are influenced by the central beliefs of individuals. The motivations behind company actions are as important as the company actions itself. When individuals perceive companies to be driven by self-serving motives, they consider them less credible and, consequently, less appropriate. To prevent such negative judgment, we advise companies to strategically match their sustainability strategy with their business strategy and correspondingly provide transparent communication.

Stakeholders are not only increasingly demanding that companies do business sustainably, they are also insisting on having a positive influence on this development. Our study highlights that a comprehensive stakeholder management, including a stakeholder dialogue, is necessary for stakeholders to assess the sustainability concept of companies as credible.

Reference:

Jahn, J., Eichhorn, M., & Bruhl, R. 2020. How Do Individuals Judge Organizational Legitimacy? Effects of Attributed Motives and Credibility on Organizational Legitimacy. Business & Society, 59(3).