Wall Street vs. Main Street: Firm Strategies for Defending Legitimacy and Their Impact on Different Stakeholders

Abstract

We assess the effect of firm strategies to defend legitimacy on two different stakeholder groups—the public (“Main Street”) and the investment community (“Wall Street”). We identify four types of firm strategies in response to challenges to their legitimacy—denial, defiance, decoupling, and accommodation— drawing from theory and from case studies of international outsourcing. We then develop and test hypotheses on the effectiveness of these strategies in defending legitimacy across these two stakeholder groups, using data from media reports and press releases on all 126 distinct accusations of the use of international sweatshops by U.S. firms from 1990 through 2002. We find that denial and defiance responses hinder the recovery of legitimacy on Main Street, and none of the responses has a positive effect on public perception, whereas Wall Street is unaffected by denial and defiance but views decoupling favorably. Main Street and Wall Street thus perceive firm actions to defend its legitimacy quite differently, suggesting that these worlds operate by separate moralities in which Main Street appears to privilege fairness as a core value, whereas Wall Street privileges profit.

Institutional Theory and Evolution of ‘A Legitimate’ Compliance Culture: The Case of the UK Financial Service Sector

“…As such it might be the case that some firms' have different response from the majority of firms within the sector. As noted by Lamin and Zaheer (2012), these responses can include denial (dismissal of allegation in the form of denial that the problem exist, or it was related to factors such as labour practices or contractors or denying responsibility as indicated by Sutton and Callahan 1987) or defiance (contesting accusation and challenging accuser).…”

“…This is confusing for the public when trying to interpret this event, depending on whose viewpoint (the regulator or the firm) that they consider. This may indicate that this minority of firms have chosen to respond differently and follow a denial or defiance strategies (Lamin and Zaheer 2012) that dismisses the need to follow suit by issuing regret statements, or to relate the incident to factors beyond the firms' control.…”

“…This could be attributed to firms acting in a profit maximising capacity, with economic motivations outperforming the coercive, mimetic and normative pressures. This could be linked in this study, to the concept of the deterrence trap introduced by Parker (2006), or simply that this minority of firms have chosen to respond differently and follow a defiance or denial strategy (Lamin and Zaheer 2012), that dismisses the need to follow suit by issuing regret statements or relate transgression to factors beyond the firm's control, respectively.…”

Communicating Moral Legitimacy in Controversial Industries: The Trade in Human Tissue

“…The first focuses on how organizations defend challenges to legitimacy after revelations of discrediting actions (see Reuber and Fischer, 2009), such as the use of sweatshops (Lamin and Zaheer, 2012) or using organs from executed prisoners in clinical trials (Schrempf-Stirling, 2014). The second stream, and the one we draw on here, focuses on how organizations in morally controversial industries evade disapproval on an ongoing basis.…”

Language and Communication at Work

“…Due to a failure to defend effectively the moral basis of their judgments, many organizations have incurred major reputational damages and high costs (e.g. in the case of the British Petroleum oil spill), as well as loss of legitimacy in the public eye (Bazerman and Gino, 2012;Gunia et al, 2012;Lamin and Zaheer, 2012;Patriotta et al, 2011). What can be observed, then, is a growing pressure to demonstrate where, how, and when moral judgments happen in organizations, which are, in turn, called upon to be more "organized" in the ways they resolve moral puzzles.…”