How to avoid a legitimacy tumble, developing trust and the dangers of greenwashing.

Obstacles to trust

Clawing back this lost trust back is essential, but definitively difficult. The authors of this report identify a series of major obstacles preventing companies from overcoming distrust. The most important relate to a “certain set of mental models or mind-sets”. The list starts with the preoccupation with financial capital as the primary form of measuring value added (ie if you can’t put a dollar sign on it, it’s not worth a thing). Hierarchical leadership ranks high, too, along with its stable mate “blind trust”. Employees, for instance, are all too often encouraged to “get along and go along”. So the boss tells you to sell some toxic sub-prime, and you do – no hard questions asked.

These and other hurdles (for example anonymity of core stakeholders, the agency of the media, “firm-centric” models of stakeholder relationships) are all rectifiable, thankfully. All it needs is a root-and-branch overhaul of corporate culture. Do that and corporate reputations for trustworthiness might just be re-won.

“Trust after the Global Financial Meltdown”, P Werhane et al, Business and Society Review, Vol 116, Is 4, Winter 2011.

Three-legged legitimacy

Legitimacy is a nice-to-have. Illegitimacy isn’t. But what separates one from the other? And who gets to decide? First off, it all starts in the mind. Legitimacy is “socially constructed”, a composite perception – and not just anyone’s. The grand arbiter of legitimacy is the “focal organisation’s management”, or so says this insightful paper.

Legitimacy is a three-legged stool. If one leg is missing, the sitter is set to take a tumble. Leg 1 comprises the legitimacy of the stakeholder as an entity. Institutional and stakeholder theorists have argued long and hard about the grounds of such legitimacy. For Santana, it comes down to societal opinion. If society sees an entity as legitimate, it’s more likely that the focal organisation will too. Legs 2 and 3 are more “circumstance-bound”: the legitimacy of a stakeholder’s claim (is it contractually justified, for example?) and the quality of a stakeholder’s behaviour (are its activities within the law or not?).

Each aspect exists in degree. Santana provides eight scenarios to flesh out the point. The best, needless to say, is when all three – entity, claim and behaviour – are in concert. Employees using official channels to request something already agreed by company policy would be a case in point. The list runs through all the lesser permutations, ending with an entirely legless stool. Not that the totally illegitimate stakeholder can be ignored. A little urgency can make it “demanding”. Add a dose of power, and it can become veritably “dangerous”.

This paper leaves the practitioner with a good sense of what factors to look at when determining a stakeholder’s legitimacy, but no hard-and-fast rules on how to judge them. That’s where managerial perception comes in.

“Three Elements of Stakeholder Legitimacy”, A Santana, Journal of Business Ethics, Vol 105, Is 2, January 2012.

Why greenwash?

With greenwashing, no one wins. Not the company (whose credibility falls), not the consumer (whose scepticism rises) and not genuinely responsible companies (whose communications come under suspicion). So, pray tell, why do so many companies try it on?

Profit, quite simply. The green consumer market has grown to an estimated $230bn by 2009 (a figure that’s projected to jump to $845bn by 2015). “Lax and uncertain” regulation helps too. Within this context, this paper picks out three main categories of driver: institutional (or external), organisational and individual.

Lack of regulation falls into the first of the three, together with pressures from NGOs, consumers, investors and competitors. As for organisational-level drivers, think firm incentive structures and ethical climate. Last but not least are individual “cognitive failings”, such as narrow decision framing, “hyperbolic intertemporal discounting” and optimistic bias.

The paper concludes with some timely recommendations to help kick the greenwashing habit. Top of the list comes increasing the transparency of environmental performance. Try working with NGOs and other third parties on impact measurement. Sound auditing beats slippery PR.   

“The Drivers of Greenwashing”, M Delmas and V Burbano, California Management Review, Vol 54, Is 1, Winter 2011.

Campus news

An insightful look at the link between employee giving and employee loyalty by Wharton Business School’s Adam Grant features in the Network for Business Sustainability’s Top 10 research findings of 2011 here.

Harvard Business School is introducing a new three-day executive management course that promises to explore the link between sustainability and financial performance. “Innovating for Sustainability” will run 20-23 May in the UK.