Why Legitimacy Is a Business Imperative

Julien Jourdan: Legitimacy is a generalized perception in society that the actions of an organization are desirable, proper, or appropriate. Legitimacy may greatly vary with space and time. Think about environmental concerns in the automobile industry: diesel engines were perfectly legitimate in the 1980s, and their production and sale strongly encouraged by several European governments. Not anymore, certainly not since the Dieselgate scandal.

Legitimacy has cognitive, pragmatic and moral aspects: Do we understand what the firm produces? Is it useful to society? Do we regard the organization as a force for good?

JJ: I tend to think about firms as coalitions of stakeholders maintained to achieve a purpose. In a market economy, nobody is forced to work for a firm, buy its products, or acquires its shares in the stock market. Each stakeholder brings certain resources to the collective project that the firm embodies: money of course, but also talent, ideas, and hard work. Convincing stakeholders to join the coalition and stay in requires more than an attractive economic proposition. Nobody likes being associated with an organization that is regarded as illegitimate.

Believe me: no executive wants to be in the C-suite when that happens. When the US EPA accused Volkswagen of cheating engine emission tests, the firm lost 42% of its market value in a few days. The CEO was forced to step down, many executives were investigated, and some ended up being prosecuted. The German firm survived but, to rebuild its legitimacy, it had to engage in a costly company-wide strategic reorientation, reinventing itself as a force for good, a (repentant) pioneer of clean transportation.

JJ: Large geopolitical events, like revolutions, insurrections, and wars may as well shift how organizations are perceived and trigger a form of “legitimacy stress”.

Consider multinational corporations caught in geopolitical crossfires. Overnight, such firms become at risk of being targeted by activists, NGOs, and governments in their home and host countries. They may react by boosting their engagement in lobbying and other corporate political activities, as we find in a study of multinational firms in the US at the onset of the 2003 war in Iraq.

But “private politics” tactics require time and only work when institutions in place allow them.

Resisting public pressures is especially hard in times of crisis when society experiences episodes of “collective effervescence”. Even if they have a strong rationale for doing so and the best intentions, leaders need to weight the benefits of maintaining operations and the potential long-term legitimacy cost for the entire organization.

The Western firms that maintained their activities in Russia in 2022 despite “name and shame” campaigns justified their policy by the need to preserve local jobs, serve innocent populations, and pointed out that valuable assets would end up in dirty hands if they left. Yet, as growing legitimacy concerns were adding to logistical difficulties, many were forced to exit eventually.

Preserving the legitimacy of a firm is not a mundane task, not something leaders may think about when they have time on their hands, when they have taken care of “real business” issues. It should be at the top of their minds at all times. It’s a leadership job par excellence.