Why Corporate Legitimacy Matters

Submitted by Guest Contributor

By Dorothée Baumann-Pauly

This is the first post in the Managing Corporate Legitimacy series.

In response to the worldwide seven-month controversy over U.S. spying practices, President Obama recently announced his “proposal” to reform the National Security Agency.

In his January 17, 2014 speech at the Justice Department, he acknowledged the power and threats of new technologies, arguing that while there are fewer technical constraints on what can be done, the tough questions about what should be done are central to the U.S. government.

Lessons from the NSA Mass Surveillance Scandal

The NSA scandal has evoked a legitimacy crisis for the U.S. government. The general public does not perceive the spying practices as socially acceptable, particularly the collection and use of phone records. Legitimacy is based on public perceptions; and managing legitimacy matters to governments. In democratic societies, the social acceptance of government activities is fundamental for staying in power.

The immediate reactions to Obama’s speech were highly critical. Press commentaries, in the U.S. and abroad, found that the speech was calculated to reassure audiences rather than to introduce meaningful NSA reforms. With the continuous disclosures of NSA spying practices over the past months, the public has grown weary of announcements. To effectively restore trust in the US government, concrete actions will have to follow promises.

Corporate Legitimacy at Stake

Managing legitimacy is also a growing concern for corporations. In a joint statement that AOL, Apple, LinkedIn, Microsoft, Facebook, Google, Twitter and Yahoo issued after President Obama’s speech, the companies argue that the presidential proposal outlines positive progress on key issues, yet many crucial details remain to be addressed.

Over the course of the past months, these companies have moved from defensive legalistic statements to lobbying for surveillance reform in Washington to meet public expectations for privacy protection. The strategy change reflects the growing understanding that their corporate legitimacy is at stake and that it can only be restored through concrete steps in collaboration with the U.S. government.

As for governments, legitimacy is a vital resource for corporations. It ensures their social “license to operate.” For many corporations, CSR has become an essential tool for managing legitimacy.

Most large multinational corporations today are fluent in the CSR talk. They issue CSR reports and policies and participate in conferences on CSR and stakeholder dialogues. Yet, what matters for building legitimacy is substance that goes beyond glossy reports.

Lack of Consensus on CSR

Unfortunately, since CSR has emerged over a decade ago, scholars and practitioners have made many attempts to define what the concept actually entails and should entail. To this date, there is no consensus over what is expected from corporations that commit to CSR. CSR interpretations stretch from philanthropy to expectations that CSR is good for profits.

This confusion on the conceptual level has impacted the implementation of CSR. Corporate activities that are labeled CSR are often not linked to the core business processes of corporations. In these cases, CSR does not alter the way business is done.

Instead, corporations use the CSR terminology to describe how they spend their money to address societal concerns without reflecting on how they make it. This type of green-washing, while pervasive, is a short-lived legitimacy strategy.

Why so?

CSR Movement Rooted in Core Business Operations

The reason why the idea of CSR became popular in the first place was the growing public concern over corporations’ core business operations. In a globalized economy, corporations are able to split up their value chains. They can move production to jurisdictions that are weakly regulated. In those places, states that should define and enforce basic rights for their citizens are either unable or unwilling to do so.

Resulting governance gaps led to corporate human rights violations and to an exploitation of natural resources. Branded goods were found in burnt down factories; environmental pollution was traced back to corporate activities.

The growing number of social and environmental scandals triggered a reflection about the role of the corporation in a global economy. Public opinion shifted towards making corporations, not states, responsible for such societal disasters. Corporations are perceived to have the power and the resources to fill governance gaps.

Today, respecting internationally recognized social and environmental standards through core business processes is what renders corporate activities socially acceptable. Particularly when corporations assume government responsibilities and move into a space that was originally exclusive to state actors, managing legitimacy matters.

Implementing the Guiding Principles

Managing corporate legitimacy is thus at the heart of CSR. The umbrella term CSR has not helped to clarify the role of business in a global economy. The legitimacy concept, however, is a reminder for why CSR emerged and what it should stand for: Core business activities that are aligned with what society perceives as just and fair.

The UN Declaration of Human Rights embodies a consensus on universal humanitarian values. As such, it serves as the ideal reference point for corporations that hope to manage the legitimacy of their core operation’s social impact.

The discourse on business and human rights has gained momentum since the United Nations Human Rights Council unanimously endorsed a set of Guiding Principles on business and human rights in June 2011. Yet again, it will be the actual implementation of the corporate commitment to human rights that will convince critics that corporations can operate responsibly and respect human rights.

Corporate Legitimacy and Privacy as a Human Right

Privacy is a fundamental human right (Article 12 in the UN Declaration of Human Rights) and in today’s digitalized world, ensuring privacy is part of tech companies’ core business. At the World Economic Forum (WEF) in Davos, key leaders from the IT industry, governments, and academic experts met to discuss privacy issues in the context of the WEF’s Council for Human Rights.

On the agenda was how companies in this industry can work together most effectively to challenge excessive government interference and demands for data, as well as identifying best practices and responsible polices by governments to protect the privacy of users. These topics will be the subject for a two-year inquiry announced at Davos 2014. If such collective initiatives are able to develop substantial and transparent action plans, they will also help to restore legitimacy.

Managing Corporate Legitimacy – A Toolkit, released in January 2014, describes the organizational preconditions for managing corporate legitimacy through core business processes. It outlines the organizational elements that need to be in place for corporations to credibly show and tell that their commitment to contribute to the solution of pressing social issues is real.

About the Author:

Dr. Dorothée Baumann-Pauly is a business ethics scholar and human rights advocate. She received her PhD in Economics from the University of Zürich. In her scholarly work she links the interdisciplinary academic discourse on global governance with the practical implementation challenges of corporations as political actors. She currently teaches at HEC Lausanne and works with the Center for Business and Human Rights at Stern School of Business, New York University.