1. Introduction
Companies often suffer due to the negative reputation of related firms [
1,
2,
3]. For ex-ample, the nuclear power plants worldwide suffered legitimacy losses after the Chernobyl disaster in 1986 as several stakeholders, including mass media and nonprofit organizations, publicly advocated the risks posed by the nuclear power plant industry [
4]. Similarly, following Exxon Valdez’s oil spill accident in 1989, several oil companies faced public criticism regarding the potential risks generated by them and were forced to take responsibility in handling the aftermath of such incidents [
5]. The spillovers of negative reputation are caused by not only such accidents, but also disgraceful events. For instance, in Japan, the government has been publicly disclosing a monthly list of exploitative firms since 2016 to curb unethical labor practices. This has led to legitimacy losses for peer firms in the same industry without malicious activities, as stakeholders view all firms in the same industry from a similar manner [
6,
7].
The legitimacy theory in organizational studies has addressed these issues [
8,
9]. The theory holds that public disgrace is a significant driver of organizational failure because a firm’s survival and performance are functions of legitimacy acquisition [
10,
11]. However, the literature has mainly focused on disgraced firms and their reactions [
12,
13], and how organizations react to the disgrace of their industry peers remains understudied, despite its importance.
Our study attempts to fill this gap by developing a theory and providing empirical evidence on how organizations react to vicarious public disgracing. Building on the legitimacy and category theories, we assume that since stakeholders evaluate organizations belonging to the same category in a similar manner [
14,
15], the legitimacy threat originating from public disgrace diffuses across organizations within the same industry. This assumption entails that as vicarious public disgracing increases, focal firms take remedial actions in response to the potential legitimacy threats, regardless of their innocence. We particularly focus on the improvement of corporate social performance (CSP) as a remedial action because it is considered to be effective in creating legitimacy and a favorable organizational impression [
16]. To empirically test our predictions, we analyze 710 Japanese firms that their peers are blacklisted by the government for labor law delinquency, between 2016 and 2019. The findings support our predictions and reveal that organizational CSP increases with increased vicarious public disgracing in the same industry, especially in firms with a poor CSP record.
Our study makes significant contributions to the literature. Although prior studies suggest diverse factors that motivate firms to enhance their CSP [
17,
18], to the best of our knowledge, they do not address the relation between vicarious public disgrace and CSP. Hence, the results of this study provide a new antecedent to CSP improvement and enrich the existing literature. Further, we extend the legitimacy theory by displaying the influence of potential public disgrace spillover. This is a clear distinction from other studies that mainly focus on testing the legitimacy losses of the organizations directly suffering public disgrace [
12,
13]. Finally, our results provide practical implications for policymakers by suggesting ways to improve CSP, and for organizational managers by highlighting a possible source of legitimacy losses.
5. Results
Table 1 displays the descriptive statistics for each variable used in the analysis.
Table 2 shows the correlations between the variables. To check for multicollinearity, we investigated the variance inflation factors (VIFs). The individual VIFs ranged from 1.013 to 2.295, and the average VIF was 1.382. As all the VIFs are below the accepted value of 10, multicollinearity is unlikely to bias our analysis results.
5.1. Main Results
Table 3 presents the analysis results for H1 and H2. Models 1–3 show the results based on the total CSP scores, whereas Models 4–6 represent those based on the CSP scores for HR. Model 1 is the baseline model, which includes only the control variables. As predicted, firms’ lower previous CSP rankings (i.e., larger previous ranking values) (β = 0.038,
p = 0.052) and firm age (β = 2.325,
p < 0.001) are positively related to CSP. Underperforming firms in CSP are more likely to face legitimacy threats. Older firms are more recognized in society and, thus, display higher sensitivity to social responsibility. Intriguingly, Model 1 also shows an unexpected result that the proportion of female directors is negatively associated with CSP (β = −0.019,
p = 0.064). This finding conflicts with the previous results that female directors facilitate CSR activities [
54]. However, these results are justifiable in the Japanese context. Given that hiring female directors is considered a major CSR activity in itself, in the Japanese context [
59], firms that hire several female directors may neglect other overall CSR activities.
Model 2 shows the effect of vicarious public disgrace on focal firms’ total CSP. The coefficient of vicarious public disgrace shows a positive and statistically significant value (β = 0.024,
p < 0.001). This implies that with increased vicarious public disgrace, organizations make more effort to improve CSP. The result strongly supports H1. Model 3 of
Table 3 tests the moderating effects of the previous CSP ranking. The coefficient of the interaction term between vicarious public disgrace and the previous CSP ranking is positive and significant (β = 0.154,
p < 0.001). Thus, as predicted in H2, CSR improvement following vicarious public disgrace tends to be higher for organizations with lower previous CSP rankings (i.e., larger previous ranking values). The results using CSP scores for HR also show a similar tendency, as presented in Models 5–6 (H1: β = 0.032,
p = 0.023; H2: β = 0.131,
p = 0.061). The lower statistical significance of these results compared with the results based on the total CSP score might imply that the total score is a more appropriate measure for our hypotheses, as mentioned previously.
To gain further insight, we plotted the results of H2 in
Figure 2. In this figure, the horizontal axis represents the degree of vicarious public disgrace, and the longitudinal axis represents CSP. The bold line shows the results for the organizations with a lower previous CSP ranking (larger values, Mean + 1SD), whereas the dotted line indicates those with a higher previous CSP ranking (smaller values, Mean − 1SD). As shown in the figure, the positive effects of vicarious public disgrace on CSP are more significant when organizations perform poorly in terms of CSR activities.
5.2. Robustness Analyses
To check the robustness of the results above, we conducted several analyses and showed the major results in
Table 4. We conducted all the analyses for robustness checks by using two dependent variables: The total CSP score and the CSP scores for HR. As both the indicators showed similar tendencies, we only represent those results based on the total CSP score.
First, this study assumes that a linear relationship exists between vicarious public disgrace and CSP score. To disprove the potential U-shaped or inverted U-shaped relationship, we conducted a test using squared vicarious public disgrace. Although we do not present the results, we found insignificant impacts of the non-linear relationship from this robustness check.
Second, the effects of vicarious public disgrace may be dependent on the relative size of the industry. In smaller industries, a large number of blacklisted peers can indicate a more significant stigma at the industry level. Hence, it might have a stronger influence on the reaction of focal firms. Following this chain of thought, we calculated the weights by using the ratio of the number of firms in the focal industry to the total number of firms across industries. Then, we created a weighted vicarious public disgrace by dividing the number of blacklisted industry peers by these weights. Through this measurement, firms in the agricultural, forestry, and fishing sectors showed the highest mean of vicarious public disgrace, rather than the construction industry. As shown in Models 1 and 2, the analysis results using the weighted variables replicate the original analysis results (H1: β = 0.026, p < 0.001; H2: β = 0.198, p < 0.001) and strongly support our hypotheses.
Third, the original total CSP scores were calculated based on the five dimensions or a single dimension of human resources use. For the total CSP score, because financial evaluation is less relevant to social performance, the final score was recalculated based on only four dimensions: Human resource use, environment, corporate governance, and sociality. Thus, financial evaluation was removed from the total score. As shown in Models 3 and 4, the analysis results replicate the original results (H1: β = 0.022, p = 0.017; H2: β = 0.137, p = 0.004).
Fourth, to test the moderating effect in H2, we used the scores of the previous CSP, rather than the log-transformation of the previous CSP ranking. The result is shown in Model 5 (H2: β = −0.135, p < 0.001). It suggests that firms with a low previous total CSP score are likely to perform better in CSP, thus supporting the hypothesis.
Fifth, we applied random effects throughout the models rather than the previous fixed effects. The analysis results, as shown in Models 6 and 7 (H1: β = 0.065, p < 0.001; H2: β = 0.161, p < 0.001), support the hypotheses.
5.3. Additional Analyses
Our major interest in this study was to examine whether innocent firms react to their industry peers’ public disgrace by improving their own CSP. Hence, in the main analysis, we excluded the blacklisted firms from our sample. To gain further insights, this section incorporated a dummy variable (firsthand public disgrace) that takes the value of 1 for blacklisted firms, and 0 otherwise. Then, we tested their influences on the CSP scores, which are represented in
Table 5.
First, controlling the effect of the firsthand public disgrace, we obtained the consistently significant impacts of vicarious public disgrace in Model 1 (β = 0.024,
p = 0.001). However, unexpectedly, the firsthand public disgrace shows a negative and significant coefficient in Model 1 (β = −0.008;
p = 0.055). This result contradicts our intuition as well as the previous common knowledge that public disgrace triggers the involvement of firms in socially responsible activities as a means of recovering legitimacy [
12]. The results also provide substantial implications for the existence of potential bounded effects of firsthand public disgrace on CSR enhancement.
To elaborate on these unexpected results surrounding the first public disgrace, the second step was to explore the potential moderators for the negative relationship between firsthand public disgrace and CSP. Particularly, we raised the potential moderating role of organizational financial performance for two reasons [
17]. First, organizations with lower financial performance might be less sensitive to legitimacy losses owing to public disgrace because of their low popularity. Second, such organizations might have insufficient resources to improve CSP, so they might neglect CSR activities even under legitimacy threats. Thus, CSP improvement following public disgrace might be applicable only to firms with higher financial performance.
To test this possibility, we employed the interaction term between firsthand public disgrace and ROA and tested its effect on CSP. As shown in Model 2, its coefficient showed a significantly positive value (β = 0.024,
p = 0.033), supporting our prediction. We also illustrate these effects in
Figure 3. This figure suggests that only the firms with higher financial performance (bold line) are likely to improve their CSP following public disgrace.
6. Discussion
Based on the theories of legitimacy and category, we tested how organizations react to vicarious public disgrace by focusing on their CSP. By analyzing 710 Japanese firms between 2016 and 2019, we found that organizations improve CSP when a large number of their industry peers experience public disgrace on being blacklisted due to labor law delinquency. This tendency was more significant among the firms with poorer previous CSP. These findings highlight the significant effects of vicarious public disgrace on CSP and make several contributions to the relevant literature.
Our results support previous arguments of CSR studies based on the legitimacy theory, by highlighting that organizational engagement in CSR aims to acquire or repair legitimacy [
16]. Beyond this adherence to the existing knowledge, the results also provide a new perspective on the diffusion of CSR improvement across organizations. According to our results, it is possible to achieve the field-wide enhancement of CSP by publicly disgracing organizations. Some scholars confirm that CSR activities diffuse across organizations through interorganizational networks [
52,
60]. However, they focus on interorganizational imitation as the mechanism for such CSR diffusion. Our focus on the vicarious legitimacy threats among industry peers is distinct from the previous studies. In addition, our results provide new knowledge on a significant moderator to improve CSP through vicarious public disgrace—the previous CSP. These outcomes introduce and support an intriguing research agenda: The diffusion of CSP improvement under vicarious legitimacy threats.
This study also contributes to the legitimacy theory in three ways. First, previous studies on the legitimacy theory have mainly focused on how organizations react to legitimacy threats caused by their own negative experiences [
8,
14]. Conversely, our theory provides relatively insufficient information about how organizations respond to legitimacy threats experienced by industry peers. We focused on this niche area and proved that organizations enhance CSP when their industry peers are disgraced as they fear stigma diffusion within the same category. This broadens the scope of research to test organizational reactions to vicarious legitimacy threats.
Second, our study is also distinguished from existing legitimacy studies concerning the sources of legitimacy threats. The majority of existing studies have relied on the role of mass media as a catalyst for organizational legitimacy threats. For example, Piazza and Perretti [
61] find that organizations in the US nuclear power industry bailed as field players when mainstream mass media damaged their field legitimacy. Tang and Tang [
62] show that media coverage of firms’ illegitimate behaviors leads to restrictions on such firms. Unlike these studies, our study focused on the role of the government as a catalyst for legitimacy threats. Such a focus is indubitable given that the government declares and implements institutional standards that societal members are expected to adhere to. This approach adds a promising but neglected provider of organizational legitimacy threats.
Third, previous legitimacy studies suggest that organizations experiencing public disgrace should make efforts to lessen the stigma attached to them by improving social performance [
12]. In particular, Hampel and Tracey [
13] suggest a two-step process to absorb the shocks created by stigma: Stigma reduction and appealing for higher social performance. However, in additional analysis, we empirically provide a caveat that these processes may not necessarily yield any results and that the organizations with lower financial performance may not react to public disgrace (see
Figure 3). These results imply that certain boundary conditions may exist that promote organizational social performance in the face of public disgrace and that such conditions are closely relevant to organizational financial performance. Thus, we provide the potential conditional effects of legitimacy threats on organizational social performance.
Our study has several practical implications for policymakers and organizational managers. First, policymakers attempt to enhance the social responsibilities of firms and restrict their illegitimate behaviors by using several costly policies or punishments. In this study, we show that public disgrace can be an effective tool and can be used to address several societal issues, such as financial frauds and misconducts in the academia or education sector, and even in the corporate setting. Second, through the additional analysis, we prove that only financially high-performing organizations react sensitively to their own public disgrace (see Model 2 in
Table 5). Therefore, policymakers must realize that public disgrace may not motivate financially underperforming organizations to improve social performance. Finally, organizational managers should be quick to identify the implied cues that might harm their legitimacy and make efforts to respond to the potential negative spillovers in the industry. This is especially true for the industries that include several publicly disgraced organizations. Moreover, given that industry members are sensitive to their peers’ public disgrace, organizational managers may consider making a collective effort to improve the industry’s image.
Our study also has several limitations. First, the Japanese context provides a useful empirical setting to test our hypotheses because, culturally speaking, public shaming is a highly sensitive matter in Japan [
63]. This specific context, therefore, may lead to the bounded generalizability of our findings. Particularly, the notion of public disgrace has long been tested in diverse research contexts across several countries [
19,
21,
64]. However, their varying impacts depending on several international contexts have remained untested. In this connection, future research will be beneficial if it can explore whether and how the impacts of vicarious public disgrace differ, depending on the national cultures. For example, according to Hofstede’s cultural dimensions, western countries tend to have low power distance and short-term orientation [
65]. Under these cultural environments, companies might be less sensitive to the legitimacy threats caused by the government or less likely to engage in CSR as a response to legitimacy threats.
Second, our sample might have excluded highly illegitimate firms as they did not respond to the survey. This translates to limited variances in social performance among sample firms. Although this problem could be common to similar studies and was even effective in testing our hypotheses on how innocent organizations react to vicarious public disgrace, it limits further intriguing tests on how organizations react differently to their own disgrace and vicarious public disgrace or a combination of both. Further studies can focus on these issues to extend the existing knowledge on organizational reactions to public disgrace.
Third, to define categories, we focused only on industry boundaries. However, the organizational perception of categories may also include other dimensions, such as geographical locations or collaborative networks [
30]. Although we controlled for network influences in our tests, future studies can employ these diverse perceived categories and generate more information on whether and how organizations react differently to the vicarious public disgrace depending on diverse sources.
Despite several limitations, the theory and empirical findings of this study provide substantial knowledge about organizational responses to vicarious public disgrace and extend the existing literature and theories. The results of this study also provide practical implications for policymakers to enhance organizational CSP as well as for organizational managers to address legitimacy threats. We hope that the approach and findings of this study will offer critical perspectives on current CSR studies and contribute to organizations’ focus on sustainability issues.