This paper, drawing on stakeholder and legitimacy theory, addresses the issue of stakeholders’ pressure effect on a firm’s CSR behavior. It focuses on the apparel sector as these companies, characterized by consumer proximity, are under the lens of stakeholders for their direct social performance as well as for their suppliers’ actions. We analyze the Nike case in order to study how stakeholders’ pressure shapes a firm’s engagement in CSR issues. Our study points out the dynamic nature of stakeholders and legitimacy, and it underlines the influence of two actors which are rarely considered as primary and most important stakeholders, namely media and social activist groups.
Societal expectations about corporate activities nowadays focus on firms’ economic responsibilities within the boundaries established by law as well as within ethical guidelines. As Buchholtz and Carroll [
Empirical studies demonstrate that a firm’s CSR activities affect its consumers purchasing behavior [
Environmental-sensitive industries are more subject to a legitimacy gap caused by their direct actions, but CSR concerns also take into account issues, such as child labor and sweatshops, which can affect many industries [
This paper, drawing on stakeholder and legitimacy theory, studies the behaviour of companies in the apparel sector in terms of their answer to stakeholders’ pressures. Apparel companies have been, and continue to be, strongly criticized about their poor performance in social issues, as demonstrated by the very recent articles published by Financial Times [
According to legitimacy theory, a company has to operate following societal expectations. If this does not happen, a legitimacy gap is likely to arise, eventually leading to the withdrawal of company’s legitimacy, thus threatening its survival. In order to avoid this situation, a company has to show that it is operating in line with social values and beliefs. The stakeholder theory helps to understand to whom the corporations have to account. When companies take decisions, they have to take into account not only the interest of their shareholders, but also those from other stakeholders. In fact, focusing only on shareholders’ interests may threaten corporate’s legitimacy and thus the continual of its operations.
Media and social activist groups are increasing their power in influencing corporates’ decisions, both because they rise and unify the voice of other stakeholders, and because they disclose all corporates’ operations, thus pressuring companies in operating in a socially responsible way.
In order to test these assumptions, we analyse the Nike case. This case is of interest as Nike is one of the more visible companies in the apparel sector and it had to face great pressures from its stakeholders to behave more ethically and it has recently experienced a new wave of anti-sweatshop protests [
The concept of stakeholders has become popular since the publication of the book Strategic Management: A Stakeholder Approach [
By the years, stakeholder theory has gone to challenge the main idea of that time: the so called “shareholder theory”, which represents the point of view of the neoclassical economists, which main proponent is Milton Friedman. While the first theory talks about the duty of a company to engage in a positive relationship with all its stakeholders, the latter has the only objective of profit maximization, taking into account just the shareholders’ interests. Stakeholders are defined as “any group or individual who can affect or is affected by the achievement of the organization’s objective” [
Stakeholder theory points out that society is not a homogeneous group of individuals with identical expectations but is made up of different groups that have different expectations about a firm’s actions and a varying ability to influence its behavior [
Legitimacy theory is, along with the stakeholder theory, one of the most used theory in order to analyse the behaviour of a company dealing with corporate social responsibility.
Suchman [
According to Suchman [
Stakeholders perceive legitimate organizations as more worthy, meaningful, more predictable and more trustworthy [
However, it can happen at a given time, that corporate’s behaviours differ from stakeholders’ expectations. Here is when a legitimacy gap is likely to arise. Managers may strategically react to this according to how the hypothetical claim brought by a stakeholder is perceived as salient: if the stakeholder is considered as fundamental, the firm would react accommodating the request. However, if the stakeholder is considered as less important, the expectation may be ignored, and the company may decide not to take into consideration the threat or just to communicate symbolic engagement without taking significant steps into solving the problem [
According to Legitimacy theory, organizations try to prove that they are fulfilling the contract with society that allows them to carry out their business, and this contract implies that they operate in accordance with the values, limitations and norms of their respective society [
Suchman [
Two main challenges can be identified:
- stakeholders, and therefore their interests, are heterogeneous [
- multinational companies operating in multiple countries may have to face different perceptions of legitimacy according to the country in which they are operating.
Some activities may be perceived as legitimate in the host country but not in the home country of the company, thus creating a dilemma in the firm on which activities to pursue and which not [
Much harder is the task of a company that has to repair its legitimacy. It happens when a legitimacy gap between societal expectations and corporate behaviour arose, and stakeholders threaten to withdraw firm’s legitimacy. Some companies in the apparel sector had to face such issue, as their products were made in sweatshops. When this situation has become known by their stakeholders, a legitimacy crisis emerged.
One of the problems in this situation is that “legitimacy crises tend to become self-reinforcing” [
R. Q. How does stakeholders pressure shape a firm’s engagement in CSR issues?
In order to develop the analysis, we apply the “network theory of stakeholder influences” of Rowley [
Moreover, it adds some considerations and provides four strategies for managers in their interaction with the stakeholders, according to the level of network’s density and the centrality of the company within the network.
Density is defined as the “measure of the relative number of ties in the network that link actors together” and, accordingly with literature [
Density = 2 e / n ( n − 1 ) (1)
where: e = number of ties; n = number of nodes.
Finally, centrality refers to the company’s position inside the network. It is possible to compute three kinds of centrality:
- Degree centrality, defined as “the number of ties he or she (the company) has with other actors in the network”.
It is less useful than the other two types of centrality, being not relative to other stakeholders’ ties. However, we are going to calculate it too in order to be as complete as possible.
- Closeness centrality measures “an actor’s independent access to different points in the network” [
Closeness Centrality = ( n − 1 ) / ∑ d G ( v , t ) (2)
- Betweenness centrality is defined by Freeman [
Betweenness Centrality = ∑ σ s t ( v ) / σ s t (3)
where: n = number of nodes; v = company’s node; t, s = other nodes; dG(v, t) = shortest path between v and t; σst = number of shortest paths between s and t; σst(v) = number of shortest paths between s and t that pass-through v.
We make use of this structure considering three different moments: the first years of activity of the firm, when Nike’s activity was basically of import and sale of the Onitsuka Tiger shoes; second, when the company decided to move the production to Third World countries but before media disclosure; and finally, after media disclosure of Nike’s sweatshops in those countries and the appearance of a legitimacy gap.
Nike was born in 1964 from a graduate student at Stanford Business School called Phil Knight and Bill Bowerman, his former track coach at Oregon University [
In the beginning the name of the company was Blue Ribbon Sports, a name invented by Knight during its first trip to Japan, where he went to meet the executives of the Japanese company Onitsuka.
Knight has been really fascinated by the Onitsuka Tiger running shoes, which he thought could perform better than the more expensive shoes that were in the US market at that time and presented himself to the Japanese company as an importer from the United States.
During its first years, the company Blue Ribbon Sports was basically an importer from the Japanese company Onitsuka to sell shoes in the local market at a competitive price, thanks to the favourable exchange rate between Japan and United States. Blue Ribbon Sports was, until the early years of the 1970s a quite small company, with earnings being around $1 million [
The stakeholders’ network was not populated of many actors: the company almost did not have any direct impact on the natural environment nor relationships with the media; customers were running people and young students from the university; and the employees base was really small (
As it is possible to see in
Ties | Total possible ties n(n − 1)/2 | Density | ∑dG(v, t) | Closeness Centrality | σst(v) | σst | Betweenness Centrality |
---|---|---|---|---|---|---|---|
11 | 15 | 0.733 | 5 | 1 | 1 | 10 | 0.1 |
Source: Authors’ calculations.
how to handle each customer’s complaint, due to the small number of customers the company had in the beginning.
Moreover, dense networks are likely to hinder firm’s activities which goes against stakeholders’ expectations, due to the possibility of coalition’s formation between stakeholders and also to the fact that stakeholders are able to monitor the behaviour of the company.
Looking at closeness centrality, the value is 1, suggesting a focal position of the organization, which means that the company can spread the information quickly, and it has been associated by Freeman with fewer message transmissions, shorter time and lower costs [
According to Rowley [
In the early 1970s the company changed its strategy and started designing a new line of shoes that was called Nike. However, for doing so they needed cash, which arrived from the sale of 35% of the company to investors [
In the beginning of the 1970, Blue Ribbon Sports outsourced the production to two Japanese shoe manufacturers and opened up its own factories in Maine and New Hampshire. However, the company has soon to close those factories due to the high costs of production in the United States. The same happened with the providers in Japan: as the country developed, the costs rose, the labour market become tighter and the exchange ratio between dollar and yen was not as convenient as before due to the economic measures undertaken by the President of the United States Richard Nixon, who abolished the direct convertibility of the dollar into gold, causing a devaluation of the dollar against other currencies. For these reasons, Blue Ribbon Sports started looking around in search of new countries, with cheap and flexible labour market, where outsourcing the production of shoes. The countries that were chosen are: China, Korea, Taiwan (Republic of China) and Thailand.
Although the Nike shoe line was launched in 1971-1972, the company changed its name from Blue Ribbon Sports to Nike just in 1978. Nike’s strategy has been from the beginning to look for the cheapest place where to move the production, and the same that happened in Japan and in the United States, happened after with the factories in Korea and in Taiwan (Republic of China). As the costs in these two countries started to rise, the company moved the production to cheaper countries, such as Vietnam and Indonesia. However, this strategy may have drawbacks too: one of this is the charge of looking for factories which pay low wages and have poor working conditions, thus undermining the reputation of the company and to pose legitimacy at risk. This kind of critics against Nike started around the 1980s, and grew exponentially in the 1990s, when Nike has been overwhelmed by a wave of criticisms. The first proof of child labour in one of Nike’s factories will appear in 1996 in Bangladesh [
As reported by Suchman [
Looking at the chart (
As reported in
Ties | Total possible ties n(n − 1)/2 | Density | ∑dG(v, t) | Closeness Centrality | σst(v) | σst | Betweenness Centrality |
---|---|---|---|---|---|---|---|
13 | 28 | 0.46 | 8 | 0.875 | 6 | 21 | 0.286 |
Source: Authors’ calculations.
have direct communication with the company, and probably even do not know what Nike is, and are forced to pass through Nike’s suppliers if they want to communicate with the company. Looking at the betweeness centrality now the value is 0.286 which is higher than the previous value as Nike have more ability to control the information flows across the network. Degree centrality is equal to 6, as Nike has one more tie, namely that one with shareholders. Rowley identifies low density and high centrality with a position of commander, and it is confirmed by the fact that before media disclosure, Nike did not face any campaign of boycott, nor significant problem in the relation with its stakeholders. In low dense network, stakeholders are less able to coordinate each other and unify against the behaviour of a company, becoming in this way passive [
The 1990s has been the period in which Nike has received more critics about the working conditions in the factories where the company outsourced its production.
Chronologically, Nike has been accused of child labour for the first time in 1996, when the magazine Life published an article on this issue with a photo of a Pakistan 12-years boy sewing a Nike soccer ball [
Moore: “twelve years old working in factories, that’s okay for you?
Knight: “They’re not 12-years old. The minimum age is 14.”
Moore: “How about 14, then? Doesn’t that bother you?”
Knight: “No.” [
As it is possible to see, the only concern of the CEO of Nike was to follow the rules of the countries in which the company outsourced the production, without taking into consideration any ethical issue. Another evidence of this, is what Nike’s general manager in Jakarta argued about low wages and poor working conditions in Indonesian factories that produced for Nike: “They are our subcontractors. It’s not within our scope to investigate” [
According to Maria Eitel, Vice President and Senior Advisor for Corporate Responsibility at Nike, the disclosure by media of children’ employment in Pakistan factories represented a “critical event for the company in terms of its understanding of globalization, international labour standards, and corporate responsibility” [
Such measures include an increased level of suppliers’ monitoring; relations with International and Non-Profit Multi-Stakeholder Organizations such as the UN Global Compact and the Fair Labor Association; new departments that deal with sustainability issues such as environment and labour practices; and the increasing of the minimum age for workers in Nike factories to 18 years old in footwear factories and 16 years old in apparel factories [
Repairing legitimacy is a much hardier task than maintaining it, especially because of the higher degree of stakeholders’ scrutiny a company will have to face for a long time. Trying to manipulate stakeholders through communication channels may be highly dangerous, as if stakeholders become aware of this may decide to withdraw definitely the company’s legitimacy. Looking at the stakeholder network, it presents the same situation as in the 1970-1990 period but with two important new actors: media and social activist groups. As seen, media has had the fundamental role of disclosing the operations in Third World factories from where many companies in developed countries outsourced the production of its products. By itself, outsourcing is a legitimate strategy; however, it should be done in an ethical way, with constant monitoring of the providers. Unfortunately, most of the time outsourcing results in an extreme imbalance in the contractual power between the parts, with firms in developed countries imposing really low prices to their subcontractors without possibility of negotiations, thus leading providers to be forced, in order to compete with others, to hire workforce as cheap as possible, with children being surely the cheapest. Moreover, companies often impose very strict timing and quantity of production to their suppliers, thus leading to stressful working days for the employees in the factories. As an example, we can cite some providers of Nike that have adopted a salary system in which workers receive their full-day’s pay only if they meet their work quota, leading them, if the requirement is not met, to work more in order to receive the standard pay [
Another new actor of the network is social activist groups (
Following the stakeholder theory, a company should engage in a positive exchange of information and communication with all its stakeholders, and not just the shareholders. While in the beginning Nike seemed to follow a different strategy,
not taking care of the critics it receives from media, customers, and pressure groups, it has to change soon its strategy, promising to consider ethical issues too. Another evidence that stakeholders do matter, and that companies have responsibilities in dealing with them, is what happened in 1997 in Vietnam.
The audit firm Ernst and Young audited a Nike subcontractor in Vietnam and found that “toluene” (chemical solvent) concentrations exceeded between 6 and 177 times the acceptable standards in certain sections of the plant”, adding that “chemical releases had causes numerous cases of skin and heart disease, and that respiratory ailments, due to excess dust, were rampant in other areas of the factory” [
This episode has been considered very damaging for Nike reputations, first of all because the audit firm was hired by Nike to audit its suppliers’ factories, and secondly because Nike explained in its report that it has adopted measures to solve the problems in the sweatshops, but it did not disclose the problems that the audit firm found in the Vietnamese factor. Mark Kasky, who called himself a “corporate referee” judged this issue as “false advertising” and filed in 1998 a lawsuit against Nike. Nike appealed on the First Amendment protection, helped by the limited definition of commercial speech, namely a speech that does “no more than propose a commercial transaction” [
This means that companies are accountable for transparency in the disclosure of CSR information with respect to their stakeholders. In the disclosure moment, the density of the network increased again, at a value of 0.6 (
As it is possible to see (
Ties | Total possible ties n(n − 1)/2 | Density | ∑dG(v, t) | Closeness Centrality | σst(v) | σst | Betweenness Centrality |
---|---|---|---|---|---|---|---|
27 | 45 | 0.60 | 10 | 0.9 | 1 | 36 | 0.028 |
Source: Authors’ calculations.
face an uncertain environment, and its stakeholders that may build solid link between them and may influence corporate behaviour. In this situation Nike had to adopt measures in order to re-establish its reputation and credibility within the network, such as improving monitoring program and adopting stricter labour standards.
Although there are no doubts about the increased engagement of Nike in trying to solve the sweatshop issue, there is still some doubt on the effectiveness of the adopted measures. For example, although Nike promised commitment in coping with child labour, in 2000 the BBC program Panorama showed that it was still a reality in factories where Nike outsourced its products. So, the legitimate question is: how is it possible that such a situation was discovered by media and not by the monitoring programs that Nike have adopted? However, it is true that child labour is a plague difficult to completely solve: due to the situation in those countries, children are forced to work and sometimes have false document in order to get a job, thus making the discovery of the phenomenon more complex.
The most effective solution may be to grant parents who work in those factories with a living wage, as established by the Worker Rights Consortium (WRC), an independent labour right monitoring organization. This view opposed the concept of minimum wage, which is promoted by other monitoring organizations such as the Fair Labor Association (FLA). In this way parents receive a salary that allow them to take care of themselves and their families, children included, meeting their basic needs.
Unfortunately, Nike has always refused to apply the standards of the WRC, while accepting to monitor its subcontractors making sure that in those factories the employees receive the minimum wage or the local industry standard if higher (Workplace code of Conduct, FLA). Nike’s reasons have been mainly two: first of all, there is not a globally accepted definition of living wage and second, legal wage is fairly enough for a worker in order to meet the basic need of him and his family.
About the first point, although it may be true that a definition of living wage is difficult to quantify in economic terms, Nike could engage in positive conversations with the stakeholders involved in the issue, such as workers, labour-right organizations and expertise and come to an agreement about how much a living wage may be.
The second reason is definitely weaker than the first and has been demonstrated as false. First of all, because it is known that many developing countries impose really low minimum wages in order to attract foreign investments; and second, because there are empirical evidences suggesting that minimum wages are often not enough to meet basic needs [
This analysis of the stakeholder network of Nike during its history, has been useful in order to highlight and reinforce at least four points that have to be taken in mind when considering the legitimacy theory and the stakeholder theory and approach:
The first point is that before media disclosure, Nike’s departure from societal norms and values went unnoticed so the company was able to retain its legitimacy. The legitimacy claim was brought only by exploited children and workers in the Third World factories; however, they lacked the attributes to be considered salient stakeholders by the company, thus making their claims unheard. When media disclosed the operation of the company in the Third World countries, society became aware of the departure of Nike from their beliefs and a legitimacy gap arose. As reported by Suchman [
The second point is that there are cases in which companies must “go beyond the law” and follow a strategy based on ethical responsibility. Nike and its sweatshops, along with the issue of child labour, are clear examples of a situation in which a company has to adopt a proactive behaviour with respect to the problem, although if it could be considered legal to avoid such approach. Such consideration is based on normative ground, but as it has been showed previously, there are also economic reasons. Nike in the beginning adopted an indifferent attitude about the sweatshops issue, but soon it has been forced to deal with it actively, as media and social activist groups (and the society all) expressively asked to do so. Not taking into consideration the society expectations and keeping a passive behaviour may have cost to the company an extremely greater amount of resources due to bad reputation. Moreover, sustainable supply chain management may actively shape a firm’s reputation as a “good citizen” as it may be perceived not as a mere reaction to stakeholders’ pressure [
The third is the effect of media pressure. Media, by disclosing corporate activities, can force companies to handle the new situation that has been reported. As it is possible to see, the situation of Nike was very different before and after media disclosure of the sweatshops in the Third World countries. Before it, the stakeholder network was less dense, with the company in a central position able to enforce its norms over the stakeholders. The flow of information about what was happening in the factories of Nike’s subcontractors was hindered by the fact that there was not any actor, if not Nike, to be directly connected to them, and that it could therefore exchange information to other stakeholders in the network. This role has been taken later by the media who, thanks to their direct relationship with Nike’s suppliers have been able to report about the working conditions in those factories. The consequences of this have been very grave for Nike, as customers driven by activist groups started promoting boycott of the company’s products, thus seriously threatening Nike reputation. The role of media and the free flow of information is something that companies have to deal with, trying to take advantage of it.
The legitimacy framework explains the role that communication has for companies in doing so. Companies that are neither transparent nor accountable to their stakeholders will be overwhelmed by the new communication technologies, thus posing their legitimacy at risk.
The fourth point is the dynamic nature of the stakeholders and legitimacy concept. Actors who before were not considered as stakeholders of Nike, or with whom Nike had not relations, such as media and social activist groups, then have become influential and the company had to take them into consideration, thus demonstrating that actors who are not actually stakeholders or not worthy of attention, may be so in the future.
This case highlights the feasibility of the stakeholders’ definition made by Mitchell et al. [
Another example are media and social activist groups who before disclosure did not deserve attention by the company, but after they acquired power and legitimacy, thus becoming dominant stakeholders.
Legitimacy is a dynamic concept too: before disclosure Nike has its legitimacy intact; however, as it has been shown, this situation is not permanent, and the company has to carefully monitor stakeholders’ expectations and the external environment if it wants to avoid a legitimacy gap to arise.
The main shortcoming of the network perspective is that because of the great number of stakeholders within the network of a company, it is difficult to be able to represent the network in a clear way. For this reason, we faced the challenge to decide which stakeholders to represent and which to leave out of the analysis. The two most important actors who are not in the analysis are government and local communities. Regarding the first, due to globalization and outsourcing of production, governments are seeing their power to greatly decrease in front of the companies, which are increasingly deciding to adopt voluntary codes of conduct and standards of behaviour in order to fill the public regulation’s gap. For the same reasons, namely globalization and outsourcing, local communities too are losing their power and have almost any relationship with companies, especially in case of multinationals such as Nike.
The story of Nike confirms that the need for legitimacy does work in influencing corporates’ decisions, as when a legitimacy gap between society’s expectations and firm’s operations emerged Nike changed its strategy from a denial of the responsibilities to a proactive approach in social issues.
While in the beginning the network of Nike was not composed of many stakeholders, as the company started to move its operation internationally, its visibility increases. However, it is only in the 1990s when media disclosed the poor working condition and the employment of children in Nike’s supplier factories. From that moment, a legitimacy gap arose between societal expectations and company’s activities. Although it was not a legal responsibility of Nike to check suppliers’ sweatshops, society expected Nike to go beyond what established by the law and to commit to ethical responsibilities too. Stakeholders started organizing themselves against Nike’s operations, thanks to the help of media and social activist groups. Even if in the beginning Nike denied any responsibility, as it saw its legitimacy and reputation at risk, it started to adopt measures for solving the problem.
This analysis highlights some important points. First of all, it is possible to notice clearly the moment when the legitimacy gap arose, and the different responses of Nike, from denying responsibilities to engaging in proactive behaviors. The case highlights the dynamic nature of stakeholders and legitimacy, and it underlines the importance of two actors which are rarely considered as primary and most important stakeholders, namely media and social activist groups. It confirms that as visibility increases, the company is likely to become an easier target of criticisms and stakeholders’ scrutiny, and it highlights the influence and power that media can have on an organization. This suggests that either if we want to consider them as stakeholders or if we do not―as Donaldson and Preston [
The authors declare no conflicts of interest regarding the publication of this paper.
Lucchini, A. and Moisello, A.M. (2019) Stakeholders’ Pressure and CSR Engagement. A Case in the Apparel Sector. American Journal of Industrial and Business Management, 9, 169-190. https://doi.org/10.4236/ajibm.2019.91012