Reputational Imprints: How Public Criticism During Global Crises

REPUTATIONAL IMPRINTS: HOW PUBLIC CRITICISM DURING GLOBAL CRISES AFFECTS SUSTAINABILITY-DRIVEN INNOVATION ABSTRACT Public criticism of firms’ environmental, social, and governance (ESG) practices offers an important source of environmental feedback that can prompt innovation. However, such criticism can also affect organizations’ reputations in ways that constrain innovation, limiting both access to necessary resources for and the potential payoff from such innovation. In this study we examine this tension between public criticism as a source of organizational learning and reputational constraint in the context of global crises. Building on the organizational imprinting literature, we argue that global crises represent pronounced periods of upheaval for firms, during which firms are imprinted by public criticism in ways that over time channel firms’ sustainability–related strategies. We test our hypotheses using a panel data set of 4,738 companies across a 12–year period beginning during the 2007–2009 global financial crisis. Our findings suggest that although the firms initially engaged in similar levels of sustainable practices, firms differed over time in their embrace of innovation in response to ESG incidents depending on how extensively they were criticized during the crisis. Moreover, competition is shown to amplify the resulting virtuous and vicious spirals. Our findings contribute to scholarship on imprinting, corporate reputation, and organizational sustainability. Keywords: imprinting; public criticism; sustainability; corporate reputation; ESG issues 1 INTRODUCTION Organizations’ reputations are increasingly informed by their responses to environmental and social sustainability issues (Barnett & King, 2008; Brammer & Pavelin, 2006). In many cases organizations become acutely aware of such reputational effects following third–party sustainability audits which expose incidents wherein the organizations’ environmental, social and governance (ESG) practices are perceived as deficient. In this paper we conceptualize ESG incidents as public scandals derived from both traditional and non–traditional media sources regarding a firm’s unsustainable practices. Such incidents, for instance, include expressed media and public criticism regarding a firm’s negative contributions to a host of social and environmental issues, including climate change, forced labor, corruption, and controversial products and services, among many others. Prior research suggests that ESG incidents represent substantial reputational threats, oftentimes triggering organizations to respond by way of either symbolic or more substantive reforms in order to protect their reputations (Briscoe & Gupta, 2016; Durand, Hawn & Ioannou, 2019; Grimes, Williams & Zhao, 2019). In effect, we might expect organizations to learn from public criticism. Yet it is also possible that as ESG incidents accumulate, the reputational damage might undermine even the possibility of such sustainability–related improvements by limiting the respective organization’s capacity to acquire the resources needed to pursue those improvements as well as its ability to capitalize on the improvements (Shea & Hawn, 2019; Waldron, Navis, & Fisher, 2013). Although recent and longstanding work offers important insight into why firms’ responses to social and environmental issues are likely to vary (Dowell & Muthulingam, 2017; Durand, et al., 2019; Gupta & Briscoe, 2020; Oliver, 1991), this work has yet to explore how times of global crisis, such as the global financial crisis or the Covid- 19 crisis might contribute to such variation. As noted recently by one impact investor, “Investors 2 who follow ESG criteria are looking closely to see how companies have responded to employees, customers, and other stakeholders during the [Covid-19] crisis. These actions will inform the company’s reputation as an employer and of its brand value for many years to come (Barron’s, 2020)”. In other words, global crises may represent pronounced periods of organizational upheaval, during which investors and other stakeholders are increasingly attuned to ESG-related criticism, with potentially lasting ramifications for the firms, their reputations, and thus we argue their capacity to innovate even after the crisis has subsided. In order to theorize about the lasting significance of public criticism during a global crisis, we draw from the growing body of research on organizational imprinting, which focuses on how “external environments exert a powerful influence on organizations and their building blocks during periods of organizational transition, upheaval, and instability” (Marquis & Tilcsik, 2013, p. 200). Although many studies of organizational imprinting have focused on the environment’s external influence over firms in the context of those firms’ foundings or births, more recent scholarship argues and offers evidence that other moments of transition (Dowell & Swaminathan, 2006; Noda & Collis, 2001), disasters (Tilcsik & Marquis, 2013) or crises (Almandoz, Lee, & Marquis, 2017; Dieleman, 2010; Dixon, Meyer, & Day, 2007) represent important sensitive periods, during which firms can be exposed to lasting imprints (Simsek, Fox, & Heavey, 2014). Building on this research, we examine how global crises increase firms’ sensitivity to their external environments, and we argue that the mechanism by which the environment exerts influence over firms during these periods of crisis is that of public ESG criticism, which then shapes firms’ sustainability-driven innovation in perpetuity. By sustainability-driven innovation we refer specifically to the “integration of ecological and social aspects into products, processes, and organizational structures” (Klewitz & Hansen, 2014; p. 57). Understanding how public criticism 3 regarding ESG incidents intersects with moments of global crises is theoretically important, given growing scholarly attention to the role of activism and social movements as agents of change, pressuring firms to behave in socially responsible ways (Briscoe & Gupta, 2016; den Hond & de Bakker, 2007; McDonell & King, 2013; King, 2008; King & Soule, 2007; Waldron, Navis, Aronson, York, & Pacheco, 2019). Yet it is also of contemporary significance given the increased salience of several global crises as well as the increased media-based scrutiny of firms’ actions during these crises. Our analysis addresses the following question: how does public criticism of firms’ ESG practices during a global crisis enable and constrain those firms’ capacity to engage in sustainability–driven innovation? We introduce and test a conceptual model of how ESG incidents experienced during a period of economic and social crisis perpetually condition firms’ sustainability–driven innovation by way of reputational imprints. We also theorize and test how competitive dynamics further exacerbate these reputational effects. To test this conceptual model, we empirically examine changes in ESG practices across 4,738 unique firms in 76 countries and 62 industries over a 12–year period beginning during the 2007–2009 global financial crisis. Consistent with our interest in sustainability–driven innovation, ESG practices in this case refer to a company’s policies, programs, and strategies designed to manage its ESG risks and opportunities. Our sample ranges from firms that were not exposed at all to ESG incidents to those which received extensive public criticism across both traditional and social media on a comprehensive set of 28 different ESG issues. Our findings demonstrate that differences in how firms are criticized during a period of global crisis are likely to imprint upon the firms’ reputations, thereby enabling and constraining sustainability–driven innovation in an ongoing manner following the crisis. At the start of the global financial crisis the two groups of firms exhibited similar ESG practices. Despite such initial 4 similarities in ESG practices, the two groups were exposed to substantial differences in public criticism of those practices during the crisis. We observe that firms which received less extensive ESG criticism during the crisis demonstrate the ongoing capacity to be positively responsive to and learn from such criticism, increasing their ESG–driven innovation following future ESG incidents. Alternatively, firms which received more extensive ESG criticism during the crisis become negatively responsive to future incidents, decreasing their ESG–driven innovation over time even after the global crisis wanes. These findings thus suggest that such virtuous and vicious reputational spirals were not due to different initial capabilities or other organizationally determined inertial forces, but once again shaped by the imprinting effect of public criticism received during a time of global crisis. Building on these findings, we further demonstrate that competitive pressures from the product market intensify the divergent reputational spirals. Taken together our findings challenge and extend prior research on organizations’ responses to normative pressures, most notably by highlighting the important ways that periods of global crises can serve to both enable and constrain firms’ capacity to learn from public criticism and engage in sustainability-driven innovation. THEORETICAL MOTIVATION and HYPOTHESES The Increasing Importance of Public Criticism of Firms’ Sustainability Reputations Over the recent decade, public awareness and public criticism of corporations’ sustainability practices has risen precipitously, such that

Load more