New generations of workers are increasingly conscious of the harmful consequences of business activities on the environment. Firms that fail to align with environment-related imperatives risk censure and stigmatization from current and future employees. Our study examines how elite corporate law firms’ ability to hire entry-level workers is affected when adding stigmatized (oil and gas) clients to their portfolio. Our findings suggest that taking on stigmatized clients can reduce the ability of firms to hire graduates from leading law schools. Thus, these elite firms are subject to negative demand-side externalities in the rookie labor market. However, firms can offset this negative hiring implication and deflect stigma-by-association by allowing workers to engage in more meaningful work (“stigma cleansing”) and by offering a greater range of services to non-stigmatized clients (“stigma dilution”).

Firms apply substantive and symbolic actions and communication to enhance their legitimacy and reputation in response to the complex institutional environment. Corporate sustainability and its communication have become integral to firms' legitimacy and reputation. When companies design sustainability communication strategies, they constantly seek to uphold a legitimate image by aligning with given societal norms and expectations. Firms do so while simultaneously trying to build a positive reputation based on differentiation. This multiple case study aims to understand how this balancing act can lead to unintentional greenwashing or brownwashing. The results describe three observed interplays of legitimacy and reputation and associated (non)communication risk–greenwashing and brownwashing practices. The findings reveal that building on pragmatic legitimacy contributes to credibility and brings the lowest risk of communication distortion. The study contributes to research on the relationship between reputation and legitimacy and joins the ongoing debate about the dynamics of greenwashing and brownwashing. By so doing, the paper adds to the critical scholarly discussion on sustainability. Practically, the study seeks to help companies avoid over- or under-communication of their sustainability achievement and encourages them to develop stakeholders' knowledge and influence legitimate practices actively.

We build an analytical model of greenwashing and derive a firm's decisions to improve its social and environmental impacts (SEI) as well as communicate about them to the public. We analyze the impact of external pressure on the firm, its supply chain visibility, and lack of public trust in such communications on the firm's decisions, and on the incidence and magnitude of greenwashing. We uncover several interesting insights which are relevant for firms and external entities like regulatory authorities and sustainability activists. We also derive a parameter that we call the 'mistrust risk' and demonstrate its importance for firms to decide an appropriate strategy for communicating their SEI to the public. A key finding of our paper is that greenwashing cannot be reduced just by increasing external pressure on firms. We also find that firms should be allowed to showcase any verifiable initiatives that they undertake for improving their SEI. Both these findings defy common intuition and practice. Furthermore, we make a strong case for external entities to try to understand firms' intent to greenwash rather than just penalizing them for greenwashing.