What happens when owners and employees disagree?

Orion was an emerging creative firm during the dot.com boom and bust of the late 1990s and early 2000s. It was an unusual time — companies were getting venture capital based on informal “back of the envelop” plans — but it provided a unique high speed view of how companies emerge, transform, and adapt.

We were studying Orion during this period. We observed, in compressed time, how the commitment of owners and employees to the organization can either converge or diverge, and the consequences. Many firms have mission statements and strategic plans, but it’s rare to have the opportunity to carefully analyze what happens when owners, managers, and employees disagree on fundamental goals and objectives.

Do these values really matter? If there is disagreement about them does it affect the company’s bottom line? Can a CEO impose a set of values?

What happens when owners, managers, and employees disagree on fundamental goals and objectives?

We know that the external legitimacy of a new company is important. It relates to how investors, customers, and other institutions view the firm — particularly with regard to how it obtains critical resources. We also examined internal legitimacy — how employees and other members view their own organization — and why that matters.

How do both types of legitimacy develop? Together, how do they interact and affect the organization’s evolution?

Legitimacy is a product of action. It is continually reproduced and reconstructed by the actions of internal and external parties. Both types of legitimacy evolve as a new company emerges. We were able to observe the role that management plays in leading this development, and what happens when imbalances result in conflict. If employees do not “buy in” to the goals and values of a firm, it can eventually undermine the foundation of the company.

In Orion’s case, a sense of internal legitimacy was institutionalized in the beginning. It was the foundation for practices, routines and visions that were challenged later in the company’s development. Pressure built from both inside and outside the organization. Eventually, the firm’s internal legitimacy was contested and this in turn was reflected in new practices. Forces of internal and external legitimacy both reinforced and undermined each other. The firm’s founder and the employees both tried to seek meaning from the organization’s original values. But as actions and values began to decouple from the company’s original practices, internal conflicts arose, daily routines were disrupted, and the organization became more fragmented and divided.

Employees are not passive. Their actions of support and objection determine the internal legitimacy of the firm, and that legitimacy can be used to promote their interests and negotiate their position in the evolving context of an emerging company.

Read more: A Process Model of Internal and External Legitimacy [restricted access]. Israel Drori and Benson Honig. Organization Studies (a Financial Times FT 45 Top Journal).