Chapter 8 – Systems oriented theories
1. Introduction
Rationale: Why corporate management might elect to voluntarily provide particular information to parties outside the organisation. (Page 250 & 251)
Gray, Owen and Adams(1996):
Legitimacy Theory and Stakeholder Theory are two theorietical perspectives that have been adopted by a number of researchers in recent years. The theories are sometimes referred to as “systems-oriented theories”.
Within a systems-based perspective, the entity is assumed to be influenced by, and in turn to have influence upon, the society in which it operates.
Within both legitmacy theory and Stakeholder theory, accounting disclosure polices are considered to constitute a strategy to influence the organisation’s relationships with the other parties with which it interacts.
2. Political Economy Theory
According to Gray, Owen and Adams (1996), Legitmacy Theory and Stakeholder Theory are both derived from a broader theory which has been called “Political Economy Theory”.
“Political Economy” as defined by Gary and Owen as the “social, political and economic framework within which human life takes places”.
The perspective embraced is that society, politics and economies are inseparable, and economic issues cannot meaningly be investigated in the absence of considerations about the political, social and institutional framework in which the economic activity takes place.
Gurthrie and Parket (1990) states that corporate reports cannot be consdered as neutral, unbiased documents …., but rather are ‘a product of interchange between the corporation and its environment and attempt to mediate and accommodate a variety of sectional interests.’
Chapter 8 – Systems oriented theories
2. Political Economy Theory(Cont’d)
Two Broad streams which Gray, Owen and Adams have labelled are:
-Classical political economy
-Bourgeois political economy
Classical political economy – Karl Mars explicitly places “sectional (class) interests, structural conflict, inequity, and the role of the State at the heart of the analysis.
Bourgeois political economy– Gray, Kouhy and Lavers largely ignores these elements and, as a result, is content to preceive the world as essentially pluralistic.
Disclosure and Accounting report
Classical political economy tends to perceive accounting reports and disclosure as a means of maintaining the favoured positon of those who control scarce resources (captial), and as a means of undermining the position of those without scarce capital. “It focuses on the structural conflicts within society”.
Bourgeois political economy does not explictly consider structural conflicts and class struggles but rather ‘tends to be concerned with interaction between groups in an essentially pluralistic world.
It is this branc of Political Economy Theory from which Legitimacy Theory and Stakeholder Theory derive.
Chapter 8 – Systems oriented theories
3. Legitmacy Theory (page 253 to 258)
Legitimacy Theory asserts that organizations continally seek to ensure that they operate within the bounds and norms of their respective societies, that is, they attempt to ensure that their activities are perceived by outsdie parties as being “legitimate”.
These bounds and norms are not considered to be fixed, but rather, change over time, thereby requiring the organization to be responsive to the environment in which they operate.
Lindblom (1994) distinguishes between legitimacy which is considered to be a status or condition, and ligitimation which she considers to be the process that leads to an organization being adjudged legimate.
Legitimacy Theory relies upon the notion that there is a ‘social contract’between the organization in question and the society in which in operates.
The ‘Social contract’ is the concept used to represent the multitude of implicit and explicit expectation that society has about how the organisation should conduct its operations.
Any social institution– and business is no exception – operates in society via a social contract, expressed or implied, whereby its survival and growth are based on:
(1)the delivery of some socially desirable ends to society in general, and
(2)the distribution of economic, social, or political benefits to groups from which it dervies is power.
It is assumed that society allows the organisations to continue operations to the extent that it generally meets their expectation. Legitimacy Theory emphasises that the organization must appear to consider the rights of the public at large, not merely those of its investors.
Failure to comply with societal expectations may lead to sanctions being imposed by society. For example, in the forms of legal restrictions imposed on its operation, and reduced demand for its products.
Chapter 8 – Systems oriented theories
3. Legitmacy Theory (page 253 to 258)
Action an steps taken by Organization to cope with Legitmacy
Downling and Pfeffer stats that organizations will take various actions to ensure that their operations are perceived to be legitimate. That is, they will attempt to establish congruence between ‘the social values assoicated with or implied by their activities and the norms of acceptable behavior in the larger social system of which they are a part.
Dowling and Pfefferalso outline the means by which an organisaion may legitimate its activities: -
-Adpating its output and goals to conform to prevailing definiations of legitimacy.
-Attempt through communications, to alter the definition of social legitmacy so that it conforms to the organisation’s present practices, output and values.
-Attempt through communications, to become identified with symbols, values or institutions that have a strong sense of legitimacy.
Lindblom identifies four courses of action that an organisation can take to obtain or maintain legitmacy as follows:
- Seek to educate and inform its ‘relevant publics’ about changes in the orgsn’s performance and activities;
- Seek to change the perception of the “relevant publics”;
- Seek to manipulate perception by deflecting attention from the issue of concern to other related issues through an appeal to emotive symbols or;
- Seek to change external expectation of its performance.
According to Lindblo and Downling and Pfeffer, the public disclosure of information in such places as annual reports can be used by an organisation to implement each of the above strategies.
Chapter 8 – Systems oriented theories
4. Empirical tests of Legitmacy Theory (page 259 to 265)
Legitimacy Theory has been used by numerous accounting researchers who have elelcted to study social and environmental reporting practices.
- An early study that sought to link legitimacy theory to corporate social disclosure polices was conducted by Hogner (1982)– US Steel Corporation. Hogner showed that the extent of social disclosures varied from year to year and he speculated that the variation could represent a response to society’s changing expectation of corporate behavour.
- Pattern (1992) focused on the change in the extent of environmental disclosure made by North American of companies. Legitimacy theory sugest that companies operating within their industry would respond by increasing the amount of envir. disclosure in their annual report after 1989 Alsakan oil spill.
- In Australian study, Deegan and Rankin (1996) utilised Legitimacy Theory to try to explain systemic changes in corporate annual report environmental disclosure policies aroung the time of proven environmetnal prosecution. (Exhibit 8.2 – Deaths blamed onmine neglect)
- Deegan, Rankin and voght (2000) also utilised Legitimacy Theory to explain how the social disclosures included within the annual reports of companies in selected industries changed aroung the time ot major social incidents or disasters that could be directly relatled to their particular industry.
Media Agenda Setting Theory (MAS theory)
Brown and Deegan use the extent of media coverage given to a particular issue as a measure of community concern. MAS Theory proposes a relationship between the relative emphasis given by the media to various topics, and the degree of salience these topics have for the general public.
The arguments provided in Brown and Deegan (1999) can be summarised as:
Amanagement uses the annual report as a tool to legitimise the ongoing operations of the organization (from Legitimacy Theory);
BCommunity concerns with the env. Performance of a specific firm in an industry will also impact on the disclosue strategies of firms across that industry(consistent with Pattern, 1992 Legitimacy Theory) and;
Cthe media are able to influence community preceptions about issues such as the environment (from Media Agenda Setting Theory).(Exhibit 8.3 – Laws denies offering bank statements).
Chapter 8 – Systems oriented theories
5. Stakeholder Theory
There are two branches of stakeholder theory, namely:
-Ethical (moral) or normative branch and;
-Positive (managerial) branch.
I. The ethical branch of Stakeholder Theory
The moral (and normative) perspective of Stakeholder Theory argues that all stakeholders have the right to be treated fairly by an organization, and that issues of stakeholder power are not directly relevant.
Stakeholder definition according to Freeman and Reed (1983):
Any identifable group or individual who can affect the achievement of an organization’s objectives,or it is affected by the achievement of an organization’s objectives.
Clarkson (1995) sought to divide stakeholders into primary and secondary stakeholders. A primary stakeholder was defined as ‘one without whose continuing participation the corporation cannot survive as a going concern’.
Secondary stakeholders were defined as ‘ those who influence ot affect, or are influenced or affected by, the corporation, but they are not engaged in transactions with the corporation and are not essential for its survival.
In considering the notion of rights to information, we can briefly consider Gray, Owen and Adam’s perspective of accountability as used within their accountability model.
Gray, Owen and Adam defined accountability as:
The duty to provide an account (by no means necessarily a financial account) or reckoning of those actions for which one is held responsible.
It would involve two responsibilites or duties:
1The responsibility to undertake certain actions; and
2The responsiblitiy to provide an account of those actions.
Chapter 8 – Systems oriented theories
- Stakeholder Theory
II. The ManagerialBranch of Stakeholder Theory
The managerial branch of stakeholder theory perspectives attempt to explain when corporate maangment will be likely to attend to the expectations of particular (powerful) stakdholders.
According to Gray, Owen and Adam, this perspective tends to be more ‘organization centred’. Within the stakeholder theory, the organisatin is also considered to be part of the wider social system, but this perspective theory specifically considers the different stakeholder groups within society and how they should best be managed if the organisation is to survive.
Freeman (1984) discusses the dynamics of stakeholder influence on corporate decisions. A major role of corporate management is to assess the importance of meeting shareholder demands in order to achieve the strategic objectives of the firm.
According to Evan and Freeman (1988), the very prupose of the firm is, in our view, to serve as a vehicle for coordinating stakeholders. It is through the firm that each stakeholder group makes itself better off through voluntary exchanges.
According to Ullman (1985), the greater the importance to the organisation of the respective stakeholder’s support, then it would be the greater the probability that the particular stakeholder’s expections will be incorporated in the organisation’s operations.
Within the managerial perspective of Stakeholder Theory, information is a major element that can be employed by the organization to manage (or manipulate) the stakeholder in order to gain their support and approval, or to distract their opposition and disapproval. This is consistent with the stratgies suggested by Lindblom (1994).
Chapter 8 – Systems oriented theories
- Stakeholder Theory
III. Empirical tests of Stakeholder Theory
Neu, Warsame and Podwell (1998) also found support for the view that particular stakeholder groups can be more effective than others in demanding social responsibility disclosures.
A measure of correlation was sought between increase and decrease in environmental disclosure and the companies were more responsive to the demands or concerns of financial stakeholders and government regulators than to the concern of environmentalists.
Please read the Exhibit 8.4 and 8.5 for more understanding of how an organisations should operate with the different expectation of a multitude of stakeholders.