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 Pfeffer also 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:
1. Seek to educate and inform its ‘relevant publics’ about changes in the
orgsn’s performance and activities;
2. Seek to change the perception of the “relevant publics”;
3. Seek to manipulate perception by deflecting attention from the issue of
concern to other related issues through an appeal to emotive symbols or;
4. 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.
A. 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.
B. 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.
C. 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)
D. 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:
A
management uses the annual report as a tool to legitimise the ongoing
operations of the organization (from Legitimacy Theory);
B
Community 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;
C
the 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:
1 The responsibility to undertake certain actions; and
2 The responsiblitiy to provide an account of those actions.
Chapter 8 – Systems oriented theories
5. Stakeholder Theory
II. The Managerial Branch 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
6. 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.