Chapter 8

UNREGULATED CORPORATE REPORTING DECISIONS: CONSIDERATIONS

OF SYSTEMS-ORIENTED THEORIES

Legitimacy Theory
Legitimacy Theory asserts that organisations continually seek to ensure that they are
perceived as operating within the bounds and norms of their respective societies—that is,
they attempt to ensure that their activities are perceived by outside parties as being
‘legitimate’. These bounds and norms are not considered to be fixed, but change over time,
thereby requiring organisations to be responsive to the ethical (or moral) environment in
which they operate.
According to Lindblom(p. 2), legitimacy is:
… a condition or status which exists when an entity’s value system is congruent with the
value system of the larger social system of which the entity isa part. When a disparity, actual
or potential, exists between the two value systems, there is a threat to the entity’s legitimacy.
For an organisation seeking to be perceived as legitimate, it is not the actual conduct of the
organisation that is important; it is what society collectively knows or perceives about the
organisation’s conduct that shapes legitimacy. Information disclosure is vital to establishing
corporate legitimacy. As Suchman (1995, p. 574) states:
An organisation may diverge dramatically from societal norms yet retain legitimacy because
the divergence goes unnoticed. Legitimacy is socially constructed in that it reflects a
congruence between the behaviours of the legitimated entity and the shared (or assumed
shared) beliefs of some social group; thus legitimacy is dependent on a collective audience,
yet independent of particular observers.

LEGITIMACY, PUBLIC EXPECTATIONS AND THE SOCIAL CONTRACT

Proponents (supporters) of Legitimacy Theory also often rely upon the notion that there is a
social contract between the organisation in question and the society in which it operates. The
social contract concept is used to represent the multitude of implicit and explicit expectations
that society has about how the organisation should conduct its operations. It can be argued
that traditionally profit maximisation was perceived to be the optimal measure of corporate
performance (Abbott & Monsen, 1979; Heard & Bolce, 1981; Patten, 1991, 1992;
Ramanathan, 1976). Under this notion, a firm’s profits were viewed as an all-inclusive
measure of organisational legitimacy (Ramanathan, 1976).
It has been argued that society increasingly expects business to ‘make outlays to repair or
prevent damage to the physical environment, to ensure the health and safety of consumers,
employees, and those who reside in the communities where products are manufactured and
wastes are dumped’(Tinker & Neimark, 1987, p. 84). Consequently, companies with a poor
social and environmental performance record may increasingly find it difficult to obtain the
necessary resources and support to continue operations within a community that values a
clean environment. Perhaps this was not the case a number of decades ago.
It is assumed within Legitimacy Theory that society allows the organisation to continue
operations to the extent that it generally meets society’s expectations —that is, to the extent
that it complies with the social contract. Legitimacy Theory emphasises that the organisation
must appear to consider the rights of the public at large, not merely those of its investors.
Failure to comply with societal expectations (that is, comply with the terms of the ‘social
contract’) may lead to sanctions being imposed by society, for example, in the form of legal
restrictions imposed on an organisation’s operations, limited resources (for example, financial
capital and labour) being provided and/or reduced demand for its products (sometimes
through organised consumer boycotts).
Consistent with Legitimacy Theory, organisations are not considered to have any inherent
right to resources. Rather, the right to access resources must be earned. Legitimacy (from
society’s perspective) and the right to operate go hand in hand.

LEGITIMACY AND CHANGING SOCIAL EXPECTATIONS

As community expectations change, organisations must also adapt and change. That is, if
society’s expectations about performance change, an organisation will need to show that what
it is doing is also changing (or perhaps it will need explicitly to communicate and justify why
its operations have not changed).
In relation to the dynamics associated with changing community expectations,
Lindblom(1993, p. 3) states:
Legitimacy is dynamic in that the relevant publics continuously evaluate corporate output,
methods, and goals against an ever evolving expectation. The legitimacy gap will fluctuate
without any changes in action on the part of the corporation. Indeed, as expectations of the
relevant publics change the corporation must make changes or the legitimacy gap will grow
as the level of conflict increases and the levels of positive and passive support decreases.
The term ‘legitimacy gap’—as in the above quote—is a term that has been used by many
researchers to describe the situation where there appears to be a lack of correspondence
between how society believes an organisation should act and how it is perceived that the
organisation has acted . In relation to how legitimacy gaps arise, Sethi (1978) describes two
major sources of the gaps. First, societal expectations might change, and this will lead to a
gap arising even though the organisation is operating in the same manner as it always has.
While organisations might change towards aligning with community expectations, if the
momentum of their change is slower than the changing expectations of society, then
legitimacy gaps will arise.
The second major source of a legitimacy gap, according to Sethi (1977), occurs when
previously unknown information becomes known about the organisation —perhaps through
disclosure being made within the news media. In relation to this possibility, Nasi et al. (1997,
p. 301) make an interesting reference to ‘organisational shadows’. They state:
The potential body of information about the corporation that is unavailable to the public—the
corporate shadow (Bowles, 1991)—stands as a constant potential threat to a corporation’s
legitimacy. When part of the organisational shadow is revealed, either accidentally or through
the activities of an activist group or a journalist, a legitimacy gap may be created.

Source : G. O’Donovan (2002), ‘Environmental disclosures in the annual report: extending

the applicability and predictive power of legitimacy theory’, Accounting, Auditing and
Accountability Journal , 15(3) pp. 344–371.

PHASES OF LEGITIMATION
Suchman (1995) and O’Donovan (2002) indicate, legitimation strategies might be used to
either gain , maintain or repair legitimacy.
Gaining legitimacy is required when an organisation moves into a new area of operations in
which it has no past reputation. In such a situation, the organisation suffers from the ‘liability
of newness’ (Ashforth & Gibbs, 1990) and it needs to proactively engage in activities to win
acceptance. This acceptance is won, in part, through various communication strategies.
The task of maintaining legitimacy—which is undertaken once legitimacy has been
established—is typically considered easier than gaining or repairing legitimacy (O’Donovan,
2002; Ashforth &Gibbs, 1990). According to Ashford and Gibbs (1990, p. 183), legitimacy-
maintenance activities would include maintaining activities that are consistent with
community expectations and the provision of symbolic assurances that all is well. One of the
‘tricks’ in maintaining legitimacy is to be able to anticipate changing community perceptions.
According to Suchman (1995, p. 594), strategies for maintaining legitimacy fall into two
groups—forecasting future changes and protecting past accomplishments.
In relation to maintaining legitimacy, the greater the extent to which the organisation trades
on its level of legitimacy, the more crucial it will be for that organisation to ensure that it
does not deviate from the high standards that it has established. Conversely, the less
legitimacy an existing organisation has to begin with, the less it needs to maintain.
In considering repairing legitimacy, Suchman (1995, p. 597) suggests that related
legitimation techniques tend to be reactive responses to often unforeseen crises. In many
respects, repairing and gaining legitimacy are similar. As O’Donovan (2002, p. 350) states:
Repairing legitimacy has been related to different levels of crisis management (Davidson,
1991; Elsbach and Sutton, 1992). The task of repairing legitimacy is, in some ways, similar to
gaining legitimacy. If a crisis is evolving proactive strategies may need to be adopted, as has
been the case for the tobacco industry during the past two decades (Pava and Krausz, 1997).
Generally, however, the main difference is that strategies for repairing legitimacy are
reactive, usually to an unforeseen and immediate crisis, whereas techniques to gain
legitimacy are usually ex ante, proactive and not normally related to crisis.

2.0 STAKEHOLDER THEORY

The name ‘Stakeholder Theory’ itself can be a confusing term. Many different researchers
have stated that they have used Stakeholder Theory in their research, yet when we look at the
research we see that different theories with different aims and assumptions have been
employed—and all have been labelled ‘Stakeholder Theory’.
We can think of the term ‘Stakeholder Theory’ as an umbrella term that actually represents
a number of alternative theories that address various issues associated with relationships with
stakeholders, including considerations of the rights of stakeholders, the power of
stakeholders or the effective management of stakeholders.
Stakeholder Theory provides a more refined resolution by referring to particular groups
within society (stakeholder groups). Essentially, Stakeholder Theory accepts that, because
different stakeholder groups will have different views about how an organisation should
conduct its operations, there will be various social contracts ‘negotiated’ with different
stakeholder groups, rather than one contract with society in general. While implied
within Legitimacy Theory, the managerial branch of Stakeholder Theory explicitly refers to
issues of stakeholder power, and how stakeholders’ relative power affects their ability to
‘coerce’ the organisation into complying with the stakeholders’ expectations.

Stakeholder
Theory

Ethical Managerial
Branch Branch

2.1 THE ETHICAL BRANCH OF STAKEHOLDER THEORY

The moral or ethical (also referred to as the normative) perspective of Stakeholder Theory
argues (or ‘prescribes’) that all stakeholders have the right to be treated fairly by an
organisation, and that issues of stakeholder power are not directly relevant. That is, the
impact of the organisation on the life experiences of a stakeholder should be what determines
the organisation’s responsibilities to that stakeholder, rather than the extent of that
stakeholder’s (economic) power over the organisation.
As Hasnas (1998, p. 32) states:
When viewed as a normative (ethical) theory, the stakeholder theory asserts that, regardless
of whether stakeholder management leads to improved financial performance, managers
should manage the business for the benefit of all stakeholders. It views the firm not as a
mechanism for increasing the stockholders’ financial returns, but as a vehicle for
coordinating stakeholder interests, and sees management as having a fiduciary relationship
not only to the stockholders, but to all stakeholders. According to the normative stakeholder
theory, management must give equal consideration to the interests of all stakeholders and,
when these interests conflict, manage the business so as to attain the optimal balance among
them. This of course implies that there will be times when management is obliged to at least
partially sacrifice the interests of the stockholders to those of the other stakeholders. Hence,
in its normative form, the stakeholder theory does imply that business has true social
responsibilities.
Clearly, many people (or organisations) can be classified as stakeholders if the above
definitions are applied (for example, shareholders, creditors, government, media, employees,
employees’ families, local communities, local charities, future generations).
With this in mind, 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’ (p. 106).
Secondary stakeholders were defined as ‘those who influence or 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’ (p. 107). According to Clarkson, primary
stakeholders are the ones that must primarily be considered by management, because for the
organisation to succeed in the long run it must be run for the benefit of all primary
stakeholders. Clarkson’s definition of primary stakeholders would be similar to the definition
of stakeholders applied by many researchers working within a managerial perspective of
Stakeholder Theory, but this focus on primary stakeholders would be challenged by
proponents of the ethical branch of Stakeholder Theory—who would argue that all
stakeholders have a right to be considered by management.

2.2 THE MANAGERIAL BRANCH OF STAKEHOLDER THEORY

Within a descriptive managerial branch of Stakeholder Theory the organisation is also
considered to be part of the wider social system, but this perspective of Stakeholder Theory
specifically considers the different stakeholder groups within society and how they should
best be managed if the organisation is to survive (hence we call it a ‘managerial’ perspective
of Stakeholder Theory).
Like Legitimacy Theory, it is considered that the expectations of the various stakeholder
groups will impact on the operating and disclosure policies of the organisation. The
organisation will not respond to all stakeholders equally (from a practical perspective, they
probably cannot), but rather will respond to those stakeholders that are deemed to be
‘powerful’ (Bailey, Harte & Sugden, 2000; Buhr, 2002). Nasi et al. (1997) build on this
perspective to suggest that the most powerful stakeholders will be attended to first. This is
consistent with Wallace (1995, p. 87), who argues that ‘the higher the group in the
stakeholder hierarchy, the more clout they have and the more complex their requirements will
be’.
A stakeholder’s (for example, owner’s, creditor’s or regulator’s) power to influence corporate
management is viewed as a function of the stakeholder’s degree of control over resources
required by the organisation (Ullman, 1985). The more critical the stakeholder’s resources are
to the continued viability and success of the organisation, the greater the expectation that the
stakeholder’s demands will be addressed. A successful organisation is considered to be one
that satisfies the demands (sometimes conflicting) of the various powerful stakeholder
groups.
In this respect, Ullman (1985, p. 2) states:
… our position is that organisations survive to the extent that they are effective. Their
effectiveness derives from the management of demands, particularly the demands of interest
groups upon which the organisation depends.
Some researchers have considered stakeholder power in conjunction with other stakeholder
attributes. For example, Mitchell, Agle and Wood (1997) provide a framework to identify
stakeholders according to the relative importance of each type of stakeholder in terms
of an organisation meeting its objectives. They argue that there are three features of a
stakeholder that need to be considered, these being power, legitimacy and urgency.
Power refers to the extent that a stakeholder can exert its influence on the organisation. A
stakeholder has legitimacy when its demands conform to the norms, values and beliefs of the
wider community. Urgency is the extent to which stakeholder demands require immediate
attention from a firm. The greater the extent to which organisations believe that stakeholders
possess these three attributes, the greater their importance to an organisation.
2.3 EMPIRICAL TESTS OF STAKEHOLDER THEORY
Using Stakeholder Theory to test the ability of stakeholders to impact on corporate social
responsibility disclosures, Roberts (1992) found that measures of stakeholder power and their
related information needs could provide some explanation about levels and types of corporate
social disclosures.
Neu, Warsame and Pedwell (1998) also found support for the view that particular stakeholder
groups can be more effective than others in demanding social responsibility disclosures. They
reviewed the annual reports of a number of publicly traded Canadian companies operating in
environmentally sensitive industries for the period 1982–91. A measure of correlation was
sought between increases and decreases in environmental disclosure and the concerns held by
particular stakeholder groups. The results indicated that the companies were more responsive
to the demands or concerns of financial stakeholders and government regulators than to the
concerns of environmentalists. They considered that these results supported a perspective
that, where corporations face situations where stakeholders have conflicting interests or
expectations, the corporations will elect to provide information of a legitimising nature to
those stakeholders deemed to be more important to the survival of the organisation, while
downplaying the needs or expectations of less ‘important’ stakeholders.
In another study that investigated how stakeholder power influences corporate disclosure
decisions, Islam and Deegan (2008) investigated the social and environmental disclosure
practices of a major trade organisation operating within a developing country. Specifically,
they investigated the social and reporting practices of the Bangladesh Garments and
Manufacturing Enterprise Association (BGMEA). This organisation is authorised by the
government in Bangladesh to provide export licences to garment manufacturers, thereby
enabling local garment manufacturers to sell their products to foreign buyers, many of which
are large multinational companies. Islam and Deegan interviewed senior executives from
BGMEA. The executives indicated that the operating and disclosure policies of BGMEA and
its member organisations were particularly influenced by the demands and expectations of
multinational buying companies (such as Nike, Gap, Reebok, Hennes & Mauritz), the group
they considered to be their most powerful stakeholders. The senior executives also stated that
they believed that the demands and expectations of the multinational buying companies
directly responded to the expectations of Western consumers, and that the expectations of
Western consumers were influenced by the Western news media. In this regard, the
executives of BGMEA noted that, prior to the mid-1990s, multinational companies placed no
requirements or restrictions on the Bangladesh manufacturing companies in relation to
factory working conditions or the use of child labour. However, once the Western news
media began running stories on the poor working conditions in ‘sweatshop’ factories and
stories on the use of child labour, this caused concern for Western consumers, who started to
boycott the products of the large multinational sportswear and clothing companies. The
Western consumers were key stakeholders of the multinational companies. At this point the
multinational companies started imposing operating and reporting requirements on suppliers
in terms of their employee conditions and their use of child labour. Reflective of the changes
in perceived pressures, and the resultant reactions of BMGEA and its members, one of the
senior executives of BGMEA stated (Islam & Deegan, 2008, p. 860):
The 1990 multinational buyers only wanted product, no social compliances were required
and no restriction was placed on the employment of child labour. Now multinational buying
companies have changed their attitudes towards us, perhaps because of the pressures from
western consumers. We had to change ourselves following buyers’ requirements and to fit
with global requirements and restrictions. Western consumers and human rights
organisations pressured foreign buyers, and then foreign buyers pressured us.

Diagrammatic representation of the sequence of events as reported in Deegan and Islam

(2009)
Stakeholders’ concern about an attribute of an organisation’s performance
A further example of particular stakeholders’ concern about attributes of an
organisation’s performance

INSTITUTIONAL THEORY
Institutional Theory has a long history. According to Scott (2008a), the earliest institutional
arguments were developed in the 1880s, and in particular, within the social sciences. Initially,
early works utilising institutional theory in economics, political science and sociology did not
directly pay attention to organisations or organisational forms. However, later developments
from the 1970s, such as Meyer and Rowan (1977), linked organisations’ formal structures
and practices to certain expectations held within society. The basic view of organisations, as
perceived by such theorists, was that an ‘organisation’ becomes an institutionalised form
reflecting not only the technical necessities required to efficiently function but importantly,
they also need to reflect the cultural rules and beliefs operating within the social
environments at that time (Scott, 2008b). That is, and according to Carruthers (1995), these
new institutional theorists viewed the world as being socially constructed and filled with
‘taken-for-granted meanings and rules’. This newer (post 1970) perspective of Institutional
Theory is often labelled as ‘neo-institutional theory’.
As Ji (2013) notes, Institutional Theory has been used in various disciplines, for example in
economics, political science and sociology. Indeed, some researchers have utilised
terminology such as Neo-Institutional Sociology Theory, Neo Institutional Economic Theory
and Neo-Institutional Political Science Theory (NIPS).
The concept of ‘institution’—something central to Institutional Theory (obviously)—is a key
construct within sociology (DiMaggio & Powell, 1991). However, the idea of ‘institution’ is
very diverse in meaning and application (for examples of diverse approaches, see Scott,
1987), and hence no definitive all-inclusive definition is possible. However, Scott (2008b, p.
48) proposed a ‘broad and dense definition’ of institutions as follows:
Institutions are comprised of regulative, normative and cultural-cognitive elements that,
together with associated activities and resources, provide stability and meaning to social life.
Meyer, Boli and Thomas (1987, p. 13) provide a slightly different meaning of ‘institution’
but one which is consistent with the above definition:
We see institutions as cultural rules giving collective meaning and value to particular entities
and activities, integrating them into larger schemes. When actions, processes or
organisational forms become ‘institutionalised’ they become accepted as ‘the way to do
things’. When things (such as particular organisational structures or particular reporting
approaches) become highly institutionalised they effectively also become ‘beyond the
discretion of individuals and organisations’ (Meyer & Rowan, 1977, p. 344). They are taken
for granted as legitimate and because of the ‘taken-for-granted’ status they tend to
perpetuate. As such, the institutions are often not evaluated by their impacts or technical
outcomes.
If we refer to the definition of institutions provided above by Scott, we can see reference
is made to three elements, these being regulative, normative and cultural-cognitive
elements. According to Scott, these regulative, normative and cultural cognitive
elements serve as three vital ‘pillars’ of ‘institutions’.
The regulative pillar involves rules, laws and associated sanctions. This pillar stresses that
‘it is a legal requirement to do things in a particular way otherwise sanctions may apply’. The
regulative pillar is maintained through various ‘coercive’ mechanisms, many of which are
enforced by government or powerful constituents that organisations are dependent upon.
The normative pillar incorporates value and norms reflecting certain social obligations
or expectations—that is, certain processes or structures become socially accepted (and
‘institutionalised’) as the ‘right or moral ways’ to do things. Expectations about the ‘right
or proper’ ways to do things will in turn be influenced by various processes such as
professional and educational experiences. This normative pillar is maintained through
processes such as accreditations, professional endorsement and formal education.
The third pillar, the cultural-cognitive pillar, is the major distinguishing feature of
Institutional Theory (Scott, 2008b). Various ‘taken-for-granted assumptions are at the core
of social action’ (Zucker, 1987, p. 443). That is, this cultural-cognitive pillar consists of
taken-for-granted symbolic systems and meanings. Cultures and beliefs are transmitted as
‘this is the way how these things are done’ (Scott, 2008b, p. 125) or ‘this is the way that
other legitimate parties are undertaking an activity’ so that doing otherwise effectively
becomes unthinkable. This pillar works in a subtle, hard to detect, but nevertheless powerful
way and is maintained by the mimetic mechanisms in which organisations tend to imitate (or
copy) others.
These three ‘pillars’ will, in combination, move the acceptability of certain structures or
processes from ‘the conscious to the unconscious, and from the legally enforced to the taken
for granted’ (Hoffman, 2001, p. 36), and the three pillars are ‘central building blocks of
institutional structure’ (Scott, 2008b, p. 49) that both constrain and empower social behaviour
through coercive, mimetic and normative mechanisms (DiMaggio & Powell, 1983). These
three pillars are interrelated and co-exist at any time and one or more pillars may play a
dominant role at a particular point in time (Hoffman, 2001).
There are two main dimensions to Institutional Theory. The first of these is termed
isomorphism while the second is termed decoupling. Both of these can be of central
relevance to explaining voluntary corporate reporting practices.
a) Isomorphism
The term ‘isomorphism’ is used extensively within Institutional Theory, and DiMaggio and
Powell (1983, p. 149) have defined it as ‘a constraining process that forces one unit in a
population to resemble other units that face the same set of environmental conditions’.
That is, organisations that adopt structures or processes (such as reporting processes) that are
at variance with other organisations might find that the differences attract criticism.
Carpenter and Feroz (2001, p. 566) further state:
DiMaggio and Powell (1983) label the process by which organizations tend to adopt the
same structures and practices as isomorphism, which they describe as a homogenization of
organizations. Isomorphism is a process that causes one unit in a population to resemble
other units in the population that face the same set of environmental conditions. Because of
isomorphic processes, organizations will become increasingly homogeneous within given
domains and conform to expectations of the wider institutional environment.
Dillard, Rigsby and Goodman (2004, p. 509) explain that ‘Isomorphism refers to the
adaptation of an institutional practice by an organisation’. As voluntary corporate reporting
by an organisation is an institutional practice of that reporting organisation, the processes by
which voluntary corporate reporting adapts and changes in that organisation are isomorphic
processes.
DiMaggio and Powell (1983) developed an analytical framework identifying ways in which
rationalised procedures spread across organisations. They identify three mechanisms of
isomorphic change in organisations: namely, coercive, mimetic and normative isomorphism.
They set out three different isomorphic processes (processes whereby institutional practices
such as voluntary corporate reporting adapt and change), referred to as coercive
isomorphism, mimetic isomorphism and normative isomorphism.
i) Coercive isomorphism:
The first of these processes, coercive isomorphism, arises where organisations change their
practices because of pressure from those stakeholders upon whom the organisation is
dependent (that is, this form of isomorphism is related to ‘power’). According to DiMaggio
and Powell (1983, p. 150)
Coercive isomorphism results from both formal and informal pressures exerted on
organizations by other organizations upon which they are dependent and by cultural
expectations in the society within which organizations function. Such pressures may be felt as
force, as persuasive, or as invitations to join in collusion.
Coercive isomorphism is related to the managerial branch of Stakeholder Theory (discussed
earlier), whereby a company will, for example, use ‘voluntary’ corporate reporting
disclosures to address the economic, social, environmental and ethical values and concerns of
those stakeholders who have the most power over the company. The company is therefore
coerced (in this case usually informally) by its influential (or powerful) stakeholders into
adopting particular voluntary reporting practices.
In the mid-1990s there was a great deal of concern by Western consumers that multinational
clothing companies were sourcing their products from developing countries where local
supply factories were using child labour (Islam & Deegan, 2008). It has also been argued that
funding bodies such as the World Bank, which often lends funds for projects being
undertaken in developing countries, has the power to coerce borrowers to adopt accounting
and reporting rules that comply with its requirements.
ii) Mimetic isomorphism:
This involves organisations seeking to emulate (or copy) or improve upon the institutional
practices of other organisations, often for reasons of competitive advantage in terms of
legitimacy. That is, an organisation might imitate another organisation that they believe
appears ‘successful’. In explaining mimetic isomorphism, DiMaggio and Powell (1983, p.
151) state:
Uncertainty is a powerful force that encourages imitation. When organizational technologies
are poorly understood, when goals are ambiguous, or when the environment creates symbolic
uncertainty, organizations may model themselves on other organizations.
According to DiMaggio and Powell, when an organisation encounters uncertainty it might
elect to model itself on other organisations.
iii) Normative isomorphism
The final isomorphic process explained by DiMaggio and Powell (1983) is normative
isomorphism. This relates to the pressures arising from group norms to adopt particular
institutional practices. In the case of corporate reporting, the professional expectation that
accountants will comply with accounting standards acts as a form of normative isomorphism
for the organisations for whom accountants work to produce accounting reports (an
institutional practice) that are shaped by accounting standards. In terms of voluntary reporting
practices, normative isomorphic pressures could arise through less formal group influences
from a range of both formal and informal groups to which managers belong—such as the
culture and working practices developed within their workplace. These could produce
collective managerial views in favour of or against certain types of reporting practices, such
as collective managerial views on the desirability or necessity of providing a range of
stakeholders with social and environmental information through the medium of corporate
reports.
b) Decoupling
Decoupling implies that while managers might perceive a need for their organisation to be
seen to be adopting certain institutional practices, and might even institute formal processes
aimed at implementing these practices, actual organisational practices can be very different
from these formally sanctioned and publicly pronounced processes and practices.
Thus, the actual practices can be decoupled from the institutionalised (apparent) practices. In
terms of voluntary corporate reporting practices, this decoupling can be linked to some of the
insights from Legitimacy Theory, whereby social and environmental disclosures can be used
to construct an organisational image that might be very different from the actual
organisational social and environmental performance. Thus, the organisational image
constructed through corporate reports might be one of social and environmental responsibility
when the actual managerial imperative is maximisation of profitability or shareholder value.
In concluding this overview of Institutional Theory, some of the above points can be
summarised by stating that there will be various forces that cause organisations to take on
particular forms or adopt particular reporting practices. While theories such as Legitimacy
Theory and Stakeholder Theory explain why managers might embrace specific strategies
(such as making particular disclosures to offset the legitimacy-threatening impacts of
particular events), Institutional Theory tends to take a broader macro view to explain why
organisations take on particular forms or particular reporting practices. Institutional Theory
also provides an argument that, while organisations might put in place particular processes,
such processes might be more for ‘show’ than for influencing corporate conduct. In the
discussion of Legitimacy Theory we saw how managers might undertake particular activities
—such as disclosure activities—to alter perceptions of legitimacy. By contrast, researchers
who adopt Institutional Theory typically embrace a view that managers are expected to
conform with norms that are largely imposed on them (although there are a number of
institutional theorists who also emphasise how across time actions of particular organisations
feed back and influence perceptions about legitimate institutions). Nevertheless, it needs to be
appreciated that there is much overlap between Institutional Theory, Legitimacy Theory and
Stakeholder Theory.