In terms of organisational behavior, there are two theories that are used to explain the actions of these organizations and their disclosure – legitimacy theory and stakeholder theory. Legitimacy theory and stakeholder theory enrich, rather than compete for, our understandings of corporate social disclosure practices. In the search for transparency and ethical business practices, both of these theories can be used to make sure that those who invest in the company, as well as the market at large, can consider an organisation to operate legitimately. In this analysis, the argument is framed through two case studies involving organizational change – the WWF Australia’s influence on the Australian minerals industry and changes of social and environemntal (SE) reporting to improve sustainability on the Australian food and beverage industry.
Legitimacy theory is applied to an organization when it takes steps to match society’s expectations for an organisation at this time; society seeks to hold organisations up to a certain standard, and so steps are taken to match that standard (Deegan & Blomquist, 2006). Stakeholder theory involves groups of stakeholders, who all have a vested interest in the success of the business. With this theory, there is less of an issue with perception versus action, as the stakeholders are much more aware of an organisation’s actual actions. Lobby groups are thought to bring significant pressure to organizations in order to keep organisations sustainable and environmentally friendly (Deegan & Blomquist, 2006).
WWF Australia is an example of a stakeholder; it is a non-government organisation that holds businesses and corporations accountable within Australia for environmental sustainability (Deegan & Blomquist, 2006). In its interactions with the Minerals Council of Australia (MCA) and others, it has attempted to maintain legitimacy within those companies by lobbying for transparency and providing information to the public about their environmental practices, or to advocate for changes in existing strategy. WWF advocates for greater stakeholder transparency, allowing those who are invested in the company to know what the MCA is doing (Deegan & Blomquist, 2006). These actions would, in turn, increase legitimacy – the MCA would then be known as a legitimate organisation that is open and communicative to its shareholders about how it does business.
The Australian food and beverage industry is also the recipient of regulations based on legitimacy and stakeholder theories. Sustainability within these organisations involves an improvement of the traditional financial reporting framework by which stakeholders are informed of how the company runs itself. Gaps in legitimacy are indeed an issue within companies when their actions are perceived to be negative, such as the tobacco industry, or when byproducts are thought to exist that are negative (Campbell et al., 2003, in Guthrie et al., 2008). As a result, proper reporting and disclosure are important parts of both legitimacy and stakeholder theory, as they are the means by which stakeholders are informed of the actions of their invested company, and how organisations can maintain their legitimacy and sense of sustainability toward the larger public. The gap between perceived change and actual change can be lessened in organisations like the MCA and companies within the food and beverage industry when full and proper reporting of activities is done (Guthrie et al., 2008). The importance of NGOs like the WWF and other outside influences cannot be underestimated; they are the avenues by which societal and ethical legitimacy is enforced by organisations (Deegan & Blomquist, 2008). However, stakeholders also have a vested interest in maintaining a company’s legitimacy, and their economic involvement with the company allows their voices to be heard much more prominently in the boardroom.
There are some who argue that one cannot mix the two theories; that their goals are simply too divergent, and the methods in which each theory accomplishes said goals contradict each other. In the case of stakeholder theory, the financial component can often conflict with the business ethical standpoint of their actions; steps which would make a company more sustainable may allow the stakeholder to suffer financially (Deegan & Blomquist, 2006). This means that the implementation of legitimacy theory when conducting policy changes can mean an overall risk to the stakeholder. However, the terms of the social contract should outweigh whatever monetary concerns the stakeholders have, as the overall social values must be considered when dictating policy, leaving a greater desire by the stakeholder for their company to be legitimate (Deegan & Blomquist, 2006).
Legitimacy and stakeholder theory can be used in conjunction to bring accountability and transparency in these companies. With legitimacy theory, outside organisations like the WWF can bring pressure onto corporations, while stakeholder theory involves the attempts of companies and businesses like the MCA to appease the stakeholders and bring legitimacy to themselves (Deegan & Blomquist, 2006). While they take two dramatically different approaches, there is no need to avoid using them together, as they do not conflict. In the case of the MCA and companies within the Australian food and beverage industry, the importance of proper reporting and disclosure of activities and strategies cannot be overemphasized in determining public image (Guthrie et al, 2008). This increases the perceived reliability of these companies and their transparency, appeasing the shareholders and the world at large.
Deegan, C & Blomquist, C 2006, ‘Stakeholder influence on corporate reporting: an exploration
of the interaction between WWF-Australia and the Australian minerals industry’,
Accounting Organisations and Society, vol. 31, no. 4-5, pp. 343-72.
Guthrie, J, Cuganesan, S & Ward, L 2008, ‘Industry specific social and environmental reporting:
the Australian food and beverage industry’, Accounting Forum, vol. 32, no. 1, pp. 1-15.
GRI Guide lines and Australian accounting standards