Legitimacy and stakeholder theory Essay Example
Legitimacy and Stakeholder Theory
A number of accounting theories provide an additional explanations regarding why an organization might make a decision on the issue of reporting social and environmental information. Such theories include legitimacy theory, institutional theory, positive accounting theory and also stakeholder (Bebbington 212). Generally, these theories are used to explain and prescribe accounting practices and operations as well as reactions to accounting regulations. Legitimacy theory and Stakeholder theory are considered system-oriented theories that illustrate the role of information in managing the relationship existing between an entity and the community that it interacts with (O’Dwyer 412). This paper will report about legitimacy theory and stakeholder theory. It will also compare and contrast the two frameworks and provide existing deficiencies of the theories in explaining the approach of social and environmental accounting.
Analysis of Legitimacy and Stakeholder Theory
Legitimacy theory is founded upon the concept of organizational legitimacy. The theory highlights that organizations often seek to ensure that their practices and activities are within the bounds of their respective communities (Donovan 391). The adoption of legitimacy theory by an organization drives the company to voluntarily report on practices if the management perceive that such operations are expected by the society in which it operates. Legitimacy theory is based on the concept that there exist a ‘Social contract’ between an entry and the community in which it operates. In case the perceived ‘Social contract’ is breached then the company tend to take corrective action. Generally, according to the theory, companies are required to consider the rights of the general public and not just the investors (Donovan 415). On the other hand, Stakeholder theory is divided into two branches; Ethical branch and Managerial branch. In the Ethical branch all stakeholders possess the right to be treated fairly in an organization and issues of stakeholder power tend not to be of direct relevance. In addition, in the branch, management is required to manage a company for the benefit for the stakeholders at large and they have a fiduciary relation to the stakeholders. Managerial branch detail out when corporate management will attend to the expectation of powerful stakeholders (O’Dwyer 422). In addition, in the managerial branch the relative power of the stakeholders can be considered and can change across time with regard to control of resources. In general, an organization will take the responsibility to manage its relationship with all stakeholders.
Contrast and Comparison of the Theories
One of the differences between stakeholder and legitimacy theory is that stakeholder theory does not dictate the information to be disclosed; it just indicates that the facilitation of information can be helpful for the day-to-day operations of an organization (O’Dwyer 430). On the other hand, in the legitimacy theory, when an organization breach any ‘Social contract’, then corrective action is taken which might include disclosures. In addition, in the stakeholder theory, social responsibility practices are important in creating and maintaining relationship with stakeholders as well as political bodies whereas in the legitimacy theory, report disclosure is used to manage an organization’s relationship with the society (Chris 2020). Legitimacy theory generally emphasized that an entity should consider the rights and norms of the public at large while stakeholder theory seek to exhaust the interests of the stakeholders. Also, the legitimacy theory entirely relies on the concept of ‘social contract’ while stakeholder theory attempts to explain which groups are stakeholders deserving management attention (Roberts 609).
Both legitimacy theory and stakeholder theory encompass a strategy that influence the organization’s relationship with parties with which it interacts. In addition, both legitimacy theory and stakeholder theory offer a theoretical motivation for the concept of social disclosure (Roberts 611). Also, they both focus their attention entirely on the relationship between an entity and its operating environment. Moreover, legitimacy and stakeholder theory are considered multi-faceted theoretical perspectives that highlight the assumptions and perceptions recognized by a political economy perspective. Additionally, both legitimacy theory and stakeholder theory focus largely on the role and function of information and disclosure in creating and maintaining relationships between a business entity, individuals, groups and the state at large. Furthermore, both legitimacy theory and stakeholder theory offer additional explanations about why an organization might make a decision to report both social and environmental information (Seleshi 44).
Deficiencies of Legitimacy and Stakeholder Theory
Under the stakeholder theory, the outside interests are determined irrespective of the views of the management. However, it is unclear how such framework can be attained nor how the range of the groups can be legitimately recognized (Roberts 601). The success of any organization is related to purpose. Talking about a company’s success involves the company’s criteria or some combination. Nevertheless, the implication of stakeholder theory and legitimacy theory is that the community at large and not the company determines what constitutes success. As seen earlier, stakeholder theory is founded upon an obligation to society rather than the payment of taxes. Typically, the society deserves first consideration with interests reducing when the circle involves the national interests. In the current global village, it should not just end there. Generally, the stakeholder theory is not practical where society’s interest lie (Roberts 601). Both the stakeholder theory and legitimacy theory suggest that the operation and the purpose of the organization can be controlled and determined by those who are affected by an organization other than those who take part of it (Deegan, Rankin and Tobin 322). The subsequent alteration from the creation of wealth to its division is certain to cause problems to upcoming organizational performances.
In conclusion, organizations use both legitimacy theory and stakeholder theory to make decision on the issue of reporting social and environmental information. Both legitimacy and stakeholder theory are considered to be system-oriented theories in which legitimacy theory is based on organizations legitimacy whereas stakeholder theory is based on the stakeholder’s responsibilities. Both legitimacy and stakeholder theory encompass a strategy that influence the organization’s relationship and also focus their attention entirely on the relationship between an entity and its operating environment. On the other hand the two theories have their differences since stakeholder theory does not dictate the information to be disclosed whereas in legitimacy theory, when an organization breach any ‘Social contract’, then corrective action is taken which might include disclosures. Finally, the deficiencies of the two theories is that it gives rights to the party who benefit from a company’s success rather than who contribute and participate in its success.
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Hibbitt, Chris. External environmental disclosure and reporting by large European companies : an economic, social and political analysis of managerial behaviour. S.l: s.n, 2004. Print.
O’Donovan, G.“Environmental Disclosures in the Annual Report: Extending the Applicability and Predictive Power of Legitimacy Theory”, Accounting, Auditing and Accountability Journal, Vol 15, No 3, 2002, pp. 344-711.
O’Dwyer, B. “Managerial Perceptions of Corporate Social Disclosure: An Irish Story”, Accounting, Auditing and Accountability Journal, Vol. 15, No. 3, pp. 406 – 436.
Roberts, R.W. “Determinants of Corporate Social Responsibility Disclosure: An Application of Stakeholder Theory”, Accounting, Organizations and Society, Vol. 17, No. 6, pp. 595 – 612.
Sisaye, Seleshi. Ecology, sustainable development and accounting. Abingdon, Oxon New York, NY: Routledge, is an imprint of the Taylor & Francis Group, an Informa business, 2016. Print.
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