Systems Oriented Theories

Systems oriental theories are concerned with the reason why corporate management chooses to provide certain information to parties outside the organisation. They include legitimacy and stakeholder theories. In terms of systems-oriented theories, it is assumed that the organisation influences, and is influenced by, the community within which it operates. There are three common legitimacy theories that explain the sustainability reporting of organisations. They are: political economy theory, legitimacy theory and stakeholder theory. These theories are applied in real life through the explanation of various motivators of corporate voluntary reporting practice.

  • Political economy theory

Political economy theory includes the political, economic and social framework upon which a society is built. This theory assumes that the social, economic and political elements of a given society cannot be separated. The economic activities of the society cannot be investigated without considering social, institutional and political framework. According to Deegan (2014), corporate reports are considered as a means and product of interchange between the organisation and its environment. According to this theory, corporate reports mediate the interests of various stakeholders in the society. Political economy theory has resulted to the development of stakeholder and legitimacy theories.

Political economy is divided into classical political economy and Bourgeois political economy. Classical political economy is derived from classical economics of Karl Marx. According to the classical political economists, accounting reports and disclosures maintain the position of those who have absolute control of scarce resources in the society (capitalists). In this case, corporate reports undermine those who do not have control over scarce resources in the economy (Gray et al, 1996). As such, it suggests that the society is overwhelmed by structural conflicts. Bourgeois political economy avoids the focus on class or interest groups and structural conflicts. On the contrary, it is concerned with pluralism in the society.

This theory is relevant in explaining motivation for corporate disclosures. For instance, it shows the impact of accounting reports on income and wealth distribution. In this case, accounting reports are motivated by the need to increase income and wealth in the corporation. As a company provides its corporate reports, it enhances its corporate image; hence increasing its competitive advantage (Gray et al, 1996). Corporate reports are also produced in order to enhance good social relationships between the company and various members of the community. However, the application of political economy theory is based on whether it can be viewed from the perspective of legitimacy theory or stakeholder theory.

  • Legitimacy theory

Legitimacy theory suggests that organisations should operate within the bounds and norms of the community within which the company operates. This theory argues that corporate reports should be provided in order to ensure that outsiders perceive the activities of the organisation as legitimate. The needs of the society change as the norms and bounds of the society change. In this case, organisations should be flexible in order to adapt the changing environmental needs. Legitimacy theory assumes that there is a pre-existing social contract between the organisation and society, which ensures that the company does things that the society considers to be legitimate. In this perspective, the survival and growth of the social contract between the organisation and the society depends on the organisation’s ability to deliver socially desirable outcomes and distribute social, political, and economic benefits to various groups in the society from which their power originates.

This theory is essential in understanding the concept of voluntary social disclosures in organisations. Many organisations disclose their social information voluntarily. This may be in form of management discussions in annual reports or separate corporate disclosures. The content of the voluntary social disclosures and how to disclose them depends on the company which reports them. Furthermore, organisations exclude some audiences and choose particular medium of publishing. In 2002, BAT omitted the GRI’s section of products and services, which is concerned with the ethical issues associated with the use of principal products of the company, from its social report 2001/2002 (Van der Laan, 2009). The principle product of the company is harmful to human health – cigarette. This indicates conformity with the legitimacy theory which requires organisations to display what is legitimate. In terms of voluntary social disclosure, organisations choose what to disclose, how to disclose and when to disclose.

Van der Laan (2009) suggests that there would be no need for corporate disclosure if the organisation’s perceptions are homogenous and are in line with the organisation’s expectations of public perceptions. Organisations have the ability to control the forum and agenda for corporate sustainability reporting. However, there must be motivations for disclosure. Such motivations include the achievement and maintenance of organisational legitimacy. The legitimacy theory therefore explains managerial motivation to disclose in this perspective.

  • Stakeholder theory

This theory explains the relationships that exist in the real world. It identifies the type of stakeholders who deserve management attention and those who do not (Neu et al, 1998). It also encourages the identification of stakeholders that have the right to information. The theory also ranks or prioritizes the interests of each stakeholder. This theory defines a stakeholder as anyone who can contribute to the achievement of an organisation’s objectives. There are two classes of stakeholders: primary and secondary stakeholders. Primary stakeholders are engaged in transactions with the company while secondary stakeholders affect the achievement of organisational objectives without being involved in transactions with the company.

There are two branches of stakeholder theory: managerial branch and normative branch. Under the normative perspective, all stakeholders are treated fairly by an organization; stakeholder power is not considered relevant. Accountability is an essential element in normative branch of stakeholder theory (Llewelyn, 2003). The normative stakeholder theory defines accountability as the duty of a corporate body to provide an account of its actions. The company has the responsibility to undertake certain activities and the responsibility to account for those actions.

The managerial branch of the stakeholder theory explains when the management may address the expectations of a given class of stakeholders (powerful stakeholders). Managerial perspective of stakeholder theory is organisation centered (Patten, 1992). It also suggests that the organisation is part of the wider social system. Furthermore, managerial branch identifies different groups of stakeholders in the society and explains how organisations should manage them in order to achieve their objectives.

Before providing sustainability reports, organisations assess the need to meet the demands of various groups of stakeholders. If the organisation perceives that the support of a particular stakeholder is important, then the company will incorporate the expectations of such stakeholders in the organisation’s operations (Ullmann, 1985). In this theory, organisations use the power of information to manage and manipulate different groups of stakeholders in order to obtain their support.

Stakeholder theory can be applied in explaining the motivators for corporate sustainability reporting. Social disclosures by various organisations reflect the key aspects of stakeholder theory. By complying with the requests for social disclosure, organisations seem to be furthering their interests. Furthermore, complying with the requests for corporate sustainability reporting also allows organisations to acquire capital from ethical or socially responsible fund managers. Organisations that comply with requests from NGOs also carry out their activities free of interruption. Organisational responses to solicited social disclosure are also motivated by two factors: the power of the requesting stakeholder in the organisational environment and the organisation’s perception of its duty of accountability to a particular stakeholder (Van der Laan, 2009).

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