Social and Environmental Reporting

Social & Environmental Accounting (Deegan, 1996)  (Godfreys 1996)

Deegan page 121

In1987, Gray, Owens & Maunders defined social & environmental reporting “as the process of communication the social and environmental effects of organisations’ actions within society and to society at large”        Bad examples of environmental disasters on page 194 (Drever)

Example: The logging of the forest or mining of a deposit have resulted in the loss of habitat, species extinction, or a complete cultural change for the local population (Hawken 1994). He also said that no monetary value have been placed on social & environment.

Sustainability Development: Development that meets the needs of the present without compromising the ability of the future generations to meet their own needs. (Drever, 2007)

Legitimacy Theory: It suggests that society will penalise firms that if organisations will fail to conform to community expectations and values. (Lindblom, 1994)

According to legitimacy theory, organisations undertake actions, including disclosing information in an endeavour to appear legitimate to the society in which they operate.

• Motivation for disclosures.
• Mgt signals through annual reports
• Social contract with society & organisation
• Organisation must consider society at large not just shareholders.

Legitimacy theory suggests that “where concern is raised, organisations will respond by increasing the extent of disclosure of the environmental information within the annual report” (Brown and Deegan, 1998, p.21).

Deegan & Rankin (1996, p. 54) pursuant to Legitimacy said that if organisation has failed to justify its continued operation then the community may in a sense revoke (stop) the organisation’s contract to continue its operation. This might occur that society has stopped buying products from that organisation, so lack of demand, factors suppliers such as elimination of labour and financial capital to the business, or constituents lobbying government for the increased taxes, fines or laws to prohibit the actions that do not conform to the expectation of the community.  Example refer to Vishal 

Example: Mitsubishi has failed to inform customer about potential safety problems with vehicles or recall the vehicles for repair, which it is claimed led to accidents, including one resulting in the death of driver. (Asahi Shimbun, 2004)

• BP
• James Hardy
• Nike   (refer to Lecture notes)

Legitimacy Gap: Refers to the difference between the expectations of the society and organisation unable to fulfil those expectation that difference is called legitimacy difference. (Deegan, 1996)

Legitimacy Gap: The scenario in which society reacting in different way to the organisation’s way. The gap between the 2 different thinking is the legitimacy gap.

Legitimacy gap could be attained by following points:

• Educate the society
• Try to change the society’s perspective (MEDIA)
• Deflects the society’s attention towards what competitors are doing
• Change society’s norms & expectations

Dowling and Pfeffer (1975) said that organisations will take various actions to ensure that their operations are perceived to legitimate. One such action would be to provide disclosures, perhaps within the annual report. (Disclosures according to community’s expectations)

In Australian study, Deegan and Rankin (1996) used Legitimacy theory to explain the changes in the environmental disclosure policies in corporate annual reports. The author examined the environmental disclosures practices of a sample of firms were successfully prosecuted by NSW and Victorian Environmental Protection Authorities (EPAs) for the breaches of environmental protection laws during the period 1990 to 1993.

Deegan and Rankin (1996) studied the disclosure practices of sample of companies that were known to have negative information available to disclose in their annual reports. The authors examined the environmental-reporting practices of a sample of 20 companies were prosecuted by the NSW or Victorian Environmental Protection Authorities (EPA) for the offences under various environmental protection laws. Deegan and Rankin argue that this is consistent with a legitimacy motive by the sample corporations. They also found those shareholders and other individuals within the organisation including consumer associations, employee groups, industry association and environmental groups consider that the environmental information is material to the decisions.

Stakeholder Theory: The theory that incorporate the interests of a broader range of stakeholders in an entity, not just the shareholders. (Drever, 2007) The stakeholder theory put emphasis to disclose information to related stakeholder only instead of all stakeholders together.

A stakeholder can be defined as “any group or individual who can affect or is affected by the achievement of the firm’s objective. (Freeman, 1984)

Two types in stakeholder theory: Ethics-based theory and managerial or positive base

1. Ethics-based theory (normative): How organisation treat their stakeholders and emphasising the organisations’ responsibilities.

• Benefits for all stakeholders
• Affect on the society from the organisation such as pollution, community sponsorship, provision of employment, safety incentives.

1. Managerial or positive based: Need to manage particular stakeholder groups,  especially powerful. Such as lenders, suppliers, regulators and consumers.

• Explain & predicts organisation’s reaction
• Identify particular stakeholder
• The power of stakeholders (owners, creditors & regulators) to influence corporate mgt is viewed as a function of stakeholders’ degree of control over resources required by the organisation. (Ullmann, 1985)
• More powerful stakeholders will demand more expectations as compared to less powerful LOL

Comparison between legitimacy and stakeholder theory

In legitimacy theory, the audience of interest is typically defined as “the community”. A related theoretical perspective is stakeholder theory. In stakeholder theory, the organisation is also considered to be part of the wider social system, but this theory specifically considers the different stakeholder groups within society. In stakeholder theory, the organisation will not respond to all stakeholders equally from a practical perspective, but rather it will respond to the groups that are deemed to be powerful. The powerful stakeholders are owners, creditors, or regulators over the organisation. (Ullmann, 1985)