Week 9 tut questions and solutions:

Suggested solutions to tutorial 10 from Ch 8 “Unregulated Corporate Reporting

Decision”
(Please note that these answers are only hints. Students are strongly encouraged
to add your own points, examples and other information that were discussed in
the tutorials. Students are also strongly encouraged to write points/examples in
lectures and tutorials.)

Discussion Questions (DQ): 8.5, 8.9, 8.19, 8.20, 8.26 and 8.34

AQ (additional questions): 8.32.

Students Critical thinking questions: Read all the articles and decide whether CSR
and other corporate reporting is to make external people happy without really
changing the operations favourable to the workers, community and the environment
(Decoupling behaviour). Or should CSR be in the light of ethical behaviours of
business. Substantiate your answer by evidence.

8.5 How would corporate management determine the terms of the “social contract”
and what would be implications for firms if it is breached the terms of the contract?

Answer:
Determining the terms of the “social contract” (that is, what the norms and
expectations of the community have) is clearly not an easy exercise. Different
managers will have different perceptions about what is expected. It could be argued
that a successful manager is one who is best able to understand community
expectations, and to respond to changes therein.

The social contract can be construed as being made up of some ‘clauses’ that are
explicit, and some that are implicit. Explicit clauses may be ‘easier’ to determine.
Gray, Owen and Adams (1996) suggest that legal requirements provide the explicit
terms of the contract, while other non-legislated societal expectations embody the
implicit terms of the contract.

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This is because there is an imperfect correlation between the law and societal norms
(as reflected by the social contract) and according to Dowling & Pfeffer (1975) there
are three broad reasons for the difference. Firstly, even though laws are reflective of
societal norms and values, legal systems are slow to adapt to changes in the norms and
values in society. Secondly, legal systems often strive for consistency whereas
societal norms and expectation can be contradictory. Thirdly, it is suggested that while
society may not be accepting of certain behaviours, it may not be willing or structured
enough to have those behavioural restrictions codified within law. It is in relation to
the composition of the implicit terms of the ‘contract’ that we can expect managers’
perceptions to vary greatly.

Various approaches have been suggested as a means of understanding community

expectations (which relate particularly to the implicit terms of the social contract), and
these include the following:

(a) Reviewing various community-based surveys that have been undertaken to

establish community views on issues. In most countries, various government
departments (as well as several private sector ‘polling’ organisations)
undertake different attitudinal surveys from time to time.

(b) Many organisations subscribe to services that scan the news media and which
identify the issues that are attracting the most coverage. Such an approach
adopts a perspective that the news media reflects, or perhaps shapes, public
perceptions in particular, perhaps, in relation to unobtrusive issues).

(c) Some managers directly engage their stakeholders through various stakeholder
meetings. Within these meetings the managers ask representatives of groups
such as local community, environmental, employee, investment and consumer
groups about what expectations they have about the organisation and whether
the organisation is seen to be operating in a manner consistent with their
expectations.

There is no universally accepted way of learning about the community’s expectations.

While a minority of management teams might appear to ignore community

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 expectations (they do not see themselves as part of a broader social system), it is
generally accepted that more and more organisations are undertaking greater dialogue
with various stakeholder groups.

Failure to consider community expectations (and changes therein) are expected to lead
to negative implications for an organisation with an extreme result being that the
organisation will be driven out of business. Organisations are not considered to have
any absolute right to exist. As Mathews (1993, p.26) states:

The social contract would exist between corporations (usually limited

companies) and individual members of society. Society (as a collection of
individuals) provides corporations with their legal standing and attributes
and the authority to own and use natural resources and to hire employees.
Organisations draw on community resources and output both goods and
services and waste products to the general environment. The organisation
has no inherent rights to these benefits, and in order to allow their
existence, society would expect the benefits to exceed the costs to society

Pursuant to Legitimacy Theory, if an organisation does not comply with community

expectations then in a sense the community may revoke its ‘contract’ to continue its
operations. This may occur through consumers reducing or eliminating the demand
for the products of the business, factor suppliers eliminating the supply of labour and
financial capital to the business, or constituents lobbying government for increased
taxes, fines or laws to prohibit those actions which do not conform to the expectations
of the community.
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8.9 What is a legitimacy gap and why could such gap suddenly occur ?

Answer: The term ‘legitimacy gap’ is a term that has been utilised 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 the organisation has acted.

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 In relation to how legitimacy gaps arise, Sethi (1978) describes two major sources of
the gaps.

Firstly, 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 had.

Secondly, the legitimacy gap occurs when previously unknown information becomes
known about the organisation—perhaps through disclosure being made within the
news media.
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8.19: How do you think that information could be used to manage organisational
relationship with its powerful stakeholders?

Answer: Advocates of the managerial branch of Stakeholder Theory would tend to

suggest that the disclosure of information is one way of managing powerful
stakeholders. As Gray, Owen and Adams (2010, p. 26) state:

Here (under this perspective), the stakeholders are identified by the organisation
of concern, by reference to the extent to which the organisation believes the group
needs to be managed in order to further the interests of the organisation (what
Mitchell, Agle &Wood, 1997 call ‘salience’). (The interests of the organisation
need not be restricted to conventional profit-seeking assumptions.) The more
important (salient) the stakeholder to the organisation, the more effort will be
exerted in managing the relationship. Information – including financial accounting
and social accounting information - is a major element that can be employed by
the organisation to manage (or manipulate) the stakeholder in order to gain their
support and approval, or to distract their opposition and disapproval.

Information can be used to manage particular stakeholders because the company can
specifically respond to the information needs of these stakeholders, which would then
potentially increase the support they receive from these stakeholders. Also, the
organisation might manipulate information about the organisation so that it tends to

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match the expectations that these stakeholders have about how the organisation should
be performing.

Whether we believe that ‘managing stakeholders’ is an appropriate rationale for

producing information will be a matter of opinion. If we believe that information
should be produced in an unbiased and neutral manner, and/or that information should
be produced on the basis that people have a ‘right-to-know’ about various aspects of
an organisation’s operations, then we would not consider that it is appropriate to
produce information to manage stakeholders. However, if we were adopting a more
managerial focus wherein we are attempting to advance the interests of the
organisation, then we might consider it more appropriate to produce information for
strategic purposes.

8.20: Assume that you are undertaking a research project that was investigating
how particular adverse environmental events negatively impacted the legitimacy
of the organisations. How would you determine that legitimacy was eroded ?
Answer:
Some researchers simply infer that if an adverse social or environmental event occurs
that was caused by, or related to, an entity then this will erode the legitimacy of an
organisation. Obviously, such an inference is simplistic. Other researchers have
argued that if the news media run a number of negative stories about an organisation
then this will impact the legitimacy of the organisation. Again, this is rather
simplistic.

Such approaches are adopted because determining changes in legitimacy is a very

subjective exercise. Another approach towards showing that legitimacy has been
eroded would be to look at the resource’s flows coming from different
stakeholder groups. If it is shown that the resources being contributed by
particular stakeholder groups have declined, then this would be consistent with
the view that the legitimacy of the organisation has been eroded. The assumption
here is that if people no longer believe that an organisation is ‘legitimate’ then they
will be less likely to transact with that organisation. Applying this view to the tobacco
industry, such an industry would probably have more difficulty than many others in

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 attracting good employees and investment capital, as well as in receiving favourable
government or media attention.

8.26 Read the accounting Headlines 8.6 on page 381 that relates to financial exclusions
of some sectors in the society. After reading the articles: apply the managerial
perspective of Stakeholders theory to explain whether management would be caring for
the concern of the charity one parents family ?
(b) if we apply an ethical perspectives of stakeholders theory, should management
care ? and (c) If society considered that banks policies were unreasonable, would you
expect the banks to use their annual reports to defend their positions ?

Answer:

(a) Applying the managerial perspective of stakeholder theory, the managers of

banks would only care about the concerns of one-parent families to the extent that, as
a group, these stakeholders have the power to influence the goals of the organisation,
which may, or may not, be fixated on corporate profitability. If they do not have such
power then the theory would suggest that their concerns would be given minimal
priority. The managerial branch of stakeholder theory does not consider the broader
issues of banks’ responsibilities to various groups.

(b) As single parent families would be a stakeholder of the banks (they have their
deposits with the banks and the banks’ fee structures will impact their wealth)
then the ethical (normative or moral) branch of stakeholder theory would argue
that a responsibility is owed to them, regardless of their inability to influence
the profitability of the banks. Under this perspective, a responsibility is owed
to all parties that are affected by the banks’ operations and hence the bank
should care about the harm potentially being caused to one-parent families.

(c) If society considered that the banks were being unreasonable then the
legitimacy of the banks would be brought into question. Consistent with
Legitimacy Theory, and a number of the studies referred to in this chapter, we
would expect banks to use disclosures as a strategy to minimise the damage to
reputation (and profitability) that might follow publicity such as that provided

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 in Accounting Headline 8.6—but only to the extent that the legitimacy of the
organisation was threatened in a way that negatively impacted its operations.
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8.34: Explain the concepts of coercive isomorphism, mimetic isomorphism and
normative isomorphism in the institutional theories. How can these concepts be used to
explain voluntary corporate reporting?

These concepts come from institutional theory. There are two main dimensions to
institutional theory. The first of these is termed isomorphism—which is what we are
concerned with in this question—while the second is termed decoupling. Both of
these can be of central relevance to explaining voluntary corporate reporting practices.

DiMaggio and Powell (1983, p.149) have defined isomorphism 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 who adopt structures or
processes (such as reporting processes) that are at variance with other organisations
might find that the differences attract criticism. 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.

Coercive isomorphism arises where organisations change their institutional practices

because of pressure from those stakeholders upon whom the organisation is
dependant. For example, the company might be coerced into adapting its existing
voluntary corporate reporting practices (including the issues upon which they report)
so as to bring these into line with the expectations and demands of its powerful
stakeholders (while possibly ignoring the expectations of less powerful stakeholders).
Since these powerful stakeholders might have similar expectations of other
organisations as well, there will tend to be conformity in the practices being adopted
by different organisations—institutional practices will tend towards some form of
uniformity.

Mimetic isomorphism involves organisations seeking to emulate (perhaps copy) or

improve upon the institutional practices of other organisations; often for reasons of

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 competitive advantage in terms of legitimacy. According to DiMaggio and Powell,
when an organisation encounters uncertainty then it might elect to model itself on
other organisations. This argument links pressures for mimetic isomorphism with
pressures underlying coercive isomorphism, as Unerman and Bennett (2004) maintain
that without coercive pressure from stakeholders, in this case there would be unlikely
to be pressure to mimic or surpass the social reporting practices (institutional
practices) of other companies.

Normative isomorphism 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) which 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).

Having described the three forms of isomorphic processes (coercive, mimetic and
normative isomorphism), it should be noted that such processes do not necessarily
make the organisations more efficient. While three types of isomorphism have been
described above, in practice, it will not necessarily be easy to differentiate between
the three.

(Please read Bose et al (2018) articles to understand more on these three concepts and
applying in the real-life situation. The article is given in the canvas)

8.40: Please read information from page 398 of text book on MacDonald’s

Questions:

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(a) Explain MacDonald’s Reaction in terms of both legitimacy theory and Media
agenda setting theory.
(b) Do you think that Mac would be considered to have great deal of legitimacy to
protect through such disclosures?
Answer:
Legitimacy theory provides a view that corporations need to maintain ‘legitimacy’ in
order to survive. Retaining legitimacy is dependent upon complying with
community expectations, and the expectations of the community are
considered to be embodied within the ‘social contract’.

As community expectations change, the terms of the social contract are also
expected to change. This in turn means that organisations have to adapt if they
are going to survive.

Media agenda setting theory explains that the media is able to shape and
change the expectations of the community—particularly in relation to issues
with which community members do not have first hand experience (often
referred to as unobtrusive events).

If we are to accept that organisations react to changing community

expectations, and if we accept that extensive media attention directed to a
particular issue can lead to changes in community expectations, then we
should accept that corporate managers will react to adverse media attention
directed toward their organisation. Hence, if the media was critical of
McDonalds Australia for buying its raw materials from countries outside of
Australia (because the offshore produce was cheaper than its domestic
equivalent), then we would anticipate that McDonalds will react, and
consistent with the strategies discussed by Lindblom (1993) and Dowling and
Pfeffer (1975)—as discussed in Chapter 8—disclosure will be one of the key
strategies associated with the reaction. The disclosures could be made in a
variety of places—including on the corporation’s website.

(b) This is an interesting issue to consider and one which students should be
encouraged to debate. Legitimacy will be more susceptible to loss in some
organisations than others. For example, in relation to maintaining legitimacy,

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 the greater the extent to which the organisation trades on its level of legitimacy
the more crucial will it be for that organisation to ensure that it does not
deviate from the high standards that it has established. For example, compare
an armaments manufacturer with, say, The Body Shop. The products of
armaments manufacturers are designed to kill—such an organisation arguably
has less to worry about in terms of its legitimacy than The Body Shop. The
Body Shop trades on its reputation for caring about the environment, society
and the welfare of animals. If there is a ‘slip-up’ and it is found out by the
media (for example, that one its products was tested on animals—perhaps
unknown to the organisation) then this could be extremely costly to the
organisation. It has a lot of investment in legitimacy to lose. But in referring
this issue to McDonald's—how much legitimacy does McDonald's have and
how sensitive is McDonald's to criticisms of its activities? Student discussion
should generate some interesting points.

Additional questions:

8.32: What do isomorphism and decoupling mean with respect their use in Institutional
theory ?

Answer:
The term ‘isomorphism’ is used extensively within Institutional Theory. 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.

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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.

Decoupling – another key dimension of Institutional Theory – 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. As
Laine (2009, 0. 1031) states:

Factual organisational activities may become decoupled from the accounts given
outside (Carruthers, 1995; Meyer and Rowan, 1977), leading to window dressing
(Mouritsen and Skaerbaek, 1995). The external appearance may be rationalized and
used to help the organisation meet the social expectations and to “confer legitimacy
upon the organisation” (Carruthers, 1995, p. 315; also Meyer and Rowan, 1977),
even though the underlying factual organisational reality may remain unchanged.

The actual practices can be decoupled from the institutionalised (apparent) practices.
According to Dillard, Rigsby and Goodman (2004, p. 510) put it:

Decoupling refers to the situation in which the formal organizational structure or

practice is separate and distinct from actual organizational practice. In other
words, the practice is not integrated into the organization’s managerial and
operational processes [it is decoupled]. Formal structure has much more to do
with the presentation of an organizational-self than with the actual operations of
the organization.
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