Accounting, Auditing & Accountability Journal

Emerald Article: Introduction: The legitimising effect of social and

environmental disclosures - a theoretical foundation
Craig Deegan

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Craig Deegan, (2002),"Introduction: The legitimising effect of social and environmental disclosures - a theoretical foundation",
Accounting, Auditing & Accountability Journal, Vol. 15 Iss: 3 pp. 282 - 311
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Craig Deegan, Michaela Rankin, John Tobin, (2002),"An examination of the corporate social and environmental disclosures of BHP
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Rob Gray, Reza Kouhy, Simon Lavers, (1995),"Corporate social and environmental reporting: a review of theliterature and a
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AAAJ
15,3
282
Received April 2002
Revised May 2002
Accounting, Auditing &
Accountability Journal,
Vol. 15 No. 3, 2002, pp. 282-311.
# MCB UP Limited, 0951-3574
DOI 10.1108/09513570210435852
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Introduction
The legitimising effect of social
and environmental disclosures a
theoretical foundation
Craig Deegan
School of Accounting and Law, RMIT University, Melbourne, Australia
Keywords Social accounting, Environmental audit, Motivation
Abstract This paper serves as an introduction to this special issue of Accounting, Auditing &
Accountability Journal; an issue which embraces themes associated with social and
environmental reporting (SAR) and its role in maintaining or creating organisational
legitimacy. In an effort to place this research in context the paper begins by making reference
to contemporary trends occurring in social and environmental accounting research generally, and
this is then followed by an overview of some of the many research questions which are currently
being addressed in the area. Understanding motivations for disclosure is shown to be one of the
issues attracting considerable research attention, and the desire to legitimise an organisation's
operations is in turn shown to be one of the many possible motivations. The role of legitimacy
theory in explaining managers' decisions is then discussed and it is emphasised that legitimacy
theory, as it is currently used, must still be considered to be a relatively under-developed theory of
managerial behaviour. Nevertheless, it is argued that the theory provides useful insights. Finally,
the paper indicates how the other papers in this issue of AAAJ contribute to the ongoing
development of legitimacy theory in SAR research.
1. Introduction
This article has been written to provide an overview of a particular theoretical
perspective that has been used to explain why managers might elect to publicly
disclose information about particular aspects of their social or environmental
performance[1]. This article also provides an introduction to the other articles
in this special issue of Accounting, Auditing & Accountability Journal, and it
does this by indicating where the authors' research ``resides'' within the broader
body of literature which has typically been labelled as social and
environmental accounting research (SEAR). It will be shown that the four other
papers in this special issue of AAAJ embrace a sub-set of the total research
effort, this ``sub-set'' being research which explores the motivations behind
corporate social and environmental reporting. As will be indicated, there is a
deal of research that provides evidence that corporate social and environmental
reporting is motivated by a desire, by management, to legitimise various
aspects of their respective organisations. This might be a valued strategy for
an organisation when particular events occur that are perceived by
management as being detrimental to the organisation's reputation, and
The author gratefully acknowledges the support provided by James Guthrie and Lee Parker in
relation to compiling this special issue of AAAJ, and for their comments on this particular
paper. The helpful comments provided by Reg Mathews are also acknowledged.
perhaps, ongoing survival. Indeed, three of the following four papers provide Introduction
evidence consistent with the view that public disclosure of social and
environmental information, in media such as the annual report, is undertaken
for legitimising purposes. Such a motivation for reporting (to legitimise the
organisation's operations) would be in contrast to a reporting approach which
reflects an acceptance by managers of an accountability, or a responsibility, to
disclose information to those who have a right-to-know[2]. Whether 283
legitimising disclosures, broadly speaking, are to the benefit of the broader
community is also something that we will briefly consider.
This article also seeks to provide a brief overview of research trends and
opportunities in the area of social and environmental accounting research.
Because the area is so broad, we obviously cannot be ``all-inclusive'' in such a
review. Interested readers should also review other ``trends and opportunities''
papers, such as the excellent review provided by Mathews (1997), and more
recently, the review provided by Gray (2002).
The balance of this paper is organised as follows. The next section, section 2,
describes the broad area of social and environmental accounting research and
identifies some particular areas of research that are attracting increased
attention. Section 3 then discusses various research questions that might be the
focus of social and environmental accounting researchers. As is demonstrated,
there is a vast array of research questions which can be and have been
addressed, including issues associated with explaining managers' motivations
for publicly disclosing social and environmental information something
directly relevant to the other papers in this special issue of AAAJ. Section 4,
considers the issue of motivation further, and provides an overview of various
motivations that could be attributed to the decision to disclose social and
environmental information. The desire to legitimise an organisation's
operations is shown to be one of the many motivations considered to drive
disclosure-related decisions. Section 5 investigates the legitimisation motive in
more depth with particular consideration being given to legitimacy theory.
Section 6 discusses the potential contribution of the other four papers in this
edition of Accounting, Auditing & Accountability Journal to the development of
legitimacy theory, and section 7 provides concluding comments.

2. The growth in social and environmental accounting research

Research in the area which we broadly refer to as SEAR has ebbed and flowed
for a number of decades. However, in recent times, there has been substantial
growth in the research attention being devoted to social and environmental
accounting issues. This increase in attention can be demonstrated by the
number of academic researchers entering the area, and by the increased focus
being applied by governments, professional accounting bodies, industry
bodies, and corporations to various related issues. Arguably, it is over the last
decade, and particularly since the mid-1990s, that there has been major growth
in related research. What has created this growth is, in itself, an interesting
issue for investigation. What must be emphasised, however, is that such
AAAJ research is not new, but the degree of attention is unlike anything in the past.
15,3 Various academic research journals are now publishing numerous articles on
social and environmental accounting and accountability issues. Most notably
amongst these would be Accounting, Auditing & Accountability Journal,
Accounting Forum, Accounting, Organizations and Society, Advances in Public
Interest Accounting, Critical Perspectives on Accounting, British Accounting
284 Review, Accounting and Business Research, Business Strategy and the
Environment, Asia Pacific Journal of Accounting and Interdisciplinary
Environmental Review. Journals such as Accounting, Auditing & Accountability
Journal (Vol. 10 No. 4, 1997, as well as this issue), Accounting Forum (Vol. 19
Nos 2/3, 1995 and Vol. 24 No. 1, 2000 ), European Accounting Review (Vol. 9 No.
1, 2000) and Asia Pacific Journal of Accounting (Vol. 4 No. 2, 1997) have
dedicated entire editions to social and environmental accounting issues. This
volume of research is in contrast to what was occurring until the early 1990s,
when much less research was being published in the area (and when it was
being published it was typically emanating from a small number of people who
had gone against the ``trend'' and embraced issues associated with social and
environmental accountability).
It is also worthy of note that many of the so-called ``leading schools'' in the
area of accounting (and this is an interesting ``tag'' given that so many did not
lead efforts in this growing field of research that was arguably of relevance and
importance to the broader society, rather than simply to those parties operating
within ``the market-place'') did not embrace research in areas associated with
social and environmental accountabilities (and some still resist). More often
than not, doctoral students were counselled to do research in conventional
areas typically based on neo-classical economics and related notions of
market efficiencies (a great deal of which was emanating from ``leading'' US
business schools) areas of research which perceivably would not ``stifle''
academic promotion-prospects. This had implications for the inflow of ``new
talent''. The few early advocates of social and environmental research (and
early researchers within the 1970s and 1980s typically included ``environment''
within the broader term of ``social'') were arguably seen by many as quite
radical at the time something which critical theorists of today (perhaps
informed by Marxian, feminist or deep-green philosophies) could find quite
amusing. As Mathews (1997, p. 488) states:
Those who researched non-traditional disclosures or wrote in support of socially-related
disclosures were regarded as both radical and critical, because they were explicitly or
implicitly criticizing the current structure of the discipline: historical financial accounting
reports for shareholders and creditors. It was later that some of these writers were themselves
criticized for being prepared to modify rather than replace the system within which
accounting was situated.

The work of the critical theorists (as displayed in such journals as AAAJ and
Critical Perspectives on Accounting), provided much needed critique and
commentary on various social reporting prescriptions. They were often critical
of the proponents of social and environmental accounting because the
approaches being proposed were perceived as doing little, or nothing, to alter Introduction
the way business conducted its operations (Tinker et al., 1991). In this regard,
the published exchanges between Parker and Puxty in the first volume of
Advances in Public Interest Accounting (1986) makes interesting reading[3].
Throughout the 1990s, research directions were changing in many research
schools and ``the environment'' was becoming the major focus of researchers
who were embracing the area arguably at the expense of the ``social'' (Owen 285
et al., 1997; Mathews, 1997). However, perhaps heeding the concerns of authors
such as Owen and Mathews, the ``social side'' of research and practice has
gained more prominence in recent years both at the corporate level, and with
researchers. Consistent with the increased research focus, there has also been a
marked increase in the number of research students studying various social
and environmental accounting issues, as reflected, obviously somewhat
imperfectly, by the increasing number of PhD students researching the area,
and the number of people attending social and environmental accounting
research doctoral colloquiums, such as those held at the Centre for Social and
Environmental Accounting Research (University of Glasgow) and the recent
International Congress on Social and Environmental Accounting held in
Melbourne in April 2002. A number of universities (albeit still in the minority)
have put in place subjects dedicated to social and environmental accounting
practice and research. In the mid 1990s financial accounting theory texts also,
for the first time, dedicated chapters to social and environmental accounting
with one of the early examples being Mathews and Perera (1996). This practice
has now been adopted within other leading accounting theory texts (for
example, Deegan, 2000). Other ``theory'' books, while not strictly dedicated to
accounting theory, provided much needed input into the growing debate (for
example, see the important contribution made by Gray et al. (1996)).
Governments, industry bodies and accounting professions have also shown
a marked increase in the amount of attention being devoted to social and
environmental accounting issues, particularly in the area of external reporting.
Professional accounting bodies showed an early interest in social accounting,
the best example of which was The Corporate Report (issued in 1975 by the
Accounting Standards Steering Committee of the Institute of Chartered
Accountants in England and Wales). This innovative release, which discussed
and emphasised ``rights'' to information, did not, however, lead to a lot of other
effort or change by accounting professions and the issue seemed to disappear
from the agenda of professional accounting bodies until it was to re-emerge in
the 1990s. A number of organisations, such as the Global Reporting Initiative,
The Institute for Social and Ethical Accountability, World Business Council for
Sustainable Development, and the Council on Economic Priorities, have
recently released guidance documents that are being embraced
internationally[4]. The work of these bodies perhaps indicates a trend towards
taking the development of the area away from the accounting profession. In
some respects, this is surprising given the expertise that accounting
professionals could usefully bring to the area (Gray, 2002). Also given the
AAAJ extent of interest in various social and environmental accounting and
15,3 accountability issues it would appear unlikely that the topics are likely to
retreat from research agendas. Although, as Gray (2002) warns, social
accounting was a ``hot-topic'' in the 1970s and early 1980s with various
organisations and governments embracing this issue, yet it seemed to almost
vanish from the radar for over a decade. As was the case back then, social and
286 environmental reporting is predominantly a voluntary practice so
conceivably, in the absence of regulation, it could vanish again but with the
mass of effort dedicated to the area this time, this would appear unlikely.
Because the development of social and environmental accounting and
accountability practices is still in its infancy (for example, compared to the long
historical practice of financial reporting), there is still much debate on various
issues. For example, in relation to the external reporting side, there is a lack of
consensus on key issues such as the objectives of reporting; the qualitative
characteristics the information should possess; the audience of the reports; the
``best'' presentation formats, and so forth. However, this lack of consensus leads
to much experimentation which in turn adds to the excitement of this rapidly
developing area an area that is full of rewarding research opportunities for
those that care to be involved!

3. An overview of some of the research questions that can be

pursued
Within the broad area of research known as social and environmental
accounting research there are many areas or issues that can be researched. In
the brief discussion below we will outline a number of issues an outline that is
anything but comprehensive. However, it does help to place the other papers in
this edition of Accounting, Auditing & Accountability Journal in context. Some
of the various research questions that have been researched or are currently
being researched include:
. What are companies reporting? A great deal of the early research in the
area, such as the studies by Ernst & Ernst throughout the 1970s,
provided information about what various organisations were disclosing.
Such work is still being undertaken today, with some of it focusing on
international comparisons. See Teoh and Thong (1984); Andrews et al.
(1989); Guthrie and Parker (1990); Harte and Owen (1991); Lynn (1992);
Adams et al. (1995); Gibson and Guthrie (1995); Niskala and Pretes
(1995); Deegan and Gordon (1996); Gamble et al. (1996); Choi (1999); Bell
and Lehman (1999); Newson and Deegan (2002).
. Can social and environmental disclosure practices be linked to other
attributes of performance, such as economic performance, or to factors
such as industry membership, country of origin (and culture), or size?
See Ingram and Frazier (1980); Trotman and Bradley (1981); Ullman
(1985); Cowen et al. (1987); Fayers (1998); Newson and Deegan (2002).
. How do particular stakeholders react to social and environmental Introduction
disclosures? See Ingram (1978); Buzby and Falk (1978, 1979); Anderson
and Frankle (1980); Jaggi and Freedman (1982); Shane and Spicer (1983);
Freedman and Jaggi (1986, 1988a, b); Epstein and Freedman (1994);
Blacconiere and Patten (1994) for research about investor reaction to
social and environmental disclosures. For the reactions of other
stakeholder groups see Tilt (1994); Deegan and Rankin (1997). 287
. What are accountants' attitudes to social and environmental
accounting? See Bebbington et al. (1994); Deegan et al. (1996).
. What is the correspondence between corporate social and environmental
disclosures and actual corporate performance? See Wiseman (1982);
Rockness (1985).
. What are the roles of taxation instruments in relation to environmental
protection? See Baumol (1975); Lockhart (1997); O'Riordan (1997).
. How is accounting education embracing the area, and what are some of
the impediments to including social and environmental issues with the
accounting education programs of universities and professional
accounting bodies? See Blundell and Booth (1988); Gray et al. (1994);
Gibson (1997); Gordon (1998); Gray and Collison (2001).
. How should organisations account for their social and environmental
performance? Should externalities be attributed a ``cost'' for financial
accounting purposes? See C.C. Abt Associates (1972); Milne (1991);
USEPA (1996); Bebbington and Gray (1997); Mathews (2000).
. What theories best explain how we do report, or perhaps, how we should
report social and environmental information? See Ramanathan (1976);
Cooper and Sherer (1984); Benston (1982, 1984); Belkaoui and Karpik
(1989); Mathews (1993, 2000); Gray et al. (1996); Lehman (1999); Deegan
(2000).
. How should (and perhaps, why should) management accounting
systems embrace social and environmental issues? See Stone (1995);
Bennett and James (1997, 1998); Ditz et al. (1998); Parker (2000a, b).
. What motivates managers to make particular social and environmental
disclosures? See Guthrie and Parker (1989); Patten (1992); Roberts (1992);
Deegan and Gordon (1996); Deegan and Rankin (1997); Adams et al.
(1998).
. What is the role, or scope, of social and environmental verifications,
attestations, or audits (and these can all take on various forms)? See
Bauer and Fenn (1973); Grojer and Stark (1977); Brooks (1980); Geddes
(1991); Gray and Collison (1991); Gray et al. (1991); Zadek (1993);
Gallhofer and Haslam (1995): Power (1997); Owen and Swift (1999); Ball
et al. (2000); Owen et al. (2000); Gray (2002).
AAAJ . Are current or proposed social and environmental reporting practices
15,3 really of benefit to the broader community, or do they simply act to
legitimise existing social structures which benefit some groups at the
expense of others? See Puxty (1991).
As can be seen from the above list, some of the research is quite descriptive
288 (describing what is), some is normative (describing what should be), whilst
other is positive in nature (explaining what is). Some of the research is theory-
building. When describing what is being disclosed, there has been much debate
about how to measure and classify social and environmental disclosures. Ernst
& Ernst (1976), and subsequently, recent papers such as Milne and Adler (1999)
and Gray et al. (1995a) provide useful direction. When explaining why
particular disclosures are being made, or in describing how organisations
should make particular disclosures, reference is often made to a particular
theoretical perspective (such as legitimacy theory, which is one of many
theories that might be applied, and which is the focus of this edition of AAAJ).
However, reflecting the fact that we do not have an ``accepted'' theory for social
and environmental accounting, there is much variation in the theoretical
perspectives being adopted. Where efforts have been made to explain social
and environmental disclosure practices, recent research has tended to rely upon
legitimacy theory, and to a lesser extent, stakeholder theory (with both theories
having antecedents in political economy theory). At the same time, much of the
critical review of social and environmental reporting practice and prescription
(and indeed, critiques of the work of many researchers in the area) is informed
by other theoretical perspectives, such as by the works of Marx or by the deep-
green or feminist literatures. Whether we can ever reach consensus on one
theory for social and environmental accounting, or indeed whether we want to,
is not something that we will pursue further in this article.
In relation to recent research efforts, amongst the many areas, there appears
to be a particular increasing focus being given to a type of community
engagement practice, often labelled as social auditing. There has also been an
increased focus towards triple bottom line reporting (Elkington, 1997) and the
related notion of sustainability reporting and related verifications. This trend is
reflective of Gray et al.'s (1998) view that consideration to social reporting and
related accountability issues has re-emerged after a period of stagnation. The
reasons for this renewal of interest could be varied. According to Gray et al.
(1998, p. 303):
The increasing concern with stakeholders, growing anxiety about business ethics and
corporate social responsibilities and the increasing importance of ethical investment have all
raised the need for new accounting and accounting methods through which organisations
and their participants can address such matters. But probably the most important of all the
influences has been the dawning realisation that environmental issues especially when
examined within the framework of sustainability cannot be separated from social issues
and the accompanying questions of justice, distribution, poverty, and so forth. Social
accounting, in all its guises, is designed to deal exactly with these issues.
Social audits, which can take on various forms (be they produced by Introduction
management, or by independent bodies), were not an unknown occurrence with
exciting experiments being conducted in the 1970s by such UK organisations
as Social Audit Ltd (see Medawar, 1976). But the audits were voluntary and
their incidence decreased until a resurgence in the latter half of the 1990s. At a
broad level, a social audit can be defined as a process that enables an
organisation to assess its performance in relation to society's requirements and 289
expectations (Elkington, 1997). Research into social audits is interesting, not
least because of the variety of guises and motivations involved. Their use can
be explained as a managerial device aimed to take various social pressures
away from an organisation. For example, the international sportswear
company Nike was criticised internationally for the labour practices imposed
on its workforces in certain parts of Asia (in particular). As part of the
response, a social audit was implemented with the assistance of the Global
Alliance for Workers and Communities. If community suspicion or concern had
not been demonstrated, would such a practice have been implemented? The
results of the social audit are provided on Nike's Web site. Similar arguments
could be made in relation to social audits conducted by Shell, or the British
lottery company, Camelot. Such social audits are linked to issues such as risk
assessment and monitoring; managing key or powerful stakeholders; creating
market opportunities; increasing positive brand-recognition; and resurrecting
legitimacy. By contrast, social audits might also be undertaken for
accountability purposes and to try to explain the various social impacts an
organisation might be creating both good and bad. They might also be issue
specific, such as the implications that might follow from opening or closing a
particular plant. There is much disagreement on methodologies and given the
managerial benefits, there is much discussion about management capture of
the social audit process (see Owen et al., 2000). What is being emphasised here
is that this is an example of one area in the social and environmental
accounting field where there are many unresolved issues awaiting further
research.
As noted above, recent times have also seen an increase in ``sustainability
reporting'' which seems to have closely followed the surge in interest in triple
bottom line reporting (Elkington, 1997). There is much critical discussion about
whether sustainability reports are what they claim to be. Indeed, what would a
``true'' sustainability report look like? Do the reports using the ``sustainability''
label (and discussing such things as greenhouse emissions and support for
indigenous communities) really report about sustainability, or have they really
not progressed beyond issues of eco-efficiency? Further thought needs to go
into this area.

4. Understanding managerial motivations

Although we have provided a brief overview of some of the recent research
directions being pursued in social and environmental accounting, it is now time
to return to the theme of this issue of AAAJ. While the incidence of social audits
AAAJ and attention to triple bottom-line reporting and sustainability reporting
15,3 (however defined) is increasing, the practices are still overwhelmingly
voluntary. The voluntary nature of the activity leads researchers to question
why it occurs. As can be seen from the many bullet-points provided earlier,
researching motivations for particular voluntary actions, such as reporting
social and environmental information, is only one of many areas of research in
290 the area of social and environmental accounting. It is this issue of motivation to
which this special edition of AAAJ relates and it is this issue which will now be
the focus of the remainder of this paper. Of course, there could be a variety of
motivations for managers to voluntarily undertake certain activities, such as
deciding to report social and environmental information. Some reasons might
include:
. The desire to comply with legal requirements. This would not be a major
motivation in a great deal of countries given the lack of requirements in
relation to social and environmental disclosures and associated
verifications (Deegan, 2000).
. ``Economic rationality'' considerations that is, there might be business
advantages in appearing to do ``the right thing'' and this might be the
key motivation rather than any acceptance of any social responsibilities
of business (Friedman, 1962).
. A belief in an accountability or responsibility to report that is, there
could be a view held by managers that people have a inalienable right to
information that should be satisfied (Hasnas, 1998; Donaldson and
Preston, 1995; Freeman and Reed, 1983) regardless of the associated
costs. Unfortunately, it is unlikely that this view would be the dominant
view in most business organisations operating within the capitalist
system.
. A desire to comply with borrowing requirements. Increasingly lending
institutions are requiring, as part of their own risk management policies,
borrowers to periodically provide various items of information about
their social and environmental policies and performance.
. To comply with community expectations, perhaps reflective of a view
that compliance with the ``community licence to operate'' (or ``social
contract'') is dependent upon providing certain accounts of social and
environmental performance (Deegan, 2002).
. As a result of certain threats to the organisation's legitimacy. For
example, reporting might be a response to negative media attention,
particular environmental or social incidents, or perhaps as a result of
poor rating being given by particular ratings agencies (see Deegan et al.,
2000, 2002; Patten, 1992).
. To manage particular (perhaps powerful) stakeholder groups (see
Ullman, 1985; Roberts, 1992; Evan and Freeman, 1988; Neu et al., 1998).
 . To attract investment funds. Internationally, ``ethical investment funds'' Introduction
are becoming an increasing part of the capital market; for example, the
Dow Jones Sustainability Group Index. People responsible for rating
particular organisations for the purpose of inclusion or non-inclusion
within the funds' investment portfolio utilise information from a number
of sources, including information being released by the organisations
themselves. 291
. To comply with industry requirements, or particular codes of conduct.
For example, within Australia the Australian Minerals Industry has a
Code for Environmental Management (as do other industries, such as
the Australian Electricity Industry). There are certain pressures to sign
to such codes. Such codes can then have associated reporting
requirements (see Deegan and Blomquist, 2001).
. To forestall efforts to introduce more onerous disclosure regulations.
Linked to the above bullet-point, evidence shows that one of the reasons
that the Australian Minerals Industry introduced its code of
environmental conduct, which requires external environmental
reporting, was a fear that government might take the matter further and
instigate the development of regulation (Deegan and Blomquist, 2001).
. To win particular reporting awards. There are a number of
environmental, social, and sustainability reporting awards being offered
within numerous countries throughout the world, with possibly the
most well-known ones being those offered by the Association of
Chartered Certified Accountants. Many organisations put a great deal of
effort into winning these awards, and receiving the associated positive
publicity such awards generate. Winning an award might in turn have
positive implications for the reputation of the company (Deegan and
Carrol, 1993).
Of course, there could be several motivations simultaneously driving
organisations to report social and environmental information and expecting
that one motivation might dominate all others would be unrealistic. Indeed,
many of the above motivations are interrelated. There could be many other
motivations, other than those listed above, which would also drive the
reporting decision. As indicated above, one factor that has in recent times been
embraced by many researchers as motivation behind corporate social and
environmental disclosures is the desire to legitimise an organisation's
operations. This view is embraced within legitimacy theory. Because the
balance of the papers in this special issue of AAAJ embrace legitimacy theory
as the theoretical basis of their arguments it is useful to provide an introduction
and overview of legitimacy theory[5]. We will then consider how the other
papers in this edition of AAAJ contribute to the research being undertaken
within the area.
AAAJ 5. An overview of legitimacy theory
15,3 Legitimacy theory, like a number of other theories such as political economy
theory and stakeholder theory, is considered to be a systems-oriented theory.
According to Gray et al. (1996, p. 45):
. . . a systems-oriented view of the organisation and society . . . permits us to focus on the role
of information and disclosure in the relationship(s) between organisations, the State,
292 individuals and groups.

Within a systems-oriented perspective, the entity is assumed to be influenced

by, and in turn to have influence upon, the society in which it operates[6].
Corporate disclosure policies are considered to represent one important means
by which management can influence external perceptions about their
organisation.
The insights provided by legitimacy theory (and stakeholder theory) build
on those that emanate from another theory, known as political economy theory
(see Benson, 1975). The ``political economy'' itself has been defined by Gray et
al. (1996, p. 47) as ``the social, political and economic framework within which
human life takes place''. Political economy theory explicitly recognises the
power conflicts that exist within society and the various struggles that occur
between various groups within society. The perspective embraced in political
economy theory, and also legitimacy theory, is that society, politics and
economics are inseparable and economic issues cannot meaningfully be
investigated in the absence of considerations about the political, social and
institutional framework in which the economic activity takes place. It is argued
that by considering the political economy a researcher is better able to consider
broader (societal) issues which impact how an organisation operates, and what
information it elects to disclose. According to Guthrie and Parker (1990, p. 166):
The political economy perspective perceives accounting reports as social, political, and
economic documents. They serve as a tool for constructing, sustaining, and legitimising
economic and political arrangements, institutions, and ideological themes which contribute to
the corporation's private interests. Disclosures have the capacity to transmit social, political,
and economic meanings for a pluralistic set of report recipients.

Consistent with the view that organisations are part of a broader social system,
the perspectives provided by legitimacy theory (which, as stated, build on
foundations provided by political economy theory) indicate that organisations
are not considered to have any inherent right to resources, or in fact, to exist.
Organisations exist to the extent that the particular society considers that they
are legitimate, and if this is the case, the society ``confers'' upon the organisation
the ``state'' of legitimacy. This is consistent with Mathews (1993, p. 26), who
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 Introduction
the benefits to exceed the costs to society.

The idea of ``legitimacy'' can be directly related to the concept of a ``social

contract'', as referred to above by Mathews. Legitimacy theory itself directly
relies upon this concept[7]. Specifically, it is considered that an organisation's
survival will be threatened if society perceives that the organisation has
breached its social contract. Where society is not satisfied that the organisation 293
is operating in an acceptable, or legitimate, manner, then society will effectively
revoke the organisation's ``contract'' to continue its operations. This might be
evidenced through, for example, 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 with the expectations of the community.
As a theoretical construct, the terms (or ``clauses'') of the social contract
cannot be known with any precision, and different managers will have different
perceptions about the various ``terms'' of the contract. Offering some assistance,
Gray et al. (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. It is in relation to the composition of the implicit
terms of the ``contract'' that we can expect managers' perceptions to vary
greatly[8].
Legitimacy itself has been defined by Lindblom (1994, p. 2) as:
. . . a condition or status which exists when an entity's value system is congruent with the
value system of the larger social system of which the entity is a part. When a disparity, actual
or potential, exists between the two value systems, there is a threat to the entity's legitimacy.

Legitimacy is considered to be a resource on which an organisation is

dependent for survival (Dowling and Pfeffer, 1975). However, it is a ``resource''
that the organisation also can impact or manipulate (Woodward et al., 2001).
Consistent with resource dependence theory (see Pfeffer and Salancik, 1978),
legitimacy theory would suggest that whenever managers consider that the
supply of the particular resource is vital to organisational survival, then they
will pursue strategies to ensure the continued supply of the resource[9]. In
relation to legitimacy, such strategies may include targeted disclosures, or
perhaps controlling or collaborating with other parties who in themselves are
considered to be legitimate (Oliver, 1990; Fiedler and Deegan, 2002)[10].
Reflecting the overlapping nature of many theories, the notion of legitimacy
is also central to institutional theory (see DiMaggio and Powell, 1983). Under
this theory, organisations will change their structure or operations to conform
with external expectations about what forms or structures are acceptable
(legitimate). For example, because the majority of other organisations in an
industry might have particular governance structures there might be
``institutional'' pressure on an organisation to also have such structures in place.
That is, there is expected to be some form of movement towards conformance
AAAJ with other ``established'' organisations. Failure to undertake this process
15,3 leading to congruence, which is referred to as ``isomorphism'' (DiMaggio and
Powell, 1983, p. 149), has direct implications for an entity's survival. However,
in contrast to legitimacy theory, wherein there is perceived to be an ability of
managers to alter perceptions of legitimacy (perhaps through disclosures),
under institutional theory managers are expected to conform with ``norms'' that
294 are largely imposed upon them.
Another theory, stakeholder theory, can also provide insights which are
similar to those provided by legitimacy theory (reflective of the fact that both
derive from political economy theory). As Gray et al. (1995b, p. 52) state, to treat
legitimacy theory and stakeholder theory as two totally distinct theories would
be incorrect:
It seems to us that the essential problem in the literature arises from treating each as
competing theories of reporting behaviour, when ``stakeholder theory'' and ``legitimacy
theory'' are better seen as two (overlapping) perspectives on the issue which are set within a
framework of assumptions about ``political economy''.

Because there is a deal of overlap between a number of theories, and because

the theories can provide slightly different and useful insights, there has been a
move by some researchers to use more than one theory to provide an
explanation for particular managerial actions (see Fiedler and Deegan, 2002)
although such a strategy would not be supported by some academics
(``purists''?) who believe that a researcher must embrace just one ``view'' of the
world[11]. Briefly, in relation to stakeholder theory it should be appreciated
that there are actually a number of theories that have been given the broad
label of stakeholder theory. This in itself creates some confusion. As Deegan
(2000) explains, there is both an ethical (or normative) branch of stakeholder
theory, and a managerial (or positive) branch. The ethical branch provides
prescriptions in terms of how organisations should treat their stakeholders
(with a variety of definitions being given to ``stakeholders''). This theoretical
view emphasises the responsibilities of organisations (see Hasnas, 1998;
Donaldson and Preston, 1995; Freeman and Reed, 1983). As a theory that
provides prescription, it therefore does not have a direct role in predicting
managerial behaviour. By contrast, the managerial branch of stakeholder
theory emphasises the need to ``manage'' particular stakeholder groups
particularly those that are deemed to be ``powerful'' because of their ability to
control resources that are necessary to the organisation's operations (Ullman,
1985). As Gray et al. (1996, p. 45) state in relation to stakeholder theory (from
the managerial branch):
Here (under this perspective), the stakeholders are identified by the organisation of concern,
by reference to the extent to which the organisation believes the interplay with each group
needs to be managed in order to further the interests of the organisation. (The interests of the
organisation need not be restricted to conventional profit-seeking assumptions). The more
important the stakeholder to the organisation, the more effort will be exerted in managing the
relationship. 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 Introduction
distract their opposition and disapproval.
That is, information is disclosed for strategic reasons, rather than on the basis
of any perceived responsibilities. Managers have an incentive to disclose
information about their various programs and initiatives to particular
(powerful) stakeholder groups to indicate that they are conforming to the
stakeholders' expectations. In this regard, Neu et al. (1998) found support for 295
the view that particular stakeholder groups can be more effective than others in
demanding social responsibility disclosures. They found that particular
companies were more responsive to the demands or concerns of financial
stakeholders and government regulators (stakeholders deemed to be powerful)
rather than to the concerns of environmentalists. Similar results were reported
by Roberts (1992). Again, it is emphasised that there is much overlap between a
number of theories, such as stakeholder theory and legitimacy theory.
Proponents of legitimacy theory often talk about ``society'', and compliance
with the expectations of society (as embodied within the social contract).
However, this provides poor resolution given that society is clearly made up of
various groups having unequal power or ability to influence the activities of
other groups. Stakeholder theory explicitly accepts that different groups have
different views about how organisations should conduct their operations, and
have different abilities to affect an organisation. When researchers such as
Lindblom (1994), who embrace legitimacy theory, discuss the concerns of
``relevant publics'' they are changing the focus from ``society'' towards
particular groups therein, and indeed are borrowing insights from stakeholder
theory (even though this might not be explicitly acknowledged). The insights
provided by stakeholder theory help in identifying what groups might be
relevant to particular management decisions, and perhaps, which expectations
the organisation has to pay more attention to conforming with (arguably,
organisations are subject to a number of social contracts). Whilst the balance of
this paper, as well as the papers that follow in this special issue of AAAJ
(Deegan et al., 2002; O'Donovan, 2002; Milne and Patten, 2002; O'Dwyer, 2002),
will consider legitimacy theory, it seems important to remember the links
legitimacy has with other theories, such as stakeholder theory, and the benefits
that can accrue from trying to see a particular occurrence through more than
one view (theory) of the world.
Returning to the idea of a ``social contract'', which is central to the notion of
organisational legitimacy, it is worth noting that the theoretical construct of the
social contract is not new, having been discussed by philosophers such as
Thomas Hobbes (1588-1679); John Locke (1632-1704); Jean-Jacques Rousseau
(1712-1778). However, it is only recently that this concept, which was used in
philosophy and politics literatures, has been embraced within accounting
research. Shocker and Sethi (1973, p. 67) provide a good (and often cited)
overview of the concept of a social contract:
Any social institution and business is no exception operates in society via a social
contract, expressed or implied, whereby its survival and growth are based on:
AAAJ (1) the delivery of some socially desirable ends to society in general, and
15,3 (2) the distribution of economic, social, or political benefits to groups from which it derives its
power.
In a dynamic society, neither the sources of institutional power nor the needs for its services
are permanent. Therefore, an institution must constantly meet the twin tests of legitimacy
and relevance by demonstrating that society requires its services and that the groups
296 benefiting from its rewards have society's approval.

An organisation might not be perceived as legitimate for several reasons.

Perhaps community expectations have changed with the implication that what
was once acceptable corporate behaviour is no longer deemed acceptable. That
is, legitimacy itself is a dynamic concept (Lindblom, 1994). Or, perhaps
particular events have occurred which have detrimentally impacted the
reputation or legitimacy of the organisation, or the industry to which it relates
(Patten, 1992) such as major adverse social or environmental events that are
linked to the operations of the organisation. Again, it must be emphasised that
how or whether management reacts to perceived legitimacy gaps (perhaps
through corporate disclosures) is based on their perceptions of how society
views the organisation in terms of whether what is being done is acceptable
that is whether there is perceived to be a legitimacy gap in the first place.
Confronted with the same facts, not all managers might perceive a legitimacy
gap and related threat[12].
Where managers perceive that the organisation's operations are not
commensurate with the ``social contract'' then, pursuant to legitimacy theory,
remedial strategies are predicted. Because the theory is based on perceptions,
any remedial strategies implemented by the manager, to have any effect on
external parties, must be accompanied by disclosure. That is, information is
necessary to change perceptions. Remedial action which is not publicised will
not be effective in changing perceptions (Cormier and Gordon, 2001). This
perspective, as provided by legitimacy theory, highlights the strategic
importance (and power) of corporate disclosures, such as those made within
annual reports and other publicly released documents.
In considering organisational strategies for maintaining or creating
congruence between the social values implied by an organisation's operations,
and the values embraced by society, two particular papers have been regularly
quoted within the literature, these being Dowling and Pfeffer (1975) and
Lindblom (1994). Dowling and Pfeffer (1975, p. 127) outline the means by which
an organisation, when faced with legitimacy threats, may legitimate its activities:
. the organisation can adapt its output, goals and methods of operation to
conform to prevailing definitions of legitimacy;
. the organisation can attempt, through communication, to alter the
definition of social legitimacy so that it conforms to the organisation's
present practices, output and values; and
 . the organisation can attempt through communication to become Introduction
identified with symbols, values or institutions which have a strong base
of legitimacy.
Consistent with Dowling and Pfeffer's strategy of ``communication'', Lindblom
(1994) proposes that if an organisation perceives that its legitimacy is in
question it can also adopt a number of strategies all of which will rely on the
use of external disclosures. Lindblom (1994) identifies four courses of action
297
(there is some overlap with Dowling and Pfeffer) that an organisation can take
to obtain, or maintain legitimacy. The organisation can seek to:
(1) educate and inform its ``relevant publics'' about (actual) changes in the
organisation's performance and activities;
(2) change the perceptions of the ``relevant publics'' but not change its
actual behaviour;
(3) manipulate perception by deflecting attention from the issue of concern
to other related issues through an appeal to, for example, emotive
symbols; or
(4) change external expectations of its performance[13].
According to Lindblom and Dowling and Pfeffer, the public disclosure of
information in such places as annual reports can be employed by an
organisation to implement each of the above strategies. For example, a firm
may provide information to counter or offset negative news which may be
publicly available through the news media, or it may simply provide
information to inform the interested parties about attributes of the organisation
that were previously unknown. In addition, organisations may draw attention
to strengths, for instance environmental awards won, or safety initiatives that
have been implemented, while sometimes neglecting, or down-playing,
information concerning negative implications of their activities, such as
pollution or workplace accidents.
There have been a number of studies in the SEA area which have embraced
legitimacy theory. One early and very influential paper was Guthrie and Parker
(1989). Guthrie and Parker sought to match the disclosure practices of BHP Ltd
(BHP Ltd is a large Australian company and has subsequently become BHP
Billiton) across the period 1885-1985 with a historical account of major events
relating to BHP Ltd. The argument was that if corporate disclosure policies are
reactive to major social and environmental events, then there should be
correspondence between peaks of disclosure, and events which are significant
in BHP Ltd's history. Whilst this paper did not provide evidence supportive of
legitimacy theory (perhaps due to data limitations, as Deegan et al. (2002)
explain) a large number of subsequent research studies have used and refined
their arguments. The result has been that, more often than not, corporate social
and environmental disclosure strategies have been linked to legitimising
intentions. This subsequent research includes Patten (1992, 1995), Gray et al.
(1995a), Deegan and Rankin (1996), Deegan and Gordon (1996), Walden and
AAAJ Shwartz (1997), Brown and Deegan (1998), O'Donovan (1999), Deegan et al.
15,3 (2000) and Deegan et al. (2002).
Although there is mounting evidence that managers adopt legitimising
strategies, we can perhaps reflect upon whether this is actually a ``useful''
insight? Such results provide a view that information might only be released by
an organisation when suspicions or concerns are aroused. This is not consistent
298 with a view (or perhaps a hope?) that managers disclose information for
accountability reasons because people have a right-to-know about aspects of
the organisation's operations. The implication of such findings is that if
disclosures are successful in allaying community fears, as seems to be the
intent of managers, then these legitimising strategies may enable
organisations, that negatively contribute to various groups within society, to
continue operations. Social progress could be hindered by such legitimising
strategies (Puxty, 1991). The view that managers will only provide disclosures
when people have concerns which threaten legitimacy also has implications for
regulation. Arguably, disclosure decisions should not be responsive to
perceived legitimacy threats but should be based on beliefs about what
managers are considered to be accountable for, and what people need to know
about (which of course are difficult issues in themselves). What the weight of
the literature on disclosure motivations should do, is provide sufficient
evidence to regulators that leaving it to managers to disclose information
cannot be expected to lead to the provision of unbiased information.
As a theory that is based on managers' perceptions of social contracts (and
these perceptions will differ between managers), and potential breaches thereof,
legitimacy theory does suffer resultant problems in relation to precision of
prediction. Further, even if managers were to agree on whether there was a
legitimacy threat, conceivably different managers will adopt different
legitimising strategies from the array of possibilities that would be available
and again, any prediction would be problematic. However, whether the
inability to provide precise predictions of managerial behaviour should render
a theory deficient is far from clear. Whatever the case, legitimacy theory does
arguably provide useful insights into the managerial decision-making
processes.
While legitimacy theory might provide useful insights, it can still be
considered to be an under-developed theory. There are many ``gaps'' in the
literature which embraces legitimacy theory. For example, do legitimising
activities actually work, and if so, which forms of disclosure media are more
successful in changing community views about an organisation (see the
following paper by Milne and Patten, 2002)? Further, there is still a general lack
of knowledge about whether particular groups in society are relatively more
influenced by legitimising disclosures than others, or indeed, whether
managers think particular groups are more readily influenced than others.
Also, how do managers most effectively become aware of community concerns
and therefore, the terms of the ``social contract''? How do managers determine
which segments of society (perhaps referred to as ``conferring publics''
(O'Donovan, 2002, or ``relevant publics'' (Lindblom 1994)) are conferring the Introduction
much-needed legitimacy? While such limitations, as mentioned above, are
inherent within the literature it is hoped that new research, such as that which
is detailed in the papers that follow, will contribute to the ongoing
understanding of managers' reporting decisions.

6. The contribution of the other papers in this edition of 299

Accounting, Auditing & Accountability Journal
The four papers to follow embrace legitimacy theory as the basis of their
examination of the motivations for corporate managers to make social and
environmental disclosures. Arguably, each of the papers provides valuable
contributions to the development of theory. The first paper by Deegan et al.
(2002) relates to a study of the disclosure practices of BHP Ltd. This is a fairly
conventional style of paper as it relies on the use of publicly available
(secondary) data. The results of the study by Deegan et al. support legitimacy
theory. Whereas the paper by Deegan et al. relies on publicly available data,
and infers motivations therefrom, the other three papers directly rely on
insights provided by either corporate managers, or recipients of corporate
disclosures. These three papers are important in that they signal a more
sophisticated approach to testing corporate motivations, and an acceptance
that ``conversations'' with managers and report users can provide very
important insights into their behaviour. The direct questioning of managers for
the purposes of testing legitimacy theory had previously only been undertaken
by a limited number of researchers (for example, Buhr, 1998; O'Donovan, 1999).
The second and third papers by O'Donovan (2002), Milne and Patten (2002)
generate findings that are generally supportive of legitimacy theory in
explaining annual report disclosure practices. The final paper by O'Dwyer
(2002) provides results which tend to question the explanatory ability of
legitimacy theory. We will now consider each of the papers in slightly more
depth to identify some specific contributions to the literature.
Deegan et al. (2002) investigate the social and environmental disclosure
policies of BHP for the years 1983-1997. This paper represents an extension of
Guthrie and Parker (1989) a paper which, as previously stated, was a very
valuable contribution to the accounting literature, but one which failed to
provide general support for legitimacy theory (perhaps due to some limitations
in the data used, as Deegan et al. suggest). Deegan et al. (2000) investigate
whether the extent of community concern pertaining to particular issues
associated with BHP Ltd's operations in turn elicits particular disclosure
reactions from the company. The measure of ``community concern'' used by
Deegan et al. is based on the extent of media attention devoted to particular
issues. In doing so, they rely upon the insights provided by Media Agenda
Setting Theory, a theory that was first brought into the accounting literature
by Brown and Deegan (1998), and which has been cited in a number of
subsequent accounting studies[14].
AAAJ The Deegan et al. (2002) contribution represents a refinement of the methods
15,3 applied in Brown and Deegan (1998) as they specifically investigate the extent
of media attention directed to specific social and environmental issues relating
to BHP and how BHP's annual report disclosures, pertaining to these particular
events, appear to respond. Specifically, the underlying proposition (which is
consistent with legitimacy theory) is that changes in society concerns, reflected
300 by changes in the themes of print media articles, will be mirrored by changes in
the social and environmental themes disclosed, and by the extent of the
disclosure being made. Supportive of legitimacy theory, the findings show that
those issues that attracted the largest amount of media attention were also
those issues which were associated with the greatest amount of annual report
disclosures. These results lend support to legitimation motives for a company's
social disclosures and also support O'Donovan's (1999) conclusions that
managers make annual report disclosures in response to media coverage.
Deegan et al. (2000) therefore highlight the potential power of the media in
influencing corporate disclosure policies, and they again reinforce the dilemma
that unless community concerns are somehow aroused (perhaps as a result of
the media embracing a particular agenda) then managers may elect not to
provide information about particular aspects of their organisation's social and
environmental performance.
The next paper by O'Donovan (2002) explicitly recognises that managers'
legitimising strategies will conceivably differ depending upon whether they are
trying to gain, maintain, or repair the legitimacy of their organisation. This can
be contrasted to the many studies that simply investigate management
responses to perceived legitimacy threats. Given the lack of research into
corporate strategies for gaining and maintaining legitimacy, O'Donovan (2002)
represents a very important contribution to the literature. O'Donovan argues
that maintaining legitimacy is likely to be easier than gaining or repairing it.
Further, it is recognised that different organisations will have different ``levels''
of legitimacy to maintain, with the implication that the more an organisation
relies upon its legitimacy for commercial purposes (for example, some cosmetic
firms relative to armament manufacturers), the more vigilant the organisation
needs to be to potential legitimacy threats. In undertaking the research
O'Donovan uses six vignettes which are given to six managers from large
Australian companies. The vignettes involved hypothetical environmental
issues and events pertaining to fictitious companies, and provided different
scenarios that could be associated with either gaining, maintaining, and
repairing legitimacy. The significance of the environmental issues and events
were made to differ between the vignettes. Managers were asked how their
disclosure response would differ between the different scenarios. Supportive of
legitimacy theory, O'Donovan shows that the significance of the event impacts
whether managers will make a disclosure-related reaction. Where there is
perceived to be a minimal threat, then no disclosures would be deemed
necessary. Disclosure reactions were also found to differ depending upon
whether the action was necessary to gain, maintain, or repair legitimacy this, Introduction
arguably, is an important insight.
Whilst some existing research (including O'Donovan, 2002) concentrates on
managers' reactions to particular events, there is still very little information
about whether legitimising strategies actually change attitudes about an
organisation. The paper by Milne and Patten provides some much-needed
insights. As with O'Donovan (2002), Milne and Patten (2002) generate their own 301
data, rather than relying on secondary data sources. Specifically, Milne and
Patten report the results of an experiment in which they use 76 US practising
accountants as surrogates for investors. They ask the accountants to indicate
how they would allocate a fixed amount of investment funds across two
fictitious chemical companies. The subjects were required to consider both a
long-term and short-term investment time horizon and they were provided with
``mocked-up'' financial statements and Management Discussion and Analysis
Reports for each company. The environment section of the Management
Discussion and Analysis Report was the variable being manipulated. One
company (the ``poorer performer'') was shown to have greater exposure to US
Super-fund related requirements. All respondents received the reports of both
companies; however, half of the respondents received extra ``positive''
information from management about the poorer performer's current and future
environmental performance. The results indicated that those subjects that
received the ``legitimising disclosures'' tended, when adopting a long-term
investment horizon, to invest more in the poorly performing company than
those that did not receive the legitimising disclosures. Interestingly, the same
results did not hold when the subjects were requested to adopt a short-run
strategy. For the short-term scenario, they saw the higher risk associated with
being a poor environmental performer as being associated with potentially
higher returns, and with a short-term horizon they tended to invest relatively
more in the poorly performing company (the higher risk was associated with a
higher potential return). However, this propensity to invest more in the poorly
performing company was reduced for those subjects that received the
legitimising disclosures. These are very interesting results which, prima facie,
do suggest that legitimising disclosures can make a difference, but this
difference depends upon whether the investors adopt a long-term or short-term
decision horizon. Of course, whether these results generalise to other
stakeholders, or accountants outside of the USA (or indeed, outside of the
sample), is not something we can be sure about.
The final paper is by O'Dwyer. Following the theme of the previous two
papers, O'Dwyer (2002) also uses primary data to investigate issues associated
with legitimising disclosures. He directly seeks the perception of managers
about the motivations for corporate social disclosures within annual reports,
and whether they believe social disclosures can be successful as a legitimation
strategy. Specifically, in-depth interviews are held with 29 senior executives
from 27 Irish companies operating across six industries. He also explicitly
investigates reasons for absences of disclosure. The interviewees provide a
AAAJ view that Irish companies are the subject of ``major'' social pressures with
15,3 pressures particularly coming from local communities, environmental pressure
groups, and the print media. The managers also indicated that as a result of
many recent Irish corporate misdemeanours, society was generally sceptical of
managerial actions. There was a general acceptance that social pressures
generated a need for the companies to be responsive, with managers in
302 environmentally sensitive sectors indicating that their annual report
disclosures did tend to be reactive and tied to a desire to repair legitimacy.
Further investigation, however, indicated that many of these companies
provided minimal disclosures. A general perception is provided that in Ireland,
legitimising disclosures are unlikely to succeed and could be
counterproductive. There is a view that Irish people tended not to emphasise
positive achievements or actions (it was not ``the done thing''), and that such
disclosures could heighten suspicions about a company, and increase demands
about their performance. Managers also expressed a view that reacting to
particular social and environmental concerns, through corporate disclosures,
could act to make the concerns legitimate. Avoiding reporting could actually
assist in making issues ``go away''. O'Dwyer therefore does not challenge that
companies see the need for legitimising their organisation at different times,
but his results suggest that, at least in the Irish context, the use of corporate
social disclosures within the annual report would not be used as part of a
portfolio of legitimising strategies. Indeed some organisations that did use the
annual report for such purposes have ceased to use it because of its perceived
futility in acting as a ``legitimation vehicle''. Whether these results are Ireland-
specific are not clear. Certainly they seem to differ from the insights provided
by O'Donovan (2002) and Milne and Patten (2002). This raises the point that
legitimisation strategies, if employed, may vary between countries and broad
comments made about how managers react to particular events may need to
explicitly consider national, historical and cultural contexts.

7. Concluding comments
As this paper demonstrates, there is a growing interest in researching various
social and environmental accounting issues. Such interest has particularly
grown since the latter half of the 1990s. One particular issue that has attracted
a deal of research attention is the social and environmental reporting practices
of corporate entities. As long as such disclosures remain predominantly of a
voluntary nature then accounting academics will undoubtedly continue efforts
to understand the motivations for reporting. As was indicated in this paper,
there can be many motivations driving managers to externally report
information about an organisation's social and environmental performance.
One such motivation might be the desire to legitimise certain aspects of an
organisation's operations.
Legitimacy theory, the theoretical basis of the four following papers,
provides a foundation for understanding how and why managers might use
externally-focused reports to benefit an organisation. While legitimacy theory,
as it is currently applied, might still be considered to be in need of further Introduction
refinement, papers such as those that follow will hopefully help other
researchers to further develop theory to explain corporate social and
environmental reporting practices.

Notes
1. In writing this article there was no intention to evaluate the various reporting practices 303
being adopted by particular organisations or industries, although this is obviously a
worthy and needed area for research and commentary. Nevertheless, it should be noted
that current practices often attract criticism from various scholars within the academic
community.
2. For one view about the role of accounting in providing social and environmental
information to demonstrate accountability see the ``accountability model'' discussed by
Gray et al. (1996).
3. There have also been critical appraisals of the works of the ``critical theorists'', typically
because of the perception that their work generally lacks any prescriptive content
(Mathews, 1997).
4. See the organisations' Web sites for details of the guidance documents being released. The Web
sites, respectively, are: www.globalreporting.org; www.accountability.org.uk; www.wbcsd.ch
and www.cepaa.org.
5. Some of the following discussion about legitimacy theory is based on material provided in
Deegan (2000).
6. A systems-based perspective can be contrasted with other theoretical perspectives which
tend to be more ``closed'' in orientation. For example, Positive Accounting Theory (Watts
and Zimmerman, 1986) typically considers the relationships between only three groups,
managers (agents), owners (principals), and debt holders, and generally ignores other
stakeholder groups.
7. The notion of a social contract which comprises various societal norms and expectations
also is of direct relevance to other theoretical perspectives, such as institutional theory,
political economy theory, and stakeholder theory. See Mathews (1993), Gray et al. (1996),
and Deegan (2000) for an overview of these theories. There is much overlap between these
theories.
8. As such, legitimacy is not necessarily defined or inferred by legality. The legal
institutionalisation of corporations proscribes only narrow accountabilities and limited
responsibilities (Warren, 1999). While the law reinforces changes in social values it does
not necessarily create them.
9. As the discussion demonstrates, and as previously noted, there is much overlap between a
number of theories used to explain corporate strategies and to treat any of the theories as
discrete would be rather nave.
10. In research which considers motivations for collaborations between environmental groups
and Australian building and construction companies, Fiedler and Deegan (2002) found that
one key motivating factor, from the perspective of managers from the construction
companies, was the benefits from being associated with an environmental group. This was
because of the perceived legitimacy of such groups.
11. At this point it is worth noting that, with the exception of a very limited number of papers
such as Ness and Mirza (1991), advocates of Positive Accounting Theory (see Watts and
Zimmerman, 1986) have typically not chosen to study issues associated with the manager's
choice to disclose social and environmental information. Consistent with this, it is
interesting to consider why researchers that explore social and environmental accounting
disclosure decisions a ``positive issue'', overwhelmingly reject Positive Accounting
AAAJ Theory as the basis of their arguments. Perhaps it is because early leaders in the area of
social and environmental accounting rejected Positive Accounting Theory as ``morally
15,3 bankrupt'' (Gray et al., 1996 p. 75) and this influenced subsequent researchers. Positive
Accounting Theory also tends to be a much more ``closed-systems'' approach, with its
focus on a limited subset of stakeholders, such as managers, owners and debt-holders.
Hence it would not resonate well with researchers who envisage an organisation as being
part of a broader social system. Alternatively, perhaps it is because Positive Accounting
304 Theory, with its reliance on economics-based assumptions such as ``self-interest drives all
action'' (which encourages current consumption relative to future consumption), does not
provide very much hope for any quest towards true accountability or sustainability.
12. The ``legitimacy gap'' refers to the difference between the ``relevant publics'' expectations
relating to how an organisation should act, and the perceptions of how they do act.
13. Whilst a somewhat tangential issue, it is interesting to note that Lindblom (1994) is one of
the papers that is most highly cited by researchers who are working in the paradigm
related to legitimacy theory. Yet, there is no evidence of this conference paper ultimately
being published in an academic journal. This is quite unusual for such a highly cited
paper.
14. Media agenda setting theory has been a dominant theory in the mass-communication
literature since the 1970s.

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Further reading
Deegan, C. and Rankin, M. (1999), ``The environmental reporting expectations gap: Australian
evidence'', British Accounting Review, Vol. 31 No. 3, pp. 313-46.
Ditz, D., Ranganathan, J. and Banks, R.D. (1995), Green Ledgers: Case studies in Environmental
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York Times Magazine, 13 September, pp. 122-6.
Gray, R.H. and Bebbington, K.J. (2000), ``Environmental accounting, managerialism and
sustainability: is the planet safe in the hands of business and accounting?'', Advances in
Environmental Accounting and Management, Vol. 1 No. 1, pp. 1-44.
Hackston, D. and Milne, M. (1996), ``Some determinants of social and environmental disclosures
in New Zealand'', Accounting Auditing & Accountability Journal, Vol. 9 No. 1, pp. 77-108.
Hurst, J.W. (1970), The Legitimacy of the Business Corporation in the Law of the United States
1780-1970, The University Press of Virginia, Charlottesville, VI.
Institute of Chartered Accountants in England and Wales (1975), The Corporate Report, ICAEW,
London.
Jaggi, B. and Zhao, R. (1996), ``Environmental performance and reporting perceptions of managers Introduction
and accounting professionals in Hong Kong'', International Journal of Accounting, Vol. 31
No. 3, pp. 333-46.
Lewis, L., Humphrey, C. and Owen, D. (1992), ``Accounting and the social: a pedagogic perspective'',
British Accounting Review, Vol. 24 No. 3, pp. 219-33.
Medawar, C. (1978), The Social Audit Consumer Handbook, Macmillan Press, London.
Owen, D.L. and Gray, R.H. (1994), ``Environmental reporting awards: profession fails to rise to the 311
challenge'', Certified Accountant, April, pp. 44-8.
Social Audit Ltd (1973-1976), Social Audit Quarterly.
Spicer, B.H. (1978), ``Investors, corporate social performance and information disclosure'', The
Accounting Review, Vol. 53 No. 1, pp. 94-111.
(About the Guest Editor: Craig Deegan is based in the School of Accounting and Law at RMIT
University, Melbourne, Australia, where he is Professor of Financial Accounting. His consulting,
research and teaching areas include financial accounting, financial accounting theory, research
methods, and social and environmental accounting and accountability. He consults regularly
with corporations, government and industry on various social and environmental accountability
issues and is Chairperson of the Institute of Chartered Accountants in Australia Triple Bottom
Line Issues Group).