ACT301 Week 7 Tutorial

Chapter 8: Unregulated corporate reporting decisions

—considerations of systems-oriented theories

8.1 A ‘social contract’ is a theoretical contract between one party, perhaps a

company, and society. It is not written, but is implied. The social contract (or as
it is sometimes called, the community license to operate) incorporates
community norms and expectations about how an organisation should conduct
its operations (including what information it produces). As community norms
and expectations are expected to change across time, the ‘terms’ of the social
contract are also expected to change across time.

Different people will have different perceptions about what the terms of the
social contract are and hence, they will have different expectations about how an
organisation should operate and the extent of accountability that is due. One can
certainly not say with any precision what the terms of the contract are at a
particular point in time.

In linking the notion of a social contract with the concept of organisational

legitimacy, it is argued that for an organisation to be legitimate it must conform
to the expectations of the community in which it operates. According to
Lindblom (1993) an organisation is legitimate when its value system is
perceived as being congruent with the value system of the larger social system of
which the entity is a part. To be legitimate the organisation must conform to the
terms of the social contract. Failure to comply with these terms will bring the
legitimacy of the organisation into doubt and this in turn is expected to have
implications for the ongoing survival of the organisation.

As the chapter indicates, Shocker and Sethi (1974, p.67) provide a good
overview of the concept of a social contract. They state:

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:
(1) the delivery of some socially desirable ends to society in general, and

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 (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 benefiting from its rewards have
society’s approval.

As an additional issue, students should consider how management might actually

be able to determine the terms of the social contract.

8.2 According to Lindblom (p.2), legitimacy is:

… 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.

Within legitimacy theory, ‘legitimacy’ is considered to be a resource on which

an organisation is dependent for survival (Dowling & Pfeffer 1975, O’Donovan
2002). It is something that is conferred upon the organisation by society and it is
something that is desired or sought by the organisation. However, unlike many
other ‘resources’, it is a ‘resource’ that the organisation is considered to be able
to impact on or manipulate through various disclosure-related strategies
(Woodward et al. 1996). It is considered to be a resource because for many
organisations it is something that is necessary to the ongoing operations and
survival in much the same way as raw materials, labour or other resources would
be necessary for the organisation to continue operations.

8.17 In accordance with Gray, Owen and Adams (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, individuals and groups.

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 Systems-oriented theories have also been referred to as ‘open-systems’ theories.
Commenting on the use of open-systems theorising, Suchman (1995, p.571)
states:

Open-system theories have reconceptualised organisational boundaries as

porous and problematic … Many dynamics in the organisational
environment stem not from technological or material imperatives, but rather,
from cultural norms, symbols, beliefs and rituals. Corporate disclosure
policies are considered to represent one important means by which
management can influence external perceptions about their organisation.

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

and in turn, to have influence upon, the society in which it operates.

8.29 If we believe, consistent with Legitimacy Theory, that the successful

operation of an organisation is dependent upon it maintaining congruence with
societal expectations (that is, compliance with the ‘social contract’), then
management should be interested in the results of various community-based
attitudinal surveys to the extent that they consider the surveys are accurate
portrayals of what the community actually thinks.

Throughout the world companies started providing environmental information in

such places as the annual report around the time of the early 1990s. This time
period seemed to also tie in with the period in which environmental concerns
seemed to become a broader issue of concern for the international community. It
was also a time when membership of community-based environmental groups
started to increase (Deegan & Gordon, 1996). In more recent years community
concern has seemed to have increased in relation to issues associated with large
multinational companies using suppliers in third-world countries – whose
employees are paid unacceptable wages and are provided with unacceptable
working conditions (unacceptable often from a ‘Western’ viewpoint). Many
companies are now providing information about how they ensure that poor
conditions do not exist in relation to the manufacture of their products—a
possible response to community concerns.

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The emphasis here is that evidence suggests corporate disclosure policies seem
to change as community expectations change. Hence, if a reputable survey
indicates a change in community expectations then this in turn will have
implications for how the organisation operates and the information it elects to
disclose.