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  • Lo 2+3 - 1: Legitimacy Theory: 1 Created by DR G. L. Ilott, Cquniversity Australia

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    Ashraf Uz Zaman
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    Legitimacy Theory asserts that organizations continually try to influence society's perceptions of them and want to be seen as legitimate. There is an implied social contract where organizations agree to meet society's expectations in exchange for legitimacy and resources from society. However, legitimacy is granted by society and can be taken away, so organizations can only seek legitimacy through disclosures and actions that influence society's views of them positively. Firms are also thought to go through phases of gaining, maintaining, and potentially losing legitimacy over time based on their relationship with society.

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    Legitimacy Theory asserts that organizations continually try to influence society's perceptions of them and want to be seen as legitimate. There is an implied social contract where organizations agree to meet society's expectations in exchange for legitimacy and resources from society. However, legitimacy is granted by society and can be taken away, so organizations can only seek legitimacy through disclosures and actions that influence society's views of them positively. Firms are also thought to go through phases of gaining, maintaining, and potentially losing legitimacy over time based on their relationship with society.

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    62 views9 pages

    Lo 2+3 - 1: Legitimacy Theory: 1 Created by DR G. L. Ilott, Cquniversity Australia

    Uploaded by

    Ashraf Uz Zaman
    Legitimacy Theory asserts that organizations continually try to influence society's perceptions of them and want to be seen as legitimate. There is an implied social contract where organizations agree to meet society's expectations in exchange for legitimacy and resources from society. However, legitimacy is granted by society and can be taken away, so organizations can only seek legitimacy through disclosures and actions that influence society's views of them positively. Firms are also thought to go through phases of gaining, maintaining, and potentially losing legitimacy over time based on their relationship with society.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
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    of 9

    LO 2+3_1: Legitimacy Theory

    1 Created by Dr G. L. Ilott, CQUniversity Australia


    Legitimacy Theory

    Legitimacy Theory asserts that organisations (businesses or


    otherwise) are continually trying to influence society's perceptions
    about them. They want society to see them as "legitimate".
    Firms can expect to run operations that generally meet society's
    expectations.

    2 Created by Dr G. L. Ilott, CQUniversity Australia


    Social Contract

    Legitimacy Theory implies that there is a social contract representing


    the norms and expectations of both businesses and society.
    Social contracts, like society itself, is difficult to pin down. Expectations
    and norms are always changing. What might have been demanded of a
    corporation a decade ago might now be frowned upon.

    3 Created by Dr G. L. Ilott, CQUniversity Australia


    The contract works (roughly) as follows:

    • The firm submits to the restrictions of society's expectations (in


    other words, they are not free to lie, cheat, and plunder the
    environment).
    • In return, society approves by granting the firm legitimacy in its
    estimations, and facilitates the flow of capital and resources to the
    firm (so society has obligations under the contract too).

    4 Created by Dr G. L. Ilott, CQUniversity Australia


    However…
    "Legitimacy" is not something the firm can acquire and build upon. It is only given
    by society, and can be taken away.

    The firm can only seek legitimacy. It therefore needs ways of "being nice" to society.

    Accounting disclosures represent one way of telling society how nice the firm is.

    Therefore, expect managers to make disclosures that might influence society and
    gain greater legitimacy.

    And the opposite is also true.

    5 Created by Dr G. L. Ilott, CQUniversity Australia


    The lifecycle of legitimacy
    Firms are thought to go through a lifecycle, or phases of legitimacy:

    1. Gaining legitimacy: Society bestows legitimacy upon a new organisation.


    Uber & AirBnB have received a degree of legitimacy in recent years.
    2. Maintaining/repairing legitimacy: Work has to be done to make up for
    mistakes. Society doesn't like you quite as much any more. This might
    explain why mining companies disclose lot of information about their
    environmental efforts.
    3. Loss/abandonment: The firm works out that it isn't worth the cost of trying
    to be the "nice guy" of society. Think Big Tobacco.
    6 Created by Dr G. L. Ilott, CQUniversity Australia
    Legitimacy ≠ Accountability

    Legitimacy is not the same as accountability. Accountability represents


    the extent that the firm's governance requires those with
    responsibilities fulfil them.
    Legitimacy is the extent to which society thinks the firm is "legitimate"
    and worth supporting.
    It may be possible for a firm to be motivated in its disclosures by needs
    for legitimacy that work against the need for accountability.

    7 Created by Dr G. L. Ilott, CQUniversity Australia


    Some problems with Legitimacy Theory

    Even though Legitimacy Theory is not specifically a theory about accounting, it


    has been criticised in the accounting literature. Broadly, the criticisms relate to:

    • The difficulty of recognising when legitimacy concerns are in play, and


    empirically measuring its affect on accounting decision-making.
    • The motivation for seeking legitimacy may involve more complex strategies
    from management than the rather simplistic view of Legitimacy Theory.
    • Legitimacy Theory may be showing us nothing more than regular risk
    management activities by management.

    8 Created by Dr G. L. Ilott, CQUniversity Australia


    My view on these criticisms

    Criticisms are important for challenging views and sharpening our own critical thinking
    processes.

    I have no doubt that Legitimacy Theory offers us interesting insights into the
    motivations of accountants and managers who decide what voluntary disclosures to
    make.

    That Legitimacy Theory doesn't play well with positive theorising does not of itself
    mean that it is a bad theory.

    And almost anything we study about financial reporting has strong links with risk
    management strategies.

    9 Created by Dr G. L. Ilott, CQUniversity Australia

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