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.

Introduction: The legitimising effect of social and environmental disclosures – a theoretical foundation

The impact of culture and governance on corporate social reporting

Much of the extant research into why companies disclose environmental information in the annual report indicates that legitimacy theory is one of the more probable explanations for the increase in environmental disclosures since the early 1980s. Legitimacy theory is based on the idea that in order to continue operating successfully, corporations must act within the bounds of what society identifies as socially acceptable behaviour. The purpose of the practical research undertaken and reported in this paper is to extend the applicability and predictive power of legitimacy theory by investigating to what extent annual report disclosures are interrelated to: attempts to gain, maintain and repair legitimacy; and the choice of specific legitimation tactics. The quasi‐experimental method adopted utilised semi‐structured interviews with senior personnel from three large Australian public companies. The findings indicated support for legitimacy theory as an explanatory factor for environmental disclosures. Moreover, findings about the likelihood of specific micro‐legitimation tactics being used in response to legitimacy threatening environmental issues/events, and dependent on whether the purpose of the response is designed to gain, maintain or repair legitimacy, are reported.

Environmental disclosures in the annual report: Extending the applicability and predictive power of legitimacy theory

This study examines the social and environmental disclosures of BHP Ltd (one of the largest Australian companies) from 1983 to 1997 to ascertain the extent and type of annual report social and environmental disclosures over the period, and whether such disclosures can be explained by the concepts of a social contract and legitimacy theory. This research is also motivated by the opportunity to compare and contrast results with those of Guthrie and Parker, in whose study the social and environmental disclosures made by BHP Ltd were also the focus of analysis. In testing the relationship between community concern for particular social and environmental issues (as measured by the extent of media attention), and BHP’s annual report disclosures on the same issues, significant positive correlations were obtained for the general themes of environment and human resources as well as for various sub‐issues within these, and other, themes. Additional testing also supported the view that management release positive social and environmental information in response to unfavourable media attention. Such results lend support to legitimation motives for a company’s social and environmental disclosures. A trend in providing greater social and environmental information in the annual report of BHP in recent years, and its variable pattern, was also evidenced.

An examination of the corporate social and environmental disclosures of BHP from 1983‐1997: A test of legitimacy theory

Critics of SRI have said little about the integrity of corporate representations resulting in screening inclusion or exclusion. This is surprising given social and environmental accounting research that finds corporate posturing and deception in the absence of external verification, and a parallel body of literature describing corporate "greenwashing" and other forms of corporate disinformation. In this paper I argue that the problems and challenges of ensuring fair and accurate corporate social reporting mirror those accompanying corporate compliance with law. Similarities and points of convergence between social reporting and corporate compliance are discussed, along with proposals for reform.

Social Accountability and Corporate Greenwashing

Environmental Disclosures in the Annual Report: Extending the Applicability and Predictive Power of Legitimacy Theory

During the last fifteen years, corporations have increased the amount of information being disclosed in the corporate annual report. Research why this increase has occurred has spawned a number of theories embracing the increasing social and environmental responsibilities of business. One such theory is legitimacy theory. This theory is based on the idea that in order to continue operating successfully, corporations must act within the bounds of what society identifies as socially acceptable behaviour. If a corporation acts outside these bounds, its future profitability and existence could be threatened. Proponents of this theory argue that a corporation can (and does) legitimise itself in the eyes of the public by voluntarily disclosing information about its social activities in the corporate annual report. The main aim of the exploratory research reported in this paper was to discover to what extent legitimacy theory may explain the presence of environmental disclosures in the annual report. In a departure from content analysis methods used in prior research on environmental disclosures and legitimacy theory, a case study approach using semi–structured interviews with senior corporate personnel from three large public corporations identified as operating in environmentally sensitive industries, was adopted. Results suggest that corporations in the study will increase environmental disclosures if a need to defend or justify negative environmental activities with which the company or industry has been associated with had been identified. The incentive to disclose increased if these environmental activities had been brought to public notice via mainstream media. Management also views that the inclusion of environmental information in the annual report may help the corporation shape public opinion. These findings are consistent with the broad thrust of legitimacy theory.

Managing legitimacy through increased corporate environmental reporting: an exploratory study

The development of best practice recommendations by the Corporate Governance Council (CGC) of the Australian Stock Exchange in 2003 clearly linked corporate regulators' concerns about good governance to the concept of corporate social and environmental responsibility. The CGC recommended that one way to demonstrate good governance was to use the annual report to disclose information to all legitimate stakeholders. This paper reports on the quantity and categories of environmental information disclosed in the corporate annual reports of 41 Australian companies across eight industry groups covering the period 1983–2003. This time period has seen the importance of good corporate governance practice in relation to environmental protection escalate, as demonstrated by the introduction of separate environmental and sustainability reports, the advent of triple bottom line reporting, changes in environmental legislation and the occurrence of major environmental incidents. The results of this study indicate that an increasing number of companies are disclosing environmental information, and the relative volume of such information in annual reports is increasing across all categories.

https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=1017400

Gary O'Donovan

Papers

Environmental disclosures in the annual report: Extending the applicability and predictive power of legitimacy theory

Environmental Disclosures in the Annual Report: Extending the Applicability and Predictive Power of Legitimacy Theory

Managing legitimacy through increased corporate environmental reporting: an exploratory study

Corporate Governance and Environmental Reporting: an Australian study

The Accountants' Perspective on Sustainable Business Practices in SMEs