QUESTION

Assessment details for ALL students
Assessment item 1 — Individual or Group Written Assessment
(Assignment)
Due date:
Wednesday of Week 7
Weighting:
40%
Length:
3000 words approximately

Objectives
This assessment item relates to the course learning outcomes 1, 2, 3 and 4.
This assessment task comprises two parts.
This assessment item may be completed either individually or in groups of two (2) students.  The
group mark on both assessment items will be given to both students.  Please ensure that you
include both students’ details and clearly identify that the assessment task is a group task.  A
forum will be available on Moodle for students seeking an assessment 1 group partner.

BACKGROUND
In recent years, topics relating to the environment have dominated Australian politics.  It seems
that every day, there is a new announcement, viewpoint or debate on climate change, greenhouse
gas emissions, pollution, carbon pricing, carbon tax or an emissions trading scheme.  What many
people do not see is the way that these ever-changing and ever-evolving issues impact upon what
we as accountants do see in one of the most important business documents, the annual report.  For
us, of course, the annual report contains the Directors’ Report which in turn contains mandatory
disclosures under the Corporations Act 2001 and the all-important financial statements.  As
accountants we are commonly aware of the reporting obligations a company has under the
various Acts and the presentation of financial statements.  But how much do we really know
about the remainder of the annual report?  What are the voluntary disclosures that accompany
such important disclosures as those prescribed in the Corporations Act and under Australian
Accounting Standards?  More importantly, if these “voluntary” disclosures are not required then
why do companies make them in such an important document as the annual report?
We will consider this phenomena through the lens of two political economy theories.  Legitimacy
theory and managerial stakeholder theory are said to be overlapping (Gray, Kouhy & Lavers
1995), related (Chen & Roberts 2010) and able to explain the same phenomena (Deegan 2002);
however, the explanations will be somewhat different.

PART A – Critical evaluation of information source   (12 MARKS)
Required:
Review the requirements for this assessment item carefully.  Giving due consideration to the
requirements, find and review one (1) scholarly academic journal article on Legitimacy Theory
and one (1) on Managerial Stakeholder Theory sourced from the CQUniversity Library database.
ASSESSMENT
1
Your articles should be (i) appropriate to the key requirements of the assessment item and also be
(ii) identifiable as quality sources.  To demonstrate this you must:
(i) briefly explain the suitability of your two articles for the requirements outlined in this
assessment task.  In doing so, identify the key factors you looked for in choosing the
articles for this assessment and how such factors are evident in your chosen articles.  (2
Marks)
(ii) briefly justify the appropriateness of your articles using the five standard criteria for
evaluating sources on the Library “Compass: library help online” site below (a link to this
site is also provided on the Moodle course website or you can access it by navigating
through the Library site).  You are encouraged to include a table in this part to summarise
your evaluation.           (10
Marks)
http://facultysite.cqu.edu.au/FCWViewer/view.do?page=6658
You should write approximately 800 to 1000 words in this Part.

PART B – Practical application of accounting theory   (24 MARKS)

Section (i)           (8 marks)
Write an explanation of Legitimacy Theory and Managerial Stakeholder Theory sourced, in the
most part, from the academic journal articles evaluated in Part A above (you may use additional
sources to support your discussion including your set text). Your discussion in this section should
be focussed on the key features of each theory.
You should write approximately 800 words in this section.
Section (ii)           (8 marks)
Use the Connect4 database to find, analyse and discuss the different types of voluntary social and
environmental disclosures of one (1) company from the mining or exploration industry in the
2010/11 reporting year.   You do not need to cover all of the topics your company discusses but
should focus on those dedicated to environmental and social issues.  Your analysis should include
the approximate quantity of disclosures made for each topic (approximate number of words,
sentences or paragraphs), and “nature” of the disclosures (are the disclosures mostly positive or
negative in how the company portrays its performance?).  Basic examples of your company’s
voluntary social and environmental disclosures should be included in an appendix.
You should write approximately 500 words in this section.
Section (iii)            (8 marks)
Section (iii) uses your research from Sections (i) and (ii) to explain accounting reality using
accounting theory. Use Legitimacy Theory and (then) Managerial Stakeholder Theory to
potentially explain why the company in Section (ii) provided voluntary disclosures in the annual
report.  In addressing this, you should carefully consider the differences between the two theories.
For example, legitimacy theory-based research is typically broader and tends to focus on overall
disclosures whereby stakeholder theory-based research is narrower and tends to focus on specific
types of disclosures.  For each theory you should also make a brief reference to the relevant
findings in Section (ii) to support your discussion.
You should write approximately 800 words in this section.

PRESENTATION                                                                                          (4 MARKS)
Presentation marks are assigned for the logical flow of discussion, spelling and grammar, the
inclusion of an introduction and conclusion, and the adoption of the accepted referencing style.
You are required to present this assessment task in an essay format with an introduction and
conclusion and headings to identify the various sections.  Part A (ii) of this assessment task
should be presented as an evaluation under each relevant criterion.  A table of contents is not
required.  Australian English is required.
The assessment item should be prepared using 11 point font and 1.5 line spacing.
You are required to complete the assessment checklist available on the e-course website and
attach the completed checklist to the assignment.

IMPORTANT POINTS
• The number of words is an approximate recommendation only; however, you should not vary
too much from the recommended amount.  Use your knowledge of the topic areas and the
recommended length to determine the most important points to be included in the assignment.
• Additional information regarding this assignment may be placed on the course website.
Regular access to the course website is a requirement of this course.
• You should refer to the relevant sections in the Guide for students for information on
researching a topic, writing an essay and referencing.
• Any material transcribed directly or paraphrased/sourced from the set textbook, other texts,
journals, on-line material or a colleague’s assignment, and not properly referenced, will incur
a penalty.
• Material in the assignment that bears a strong resemblance to another source and not correctly
referenced will also be penalised.  See the policies and procedures for assessment section of
this course profile for further information.

References
Chen, JC & Roberts, RW 2010, ‘Toward a more coherent understanding of the organization-
society relationship:  a theoretical consideration for social and environmental accounting
research’, Journal of Business Ethics, vol. 97, no. 4, pp. 651-665.

Deegan, C 2002, ‘The legitimising effect of social and environmental disclosures – a
theoretical foundation’, Accounting, Auditing & Accountability Journal, vol. 15, no. 3, pp.
282-311.

Gray, R, Kouhy, R & Lavers, S 1995, ‘Methodological themes: constructing a research
database of social and environmental reporting by UK companies’, Accounting, Auditing &
Accountability Journal, vol. 8, no. 2, pp. 78-101.

Assessment criteria
This assessment task is criterion-based.  A copy of the marking sheet is included for your reference.

Assessment criteria Indicators Marks
A Briefly explain why articles are
suitable in the context of the
requirements of the assessment
item
A Explain the appropriateness of
the  (2) articles using the 5
standard criteria for evaluating
sources
B(i)  Discussion of legitimacy and
stakeholder theory
Students should provide a brief explanation of the
suitability of their chosen articles with reference to the
factors they identified as important to completing the
assessment task.
Students should briefly analyse and evaluate each
article against each criterion.  Evidence of analysis
based on the “tips” for each criterion should be
included (5 marks per article).
Students should provide a description of each theory
with reference to the theory’s main points.
Information should be primarily sourced from the
journal articles identified in Part A.
B(ii)  Discussion of  disclosure
Students should provide a description of the voluntary
B(iii)  Use of legitimacy and
stakeholder theory to explain the
voluntary disclosures
(Presentation) Quality of written
presentation and logical flow of
discussion
(Presentation) Use of correct
referencing style
social and environmental disclosures, including topics,
in the annual report of the company.  Reference must
be made to the topics, quantity of disclosure and nature
of disclosure.
Students should use Legitimacy and Stakeholder
Theory as explanatory theories for the existence of the
voluntary disclosures and, where relevant, the different
types of disclosures.  Reference should also be made to
why disclosures may differ in quantity and nature.
The assignment should include an introduction and
conclusion.  Students should present logical arguments
and discussion.  The essay should be free from
grammatical and spelling errors.  Appropriate
appendices should be included.
Students should demonstrate correct application and
use of in-text referencing and a reference list.
Referencing should be styled in accordance with
Faculty guidelines.

SOLUTION

1.1 Legitimacy Theory

Legitimacy and stakeholder theory are two perspectives that have been adopted by researchers in the recent times.  The study explores the changes in disclosure of social environmental information in annual reports in the recent times. Environmental changes and changes in carbon emission norms have resulted in organizations looking inwards. Inward looking has focused attention of the legitimacy of certain business as well the disclosure of information in an organizations. Businesses today globally have to prove their legitimacy both socially and environmentally to operate in the current business environment. Moreover thefocus has shifted to an operating a socially responsible business assuming the responsibility of the society.

To ascertain the issues related with changes in the socio-economic environment to operate business and understand the legitimacy theory an analytical study “BLOWING IN THE WIND LEGITIMACY THEORY. AN ENVIRONMENTAL INCIDENT AND DISCLOSURE” by Sha May LIM of school of Accounting and Corporate governance, University of Tasmania, Australia (2006) has been chosen. The paper analyses different aspects of the legitimacy theory as well as illustrates the theory with a suitable example from the mining industry.

1.2 Stakeholder Theory

A business is a social entity with a large numbers of groups of individuals associated with it; these individuals are referred as the stakeholders of the business. According to Freeman (1984) a stakeholder can be defined an as individual or a group of individuals that are affected and affect the achievement of an organization. The organization should be able to manage the interests of all parties associated with it. To analyse and understand the stake holder theory an analytical paper “The Stakeholder Theory” (2006) by Charles Fontaine, AntoineHaarman ,Stefan Schmid has been considered. The paper defines and analyses different aspects of the stakeholder theory.

1.3 Criteria to Evaluate Resources

To evaluate the resources 5 critical criteria’s have been considered. The criterion is a 5 pint structure that can also be referred to as AAOCC namely Authority, Accuracy, Objectivity, Currency and Coverage. This criterion should be considered while evaluating the legitimacy of any resources. The above 2 articles in considerations have been evaluated based on the AOCC criterion (library.uaf.edu – accessed on 5/3/2012).

1.3.1 Authority

The article “BLOWING IN THE WIND LEGITIMACY THEORY. AN ENVIRONMENTAL INCIDENT AND DISCLOSURE” by Sha May LIM ,TrevorWilmshurst,Sonia Shimeld is a research paper and has been published by University of Tasmania. The paper can be classified as one of the commerce research paper and has been published by a credible university authority.  The authors are highly qualified researchers which automatically provide high credibility to the paper.

On the other hand the “Stakeholder theory 2006” by Charles Fontaine, Antoine Haarman , Stefan Schmid is an education research paper published in 2006 to aid educational research. The paper analyses different aspects of the stakeholder theory and analyses the importance of each group of stakeholders on the business. Further it also analyses the strategic role played by stakeholders in business by using different strategic tools.

1.3.2 Accuracy

Both the articles under considerations are highly appropriate for the purpose of study as they analyse the subject with a high degree of skill and depth. The articles have been well researched by scholarly brains behind the article. They have been ably supported by high quality bibliographic resources. Paying close attention to the bibliographic resources the articles generally have been referenced by quality journals followed by scholarly books and highly credible web resources.

1.3.3 Objectivity

The articles do not present the bias opinion of any particular author or a perspective group. On the other hand the articles closely examine every aspect of the theory before arriving at logical conclusions. For instance “The Stakeholder Theory” defines the stakeholder theory, explains the theoretical formation of the stakeholder theory, it also analyses a normative and a descriptive stakeholder theory. Thus the article no way reflects the bias of the author and is highly objective because of the extensive research undertaken by the author to produce the article.

1.3.4 Currency

Being an issue related to commerce and business is highly important for the article to be updated and reflect relevance to the current business environment. With globalization the business environment is subject to a constant change therefore it is important that the article reflect the mood of the current situation. The articles analyses key issues that have been extensively debated and considered in the past few years and are gaining more importance. These issues related to disclosure norms affected by environmental concerns .Thus the respective articles published in 2004, and 2006 reflect the current global business scenario and are highly appropriate to the subject under analysis.

1.3.5 Coverage

For the subject under study it is important that the articles reflect a wide coverage analysing different aspects of the theories “BLOWING IN THE WIND LEGITIMACY THEORY. AN ENVIRONMENTAL INCIDENT AND DISCLOSURE” covers a wide range of issues associated with the legitimacy theory. It also analyses and explains the theory with a detailed case of aAleco Corporation to enable a critical analysis of the theory. It identifies the strengths, weaknesses and the relevance of the theory in today’s business environment. Similar is the case with the “ Stakeholder Theory 2006” which  defines the stakeholder theory, explains the historical evolution  of the stakeholder theory, it also analyses a normative and a descriptive stakeholder theory. A wide range of relevant aspects are covered on both the articles .These would enable a first-rate analysis of the subject of study.

Thus it is important that the resources satisfy the AAOCC criterion to enable an unprejudiced and extensive analysis of the subject of study. It is important for the resource to be highly credible and relevant to the subject of study. Moreover an irrelevant or inappropriate resource makes the study bias and baseless. They also subject the study to a wide range of errors , thus to avoid errors it is important that both relevant and credible resources be utilised in the analysis of the subject of study.

2. Analysis Legitimacy and Stakeholder Theory

2.1 Legitimacy Theory Analysis

Legitimacy can be defined as “Legitimacy is a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of Norms, values, beliefs, and definitions” (Suchman, 1995, p. 574, emphasis in original).The  legitimacy has become the one of the most cited theories in recent times. The legitimacy theory suggests that organizations need to continuously maintain a balance between social values established by the organization and the society’s expectation of the business. The disclosures made by the organizations have been used by the corporations to fulfil the expectations of the shareholders. It is expected that firms adopt good moral conduct often a pre conceived notion of the society.

The basic principle of legitimacy theory is of the perception of the organization by the community is based the actions of the organization or on social expectations. This view is based on the management views of the stakeholder.

Schuman has identified 3 forms of legitimacy, these can be classified as

• Pragmatic Legitimacy that can be defined as the firm’s immediate response to a certain situation to gain stakeholder support.
• Moral legitimacy can be defined as the expected response of the firm to a socially sensitive situation. This can be explained with a help of an example: For instance in case a chemical factory is producing large scale toxic wastes causing high levels of water pollution in a given area causing water borne diseases among the residents . Moral legitimacy demands that the firm reduce emissions as well as treat the waste appropriately such that it does not pollute the water causing diseases. Moral legitimacy is closely linked to pragmatic legitimacy. Often a pragmatic situation may arise where the firm is expected to react morally.
• Cognitive Legitimacy can be defined as the acceptance that the organization’s actions are essential or inevitable.

Most of these forms of legitimacy are interlinked and are closely dependant on each other. The management either has to follow the legitimate norms or aim at gaining social acceptability in society. Thus legitimacy can often be looked as acceptance of the firm’s activities. Business uses large number resources of the society therefore the business becomes socially indebted to repay the society. It can be said that the business enters into a ‘social contract’ with the society. The social contract is said to exist between the organization and the society which follows the principle of the “agency theory” in economics. However in this case the society is able to actively monitor the actions of the firm ensure acceptable operations.

(Lim et al , 2004 and ,Tilling 2004)

In the recent years environmental issues have gained importance, and businesses causing environmental damage are considered unacceptable. Especially with the rise of concerns of global warming it is important that businesses establish a balanced relation with the society and operate with a high moral code of conduct in society. For example if The Bhopal Gas Tragedy(India) in 1986 causing the shutdown of the Union Carbide Factory in India as well continues to be a bone of contention as the sponsor for 2012 London Olympics among major countries. Such incidents cause the firm to adopt disclosure strategies and take responsibility for the damage caused. Thus with the increase in environmental concerns globally it is important that firms adopt appropriate disclosure strategies acceptable to society. The firm has to act with high degree of responsiveness and high moral code of conduct.

2.2 Stakeholder theory Analysis

The stakeholder can be defined as a group of individuals that affect and get affected by organizational operations. Therefore it is important for the management to ensure participation of stakeholders in the decision making process. It is important that interests of all stakeholder groups are safeguarded by the management of the firm. The stakeholders are an integral part of the decision making process of the company therefore it is important to consider them in the decision making process. Thus based on the analysis the most important stakeholder groups have been identified as

• Customers
• Employees
• Local communities
• Suppliers
• Shareholders

Keeping the above groups in mind different corporate strategy tools has been developed to understand the stakeholder interest in the business. Strategic tools like Porters five forces, which analyses the bargaining power stakeholder groups on the business. Other strategic tools like the PEST and the SWOT analysis which enable the environment analysis for the stakeholder groups. Various number of books and theories have been developed to understand stakeholder interests with the changing business environment.

The purpose of stakeholder management was to develop methods to manage different groups and relationships in a strategic fashion. According to Freeman (1984) stakeholder management, proposes that managers formulate and implement strategies that have a stake in the business. The main purpose is to manage and integrate the relationships and interests of shareholders, employees, customers, suppliers, communities and other group which guarantees the long-term success of the business. Management of stakeholder relationship is the concerned with the active management of the business environment and the integration of interests of all stakeholder groups.

There are different approaches that have been adopted to understand the stakeholder theory. The normative approach enables the understanding of the organizations responsibilities towards its shareholders. The normative theory identifies the moral dimension while evaluating stakeholder interests. Each business has to maintain a balance between managing stakeholder business and moral responsibility. Therefore it is important for the organization to clearly define moral principle and use these principles to enable decision making. The other important aspect of management of stakeholder interests is action in an ethical manner. The firm should be able to identify the ethical outcome of management of stakeholder interests and take decision keeping in mind the social effects of such a decision.

Another concept increasingly gaining importance in the stakeholder theory is the Corporate Social Responsibility. The CSR enables the recognition of the social responsibility of the business According to one of the definitions of the CSR, the CSR can be defines as a concept which integrates social and environmental interests in the operations of business and the management of stakeholder interests. Though the CSR is a voluntary concept but has become a vital part of organizational decision making.

Various researchers have identifies three main aspects associated with CSR

• Business and Ethics asserts the moral responsibility of the business on the society, each business has a moral duty and has to act in a moral manner.
• Business and Society concept emphasises the co-existence of business and society. It underlines a clear inter relationship between the two. To ensure and maintain the confidence of the society in the business it is essential that the management takes account of the interests of the society.
• The Social Management proposes management tools to improve the performance of their companies by taking in account the expectations of the society. The management has to understand the slenderness and the complexity of the relation between business and society therefore the business has to engage in active social management techniques.

Carrol has developed a CSR pyramid which enables to understand the different aspects of CSR posed to the business.

Figure 1: Carroll’s CSR pyramid

Each of the levels depends upon the satisfaction of the previous level. For instance only if the firm ensures fulfilment of their economic responsibilities towards stakeholders only then it can take up philanthropist responsibilities.

Therefore in a globalised business environment it is important to ensure efficient management of stakeholder interest and act in a socially responsible manner.

(Fontaine et al, 2006)

3. Accounting Reality of Legitimacy and Stakeholder theory

A legitimacy gap exists when corporate performance does not match the social expectations of the public or the stakeholders of the business. The organizational legitimacy implies developing of the public image which enables the alignment of the organizational goals as well as the expectations of the public. Corporate Social Disclosures (CSD) involves the creation of some accountability through a legitimacy system as well as stakeholder management. The use of the legitimacy theory has been subject to critical evaluation over the years. The Legitimacy Theory involves the creation of a public image and a consequence of this theory is the creation of legitimacy gaps when the corporate performance does not social expectations. In the CSD theory the legitimacy theory is about the perception of the management rather than the stakeholder accountability.Legitimacy theory acknowledges the conflicting power relationships situation when the information is demanded rather than demanded.

The legitimacy theory is aimed at developing boarding the scope of the legitimacy theory. The voluntary corporate disclosure is the exercise of accountability to the shareholders. Voluntary corporate social disclosure also involves the part process of legitimation which somewhat ensures accountability in the system. Disclosing information is the explanation of the managerial motivation and the aims and the goals of the management. A single theory cannot explain the complex decision making structure of the management. These decisions are a result of complex decision making process supported by a large number of corporate strategic theories.  Therefore more often it may be found that the Legitimacy theory and the stakeholder theory move hand in hand to explain managerial behaviour and the stakeholder participation.

In the case of the stakeholder theory certain basic principles can be identifies that it focusses on the impact of the business on the general people associated with the business. These people can often be identified as close partners of the business. Each of the stakeholders exercises a certain degree of bargaining power over the business. The degree of the bargaining power exercised is determined by various tools like Ansoff Matrix, Porters five forces etc. Therefore the stakeholder theory can be called the theory of strategic management. It can be said that the stakeholder theory adopts a narrow view to closely analyse the environment in which the firm conducts their operations.  However the legitimacy theory is the case of broad based expectations of the public from the firm. In corporate performance it is important firstly that the interests of the economic stakeholders groups like the customers, suppliers and shareholders are delivered by the firm. Once the economic interests have been met the firm can undertake the fulfilment various concerns of the social stakeholders as well.

The main problem associated with legitimacy is the broad based definition under consideration like social and moral legitimacy. The legitimacy may be based on a generalised perception of the certain task. Thus legitimacy has a vast scope and is perception oriented and includes managerial perception as well as public perception of the theory. It is essential to balance the gap between the managerial perceptions and public expectations.

Therefore to undertake corporate social responsibility a balance between the legitimacy and the stakeholder theory has to maintain. It can however not be ignored that the stakeholder and the legitimacy theory are closely interlinked but also have certain differences. Corporations presume the source of the request and the style of the disclosure demanded.

The firm may adopt certain voluntary disclosures as well. The corporate disclosures may be enforced by law as well as may voluntary to the firm. For instance the compliance with the corporations Act 2001 is the obligation of legal compliance of organizations with business. This is a legal disclosure that the organization has to fulfil. On the other hand voluntary disclosures are subject to managerial decision making of the firm, For instance a firm may adopt a certain green policy and may also have specific budgetary allocation in their accounts. In such a case the firm may itself decide to peruse a high moral code of conduct as well it may be a part of the Corporate Social Responsibility of the organization(Laan,2009).

The motivation to adopt disclosure techniques is subjective prerogative of each firm. The adoption of the disclosure technique is subject to a certain degree of managerial expectations and motivations. The business operates in a social environment using the vast resources of the society it is important that the business consider a interests all stakeholders and adopt disclosure norms that fulfil the expectations of the stakeholders and other parties associated with the business.

4. References

• Fontaine, Charles, AHaarman, and S Schmid. “The Stakeholder Theory.” Edlays education 1.1 (2006): 1-33. Print
• Freeman, R. Edward , Andrew C.Wicks, and BidhanParmar. “Stakeholder Theory and “The Corporate Objective Revisited”.” Organization Science 3.15 (2004): 364–369. Print.
• LIM, S, T Wilmshurst, and S Shimeld. “BLOWING IN THE WIND LEGITIMACY THEORY. AN ENVIRONMENTAL INCIDENT AND DISCLOSURE.” School of Accounting and Corporate Governance 1.1 (2004): 1-33. Print.
• derLaan, Sandra van . “The Role of Theory in Explaining Motivation for Corporate Social Disclosures: Voluntary Disclosures vs ‘Solicited’ Disclosures.” Australasian Accounting Business and Finance 3.4 (2009): 15-27. Print.
• Brink, Alexander. Corporate governance and business ethics. Dordrecht: Springer, 2011. Print.
• “Evaluating Information Resources | Elmer E. Rasmuson&BioSciences Libraries.” Elmer E. Rasmuson&BioSciences Libraries. N.p., n.d. Web. 5 Apr. 2012. <http://library.uaf.edu/ls101-evaluation>.
• V. Tilling, Matthew. “Flinders University, South Australia.” COMMERCE RESEARCH PAPER SERIES 1.1 (2004): 04-6. Print.

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