RIJS Volume 4, Issue 10 (October, 2015) ISSN:

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1 A Journal of Radix International Educational and Research Consortium RIJS RADIX INTERNATIONAL JOURNAL OF RESEARCH IN SOCIAL SCIENCE THE ORETICAL FRAMEWORK FOR CORPORATE SOCIAL REPORTING ANINDITA PRAMANIK Research Scholar Department of Commerce University of Kalyani, West Bengal India DEBANSU DAS Associate Professor Department of Commerce, University of Kalyani, West Bengal India ABSTRACT This paper has discussed theoretical framework to understand corporate motivation behind CSR reporting. The framework of CSR includes positive accounting theory, political economy theory, legitimacy theory, stakeholder theory. However, none of these theories is universally accepted. Our analysis reveals that each theory has its own rationalization for explaining corporate social reporting practices. Among these, stakeholder theory appears to offer the most satisfactory explanation. However, it is not always possible to understand CSR reporting by any single theoretical perspective. In some cases it might be necessary to use different theoretical perspectives in order to explain CSR reporting. Keywords: CSR Reporting, Positive Accounting Theory, Political Economic Theory, Legitimacy Theory, Stakeholder Theory. INTRODUCTION Different theoretical perspectives have been used in accounting literature which provide a number of valuable insights in explaining corporate social disclosure (CSD) practices. For example, Haider (2010) used political economy theory to explain the social and environmental reporting practice in the context of developing countries (cited in Ali and Rizwan, 2013). Haniffa and Cooke (2005) and Rizk et al. (2008) used legitimacy theory to explain the corporate social reporting (CSR) practices in the context of Malaysia and 1 P a g e

2 Egypt respectively. Both legitimacy and political cost theory were used by Ghazali (2007) in the context of Malaysia. Using stakeholder theory Belal (2008) examined social accounting practices in Bangladesh. A combination of different theories (namely, political economy, legitimacy, stakeholder and accountability) was used by Naser et al. (2006) in the context of Qatar. Setyorini and Ishak (2012) applied positive accounting theory to explain corporate social and environmental reporting in Indonesia. This paper deals with theoretical framework of corporate motivations behind social responsibility reporting. The purpose of this paper is to discuss and analyse some major theories in the literature of social disclosure which assist in explaining corporate social reporting practices. The rest of the paper is designed as follows. In section 2, positive accounting theory is discussed. Section 3 presents political economy theory. Legitimacy theory is dealt with in section 4 followed by a discussion of stakeholder theory in section 5. Section 6 concludes the paper. POSITIVE ACCOUNTING THEORY Positive Accounting Theory is based on the premise that all economic activities are driven by material selfinterest. The theory suggests that self-interest guides the choice of accounting methods and techniques as well as policy decisions (Setyorini and Ishak, 2012). Watts and Zimmerman (1990) identified three key hypotheses that have been frequently used to explain and predict whether an organization would support or oppose a particular accounting method (cited in Setyorini and Ishak, 2012). These hypotheses are: i) Management Compensation Hypothesis (or Bonus Plan Hypothesis), ii) Debt / Equity Hypothesis, and iii) Political Cost Hypothesis. Under Management Compensation Hypothesis, it is argued that if managers are rewarded in terms of firm performance, they will select particular accounting method which would show increased accounting profits. Banwarie (2011) indicates that more corporate social and environmental disclosure may lead to better firm performance (cited in Setyorini and Ishak, 2012) and as a consequence, the managers will disclose more social information. Under Debt / Equity hypothesis it is argued that when a firm is making a large use of debt, a monitoring problem arises between shareholders and debt holders. Hossain et al. (1994) and Raffournier (1995) argue that holders of fixed claim anticipate that shareholders and managers are likely to expropriate their claims and consequently, extensive disclosure of information may contribute to solve the problem of monitoring the activities of shareholders / managers. Roberts (1992) opined that a high degree of dependence on debt would encourage a company to increase social activities and disclose more environmental information in order to meet its creditors expectations on environmental issues. Conversely, Belkaoui and Karpik (1989) argued that firms with a high leverage usually contain strict debt covenants and for adhering 2 P a g e

3 to these covenants they have to cut their spending on CSR activities. This reduces their ability to spend resources on CSR and disclose information about CSR. They have empirically found a negative association between leverage and corporate social disclosure level in the context of USA. Under Political cost hypothesis it is argued that various economic factors give rise to political costs which influence managers on the selection of accounting method. Watts and Zimmerman (1978) argued that companies that are more sensitive to political pressures choose accounting methods, including social responsibility campaign that minimize reported earning and reduce political costs (Ghazali, 2007). Based on political cost hypothesis, Belkaoui and Karpik (1989) find a positive and significant association between social disclosure and political visibility. Blacconiere& Patten (1994) and Patten & Nance (1998) reported that companies with more extensive disclosure in the oil and gas industry did so to manage companies exposure to future regulatory costs (cited in Ghazali, 2007). However, according to Gray et al. (1995),.. economic theory in the pristine sense in which it normally is applied in accounting research has little or nothing to offer as a basis for the development of CSR. Milne (2002) also has criticized the use of positive accounting theory in social disclosure studies. In the opinion of Orij (2007), only in some specific cases Watts and Zimmerman s work can be linked with CSR, through political costs (cited in Setyorini and Ishak, 2012). POLITICAL ECONOMY THEORY Political economy theory stresses on the fundamental interrelationship between political and economic forces in society (Miller, 1994 cited in Laan, 2009). According to Gray et al. (1995) the economic domain cannot be studied in isolation from the political, social and institutional framework within which the economic takes place. Deegan and Unerman (2006) argues that by adopting a political economy theory perspective researchers can expand the level of analysis in order to consider the broader socio-political issues that may impact how a corporation operates and what information it elects to disclose (cited in Belal, 2008). Gray et al. (1995) opined that following Marx, it became necessary to distinguish between bourgeois political economy and classical political economy. According to them, Marxian political economy put emphasis on sectional (class) interest, structural inequality, conflict and the role of the state. But the bourgeois perspective of political economy ignores all these elements. Belal (2008) argues that classical political economy offers direct insights regarding mandatory social disclosures. On the other hand, the bourgeois perspective can be used successfully to explain CSR reporting practice, particularly the absence of CSR reporting (Gray et al., 1996 cited in Belal, 2008). According to Naser et al. (2006), corporate social disclosure (CSD) is seen as having the aptitude to communicate social, political and economic messages for a varied set of recipients and thus, companies tend to make voluntary CSD to reflect a positive response to social pressure and thus avoid possible regulation regarding its disclosure. Based on their empirical study in the context of Australia, UK and the USA, Guthrie and Parkar (1990) argue that disclosure of different types of social information (e.g., 3 P a g e

4 information relating to environment, energy, human resources, products, community development and others) indicates corporate intention to mediate and accommodate the interest of a pluralistic set of recipients (cited in Belal, 2008). Political economy theory also suggests that corporations may selectively fail to make disclosures which they consider to be against their self-interests (Belal, 2008). LEGITIMACY THEORY In many cases, corporate activities have some externalities having negative impact on the society. General public is now becoming increasingly aware of the adverse effects of companies operations. Moreover, as a supplier of human and natural resources, society expects that the organizations should discharge some social obligation in return of inputs supplied to them. As a result business organizations try to obtain social sanction of their activities and legitimise them by conducting some social activities. Legitimacy theory is based on the idea of social contract (Lindblom, 1994 cited in Gray et al. 1995; Guthrie and Parker, 1989; Patten, 1992). The term 'social contract' implies a contract for fulfilling the expectations of society about how an organisation should conduct its operations. Deegan et al. (2000) argues that legal requirements form the explicit terms of the contract, while community expectations constitute the implicit terms (cited in Belal, 2008). If society is not satisfied with the corporate performance, it can revoke the corporation's 'contract' to continue its operations which could have serious implications for the organization (Belal, 2008). Legitimacy theory suggests that organizations may try to legitimize their activities by making social disclosure in order to get approval from society for their continued existence and operation. Lindblom (1994) identified four legitimization strategies. Gray et al. (1995) reviewed the work of Lindblom (1994) in the following words: Lindblom then proceeds, in a carefully argued analysis, to identify four strategies which a corporation seeking legitimation may adopt. First, the organization may seek to educate and inform its relevant publics about (actual) changes in the organization s performance and activities. (This strategy is chosen in response to a recognition that the legitimacy gap arose from an actual failure of performance of the organization). Second, the organization may seek to change the perceptions of the relevant publics but not change its actual behaviour. (This strategy is chosen as a response when the organization sees that the legitimacy gap has arisen through misperceptions on the part of the relevant publics.) Third, the organization may seek to manipulate perception by deflecting attention from the issue of concern to other related issues through an appeal to, for example, emotive symbols. (This strategy is chosen on the grounds of manipulation. One illustration is when a company with a legitimacy gap regarding its pollution performance chooses to ignore the pollution and talk instead of its involvement with environmental charities, etc.) Fourth, the company may seek to change external expectations of its performance. (This strategy is chosen when the organization considers that the relevant publics have unrealistic or incorrect expectations of its responsibilities.) As Lindblom demonstrates, social disclosure can be employed in each of these strategies. 4 P a g e

5 According to legitimacy theory, to respond to the pressure and ensure survival and continuity within society, the company s management improves its communication (Mathews, 1993). The companies attempt to justify its existence in society by legitimizing its activities. They attempt to maintain its survival and continuity by voluntarily disclosing detailed information to society to prove that it is a good corporate citizen (Guthrie and Parker, 1989). Legitimacy theory is criticized on the ground that it addresses society as a whole when society is composed of different individuals or groups with unequal power. Stakeholder theory explicitly accepts that different groups within the society have different views about how organizations should conduct their operations, and have different abilities to affect an organization (Deegan, 2002, p.295 cited in Belal, 2008). STAKEHOLDER THEORY "Stakeholder theory" was first used by Ansoff (1965) in defining the objectives of the firm. Roberts (1992) opines that a major objective of the firm is to attain the ability to balance the conflicting demands of various stakeholders in the firm (cited in Belal, 2008). Stakeholder refers to the many interest groups who can affect, or be affected by, the organization's activities such as investors, employees, customers, suppliers, government, pressure groups and the wider society (Belal, 2008). There are numerous stakeholder theories which are varied in nature. In the words of Deegan and Unerman (2006, p.302): More correctly, perhaps, we can think of the term stakeholder theory as an umbrella term that actually represents a number of alternative theories that address various issues associated with relationship with stakeholders, including considerations of the rights of stakeholders, the power of stakeholders, or the effective management of the stakeholders (cited in Belal, 2008). Donaldson and Preston (1995) viewed stakeholder theories from three perspectives: normative, instrumental and descriptive/empirical (cited in Belal, 2008). The normative perspective explains how management should deal with the stakeholders. The instrumental perspective tells the outcome of the management s dealings with stakeholders. The descriptive perspective describes how management actually deals with stakeholders. Based on stakeholder theory Ullmann (1985) developed a three dimensional conceptual model to explain the relationship between economic performance, social performance and corporate social disclosure (CSD). The first dimension of the model is related to stakeholders power. It is expected that an organization would be responsive to the stakeholders demand since they control resources critical to the organization. The more critical stakeholder resources are to the success and viability of the organization, the more likely the organisation will satisfy their demands. Thus, a positive correlation can be expected between stakeholder power, social performance and social disclosure. The second dimension is the strategic posture of an organisation toward social responsibility activities. The strategic posture may be active or passive. An organization will possess an active posture when its management seeks to influence the relationship with stakeholders. In contrast, a passive posture is followed when the management is 5 P a g e

6 neither involved in continuous monitoring activities nor in developing specific programs to address stakeholders influences. Consequently, level of corporate social activity and consequential disclosure by firms possessing an active posture are expected to be greater than those by the firms with a passive posture. The third dimension of the model focuses on the economic performance of the firm. Ullmann (1985), argues that economic strength of a company influences its financial capability to perform social activities and hence, social disclosure. In his words: Economic performance determines the relative weight of a social demand and the attention it receives from top decision makers. In periods of low profitability and in the situation of high debt, economic demands will have priority over social demands (Ullmann, 1985, p.553). Roberts (1992) argues that given the level of stakeholder power and strategic posture, economically stronger firms will have a greater level of social activities and disclosure (cited in Belal, 2008). CONCLUSION The paper has discussed and analysed some theoretical explanations provided in the literature to understand corporate motivations behind CSR reporting. Our analysis reveals that each theory has its own rationalization for explaining corporate social reporting practices. Among these, stakeholder theory appears to be the most satisfactory. However, Gray et at. (1995) opines that CSR reporting is a very complex activity to be understood by any single theoretical perspective. Hence, in certain cases, it might be necessary to take insights from more than one theoretical perspective in order to explain corporate social reporting practices. REFERENCE Ali, W., & Rizwan, M. (2013). Factors influencing corporate social and environmental disclosure (CSED) practices in the developing countries: An institutional theoretical perspective. International Journal of Asian Social Science, 3(3), Ansoff, I. (1965). Corporate Strategy. New York: McGraw-Hill. Banwarie, U. R. (2011). The relationship between ownership structure and CSR disclosure. Unpublished doctoral thesis, Erasmus National University, Rotterdam, Netherland. Belal, A. H. (2008). Corporate social responsibility reporting in developing countries: The case of Bangladesh. USA: Ashgate Publishing Company. Belkaoui, A., & Karpik, P. G. (1989). Determinants of the corporate decision to disclose social information. Accounting, Auditing and Accountability Journal, 2 (1), Blacconiere, W.G., & Patten, D.M. (1994). Environmental disclosures, regulatory costs and changes in firm value. Journal of Accounting and Economics, 18(3), P a g e

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