Social And Environmental Reporting And Its Role In Maintaining Or Creating Organizational Legitimacy 9781845446086, 9780861767106

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Accounting, Auditing & Accountability Journal

ISSN 0951-3574 Volume 15 Number 3 2002

Social and environmental reporting and its role in maintaining or creating organisational legitimacy Guest Editor Craig Deegan Paper format Accounting, Auditing & Accountability Journal includes five issues in traditional paper format. The contents of this issue are detailed below.

Internet Online Publishing with Archive, Active Reference Linking, Emerald WIRE, Key Readings, Non-article Content, Institution-wide Licence, E-mail Alerting Service, and Usage Statistics. Access via the Emerald Web site: http://www.emeraldinsight.com/ft See overleaf for full details of subscriber entitlements.

Access to Accounting, Auditing & Accountability Journal online ____________________________________ 278 Editorial advisory board ___________________________ 279 Abstracts and keywords ___________________________ 280 Introduction: the legitimising effect of social and environmental disclosures – a theoretical foundation Craig M. Deegan________________________________________________

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An examination of the corporate social and environmental disclosures of BHP from 1983-1997: a test of legitimacy theory Craig M. Deegan, Michaela Rankin and John Tobin ___________________

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Environmental disclosures in the annual report: extending the applicability and predictive power of legitimacy theory Gary O’Donovan ________________________________________________

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Securing organizational legitimacy: an experimental decision case examining the impact of environmental disclosures Markus J. Milne and Dennis M. Patten______________________________

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Managerial perceptions of corporate social disclosure: an Irish story Brendan O’Dwyer _______________________________________________

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CONTENTS

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EDITORIAL ADVISORY BOARD Margaret Abernethy University of Melbourne, Australia Carol Adams Monash University, Gippsland Campus, Australia Shahid Ansari California State University – Northridge, USA Ed Arrington University of North Carolina at Greensboro, USA Jan Bebbington University of Aberdeen, Scotland Niamh Brennan University College Dublin, Ireland Jane Broadbent Royal Holloway, University of London, UK Garry Carnegie Deakin University, Australia Chung Lai Hong Nanyang Technological University, Singapore David Cooper University of Alberta, Canada Craig Deegan RMIT University, Australia Mahmoud Ezzamel Cardiff University, UK Richard Fleischman John Carroll University, USA Tim Fogarty Case Western Reserve University, USA Warwick Funnell University of Wollongong, Australia Sonja Gallhofer Glasgow Caledonian University, Scotland Robert Gray University of Glasgow, Scotland Theresa Hammond Boston College, USA Jim Haslam Heriot Watt University, Scotland Trevor Hopper University of Manchester, UK Keith Hoskin University of Warwick, UK Christopher Humphrey University of Manchester, UK Linda Kirkham University of Manchester, UK

Katsuhiko Kokubu Kobe University, Japan Irvine Lapsley University of Edinburgh, Scotland Stewart Lawrence University of Waikato, New Zealand Tom Lee Edinburgh, Scotland Cheryl Lehman Hofstra University, USA Sue Llewellyn University of Edinburgh, Scotland Reg Mathews Charles Sturt University, Australia Kenneth Merchant University of Southern California, USA Markus Milne University of Otago, New Zealand Tom Mouck University of New Mexico, USA Christopher Napier University of Southampton, UK David Otley Lancaster University, UK David Owen Sheffield University Management School, UK June Pallot University of Canterbury, New Zealand Chris Poullaos University of Wollongong, Australia Vaughan Radcliffe Case Western Reserve University, USA Bob Scapens University of Manchester, UK Prem Sikka University of Essex, UK Tony Tinker City University of New York, USA Ken Trotman University of New South Wales, Australia Stuart Turley University of Manchester, UK Thomas Tyson St. John Fisher College, USA Stephen Walker University of Edinburgh, Scotland Paul Williams North Carolina State University, USA

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Accounting, Auditing & Accountability Journal, Vol. 15 No. 3, 2002, Abstracts and keywords. # MCB UP Limited, 0951-3574

Introduction: the legitimising effect of social and environmental disclosures – a theoretical foundation Craig M. Deegan Keywords Social accounting, Environmental audit, Motivation 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. An examination of the corporate social and environmental disclosures of BHP from 1983-1997: a test of legitimacy theory Craig M. Deegan, Michaela Rankin and John Tobin Disclosure, Environment, Management, Business policy, Perception, Annual reports 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 subissues 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. Environmental disclosures in the annual report: extending the applicability and predictive power of legitimacy theory Gary O’Donovan Keywords Environment, Disclosure, Case studies 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 1980’s. 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 quasiexperimental 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 r e s p o n s e t o l e gi t i m a c y th r e a t e n i n g environmental issues/events, and dependent on whether the purpose of the response is designed to gain, maintain or repair legitimacy, are reported. Securing organizational legitimacy: an experimental decision case examining the impact of environmental disclosures Markus J. Milne and Dennis M. Patten Keywords Investment, Decision making, Toxic waste, Liability, Chemical industry, Disclosure This paper explores the role that environmental disclosures might play in producing a legitimating effect on investors within the context of the chemical industry. By way of an experimental decision case it examines effects of negative, and the offsetting effects of positive, environmental disclosures surrounding chemical firms’ liabilities for toxic waste site liabilities. The paper outlines the theoretical bases for the process of organizational legitimation, and sets the decision experiment in a detailed historical analysis of the toxic waste problems of the 1970s that led to the enactment of legislation requiring clean up and imposing significant liabilities on chemical firms. The results from the decision experiment, which indicate that under some circumstances positive disclosures can restore or repair an

organization’s legitimacy, are discussed in the context of the earlier theoretical and historical analysis.

Managerial perceptions of corporate social disclosure: an Irish story Brendan O’Dwyer Keywords Social accounting, Disclosure, Corporate policy, Ireland This paper interprets managerial perceptions of corporate social disclosure (CSD) presence and absence through the lens of organisational legitimacy theory. Evidence from in-depth semi-structured interviews with 29 senior managers in 27 Irish public limited companies is presented. It is one of the few studies to use interview-based evidence in attempts to understand the motivations for CSD and responds to calls for more empirical work of this nature in the CSD literature. The paper extends and interrogates the use of legitimacy theory to infer motivations for CSD by presenting a narrative which contemplates conceptions of legitimacy as both a process and a state while endeavouring to understand the motives for CSD. In this manner, the paper furnishes a more complex, complete, and critical story of the motives for CSD. The perspectives suggest that while CSD may occasionally form part of a legitimacy process, ultimately this is misguided as it is widely perceived as being incapable of supporting the achievement of a legitimacy state. Consequently, for many managers, the continued practice of CSD is deemed somewhat perplexing. The paper reflects on the implications of these findings for future CSD research and practice.

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Introduction The legitimising effect of social and environmental disclosures – a theoretical foundation Craig Deegan School of Accounting and Law, RMIT University, Melbourne, Australia Keywords Social accounting, Environmental audit, Motivation Abstract 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.

1. Introduction This article has been written to provide an overview of a particular theoretical perspective that has been used to explain why managers might elect to publicly disclose information about particular aspects of their social or environmental performance[1]. This article also provides an introduction to the other articles in this special issue of Accounting, Auditing & Accountability Journal, and it does this by indicating where the authors’ research ‘‘resides’’ within the broader body of literature which has typically been labelled as social and environmental accounting research (SEAR). It will be shown that the four other papers in this special issue of AAAJ embrace a sub-set of the total research effort, this ‘‘sub-set’’ being research which explores the motivations behind corporate social and environmental reporting. As will be indicated, there is a deal of research that provides evidence that corporate social and environmental reporting is motivated by a desire, by management, to legitimise various aspects of their respective organisations. This might be a valued strategy for an organisation when particular events occur that are perceived by management as being detrimental to the organisation’s reputation, and Accounting, Auditing & Accountability Journal, Vol. 15 No. 3, 2002, pp. 282-311. # MCB UP Limited, 0951-3574 DOI 10.1108/09513570210435852

The author gratefully acknowledges the support provided by James Guthrie and Lee Parker in relation to compiling this special issue of AAAJ, and for their comments on this particular paper. The helpful comments provided by Reg Mathews are also acknowledged.

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perhaps, ongoing survival. Indeed, three of the following four papers provide evidence consistent with the view that public disclosure of social and environmental information, in media such as the annual report, is undertaken for legitimising purposes. Such a motivation for reporting (to legitimise the organisation’s operations) would be in contrast to a reporting approach which reflects an acceptance by managers of an accountability, or a responsibility, to disclose information to those who have a right-to-know[2]. Whether legitimising disclosures, broadly speaking, are to the benefit of the broader community is also something that we will briefly consider. This article also seeks to provide a brief overview of research trends and opportunities in the area of social and environmental accounting research. Because the area is so broad, we obviously cannot be ‘‘all-inclusive’’ in such a review. Interested readers should also review other ‘‘trends and opportunities’’ papers, such as the excellent review provided by Mathews (1997), and more recently, the review provided by Gray (2002). The balance of this paper is organised as follows. The next section, section 2, describes the broad area of social and environmental accounting research and identifies some particular areas of research that are attracting increased attention. Section 3 then discusses various research questions that might be the focus of social and environmental accounting researchers. As is demonstrated, there is a vast array of research questions which can be and have been addressed, including issues associated with explaining managers’ motivations for publicly disclosing social and environmental information – something directly relevant to the other papers in this special issue of AAAJ. Section 4, considers the issue of motivation further, and provides an overview of various motivations that could be attributed to the decision to disclose social and environmental information. The desire to legitimise an organisation’s operations is shown to be one of the many motivations considered to drive disclosure-related decisions. Section 5 investigates the legitimisation motive in more depth with particular consideration being given to legitimacy theory. Section 6 discusses the potential contribution of the other four papers in this edition of Accounting, Auditing & Accountability Journal to the development of legitimacy theory, and section 7 provides concluding comments. 2. The growth in social and environmental accounting research Research in the area which we broadly refer to as SEAR has ebbed and flowed for a number of decades. However, in recent times, there has been substantial growth in the research attention being devoted to social and environmental accounting issues. This increase in attention can be demonstrated by the number of academic researchers entering the area, and by the increased focus being applied by governments, professional accounting bodies, industry bodies, and corporations to various related issues. Arguably, it is over the last decade, and particularly since the mid-1990s, that there has been major growth in related research. What has created this growth is, in itself, an interesting issue for investigation. What must be emphasised, however, is that such

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research is not new, but the degree of attention is unlike anything in the past. Various academic research journals are now publishing numerous articles on social and environmental accounting and accountability issues. Most notably amongst these would be Accounting, Auditing & Accountability Journal, Accounting Forum, Accounting, Organizations and Society, Advances in Public Interest Accounting, Critical Perspectives on Accounting, British Accounting Review, Accounting and Business Research, Business Strategy and the Environment, Asia Pacific Journal of Accounting and Interdisciplinary Environmental Review. Journals such as Accounting, Auditing & Accountability Journal (Vol. 10 No. 4, 1997, as well as this issue), Accounting Forum (Vol. 19 Nos 2/3, 1995 and Vol. 24 No. 1, 2000 ), European Accounting Review (Vol. 9 No. 1, 2000) and Asia Pacific Journal of Accounting (Vol. 4 No. 2, 1997) have dedicated entire editions to social and environmental accounting issues. This volume of research is in contrast to what was occurring until the early 1990s, when much less research was being published in the area (and when it was being published it was typically emanating from a small number of people who had gone against the ‘‘trend’’ and embraced issues associated with social and environmental accountability). It is also worthy of note that many of the so-called ‘‘leading schools’’ in the area of accounting (and this is an interesting ‘‘tag’’ given that so many did not lead efforts in this growing field of research that was arguably of relevance and importance to the broader society, rather than simply to those parties operating within ‘‘the market-place’’) did not embrace research in areas associated with social and environmental accountabilities (and some still resist). More often than not, doctoral students were counselled to do research in conventional areas – typically based on neo-classical economics and related notions of market efficiencies (a great deal of which was emanating from ‘‘leading’’ US business schools) – areas of research which perceivably would not ‘‘stifle’’ academic promotion-prospects. This had implications for the inflow of ‘‘new talent’’. The few early advocates of social and environmental research (and early researchers within the 1970s and 1980s typically included ‘‘environment’’ within the broader term of ‘‘social’’) were arguably seen by many as quite radical at the time – something which critical theorists of today (perhaps informed by Marxian, feminist or deep-green philosophies) could find quite amusing. As Mathews (1997, p. 488) states: Those who researched non-traditional disclosures or wrote in support of socially-related disclosures were regarded as both radical and critical, because they were explicitly or implicitly criticizing the current structure of the discipline: historical financial accounting reports for shareholders and creditors. It was later that some of these writers were themselves criticized for being prepared to modify rather than replace the system within which accounting was situated.

The work of the critical theorists (as displayed in such journals as AAAJ and Critical Perspectives on Accounting), provided much needed critique and commentary on various social reporting prescriptions. They were often critical of the proponents of social and environmental accounting because the

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approaches being proposed were perceived as doing little, or nothing, to alter the way business conducted its operations (Tinker et al., 1991). In this regard, the published exchanges between Parker and Puxty in the first volume of Advances in Public Interest Accounting (1986) makes interesting reading[3]. Throughout the 1990s, research directions were changing in many research schools and ‘‘the environment’’ was becoming the major focus of researchers who were embracing the area – arguably at the expense of the ‘‘social’’ (Owen et al., 1997; Mathews, 1997). However, perhaps heeding the concerns of authors such as Owen and Mathews, the ‘‘social side’’ of research and practice has gained more prominence in recent years both at the corporate level, and with researchers. Consistent with the increased research focus, there has also been a marked increase in the number of research students studying various social and environmental accounting issues, as reflected, obviously somewhat imperfectly, by the increasing number of PhD students researching the area, and the number of people attending social and environmental accounting research doctoral colloquiums, such as those held at the Centre for Social and Environmental Accounting Research (University of Glasgow) and the recent International Congress on Social and Environmental Accounting held in Melbourne in April 2002. A number of universities (albeit still in the minority) have put in place subjects dedicated to social and environmental accounting practice and research. In the mid 1990s financial accounting theory texts also, for the first time, dedicated chapters to social and environmental accounting with one of the early examples being Mathews and Perera (1996). This practice has now been adopted within other leading accounting theory texts (for example, Deegan, 2000). Other ‘‘theory’’ books, while not strictly dedicated to accounting theory, provided much needed input into the growing debate (for example, see the important contribution made by Gray et al. (1996)). Governments, industry bodies and accounting professions have also shown a marked increase in the amount of attention being devoted to social and environmental accounting issues, particularly in the area of external reporting. Professional accounting bodies showed an early interest in social accounting, the best example of which was The Corporate Report (issued in 1975 by the Accounting Standards Steering Committee of the Institute of Chartered Accountants in England and Wales). This innovative release, which discussed and emphasised ‘‘rights’’ to information, did not, however, lead to a lot of other effort or change by accounting professions and the issue seemed to disappear from the agenda of professional accounting bodies until it was to re-emerge in the 1990s. A number of organisations, such as the Global Reporting Initiative, The Institute for Social and Ethical Accountability, World Business Council for Sustainable Development, and the Council on Economic Priorities, have recently released guidance documents that are being embraced internationally[4]. The work of these bodies perhaps indicates a trend towards taking the development of the area away from the accounting profession. In some respects, this is surprising given the expertise that accounting professionals could usefully bring to the area (Gray, 2002). Also given the

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extent of interest in various social and environmental accounting and accountability issues it would appear unlikely that the topics are likely to retreat from research agendas. Although, as Gray (2002) warns, social accounting was a ‘‘hot-topic’’ in the 1970s and early 1980s with various organisations and governments embracing this issue, yet it seemed to almost vanish from the radar for over a decade. As was the case back then, social and environmental reporting is predominantly a voluntary practice – so conceivably, in the absence of regulation, it could vanish again – but with the mass of effort dedicated to the area this time, this would appear unlikely. Because the development of social and environmental accounting and accountability practices is still in its infancy (for example, compared to the long historical practice of financial reporting), there is still much debate on various issues. For example, in relation to the external reporting side, there is a lack of consensus on key issues such as the objectives of reporting; the qualitative characteristics the information should possess; the audience of the reports; the ‘‘best’’ presentation formats, and so forth. However, this lack of consensus leads to much experimentation which in turn adds to the excitement of this rapidly developing area – an area that is full of rewarding research opportunities for those that care to be involved! 3. An overview of some of the research questions that can be pursued Within the broad area of research known as social and environmental accounting research there are many areas or issues that can be researched. In the brief discussion below we will outline a number of issues – an outline that is anything but comprehensive. However, it does help to place the other papers in this edition of Accounting, Auditing & Accountability Journal in context. Some of the various research questions that have been researched or are currently being researched include: .

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What are companies reporting? A great deal of the early research in the area, such as the studies by Ernst & Ernst throughout the 1970s, provided information about what various organisations were disclosing. Such work is still being undertaken today, with some of it focusing on international comparisons. See Teoh and Thong (1984); Andrews et al. (1989); Guthrie and Parker (1990); Harte and Owen (1991); Lynn (1992); Adams et al. (1995); Gibson and Guthrie (1995); Niskala and Pretes (1995); Deegan and Gordon (1996); Gamble et al. (1996); Choi (1999); Bell and Lehman (1999); Newson and Deegan (2002). Can social and environmental disclosure practices be linked to other attributes of performance, such as economic performance, or to factors such as industry membership, country of origin (and culture), or size? See Ingram and Frazier (1980); Trotman and Bradley (1981); Ullman (1985); Cowen et al. (1987); Fayers (1998); Newson and Deegan (2002).

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How do particular stakeholders react to social and environmental disclosures? See Ingram (1978); Buzby and Falk (1978, 1979); Anderson and Frankle (1980); Jaggi and Freedman (1982); Shane and Spicer (1983); Freedman and Jaggi (1986, 1988a, b); Epstein and Freedman (1994); Blacconiere and Patten (1994) for research about investor reaction to social and environmental disclosures. For the reactions of other stakeholder groups see Tilt (1994); Deegan and Rankin (1997). What are accountants’ attitudes to social and environmental accounting? See Bebbington et al. (1994); Deegan et al. (1996). What is the correspondence between corporate social and environmental disclosures and actual corporate performance? See Wiseman (1982); Rockness (1985). What are the roles of taxation instruments in relation to environmental protection? See Baumol (1975); Lockhart (1997); O’Riordan (1997). How is accounting education embracing the area, and what are some of the impediments to including social and environmental issues with the accounting education programs of universities and professional accounting bodies? See Blundell and Booth (1988); Gray et al. (1994); Gibson (1997); Gordon (1998); Gray and Collison (2001). How should organisations account for their social and environmental performance? Should externalities be attributed a ‘‘cost’’ for financial accounting purposes? See C.C. Abt Associates (1972); Milne (1991); USEPA (1996); Bebbington and Gray (1997); Mathews (2000). What theories best explain how we do report, or perhaps, how we should report social and environmental information? See Ramanathan (1976); Cooper and Sherer (1984); Benston (1982, 1984); Belkaoui and Karpik (1989); Mathews (1993, 2000); Gray et al. (1996); Lehman (1999); Deegan (2000). How should (and perhaps, why should) management accounting systems embrace social and environmental issues? See Stone (1995); Bennett and James (1997, 1998); Ditz et al. (1998); Parker (2000a, b). What motivates managers to make particular social and environmental disclosures? See Guthrie and Parker (1989); Patten (1992); Roberts (1992); Deegan and Gordon (1996); Deegan and Rankin (1997); Adams et al. (1998). What is the role, or scope, of social and environmental verifications, attestations, or audits (and these can all take on various forms)? See Bauer and Fenn (1973); Grojer and Stark (1977); Brooks (1980); Geddes (1991); Gray and Collison (1991); Gray et al. (1991); Zadek (1993); Gallhofer and Haslam (1995): Power (1997); Owen and Swift (1999); Ball et al. (2000); Owen et al. (2000); Gray (2002).

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Are current or proposed social and environmental reporting practices really of benefit to the broader community, or do they simply act to legitimise existing social structures which benefit some groups at the expense of others? See Puxty (1991).

As can be seen from the above list, some of the research is quite descriptive (describing what is), some is normative (describing what should be), whilst other is positive in nature (explaining what is). Some of the research is theorybuilding. When describing what is being disclosed, there has been much debate about how to measure and classify social and environmental disclosures. Ernst & Ernst (1976), and subsequently, recent papers such as Milne and Adler (1999) and Gray et al. (1995a) provide useful direction. When explaining why particular disclosures are being made, or in describing how organisations should make particular disclosures, reference is often made to a particular theoretical perspective (such as legitimacy theory, which is one of many theories that might be applied, and which is the focus of this edition of AAAJ). However, reflecting the fact that we do not have an ‘‘accepted’’ theory for social and environmental accounting, there is much variation in the theoretical perspectives being adopted. Where efforts have been made to explain social and environmental disclosure practices, recent research has tended to rely upon legitimacy theory, and to a lesser extent, stakeholder theory (with both theories having antecedents in political economy theory). At the same time, much of the critical review of social and environmental reporting practice and prescription (and indeed, critiques of the work of many researchers in the area) is informed by other theoretical perspectives, such as by the works of Marx or by the deepgreen or feminist literatures. Whether we can ever reach consensus on one theory for social and environmental accounting, or indeed whether we want to, is not something that we will pursue further in this article. In relation to recent research efforts, amongst the many areas, there appears to be a particular increasing focus being given to a type of community engagement practice, often labelled as social auditing. There has also been an increased focus towards triple bottom line reporting (Elkington, 1997) and the related notion of sustainability reporting and related verifications. This trend is reflective of Gray et al.’s (1998) view that consideration to social reporting and related accountability issues has re-emerged after a period of stagnation. The reasons for this renewal of interest could be varied. According to Gray et al. (1998, p. 303): The increasing concern with stakeholders, growing anxiety about business ethics and corporate social responsibilities and the increasing importance of ethical investment have all raised the need for new accounting and accounting methods through which organisations and their participants can address such matters. But probably the most important of all the influences has been the dawning realisation that environmental issues – especially when examined within the framework of sustainability – cannot be separated from social issues and the accompanying questions of justice, distribution, poverty, and so forth. Social accounting, in all its guises, is designed to deal exactly with these issues.

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Social audits, which can take on various forms (be they produced by management, or by independent bodies), were not an unknown occurrence with exciting experiments being conducted in the 1970s by such UK organisations as Social Audit Ltd (see Medawar, 1976). But the audits were voluntary and their incidence decreased until a resurgence in the latter half of the 1990s. At a broad level, a social audit can be defined as a process that enables an organisation to assess its performance in relation to society’s requirements and expectations (Elkington, 1997). Research into social audits is interesting, not least because of the variety of guises and motivations involved. Their use can be explained as a managerial device aimed to take various social pressures away from an organisation. For example, the international sportswear company Nike was criticised internationally for the labour practices imposed on its workforces in certain parts of Asia (in particular). As part of the response, a social audit was implemented with the assistance of the Global Alliance for Workers and Communities. If community suspicion or concern had not been demonstrated, would such a practice have been implemented? The results of the social audit are provided on Nike’s Web site. Similar arguments could be made in relation to social audits conducted by Shell, or the British lottery company, Camelot. Such social audits are linked to issues such as risk assessment and monitoring; managing key or powerful stakeholders; creating market opportunities; increasing positive brand-recognition; and resurrecting legitimacy. By contrast, social audits might also be undertaken for accountability purposes and to try to explain the various social impacts an organisation might be creating – both good and bad. They might also be issue specific, such as the implications that might follow from opening or closing a particular plant. There is much disagreement on methodologies and given the managerial benefits, there is much discussion about management capture of the social audit process (see Owen et al., 2000). What is being emphasised here is that this is an example of one area in the social and environmental accounting field where there are many unresolved issues awaiting further research. As noted above, recent times have also seen an increase in ‘‘sustainability reporting’’ which seems to have closely followed the surge in interest in triple bottom line reporting (Elkington, 1997). There is much critical discussion about whether sustainability reports are what they claim to be. Indeed, what would a ‘‘true’’ sustainability report look like? Do the reports using the ‘‘sustainability’’ label (and discussing such things as greenhouse emissions and support for indigenous communities) really report about sustainability, or have they really not progressed beyond issues of eco-efficiency? Further thought needs to go into this area. 4. Understanding managerial motivations Although we have provided a brief overview of some of the recent research directions being pursued in social and environmental accounting, it is now time to return to the theme of this issue of AAAJ. While the incidence of social audits

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and attention to triple bottom-line reporting and sustainability reporting (however defined) is increasing, the practices are still overwhelmingly voluntary. The voluntary nature of the activity leads researchers to question why it occurs. As can be seen from the many bullet-points provided earlier, researching motivations for particular voluntary actions, such as reporting social and environmental information, is only one of many areas of research in the area of social and environmental accounting. It is this issue of motivation to which this special edition of AAAJ relates and it is this issue which will now be the focus of the remainder of this paper. Of course, there could be a variety of motivations for managers to voluntarily undertake certain activities, such as deciding to report social and environmental information. Some reasons might include: . The desire to comply with legal requirements. This would not be a major motivation in a great deal of countries given the lack of requirements in relation to social and environmental disclosures and associated verifications (Deegan, 2000). . ‘‘Economic rationality’’ considerations – that is, there might be business advantages in appearing to do ‘‘the right thing’’ and this might be the key motivation rather than any acceptance of any social responsibilities of business (Friedman, 1962). . A belief in an accountability or responsibility to report – that is, there could be a view held by managers that people have a inalienable right to information that should be satisfied (Hasnas, 1998; Donaldson and Preston, 1995; Freeman and Reed, 1983) regardless of the associated costs. Unfortunately, it is unlikely that this view would be the dominant view in most business organisations operating within the capitalist system. . A desire to comply with borrowing requirements. Increasingly lending institutions are requiring, as part of their own risk management policies, borrowers to periodically provide various items of information about their social and environmental policies and performance. . To comply with community expectations, perhaps reflective of a view that compliance with the ‘‘community licence to operate’’ (or ‘‘social contract’’) is dependent upon providing certain accounts of social and environmental performance (Deegan, 2002). . As a result of certain threats to the organisation’s legitimacy. For example, reporting might be a response to negative media attention, particular environmental or social incidents, or perhaps as a result of poor rating being given by particular ratings agencies (see Deegan et al., 2000, 2002; Patten, 1992). . To manage particular (perhaps powerful) stakeholder groups (see Ullman, 1985; Roberts, 1992; Evan and Freeman, 1988; Neu et al., 1998).

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To attract investment funds. Internationally, ‘‘ethical investment funds’’ are becoming an increasing part of the capital market; for example, the Dow Jones Sustainability Group Index. People responsible for rating particular organisations for the purpose of inclusion or non-inclusion within the funds’ investment portfolio utilise information from a number of sources, including information being released by the organisations themselves. To comply with industry requirements, or particular codes of conduct. For example, within Australia the Australian Minerals Industry has a Code for Environmental Management (as do other industries, such as the Australian Electricity Industry). There are certain pressures to sign to such codes. Such codes can then have associated reporting requirements (see Deegan and Blomquist, 2001). To forestall efforts to introduce more onerous disclosure regulations. Linked to the above bullet-point, evidence shows that one of the reasons that the Australian Minerals Industry introduced its code of environmental conduct, which requires external environmental reporting, was a fear that government might take the matter further and instigate the development of regulation (Deegan and Blomquist, 2001). To win particular reporting awards. There are a number of environmental, social, and sustainability reporting awards being offered within numerous countries throughout the world, with possibly the most well-known ones being those offered by the Association of Chartered Certified Accountants. Many organisations put a great deal of effort into winning these awards, and receiving the associated positive publicity such awards generate. Winning an award might in turn have positive implications for the reputation of the company (Deegan and Carrol, 1993).

Of course, there could be several motivations simultaneously driving organisations to report social and environmental information and expecting that one motivation might dominate all others would be unrealistic. Indeed, many of the above motivations are interrelated. There could be many other motivations, other than those listed above, which would also drive the reporting decision. As indicated above, one factor that has in recent times been embraced by many researchers as motivation behind corporate social and environmental disclosures is the desire to legitimise an organisation’s operations. This view is embraced within legitimacy theory. Because the balance of the papers in this special issue of AAAJ embrace legitimacy theory as the theoretical basis of their arguments it is useful to provide an introduction and overview of legitimacy theory[5]. We will then consider how the other papers in this edition of AAAJ contribute to the research being undertaken within the area.

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5. An overview of legitimacy theory Legitimacy theory, like a number of other theories such as political economy theory and stakeholder theory, is considered to be a systems-oriented theory. According to Gray et al. (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.

Within a systems-oriented perspective, the entity is assumed to be influenced by, and in turn to have influence upon, the society in which it operates[6]. Corporate disclosure policies are considered to represent one important means by which management can influence external perceptions about their organisation. The insights provided by legitimacy theory (and stakeholder theory) build on those that emanate from another theory, known as political economy theory (see Benson, 1975). The ‘‘political economy’’ itself has been defined by Gray et al. (1996, p. 47) as ‘‘the social, political and economic framework within which human life takes place’’. Political economy theory explicitly recognises the power conflicts that exist within society and the various struggles that occur between various groups within society. The perspective embraced in political economy theory, and also legitimacy theory, is that society, politics and economics are inseparable and economic issues cannot meaningfully be investigated in the absence of considerations about the political, social and institutional framework in which the economic activity takes place. It is argued that by considering the political economy a researcher is better able to consider broader (societal) issues which impact how an organisation operates, and what information it elects to disclose. According to Guthrie and Parker (1990, p. 166): The political economy perspective perceives accounting reports as social, political, and economic documents. They serve as a tool for constructing, sustaining, and legitimising economic and political arrangements, institutions, and ideological themes which contribute to the corporation’s private interests. Disclosures have the capacity to transmit social, political, and economic meanings for a pluralistic set of report recipients.

Consistent with the view that organisations are part of a broader social system, the perspectives provided by legitimacy theory (which, as stated, build on foundations provided by political economy theory) indicate that organisations are not considered to have any inherent right to resources, or in fact, to exist. Organisations exist to the extent that the particular society considers that they are legitimate, and if this is the case, the society ‘‘confers’’ upon the organisation the ‘‘state’’ of legitimacy. This is consistent with Mathews (1993, p. 26), who states: The social contract would exist between corporations (usually limited companies) and individual members of society. Society (as a collection of individuals) provides corporations with their legal standing and attributes and the authority to own and use natural resources and to hire employees. Organisations draw on community resources and output both goods and services and waste products to the general environment. The organisation has no

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inherent rights to these benefits, and in order to allow their existence, society would expect the benefits to exceed the costs to society.

The idea of ‘‘legitimacy’’ can be directly related to the concept of a ‘‘social contract’’, as referred to above by Mathews. Legitimacy theory itself directly relies upon this concept[7]. Specifically, it is considered that an organisation’s survival will be threatened if society perceives that the organisation has breached its social contract. Where society is not satisfied that the organisation is operating in an acceptable, or legitimate, manner, then society will effectively revoke the organisation’s ‘‘contract’’ to continue its operations. This might be evidenced through, for example, consumers reducing or eliminating the demand for the products of the business, factor suppliers eliminating the supply of labour and financial capital to the business, or constituents lobbying government for increased taxes, fines or laws to prohibit those actions which do not conform with the expectations of the community. As a theoretical construct, the terms (or ‘‘clauses’’) of the social contract cannot be known with any precision, and different managers will have different perceptions about the various ‘‘terms’’ of the contract. Offering some assistance, Gray et al. (1996) suggest that legal requirements provide the explicit terms of the contract, while other non-legislated societal expectations embody the implicit terms of the contract. It is in relation to the composition of the implicit terms of the ‘‘contract’’ that we can expect managers’ perceptions to vary greatly[8]. Legitimacy itself has been defined by Lindblom (1994, p. 2) as: . . . 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.

Legitimacy is considered to be a resource on which an organisation is dependent for survival (Dowling and Pfeffer, 1975). However, it is a ‘‘resource’’ that the organisation also can impact or manipulate (Woodward et al., 2001). Consistent with resource dependence theory (see Pfeffer and Salancik, 1978), legitimacy theory would suggest that whenever managers consider that the supply of the particular resource is vital to organisational survival, then they will pursue strategies to ensure the continued supply of the resource[9]. In relation to legitimacy, such strategies may include targeted disclosures, or perhaps controlling or collaborating with other parties who in themselves are considered to be legitimate (Oliver, 1990; Fiedler and Deegan, 2002)[10]. Reflecting the overlapping nature of many theories, the notion of legitimacy is also central to institutional theory (see DiMaggio and Powell, 1983). Under this theory, organisations will change their structure or operations to conform with external expectations about what forms or structures are acceptable (legitimate). For example, because the majority of other organisations in an industry might have particular governance structures there might be ‘‘institutional’’ pressure on an organisation to also have such structures in place. That is, there is expected to be some form of movement towards conformance

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with other ‘‘established’’ organisations. Failure to undertake this process leading to congruence, which is referred to as ‘‘isomorphism’’ (DiMaggio and Powell, 1983, p. 149), has direct implications for an entity’s survival. However, in contrast to legitimacy theory, wherein there is perceived to be an ability of managers to alter perceptions of legitimacy (perhaps through disclosures), under institutional theory managers are expected to conform with ‘‘norms’’ that are largely imposed upon them. Another theory, stakeholder theory, can also provide insights which are similar to those provided by legitimacy theory (reflective of the fact that both derive from political economy theory). As Gray et al. (1995b, p. 52) state, to treat legitimacy theory and stakeholder theory as two totally distinct theories would be incorrect: It seems to us that the essential problem in the literature arises from treating each as competing theories of reporting behaviour, when ‘‘stakeholder theory’’ and ‘‘legitimacy theory’’ are better seen as two (overlapping) perspectives on the issue which are set within a framework of assumptions about ‘‘political economy’’.

Because there is a deal of overlap between a number of theories, and because the theories can provide slightly different and useful insights, there has been a move by some researchers to use more than one theory to provide an explanation for particular managerial actions (see Fiedler and Deegan, 2002) – although such a strategy would not be supported by some academics (‘‘purists’’?) who believe that a researcher must embrace just one ‘‘view’’ of the world[11]. Briefly, in relation to stakeholder theory it should be appreciated that there are actually a number of theories that have been given the broad label of stakeholder theory. This in itself creates some confusion. As Deegan (2000) explains, there is both an ethical (or normative) branch of stakeholder theory, and a managerial (or positive) branch. The ethical branch provides prescriptions in terms of how organisations should treat their stakeholders (with a variety of definitions being given to ‘‘stakeholders’’). This theoretical view emphasises the responsibilities of organisations (see Hasnas, 1998; Donaldson and Preston, 1995; Freeman and Reed, 1983). As a theory that provides prescription, it therefore does not have a direct role in predicting managerial behaviour. By contrast, the managerial branch of stakeholder theory emphasises the need to ‘‘manage’’ particular stakeholder groups – particularly those that are deemed to be ‘‘powerful’’ because of their ability to control resources that are necessary to the organisation’s operations (Ullman, 1985). As Gray et al. (1996, p. 45) state in relation to stakeholder theory (from the managerial branch): Here (under this perspective), the stakeholders are identified by the organisation of concern, by reference to the extent to which the organisation believes the interplay with each group needs to be managed in order to further the interests of the organisation. (The interests of the organisation need not be restricted to conventional profit-seeking assumptions). The more important the stakeholder to the organisation, the more effort will be exerted in managing the relationship. Information is a major element that can be employed by the organisation to

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manage (or manipulate) the stakeholder in order to gain their support and approval, or to distract their opposition and disapproval.

That is, information is disclosed for strategic reasons, rather than on the basis of any perceived responsibilities. Managers have an incentive to disclose information about their various programs and initiatives to particular (powerful) stakeholder groups to indicate that they are conforming to the stakeholders’ expectations. In this regard, Neu et al. (1998) found support for the view that particular stakeholder groups can be more effective than others in demanding social responsibility disclosures. They found that particular companies were more responsive to the demands or concerns of financial stakeholders and government regulators (stakeholders deemed to be powerful) rather than to the concerns of environmentalists. Similar results were reported by Roberts (1992). Again, it is emphasised that there is much overlap between a number of theories, such as stakeholder theory and legitimacy theory. Proponents of legitimacy theory often talk about ‘‘society’’, and compliance with the expectations of society (as embodied within the social contract). However, this provides poor resolution given that society is clearly made up of various groups having unequal power or ability to influence the activities of other groups. Stakeholder theory explicitly accepts that different groups have different views about how organisations should conduct their operations, and have different abilities to affect an organisation. When researchers such as Lindblom (1994), who embrace legitimacy theory, discuss the concerns of ‘‘relevant publics’’ they are changing the focus from ‘‘society’’ towards particular groups therein, and indeed are borrowing insights from stakeholder theory (even though this might not be explicitly acknowledged). The insights provided by stakeholder theory help in identifying what groups might be relevant to particular management decisions, and perhaps, which expectations the organisation has to pay more attention to conforming with (arguably, organisations are subject to a number of social contracts). Whilst the balance of this paper, as well as the papers that follow in this special issue of AAAJ (Deegan et al., 2002; O’Donovan, 2002; Milne and Patten, 2002; O’Dwyer, 2002), will consider legitimacy theory, it seems important to remember the links legitimacy has with other theories, such as stakeholder theory, and the benefits that can accrue from trying to see a particular occurrence through more than one view (theory) of the world. Returning to the idea of a ‘‘social contract’’, which is central to the notion of organisational legitimacy, it is worth noting that the theoretical construct of the social contract is not new, having been discussed by philosophers such as Thomas Hobbes (1588-1679); John Locke (1632-1704); Jean-Jacques Rousseau (1712-1778). However, it is only recently that this concept, which was used in philosophy and politics literatures, has been embraced within accounting research. Shocker and Sethi (1973, p. 67) provide a good (and often cited) overview of the concept of a social contract: 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:

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

An organisation might not be perceived as legitimate for several reasons. Perhaps community expectations have changed with the implication that what was once acceptable corporate behaviour is no longer deemed acceptable. That is, legitimacy itself is a dynamic concept (Lindblom, 1994). Or, perhaps particular events have occurred which have detrimentally impacted the reputation or legitimacy of the organisation, or the industry to which it relates (Patten, 1992) – such as major adverse social or environmental events that are linked to the operations of the organisation. Again, it must be emphasised that how or whether management reacts to perceived legitimacy gaps (perhaps through corporate disclosures) is based on their perceptions of how society views the organisation in terms of whether what is being done is acceptable – that is whether there is perceived to be a legitimacy gap in the first place. Confronted with the same facts, not all managers might perceive a legitimacy gap and related threat[12]. Where managers perceive that the organisation’s operations are not commensurate with the ‘‘social contract’’ then, pursuant to legitimacy theory, remedial strategies are predicted. Because the theory is based on perceptions, any remedial strategies implemented by the manager, to have any effect on external parties, must be accompanied by disclosure. That is, information is necessary to change perceptions. Remedial action which is not publicised will not be effective in changing perceptions (Cormier and Gordon, 2001). This perspective, as provided by legitimacy theory, highlights the strategic importance (and power) of corporate disclosures, such as those made within annual reports and other publicly released documents. In considering organisational strategies for maintaining or creating congruence between the social values implied by an organisation’s operations, and the values embraced by society, two particular papers have been regularly quoted within the literature, these being Dowling and Pfeffer (1975) and Lindblom (1994). Dowling and Pfeffer (1975, p. 127) outline the means by which an organisation, when faced with legitimacy threats, may legitimate its activities: .

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the organisation can adapt its output, goals and methods of operation to conform to prevailing definitions of legitimacy; the organisation can attempt, through communication, to alter the definition of social legitimacy so that it conforms to the organisation’s present practices, output and values; and

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the organisation can attempt through communication to become identified with symbols, values or institutions which have a strong base of legitimacy.

Consistent with Dowling and Pfeffer’s strategy of ‘‘communication’’, Lindblom (1994) proposes that if an organisation perceives that its legitimacy is in question it can also adopt a number of strategies – all of which will rely on the use of external disclosures. Lindblom (1994) identifies four courses of action (there is some overlap with Dowling and Pfeffer) that an organisation can take to obtain, or maintain legitimacy. The organisation can seek to: (1) educate and inform its ‘‘relevant publics’’ about (actual) changes in the organisation’s performance and activities; (2) change the perceptions of the ‘‘relevant publics’’ – but not change its actual behaviour; (3) manipulate perception by deflecting attention from the issue of concern to other related issues through an appeal to, for example, emotive symbols; or (4) change external expectations of its performance[13]. According to Lindblom and Dowling and Pfeffer, the public disclosure of information in such places as annual reports can be employed by an organisation to implement each of the above strategies. For example, a firm may provide information to counter or offset negative news which may be publicly available through the news media, or it may simply provide information to inform the interested parties about attributes of the organisation that were previously unknown. In addition, organisations may draw attention to strengths, for instance environmental awards won, or safety initiatives that have been implemented, while sometimes neglecting, or down-playing, information concerning negative implications of their activities, such as pollution or workplace accidents. There have been a number of studies in the SEA area which have embraced legitimacy theory. One early and very influential paper was Guthrie and Parker (1989). Guthrie and Parker sought to match the disclosure practices of BHP Ltd (BHP Ltd is a large Australian company and has subsequently become BHP Billiton) across the period 1885-1985 with a historical account of major events relating to BHP Ltd. The argument was that if corporate disclosure policies are reactive to major social and environmental events, then there should be correspondence between peaks of disclosure, and events which are significant in BHP Ltd’s history. Whilst this paper did not provide evidence supportive of legitimacy theory (perhaps due to data limitations, as Deegan et al. (2002) explain) a large number of subsequent research studies have used and refined their arguments. The result has been that, more often than not, corporate social and environmental disclosure strategies have been linked to legitimising intentions. This subsequent research includes Patten (1992, 1995), Gray et al. (1995a), Deegan and Rankin (1996), Deegan and Gordon (1996), Walden and

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Shwartz (1997), Brown and Deegan (1998), O’Donovan (1999), Deegan et al. (2000) and Deegan et al. (2002). Although there is mounting evidence that managers adopt legitimising strategies, we can perhaps reflect upon whether this is actually a ‘‘useful’’ insight? Such results provide a view that information might only be released by an organisation when suspicions or concerns are aroused. This is not consistent with a view (or perhaps a hope?) that managers disclose information for accountability reasons – because people have a right-to-know about aspects of the organisation’s operations. The implication of such findings is that if disclosures are successful in allaying community fears, as seems to be the intent of managers, then these legitimising strategies may enable organisations, that negatively contribute to various groups within society, to continue operations. Social progress could be hindered by such legitimising strategies (Puxty, 1991). The view that managers will only provide disclosures when people have concerns which threaten legitimacy also has implications for regulation. Arguably, disclosure decisions should not be responsive to perceived legitimacy threats but should be based on beliefs about what managers are considered to be accountable for, and what people need to know about (which of course are difficult issues in themselves). What the weight of the literature on disclosure motivations should do, is provide sufficient evidence to regulators that leaving it to managers to disclose information cannot be expected to lead to the provision of unbiased information. As a theory that is based on managers’ perceptions of social contracts (and these perceptions will differ between managers), and potential breaches thereof, legitimacy theory does suffer resultant problems in relation to precision of prediction. Further, even if managers were to agree on whether there was a legitimacy threat, conceivably different managers will adopt different legitimising strategies from the array of possibilities that would be available – and again, any prediction would be problematic. However, whether the inability to provide precise predictions of managerial behaviour should render a theory deficient is far from clear. Whatever the case, legitimacy theory does arguably provide useful insights into the managerial decision-making processes. While legitimacy theory might provide useful insights, it can still be considered to be an under-developed theory. There are many ‘‘gaps’’ in the literature which embraces legitimacy theory. For example, do legitimising activities actually work, and if so, which forms of disclosure media are more successful in changing community views about an organisation (see the following paper by Milne and Patten, 2002)? Further, there is still a general lack of knowledge about whether particular groups in society are relatively more influenced by legitimising disclosures than others, or indeed, whether managers think particular groups are more readily influenced than others. Also, how do managers most effectively become aware of community concerns and therefore, the terms of the ‘‘social contract’’? How do managers determine which segments of society (perhaps referred to as ‘‘conferring publics’’

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(O’Donovan, 2002, or ‘‘relevant publics’’ (Lindblom 1994)) are conferring the much-needed legitimacy? While such limitations, as mentioned above, are inherent within the literature it is hoped that new research, such as that which is detailed in the papers that follow, will contribute to the ongoing understanding of managers’ reporting decisions.

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6. The contribution of the other papers in this edition of Accounting, Auditing & Accountability Journal The four papers to follow embrace legitimacy theory as the basis of their examination of the motivations for corporate managers to make social and environmental disclosures. Arguably, each of the papers provides valuable contributions to the development of theory. The first paper by Deegan et al. (2002) relates to a study of the disclosure practices of BHP Ltd. This is a fairly conventional style of paper as it relies on the use of publicly available (secondary) data. The results of the study by Deegan et al. support legitimacy theory. Whereas the paper by Deegan et al. relies on publicly available data, and infers motivations therefrom, the other three papers directly rely on insights provided by either corporate managers, or recipients of corporate disclosures. These three papers are important in that they signal a more sophisticated approach to testing corporate motivations, and an acceptance that ‘‘conversations’’ with managers and report users can provide very important insights into their behaviour. The direct questioning of managers for the purposes of testing legitimacy theory had previously only been undertaken by a limited number of researchers (for example, Buhr, 1998; O’Donovan, 1999). The second and third papers by O’Donovan (2002), Milne and Patten (2002) generate findings that are generally supportive of legitimacy theory in explaining annual report disclosure practices. The final paper by O’Dwyer (2002) provides results which tend to question the explanatory ability of legitimacy theory. We will now consider each of the papers in slightly more depth to identify some specific contributions to the literature. Deegan et al. (2002) investigate the social and environmental disclosure policies of BHP for the years 1983-1997. This paper represents an extension of Guthrie and Parker (1989) – a paper which, as previously stated, was a very valuable contribution to the accounting literature, but one which failed to provide general support for legitimacy theory (perhaps due to some limitations in the data used, as Deegan et al. suggest). Deegan et al. (2000) investigate whether the extent of community concern pertaining to particular issues associated with BHP Ltd’s operations in turn elicits particular disclosure reactions from the company. The measure of ‘‘community concern’’ used by Deegan et al. is based on the extent of media attention devoted to particular issues. In doing so, they rely upon the insights provided by Media Agenda Setting Theory, a theory that was first brought into the accounting literature by Brown and Deegan (1998), and which has been cited in a number of subsequent accounting studies[14].

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The Deegan et al. (2002) contribution represents a refinement of the methods applied in Brown and Deegan (1998) as they specifically investigate the extent of media attention directed to specific social and environmental issues relating to BHP and how BHP’s annual report disclosures, pertaining to these particular events, appear to respond. Specifically, the underlying proposition (which is consistent with legitimacy theory) is that changes in society concerns, reflected by changes in the themes of print media articles, will be mirrored by changes in the social and environmental themes disclosed, and by the extent of the disclosure being made. Supportive of legitimacy theory, the findings show that those issues that attracted the largest amount of media attention were also those issues which were associated with the greatest amount of annual report disclosures. These results lend support to legitimation motives for a company’s social disclosures and also support O’Donovan’s (1999) conclusions that managers make annual report disclosures in response to media coverage. Deegan et al. (2000) therefore highlight the potential power of the media in influencing corporate disclosure policies, and they again reinforce the dilemma that unless community concerns are somehow aroused (perhaps as a result of the media embracing a particular agenda) then managers may elect not to provide information about particular aspects of their organisation’s social and environmental performance. The next paper by O’Donovan (2002) explicitly recognises that managers’ legitimising strategies will conceivably differ depending upon whether they are trying to gain, maintain, or repair the legitimacy of their organisation. This can be contrasted to the many studies that simply investigate management responses to perceived legitimacy threats. Given the lack of research into corporate strategies for gaining and maintaining legitimacy, O’Donovan (2002) represents a very important contribution to the literature. O’Donovan argues that maintaining legitimacy is likely to be easier than gaining or repairing it. Further, it is recognised that different organisations will have different ‘‘levels’’ of legitimacy to maintain, with the implication that the more an organisation relies upon its legitimacy for commercial purposes (for example, some cosmetic firms relative to armament manufacturers), the more vigilant the organisation needs to be to potential legitimacy threats. In undertaking the research O’Donovan uses six vignettes which are given to six managers from large Australian companies. The vignettes involved hypothetical environmental issues and events pertaining to fictitious companies, and provided different scenarios that could be associated with either gaining, maintaining, and repairing legitimacy. The significance of the environmental issues and events were made to differ between the vignettes. Managers were asked how their disclosure response would differ between the different scenarios. Supportive of legitimacy theory, O’Donovan shows that the significance of the event impacts whether managers will make a disclosure-related reaction. Where there is perceived to be a minimal threat, then no disclosures would be deemed necessary. Disclosure reactions were also found to differ depending upon

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whether the action was necessary to gain, maintain, or repair legitimacy – this, arguably, is an important insight. Whilst some existing research (including O’Donovan, 2002) concentrates on managers’ reactions to particular events, there is still very little information about whether legitimising strategies actually change attitudes about an organisation. The paper by Milne and Patten provides some much-needed insights. As with O’Donovan (2002), Milne and Patten (2002) generate their own data, rather than relying on secondary data sources. Specifically, Milne and Patten report the results of an experiment in which they use 76 US practising accountants as surrogates for investors. They ask the accountants to indicate how they would allocate a fixed amount of investment funds across two fictitious chemical companies. The subjects were required to consider both a long-term and short-term investment time horizon and they were provided with ‘‘mocked-up’’ financial statements and Management Discussion and Analysis Reports for each company. The environment section of the Management Discussion and Analysis Report was the variable being manipulated. One company (the ‘‘poorer performer’’) was shown to have greater exposure to US Super-fund related requirements. All respondents received the reports of both companies; however, half of the respondents received extra ‘‘positive’’ information from management about the poorer performer’s current and future environmental performance. The results indicated that those subjects that received the ‘‘legitimising disclosures’’ tended, when adopting a long-term investment horizon, to invest more in the poorly performing company than those that did not receive the legitimising disclosures. Interestingly, the same results did not hold when the subjects were requested to adopt a short-run strategy. For the short-term scenario, they saw the higher risk associated with being a poor environmental performer as being associated with potentially higher returns, and with a short-term horizon they tended to invest relatively more in the poorly performing company (the higher risk was associated with a higher potential return). However, this propensity to invest more in the poorly performing company was reduced for those subjects that received the legitimising disclosures. These are very interesting results which, prima facie, do suggest that legitimising disclosures can make a difference, but this difference depends upon whether the investors adopt a long-term or short-term decision horizon. Of course, whether these results generalise to other stakeholders, or accountants outside of the USA (or indeed, outside of the sample), is not something we can be sure about. The final paper is by O’Dwyer. Following the theme of the previous two papers, O’Dwyer (2002) also uses primary data to investigate issues associated with legitimising disclosures. He directly seeks the perception of managers about the motivations for corporate social disclosures within annual reports, and whether they believe social disclosures can be successful as a legitimation strategy. Specifically, in-depth interviews are held with 29 senior executives from 27 Irish companies operating across six industries. He also explicitly investigates reasons for absences of disclosure. The interviewees provide a

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view that Irish companies are the subject of ‘‘major’’ social pressures with pressures particularly coming from local communities, environmental pressure groups, and the print media. The managers also indicated that as a result of many recent Irish corporate misdemeanours, society was generally sceptical of managerial actions. There was a general acceptance that social pressures generated a need for the companies to be responsive, with managers in environmentally sensitive sectors indicating that their annual report disclosures did tend to be reactive and tied to a desire to repair legitimacy. Further investigation, however, indicated that many of these companies provided minimal disclosures. A general perception is provided that in Ireland, legitimising disclosures are unlikely to succeed and could be counterproductive. There is a view that Irish people tended not to emphasise positive achievements or actions (it was not ‘‘the done thing’’), and that such disclosures could heighten suspicions about a company, and increase demands about their performance. Managers also expressed a view that reacting to particular social and environmental concerns, through corporate disclosures, could act to make the concerns legitimate. Avoiding reporting could actually assist in making issues ‘‘go away’’. O’Dwyer therefore does not challenge that companies see the need for legitimising their organisation at different times, but his results suggest that, at least in the Irish context, the use of corporate social disclosures within the annual report would not be used as part of a portfolio of legitimising strategies. Indeed some organisations that did use the annual report for such purposes have ceased to use it because of its perceived futility in acting as a ‘‘legitimation vehicle’’. Whether these results are Irelandspecific are not clear. Certainly they seem to differ from the insights provided by O’Donovan (2002) and Milne and Patten (2002). This raises the point that legitimisation strategies, if employed, may vary between countries and broad comments made about how managers react to particular events may need to explicitly consider national, historical and cultural contexts. 7. Concluding comments As this paper demonstrates, there is a growing interest in researching various social and environmental accounting issues. Such interest has particularly grown since the latter half of the 1990s. One particular issue that has attracted a deal of research attention is the social and environmental reporting practices of corporate entities. As long as such disclosures remain predominantly of a voluntary nature then accounting academics will undoubtedly continue efforts to understand the motivations for reporting. As was indicated in this paper, there can be many motivations driving managers to externally report information about an organisation’s social and environmental performance. One such motivation might be the desire to legitimise certain aspects of an organisation’s operations. Legitimacy theory, the theoretical basis of the four following papers, provides a foundation for understanding how and why managers might use externally-focused reports to benefit an organisation. While legitimacy theory,

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as it is currently applied, might still be considered to be in need of further refinement, papers such as those that follow will hopefully help other researchers to further develop theory to explain corporate social and environmental reporting practices. Notes 1. In writing this article there was no intention to evaluate the various reporting practices being adopted by particular organisations or industries, although this is obviously a worthy and needed area for research and commentary. Nevertheless, it should be noted that current practices often attract criticism from various scholars within the academic community. 2. For one view about the role of accounting in providing social and environmental information to demonstrate accountability see the ‘‘accountability model’’ discussed by Gray et al. (1996). 3. There have also been critical appraisals of the works of the ‘‘critical theorists’’, typically because of the perception that their work generally lacks any prescriptive content (Mathews, 1997). 4. See the organisations’ Web sites for details of the guidance documents being released. The Web sites, respectively, are: www.globalreporting.org; www.accountability.org.uk; www.wbcsd.ch and www.cepaa.org. 5. Some of the following discussion about legitimacy theory is based on material provided in Deegan (2000). 6. A systems-based perspective can be contrasted with other theoretical perspectives which tend to be more ‘‘closed’’ in orientation. For example, Positive Accounting Theory (Watts and Zimmerman, 1986) typically considers the relationships between only three groups, managers (agents), owners (principals), and debt holders, and generally ignores other stakeholder groups. 7. The notion of a social contract which comprises various societal norms and expectations also is of direct relevance to other theoretical perspectives, such as institutional theory, political economy theory, and stakeholder theory. See Mathews (1993), Gray et al. (1996), and Deegan (2000) for an overview of these theories. There is much overlap between these theories. 8. As such, legitimacy is not necessarily defined or inferred by legality. The legal institutionalisation of corporations proscribes only narrow accountabilities and limited responsibilities (Warren, 1999). While the law reinforces changes in social values it does not necessarily create them. 9. As the discussion demonstrates, and as previously noted, there is much overlap between a number of theories used to explain corporate strategies and to treat any of the theories as discrete would be rather naı¨ve. 10. In research which considers motivations for collaborations between environmental groups and Australian building and construction companies, Fiedler and Deegan (2002) found that one key motivating factor, from the perspective of managers from the construction companies, was the benefits from being associated with an environmental group. This was because of the perceived legitimacy of such groups. 11. At this point it is worth noting that, with the exception of a very limited number of papers such as Ness and Mirza (1991), advocates of Positive Accounting Theory (see Watts and Zimmerman, 1986) have typically not chosen to study issues associated with the manager’s choice to disclose social and environmental information. Consistent with this, it is interesting to consider why researchers that explore social and environmental accounting disclosure decisions – a ‘‘positive issue’’, overwhelmingly reject Positive Accounting

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Theory as the basis of their arguments. Perhaps it is because early leaders in the area of social and environmental accounting rejected Positive Accounting Theory as ‘‘morally bankrupt’’ (Gray et al., 1996 p. 75) and this influenced subsequent researchers. Positive Accounting Theory also tends to be a much more ‘‘closed-systems’’ approach, with its focus on a limited subset of stakeholders, such as managers, owners and debt-holders. Hence it would not resonate well with researchers who envisage an organisation as being part of a broader social system. Alternatively, perhaps it is because Positive Accounting Theory, with its reliance on economics-based assumptions such as ‘‘self-interest drives all action’’ (which encourages current consumption relative to future consumption), does not provide very much hope for any quest towards true accountability or sustainability. 12. The ‘‘legitimacy gap’’ refers to the difference between the ‘‘relevant publics’’ expectations relating to how an organisation should act, and the perceptions of how they do act. 13. Whilst a somewhat tangential issue, it is interesting to note that Lindblom (1994) is one of the papers that is most highly cited by researchers who are working in the paradigm related to legitimacy theory. Yet, there is no evidence of this conference paper ultimately being published in an academic journal. This is quite unusual for such a highly cited paper. 14. Media agenda setting theory has been a dominant theory in the mass-communication literature since the 1970s.

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O’Donovan, G. (1999), ‘‘Managing legitimacy through increased corporate environmental reporting: an exploratory study’’, Interdisciplinary Environmental Review, Vol. 1 No. 1, pp. 63-99. O’Donovan, G. (2002), ‘‘Environmental disclosures in the annual report: extending the applicability and predictive power of legitimacy theory’’, Accounting, Auditing & Accountability Journal, Vol. 15 No. 3, pp. 344-71. O’Dwyer, B. (2002), ‘‘Managerial perceptions of corporate social disclosure: an Irish story’’, Accounting, Auditing & Accountability Journal, Vol. 15 No. 3, pp. 406-36. Oliver, C. (1990), ‘‘Determinants of interorganizational relationships: integration and future directions’’, Academy of Management Review, Vol. 15 No. 2, pp. 241-65. O’Riordan, T (Ed.) (1997), Ecotaxation, Earthscan, London. Owen, D.L. and Swift, T. (1999), ‘‘Accountability 1000: how a leading edge reporter measures up’’, Accountability Quarterly, No. 11, pp. 8-10. Owen, D.L., Gray, R.H. and Bebbington, K.J. (1997), ‘‘Green accounting: cosmetic irrelevance or radical agenda for change?’’, Asia-Pacific Journal of Accounting, Vol. 4 No. 2, pp. 175-98. Owen, D.L., Swift, T., Bowerman, M. and Humphreys, C. (2000), ‘‘The new social audits: accountability, managerial capture or the agenda of social champions?’’, European Accounting Review, Vol. 9 No. 1, pp. 81-98. Parker, L.D. (1986), ‘‘Polemical themes in social accounting: a scenario for standard setting’’, Advances in Public Interest Accounting, Vol. 1, pp. 67-93. Parker, L.D. (2000a), ‘‘Green strategy costing: early days’’, Australian Accounting Review, Vol. 10 No. 1, pp. 46-55. Parker, L.D. (2000b), Environmental Costing: An Exploratory Examination, Management Centre of Excellence, CPA Australia, Melbourne. Patten, D. (1995), ‘‘Variability in social disclosure: a legitimacy-based analysis’’, Advances in Public Interest Accounting, Vol. 6, pp. 273-85. Patten, D.M. (1992), ‘‘Intra-industry environmental disclosures in response to the Alaskan oil spill: a note on legitimacy theory’’, Accounting, Organizations and Society, Vol. 17 No. 5, pp. 471-5. Pfeffer, J. and Salancik, G.R. (1978), The External Control of Organizations: A Resource Dependence Perspective, Harper and Row, New York, NY. Power, M. (1997), ‘‘Expertise and the construction of relevance: accountants and the environmental audit’’, Accounting Organizations and Society, Vol. 22 No. 2, pp. 123-46. Puxty, A.G. (1986), ‘‘Social accounting as imminent legitimation: a critique of a technist ideology’’, Advances in Public Interest Accounting, Vol. 1, pp. 95-112. Puxty, A.G. (1991), ‘‘Social accountability and universal pragmatics’’, Advances in Public Interest Accounting, Vol. 4, pp. 35-46. Ramanathan, K.V. (1976), ‘‘Toward a theory of corporate social accounting’’, The Accounting Review, Vol. 51 No. 3, pp. 516-28. Roberts, R.W. (1992), ‘‘Determinants of corporate social responsibility disclosure’’, Accounting, Organizations and Society, Vol. 17 No. 6, pp. 595-612. Rockness, J.W. (1985), ‘‘An assessment of the relationship between US corporate environmental performance and disclosure’’, Journal of Business Finance and Accounting, Vol. 12 No. 3, pp. 339-54. Shane, P. and Spicer, B. (1983), ‘‘Market response to environmental information produced outside the firm’’, The Accounting Review, Vol. 58 No. 3, pp. 521-38. Shocker, A.D. and Sethi, S.P. (1973), ‘‘An approach to incorporating societal preferences in developing corporate action strategies’’, California Management Review, Summer, pp. 97-105.

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Stone, D. (1995), ‘‘No longer at the end of the pipe but still a long way from sustainability: a look at management accounting for the environment and sustainable development in the United States’’, Accounting Forum, Vol. 19 Nos 2/3, pp. 95-110. Teoh, H.Y. and Thong, G. (1984), ‘‘Another look at corporate social responsibility and reporting: an empirical study in a developing country’’, Accounting, Organizations and Society, Vol. 9 No. 2, pp. 189-206. Tilt, C.A. (1994), ‘‘The influence of external pressure groups on corporate social disclosure: some empirical evidence’’, Accounting, Auditing & Accountability Journal, Vol. 7 No. 4, pp. 24-46. Tinker, A.M., Lehman, C. and Neimark, M. (1991), ‘‘Corporate social reporting: falling down the hole in the middle of the road’’, Accounting, Auditing & Accountability Journal, Vol. 4 No. 1, pp. 28-54. Trotman, K.T. and Bradley, G.W. (1981), ‘‘Associations between social responsibility disclosure and characteristics of companies’’, Accounting, Organizations and Society, Vol. 6 No. 4, pp. 355-62. Ullmann, A.E. (1985), ‘‘Data in search of a theory: a critical examination of the relationships among social performance, social disclosure and economic performance of US firms’’, Academy of Management Review, Vol. 10 No. 3, pp. 540-57. US Environmental Protection Agency (US EPA) (1996), Full Cost Accounting for Decision Making at Ontario Hydro, EPA, Washington, DC. Warren, R.C. (1999), ‘‘Company legitimacy in the new millennium’’, Business Ethics: A European Review, Vol. 8 No. 4, pp. 214-24. Watts, R.L. and Zimmerman, J.L. (1986), Positive Accounting Theory, Prentice Hall, Englewood Cliffs, NJ. Walden, W.D. and Schwartz, B.N. (1997), ‘‘Environmental disclosures and public policy pressure’’, Journal of Accounting and Public Policy, Vol. 16, pp. 125-54. Wiseman, J. (1982), ‘‘An evaluation of environmental disclosure made in corporate annual reports’’, Accounting, Organizations and Society, Vol. 7 No. 1, pp. 53-63. Woodward, D., Edwards, P. and Birkin, F. (2001), ‘‘Some evidence on executives’ views of corporate social responsibility’’, British Accounting Review, Vol. 33 No. 3, pp. 357-97. Zadek, S. (1993), ‘‘The social audit of Traidcraft plc’’, Social and Environmental Accounting, Vol. 13 No. 2, pp. 5-6. Further reading Deegan, C. and Rankin, M. (1999), ‘‘The environmental reporting expectations gap: Australian evidence’’, British Accounting Review, Vol. 31 No. 3, pp. 313-46. Ditz, D., Ranganathan, J. and Banks, R.D. (1995), Green Ledgers: Case studies in Environmental Accounting, World Resources Institute, Baltimore, MD. Friedman, M. (1970), ‘‘The social responsibility of business is to increase its profits’’, The New York Times Magazine, 13 September, pp. 122-6. Gray, R.H. and Bebbington, K.J. (2000), ‘‘Environmental accounting, managerialism and sustainability: is the planet safe in the hands of business and accounting?’’, Advances in Environmental Accounting and Management, Vol. 1 No. 1, pp. 1-44. Hackston, D. and Milne, M. (1996), ‘‘Some determinants of social and environmental disclosures in New Zealand’’, Accounting Auditing & Accountability Journal, Vol. 9 No. 1, pp. 77-108. Hurst, J.W. (1970), The Legitimacy of the Business Corporation in the Law of the United States 1780-1970, The University Press of Virginia, Charlottesville, VI. Institute of Chartered Accountants in England and Wales (1975), The Corporate Report, ICAEW, London.

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Jaggi, B. and Zhao, R. (1996), ‘‘Environmental performance and reporting perceptions of managers and accounting professionals in Hong Kong’’, International Journal of Accounting, Vol. 31 No. 3, pp. 333-46. Lewis, L., Humphrey, C. and Owen, D. (1992), ‘‘Accounting and the social: a pedagogic perspective’’, British Accounting Review, Vol. 24 No. 3, pp. 219-33. Medawar, C. (1978), The Social Audit Consumer Handbook, Macmillan Press, London. Owen, D.L. and Gray, R.H. (1994), ‘‘Environmental reporting awards: profession fails to rise to the challenge’’, Certified Accountant, April, pp. 44-8. Social Audit Ltd (1973-1976), Social Audit Quarterly. Spicer, B.H. (1978), ‘‘Investors, corporate social performance and information disclosure’’, The Accounting Review, Vol. 53 No. 1, pp. 94-111. (About the Guest Editor: Craig Deegan is based in the School of Accounting and Law at RMIT University, Melbourne, Australia, where he is Professor of Financial Accounting. His consulting, research and teaching areas include financial accounting, financial accounting theory, research methods, and social and environmental accounting and accountability. He consults regularly with corporations, government and industry on various social and environmental accountability issues and is Chairperson of the Institute of Chartered Accountants in Australia Triple Bottom Line Issues Group).

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An examination of the corporate social and environmental disclosures of BHP from 1983-1997 A test of legitimacy theory Craig Deegan, Michaela Rankin and John Tobin School of Accounting and Law, RMIT University, Melbourne, Australia Keywords Disclosure, Environment, Management, Business policy, Perception, Annual reports Abstract 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.

1. Introduction This study examines whether an organisation, specifically BHP Ltd (one of Australia’s largest diversified public companies), discloses social and environmental information in response to particular social expectations, expectations which typically change across time[1]. The research updates the work undertaken by Guthrie and Parker (1989) which studied the annual reports of BHP Ltd for the 100 years to 1985 and which has become a highly cited and respected paper in the area of social and environmental reporting. The current study examines the extent and type of corporate social and environmental reporting by BHP Ltd over a 15-year period from 1983-1997. As with Guthrie and Parker (1989), this study correlates social disclosure to a measure of public concern. However, this study uses a different measure of public concern than that used by Guthrie and Parker (1989). Specifically, this study uses the extent of media attention devoted to the activities of BHP Ltd Accounting, Auditing & Accountability Journal, Vol. 15 No. 3, 2002, pp. 312-343. # MCB UP Limited, 0951-3574 DOI 10.1108/09513570210435861

The authors would like to acknowledge the helpful comments made by Rob Gray, Lee Parker, James Guthrie, Markus Milne and the anonymous referees.

over the period of the study. It does this on the basis of a belief that media attention reflects (or perhaps shapes) community concerns (see Smith, 1987; Zucker, 1978; Ader, 1993). In undertaking this study, we seek to establish if there have been changes in BHP Ltd’s social and environmental disclosures over the period of the study and to investigate whether, consistent with legitimacy theory, specific social and environmental disclosures can be associated with specific societal concerns (as reflected by the media attention). In contrast to the method used in this paper, Guthrie and Parker (1989, p. 347) used a ‘‘data bank of all major events and issues relating to BHP’’. This ‘‘data bank’’ came from the contents of 11 publications addressing BHP’s, and its industry’s history. One of the publications was compiled by BHP, whilst the other publications were produced by independent researchers. Guthrie and Parker sought to match peaks and troughs in corporate annual report disclosure with social events and issues identified by the various publications. As they state (Guthrie and Parker, 1989, p. 347): For each major category of disclosure (environment, energy, human resources and community involvement), the timing of observed peaks of disclosure was compared with any apparently related BHP activities or socio-economic environmental conditions occurring immediately before or during peak periods. A majority of peak disclosures associated with relevant events is considered evidence of a legitimising explanation for BHP corporate social reporting.

In the Guthrie and Parker (1989) study the authors were unable to confirm legitimacy theory. However, as we would argue, and as they concede, this may have been due, at least in part, to deficiencies in the way they constructed their measure for community concern. As Guthrie and Parker (1989, p. 348) acknowledge, their measure of community concern may exclude some important events or activities in BHP’s history. They also acknowledge the possibility that their testing procedures may have failed to detect disclosure reactions if those disclosure reactions lagged behind the various social and environmental events. Whilst Guthrie and Parker failed to provide results to support legitimacy theory, many other papers have tended to support the theory (for example, Dowling and Pfeffer, 1975; Patten, 1992; Gray et al., 1995a; Deegan and Rankin, 1996; Deegan and Gordon, 1996; O’Donovan, 1999; Brown and Deegan, 1998). We are left to wonder whether there is something different about BHP, or whether Guthrie and Parker’s measure for community concern was misspecified. As we show in this paper, using our method of defining community concern, there does appear to be a strong association between BHP’s disclosure policies and community concern – a result consistent with legitimacy theory, but inconsistent with Guthrie and Parker (1989). The balance of the paper proceeds as follows: the next section investigates the role of the media in either shaping or reflecting community concerns. Reference will be made to media agenda setting theory. Section 3 reviews literature which suggests that corporate social and environmental disclosures are reactive to community concerns. The development of hypotheses are

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outlined in section 4, followed by details of the research method in section 5. Section 6 discusses the results of hypotheses testing, with some concluding comments presented in section 7. 2. The role of the media in shaping community concerns As Brown and Deegan (1998) explain, media agenda setting theory posits a relationship between the relative emphasis given by the media to various topics (referred to as the ‘‘media agenda’’), and the degree of salience these topics have for the general public (as reflected by the ‘‘public agenda’’)[2]. In terms of causality, increased media attention is believed to lead to increased community concern for a particular issue. The media are not seen as mirroring public priorities; rather, they are seen as shaping them, and in turn, shaping the public agenda. In further exploring the notion of the ‘‘public agenda’’, McCombs et al. (1995, p. 282) state: Walter Lippmann (1965) defined the public agenda as that array of issues concerning which the well-being of numerous individuals is dependent upon mutual action, cooperation, or, at least, tacit consent. He also noted that this array of issues is largely beyond direct experience: For the real environment is altogether too big, too complex, and too fleeting for direct acquaintance. We are not equipped to deal with so much subtlety, so much variety, so many permutations and combinations. And although we have to act in that environment, we have to reconstruct it on a simpler model before we can manage it. To traverse the world, men must have maps of the world (p. 16). It is the news media, noted Lippmann, that provides these maps of the world. Through their selection and display of the daily news, journalists provide major cues about what are the important topics of the day. Over time, many of the issues receiving major emphasis in the news become the major issues on the public agenda. Although this agenda-setting role of the news media is a secondary and unintentional by-product of the necessity to select a few issues for attention, it is one of the most significant effects of mass communication.

McCombs et al. (1995) stress that public awareness is the first step in the formulation of public opinion and that the media clearly shapes this awareness. There have been numerous studies of media agenda-setting effects, many of which have adopted media agenda setting theory. Research indicates that the media influences the public’s perceived salience for issues (Smith, 1987; Brosius and Kepplinger, 1990; Ader, 1993), and that the media agenda typically precedes public concern for particular issues (McCombs and Shaw, 1972; Funkhouser, 1973; Trumbo, 1995; Neuman, 1990). Research also shows that public concerns and the media agenda are not necessarily reflective of ‘‘real world’’ conditions (Funkhouser, 1973; Ader, 1993). For example, in a review of newspaper articles, a ‘‘real-world’’ pollution indicator[3], and opinion polls from 1970-1990, Ader (1993) found that the amount of media attention devoted to pollution influenced the degree of public salience for the issue, but the ‘‘realworld’’ pollution indicator was negatively correlated with the amount of media coverage. According to Ader (1993, p. 310), ‘‘the public needs the media to tell them how important an issue the environment is. Individuals do not learn this from real world cues.’’

A review of the literature suggests that a number of variables mediate the relationship between media activity and public salience of an issue. These variables include: the obtrusiveness of issues; how the issue is framed (as positive or negative); and associated time lags. Zucker (1978) defined the concepts of obtrusiveness (people’s direct experience of an issue) and unobtrusiveness (people may not have direct experience of an issue). Studying six issues, he concluded that the less direct experience the public has with a given issue area, the more it will have to depend on the news media for information about that area. News media coverage preceded the rise of importance of an issue in public opinion polls for the unobtrusive issues, while for the obtrusive issues media coverage and importance to the public seemed to increase together. In a number of studies the environment has been deemed to be an unobtrusive issue, an issue about which the media appears very capable of influencing public concern (Blood, 1981; Eyal et al., 1981; Zucker, 1978). Other issues, such as the ongoing activities of politicians, are also deemed to be unobtrusive. According to Lippmann (1965, p. 18), the world people have to deal with politically is out of reach, out of sight and out of mind. It has to be explored, reported and imagined. He argued that ‘‘the pictures in our heads . . . of things we have not experienced personally are shaped by the mass media’’[4]. The intensity of the media coverage has also been found to affect the likelihood that particular media coverage will impact the public agenda, although it is not clear what extent of coverage is required before an agendasetting effect is created (Brosius and Kepplinger, 1990). The way in which the media covers the issue can also affect the likelihood of whether it impacts public attitudes. Dearing and Rogers (1996, p. 64) found that an issue presented in a negative light is more likely to be regarded by the community as an important concern. That is, negative media attention is more likely to have an effect on the public’s salience for a particular issue relative to positive, or favourable, attention. According to McCombs and Shaw (1994, p. 380) any acceptance of the ‘‘agenda setting hypothesis’’ requires that a matching public agenda lags behind the media coverage of the issue. Such a lag has been found in many studies (including some of those referred to above). In relation to the issue of time lags, Stone and McCombs (1981) took the results of two public opinion surveys and compared them with a content analysis of the US national news magazines Time and Newsweek. As well as supporting the cumulative effect of mass communication on public perception, they demonstrated ‘‘a time lag in the movement of issues’ salience from the media agenda to the public agenda’’ (Stone and McCombs, 1981, p. 53) of two to six months. In a similar vein, a content analysis of environmental news stories appearing in the three largest circulation newspapers in the Lansing Michigan area over a 239-day period, and measures of the public agenda from a number of surveys, led Salwen (1988, p. 100) to suggest that the public begin to adopt the media agenda from the five to seven week mark of a particular issue’s coverage. This is also consistent with a review of the literature undertaken by McCombs et al. (1995). Other

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studies indicate that an issue’s salience for the public can commence from within four weeks of the media coverage (see for example, Winter and Eyal (1981) who studied the relationship between public concern about civil rights between 1954-1976 and related media coverage). Of course, it would be reasonable to expect that time lags will vary depending upon the issues in focus, but the evidence does suggest that lags do exist thereby suggesting that media coverage shapes community perceptions. There are various forms of news-media, including newspapers, television and radio. Research supports the view that newspapers tend to have a greater ability to set the public agenda (McCombs, 1981). A survey undertaken by Bogart (1984) to establish the relative impact of daily newspapers and television on public perceptions documented that: . half the public is exposed daily to both newspapers and television news; . newspapers are part of the life of nearly nine out of ten Americans; . newspapers touch two out of three on a typical day; and . nearly four out of five readers report looking at any given page. According to Bogart (1984, p. 719), ‘‘for a majority of the audience, the two media complement each other, and newspapers’ ability to cover the news of the area in detail and in depth remains a major advantage’’. In a study of voting behaviour, Stempel and Hargrove (1996, p. 557) indicated that ‘‘it is newspaper reading, not TV news use, which relates most to voting’’. Such a result is also confirmed by McCombs and Shaw (1994, p. 382) who explain that by framing a story within a larger context, the print media is better able to point out its significance to a reader (as opposed to television news which is deemed to be more in the nature of a ‘‘headline service’’). Related to some of the above studies, convergence in public opinion has also been attributed to media coverage. For example, Shaw and Martin (1992) studied the opinions of people with different demographic characteristics, namely men and women, young and old, educated and uneducated, and Caucasian and non-Caucasian. They found convergence on issues associated with education, pollution, housing and poverty as the exposure to related news items increased. From the discussion above, and a review of other literature, it does appear that the media attention directed towards particular issues (particularly coverage included within newspapers) can shape and change community concern for many issues. Obviously, for corporate managers to react to media publicity (and in this study we are interested in corporate disclosures) they must perceive that the media publicity will impact community concerns and that the media is simply not a ‘‘passive transmitter of a reality that has an existence of its own’’ (Severin and Tankard, 1992). Managers are obviously not expected to be cognisant of the research undertaken within the context of media agenda setting theory. Nevertheless, consistent with the view that corporate managers do perceive that newspapers can impact public attitudes

(which is consistent with the findings of researchers working within the theoretical perspective of media agenda setting theory) it is common for corporations to subscribe to information services which provide daily information about how or whether the corporation has received media coverage in nominated national newspapers. Further, research by O’Donovan (1999), which we will consider in more depth later in the paper (which is embedded within the theoretical perspective provided by legitimacy theory), also shows that corporate managers consider previous newspaper coverage when determining the disclosures they will make in their subsequent corporate annual reports. This evidence is consistent with a view that not only is management aware of media coverage pertaining to their organisation, but that they feel a necessity to respond to it from a disclosure perspective. The next section will briefly consider the possible relationship between community concern and corporate disclosures[5]. Legitimacy theory will be utilised to explain how corporate disclosures might be used by management to change community perceptions about the disclosing corporations. Hence, whilst media agenda setting theory argues that the mass media can shape community perceptions about certain issues, legitimacy theory provides arguments consistent with the view that corporations can also impact community perceptions through their disclosure practices. 3. Corporate social disclosures as a reaction to community expectations Studies which have examined social and environmental disclosure within annual reports indicate that it has been increasing across time, both in number of companies making disclosures and in the amount of information being reported (Ernst & Ernst, 1978; Harte and Owen, 1991; Gray et al., 1995a; Deegan and Gordon, 1996). Reporting has been generally qualitative in nature and favourable to the company concerned, even to the point of increasing positive disclosures around the time of negative events (Deegan and Rankin, 1996; Deegan et al., 2000). In research specifically related to the current study, Hogner (1982, p. 249) accorded the growth, decline, and evolution of US Steel’s social reporting over an 80-year period to a ‘‘concentration on the reporting of activities that society is perceived as valuing most at the time’’. While concluding that the matrix of forces affecting corporate reporting practice arose from a legitimation motive, he did not empirically test the proposition. Guthrie and Parker (1989) undertook a study of the social and environmental disclosure practices of BHP Ltd between the years 1885-1985 and compared their observations to Hogner’s (1982) examination of US Steel annual reports for a similar period. They observe a history of growth, decline and change in social disclosure over the period studied, rather than a period of growth and development. Human resource disclosures were found to be BHP’s primary form of social disclosure, although it was quite inconsistent. The authors also observed a total absence of environmental disclosures until around 1950, with a

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recurrence in the early 1970s and 1980s, although they remained at a relatively low level. Guthrie and Parker sought to determine if disclosures were consistent with legitimacy theory and in doing so they compared the disclosure practices of BHP with major events and issues which affected BHP throughout its history as documented within the various publications they reviewed. The authors concluded that the peak in environmental disclosures in the 1970s was associated with a time when mining, steel and oil industries became targets for criticism by conservationists. However, legitimacy theory in relation to environmental activities was not supported in earlier periods when disclosures were rare and not a reaction to public pressure or other external events. The authors also concluded their evidence failed to support a legitimacy perspective for other categories of social disclosure. They acknowledged, however, that they may not have accurately captured the ‘‘events’’ in BHP’s history which they were attempting to match with the company’s reporting, and that the study may have also suffered from unidentified time lags. In another study which sought to test legitimacy theory, Brown and Deegan (1998) adopted media coverage as a proxy for community concern. They found support for legitimacy theory in relation to their review of corporate environmental disclosures. In some industries the environmental disclosure strategies of management appeared to be tied to the extent of media attention devoted to environmental issues. Further, changes in media attention, not the level of media coverage per se, appeared to explain variations in corporate environmental disclosure strategies[6]. In a further study which considered the role of the media and its impact on corporate disclosures, O’Donovan (1999) conducted interviews with senior management of three major Australian corporations, including BHP, and found that the managers consider that they use the annual report to respond to perceived public concerns, with reports in news media affecting what information they disclosed. The corporate managers’ responses were linked to a perception that media attention devoted to particular issues impacts the community’s concern about such issues. Management perceived that media reports of a continuing nature, particularly negative or unfavourable reports, were most likely to result in a response in the annual report. O’Donovan’s (1999, p. 82) data analysis suggested that ‘‘corporate management believe, to some extent, that the annual report is an effective way for informing and educating the public of the corporation’s view about certain environmental issues’’. As indicated above, in explaining the practice of corporate social reporting, many authors have adopted legitimacy theory (for example, Patten, 1992; Guthrie and Parker, 1989; Deegan and Gordon, 1996; Deegan and Rankin, 1996; Neu et al., 1998; Buhr, 1998; O’Donovan, 1999). Legitimacy theory is a theory that, as applied in the social and environmental reporting literature, is rather simplistic but nevertheless appears to be the theoretical basis most frequently used in attempts to explain corporate social and environmental disclosure policies[7]. Legitimacy theory relies upon the notion of a social contract and on

the maintained assumption that managers will adopt strategies, inclusive of disclosure strategies, that show society that the organisation is attempting to comply with society’s expectations (as incorporated within the social contract). Pursuant to legitimacy theory, managers’ choices of legitimising strategies are based on the perceptions of the particular managers involved, and different managers will be likely to have different ideas about what society expects (that is, what the terms of the social contract are), and whether the organisation is perceived by community members as complying with these expectations. Nevertheless, when significant events such as a major environmental disaster occur, or when there is sustained mass media interest, then it is reasonable to assume that most managers would perceive that the organisation’s ongoing legitimacy is threatened. Conceivably, there will also be different views about appropriate strategies to adopt when legitimacy is threatened (and of course, some managers might perceive a problem when in fact none might exist, and vice versa). Working out the effects of all the various judgements and perceptions with any precision is a difficult if not impossible task. Consequently, researchers have used simplifying assumptions: for example, that evens such as the Exxon Valdez disaster (Patten, 1992) or proven environmental prosecutions (Deegan and Rankin, 1996) are assumed to create legitimacy problems for an industry, and that the managers will use disclosure strategies to reinstate damaged legitimacy (as inferred by increasing disclosures around the time of the events). In this paper we also make assumptions, grounded in media agenda setting theory, that media attention directed at corporations can impact society’s views of such corporations. Also, we make the explicit assumption, based on previous research such as O’Donovan (1999), that managers also perceive that the media can impact community perceptions, and that the annual report is perceived by managers to be one means to shift community perceptions back in favour of the organisation. Hence, we predict that if the mass media is focusing upon particular attributes of the organisation’s operations then this is potentially legitimacy threatening and therefore likely to provoke a reaction by management – specifically, a disclosure reaction. As noted above, legitimacy theory posits that organisations seek to ensure that they act, or at least appear to act, within the boundaries and norms of the societies in which they operate. The ‘‘social contract’’ (also frequently referred to as the ‘‘community licence to operate’’) is an implicit agreement between an organisation and society (Shocker and Sethi, 1974)[8]. Failure to act in accordance with the social contract is construed as being detrimental to the ongoing operations of the entity. Community expectations are not considered static, but rather, change across time thereby requiring organisations to be responsive to the environment in which they operate. An organisation could, accepting this view, lose its legitimacy even if it has not changed its activities from activities which were previously deemed acceptable (legitimate). Because community expectations will change across time it is argued that the organisation must also make disclosures to show that it is also changing (or

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perhaps to justify why it is not changing). Changing activities without communicating such changes is considered to be insufficient. In relation to the dynamics associated with changing community expectations, Lindblom (1994, p. 3) states: Legitimacy is dynamic in that the relevant publics continuously evaluate corporate output, methods, and goals against an ever-evolving expectation. The legitimacy gap will fluctuate without any changes in action on the part of the corporation. Indeed, as expectations of the relevant publics change the corporation must make changes or the legitimacy gap will grow as the level of conflict increases and the levels of positive and passive support decreases.

Again, organisational legitimacy (a perceived state) is deemed to occur when there is congruence between what the community expects of an organisation, and whether they believe the organisation is basically complying with those expectations[9]. Using the report Tomorrow’s Company as a reference, Solomon and Lewis (2001, p. 7) identify eight ‘‘forces’’ which impact community perceptions about whether an organisation is complying with its social contract. Whilst not emanating from the mass media literature, one such ‘‘force’’ is considered to be the media[10]. Given a perspective that business organisations exist as a result of compliance with their social contract, the argument is that they must establish congruence between ‘‘the social values associated with or implied by their activities and the norms of acceptable behavior in the larger social system of which they are a part’’ (Dowling and Pfeffer, 1975, p. 122). Legitimacy, which is deemed to exist when the entity’s value system appears to be congruent with the value system of the larger social system of which the entity is a part (Lindblom, 1994) is, in a sense, treated like a resource provided by parties outside the organisation, much like financial capital or labour (Dowling and Pfeffer, 1975). Pursuant to legitimacy theory, management are deemed to use disclosure media, such as the annual report, to allay community concerns, or more particularly, what they perceive to be the community concerns (Lindblom, 1994). Indeed, Hurst (1970) argues that one of the functions of accounting and related reports is to legitimise the existence of the organisation. Further, the annual report has been deemed to be an important document for an organisation seeking to shape its own ‘‘social imagery’’ (Gray et al., 1995b). According to legitimacy theory, the disclosures might be made to show that the organisation is conforming with community expectations, or alternatively, they might be made to alter societal expectations. Of course, studies which argue that disclosures can change, or perhaps are perceived to change, community perceptions (many such studies being grounded in legitimacy theory) are based upon an assumption that corporate disclosures, such as those in annual reports, do actually impact community concerns. This assumption is consistent with the views held by senior managers interviewed by O’Donovan (1999) who, when interviewed, responded that annual report disclosures are used as a strategy to change perceptions about the organisation[11]. In summary, to this point we have argued that the media agenda impacts society’s level of concerns for particular issues (from media agenda setting

theory) and we have provided evidence that managers believe that the mass media has the ability to shape community expectations. We have also argued that the extent and type of corporate social disclosure, in the annual report, is likely to be directly related to management’s perceptions about the concerns of the community (from legitimacy theory). The next section of the paper develops the hypotheses of this study. 4. Hypotheses development The importance that the public ascribe to an issue is influenced by the amount of media attention it receives (for example, see McCombs and Shaw, 1972; Funkhouser, 1973; Ader, 1993). Public salience for an issue increases with the number of media articles between ‘‘takeoff’’ and ‘‘tapering’’ thresholds (Neuman, 1990). A certain ‘‘critical’’ number of articles are required to move an issue to one of public concern, and the pattern of evolving public awareness varies for different types of issues (Neuman, 1990, p. 159). The response function varies according to the issue covered, but there is consistent evidence of a relationship between the volume of media coverage and the level of public concern. To this point, a varying pattern of social disclosures across both companies, and time, has been displayed (for example, see Pang, 1982; Guthrie, 1982; Guthrie and Parker, 1990; Deegan and Gordon, 1996). If management perceive that in the opinion of the ‘‘relevant publics’’ the organisation is not meeting its ‘‘social contract’’ with society, it is likely that the organisation will take steps to demonstrate its legitimacy and relevance to society and so avoid potential constraints and sanctions. Research has shown that management consider that the media can influence community concern, and that management will use the annual report to counter unfavourable media coverage (O’Donovan, 1999). The discussion above has focused on establishing that disclosures, inclusive of social and environmental disclosures, are likely to be made to legitimise corporate behaviour in response to public concern, and that public concern is impacted by the media agenda, as expressed by the print media. The underlying proposition is that changes in society concerns, reflected by changes in the themes of print media articles, will be mirrored by changes in the social and environmental themes disclosed, and to the extent of the disclosure made. Applying this specifically to BHP leads to the development of the following hypothesis. H1. Higher (lower) levels of the print media coverage given to specific attributes of BHP’s social and environmental performance will be associated with higher (lower) levels of specific social and environmental disclosures made by BHP in its annual reports. The above hypothesis does not address whether the media coverage and annual report disclosures are favourable or unfavourable in nature. As noted previously, the framing of an issue in the media as positive or negative influences its salience for the public (Schoenbach and Semetko, 1992; Dearing and Rogers, 1996). The managers in O’Donovan’s study indicated that they

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were most likely to respond to media coverage that depicted their companies in an unfavourable light. Other studies indicated an increase in positive or selflaudatory disclosures around the time of events that depicted the organisation in an unfavourable light (Patten, 1992; Deegan and Rankin, 1996). In circumstances where media attention is of a negative or unfavourable nature, organisations have a greater incentive to provide more positive disclosure (Brown and Deegan, 1998) to affirm or re-establish their legitimacy. This is consistent with the disclosure strategies described by Lindblom (1994). One way to convince society that the organisation is meeting its social contract is to furnish positive perspectives of its activities. Accordingly: H2. Higher (lower) levels of unfavourable print media coverage given to specific attributes of BHP’s social and environmental performance will be associated with higher (lower) levels of specific positive social and environmental disclosures made by BHP in its annual reports. 5. Research method Content analysis is used in this study to measure both media attention and corporate social disclosure. Krippendorff (1980) defines content analysis as ‘‘a research technique for making replicable and valid inferences from data to their context’’. The success of the process depends on the reliability and validity of the procedures employed. While there are a number of measures of reliability, Krippendorff’s (1980) alpha[12] will be used to assess the replicability of the results. The coding rules are developed in detail to yield standard classifications over each of the 15 annual time-periods of this study. Ingram and Frazier (1980) state that categories used in content analysis should result from a systematic application of a set of rules to identify exhaustive and mutually exclusive categories. Accordingly, in order to draw valid and reliable inferences from the measurement process, the method suggested by Weber (1985) to create and test a coding scheme has been followed. First, the recording units are defined. The reliability of different measures of social disclosure has received much attention in the literature. Ingram and Frazier (1980) suggest the sentence as the unit of analysis, as it is easily identified and is less subject to intercoder variation than other measures, such as words and pages. The advantages of sentences are in not needing to standardise words, in obtaining more reliable intra- and inter-rater coding, and in allowing more detailed analysis of specific issues and themes. ‘‘Sentences are to be preferred if one is seeking to infer meaning’’ (Gray et al., 1995b, p. 84). Whilst we use sentences in this study to measure the amount of annual report disclosure it should be noted that many other studies use measures such as words, or proportion of pages. These different measures have been found to be highly correlated (Hackston and Milne, 1996), hence the results should not be greatly influenced by the choice of sentences instead of words, or proportion of pages. Second, the categories to be classified are defined to allow an item to be allocated to a particular category. They are intended to be mutually exclusive

to avoid confounding of the subsequent statistical analysis. This study primarily employs the content classifications of Hackston and Milne (1996), which are based on earlier schemes developed by Ernst & Ernst (1978), Guthrie (1982), and Gray et al. (1995b). Accordingly, the dimensions of the content analysis for both media articles and BHP’s annual reports broadly embrace the classifications of environment, energy, human resources, community involvement and other. Third, test coding is undertaken on a sample of the texts by one team member. This reveals some ambiguities in the proposed coding rules, and suggests some minor, but helpful, revisions of the classifications. Fourth, the accuracy or reliability of the coding is assessed by a test-retest, by the same team member, of a sample of the data at different times, and by supplying the coding rules and data samples to a second reviewer for analysis. Fifth, the coding rules are revised to increase the expected reliability of the coding of all texts, and sixth, all relevant text is coded. Finally, the second reviewer again codes samples of the data to assess achieved reliability and accuracy, using Krippendorff’s (1980) alpha. The results of our testing indicate that our coding procedures appear reliable (using the guidance provided by Krippendorff (1980)). Societal pressure/community concern is measured by the number of relevant articles in the print media. Previous discussion has suggested that coverage of issues in the print media parallels exposure in the overall communication media. Summaries of all articles in the CD-ROM index, the Australian Business Index database (ABIX), mentioning BHP for the period 1983 to 1997, are obtained[13]. The index provides an up-to-date and accurate guide to published information from a wide cross-section of business, finance and trade resources by indexing approximately 85 newspapers and journals (Brown and Deegan, 1998). The number of those newspapers and journals in the ABIX database has steadily increased during the 15-year period. To enable a consistent comparison across the years 1983-1997, only print media services present in the database for those years, and which are available for review in the authors’ home university library, are selected. The papers used had the largest circulations of major newspapers in Australia and included The Age, The Australian, The Australian Financial Review, Westralian, The Bulletin, Business Review Weekly, Courier Mail and The Sydney Morning Herald. It is proposed that this selection includes an adequate number of national and regional papers in Australia to reflect adequately media attention to, and public concern with, the issues of this study. Following selection of the articles mentioning BHP in the Corporate Name/ Subject area of the ABIX search menu, the abstract of each article is examined for information concerning any of the themes outlined in the previous section. Relevant articles are then examined from microfilm records of the publications, and where relevant, are coded according to the categories or themes provided in the Appendix.

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This classification is sufficient to test H1, but additionally, to test the H2, and following the definitions of Hogner (1982) and Brown and Deegan (1998), each print media article is categorised as: . unfavourable: where the content indicates that the operations/strategies/ performance of BHP are detrimental to, or not in harmony with, the social environment; . favourable: where the content indicates that the operations/strategies/ performance of BHP are beneficial to, or in harmony with, the social environment; . other: where the content does not indicate that operations/strategies/ performance of BHP are beneficial or detrimental to the social environment. Each media article is then given a score of 1, and allocated to the specific issue within each general theme, with an attendant favourable, unfavourable, or ‘‘other’’ classification[14]. As noted in a previous section, measurement of corporate social disclosure has largely focused on information provided in companies’ annual reports. This medium is considered the preferred information source for a number of stakeholder groups (Tilt, 1994; Deegan and Rankin, 1997). Use of the annual report enables comparisons to previous studies (Hogner, 1982; Guthrie and Parker, 1989; Brown and Deegan, 1998), and allows examination of whether managements’ perceptions (O’Donovan, 1999) of using information in the annual report to respond to public concerns is supported. The annual reports of BHP are examined for the years 1983-1997. The content themes and issues, and reasons for the selection of sentences as the recording unit, have already been presented. Positive and negative disclosures are defined similar to Hogner (1982) and Brown and Deegan (1998) as: . positive: referring to information about corporate social activities which have a positive or beneficial impact on society; . negative: referring to information about corporate social activities which have a negative or deleterious impact on society; . neutral: referring to information about corporate social activities whose impact on society cannot be determined as either positive or negative. The positive/negative measurement is central to the testing of H2. 6. Results and interpretation 6.1 Print media coverage and levels of corporate social disclosure In examining this association, media articles were collated by year for each of the 49 issues shown in the Appendix, and compared to the corresponding annual report sentences on the same issues in the same years[15]. The data are now described for all of the categories of the study. Summary aggregated totals over the 15-year period from 1983-1997 are displayed in Table I for each theme. Human resources, environment and

Theme Environment Energy Human resources Community involvement Other Total

Total annual report sentemces

Total media articles

Positive annual report sentences

Unfavourable media articles

347 11 403 95

87 8 460 31

276 11 382 79

48 0 400 16

36 892

2 588

36 783

0 464

Notes: Spearman’s rank-order correlation between total annual report sentences and total media articles = 0.9000 (p = 0.019); Spearman’s rank-order correlation between positive annual report sentences and unfavourable media articles = 0.9747 (p = 0.002); Spearman’s rank-order correlation coefficient (one-tailed) expresses the correlation of the number of annual report sentences on the five general themes, with the number of media articles on the same five themes, for 15 years

community involvement rank in that order in both the print media and the annual reports, with the categories of ‘‘energy’’ and ‘‘other’’ receiving minimal attention in both media. At this aggregated level the results are consistent with the hypotheses in this paper. The two issues attracting the most media attention (human resources and environment which together account for 93 percent of the media coverage) account for 84 percent of the total corporate social and environmental disclosures. The results in Table I are generally consistent with Guthrie and Parker (1989). They found limited disclosures in relation to community involvement. They also found that human resource disclosures accounted for the highest proportion of total disclosures across the period of their study (1885-1985). In considering the trends in the disclosure of different categories of social and environmental information, we found that environment related disclosures made by BHP were fairly minimal (one or two sentences) until 1989. This is consistent with Guthrie and Parker who found fairly minimal disclosures across the period of their study (with the period of their study ending in 1985). In 1989, environmental disclosures increased to 11 sentences and then tended to increase in each year to 1997, wherein total environmental disclosures amounted to 140 sentences (in only two years during this period was there any downturn in environmental disclosures, but even then, disclosure did not return to 1989 levels). The disclosures in relation to energy were fairly minimal throughout the period of observation, which again was consistent with Guthrie and Parker. Disclosures pertaining to human resources, community involvement and ‘‘other’’ tended to increase and decrease from period to period with no discernible trends (of continued growth, or otherwise) being apparent. Again, this is generally consistent with the results provided by Guthrie and Parker. Table I demonstrates the association between public concern (as measured by the proxy of media attention) and annual report social and environmental disclosures, by five themes over the 15 years from 1983-1997. This correlation of total media attention and corporate disclosures produces a correlation coefficient

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Table I. Total social and environmental disclosure by general themes – 1983-1997

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of 0.900, p < 0.05, while positive annual report disclosures and unfavourable media articles provides a correlation coefficient of 0.9747, p < 0.01. A view of the overall pattern of attention, in both the media and the annual report, to the sum of the social and environmental issues of this study, is presented in Table II. For the annual report, there is a general trend of increasing total social and environmental disclosure over time, with comparatively few such disclosures in the 1980s, followed by pronounced upward shifts in 1989 and 1996. Whilst Table II aggregates various social and environmental disclosures and media coverage of different issues it does show that total social and environmental disclosures, which have remained predominantly voluntary within Australia, are generally increasing across time. In noting the general increase in the extent of media coverage (with various peaks and troughs across time), 1989, 1995 and 1997 represented major peaks. In 1989 and 1995 the media concerns are primarily related to employee health and safety issues. In 1995, particular attention was directed to the Moura mine disaster in which a number of BHP employees were killed. The higher level of media attention in 1997 arises primarily from attention directed at the Newcastle plant closure. The Newcastle plant was a major employer of people from the Newcastle area and had been in operation for many years. Overall, the associations between total annual report sentences and total Year 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Total Minimum Maximum Mean

Table II. Aggregated social and environmental disclosure and media attention by year

Total annual report sentences

Total media articles

Positive annual report sentences

Unfavourable media articles

16 36 41 27 21 20 51 43 49 74 54 39 69 148 204 892 16 204 59

20 15 11 0 5 1 47 7 1 3 19 29 139 57 234 588 0 234 39

11 36 40 25 18 20 51 39 49 74 52 37 61 142 128 783 11 142 52

18 15 8 0 5 1 47 6 1 2 6 26 123 35 171 464 0 171 31

Notes: Spearman’s rank-order correlation between total annual report sentences and total media articles = 0.5201 (p = 0.023); Spearman’s rank-order correlation between positive annual report sentences and unfavourable media articles = 0.4508 (p = 0.046); Spearman’s rank-order correlation coefficient (one-tailed) expresses the correlation of the number of annual report sentences by year, with the number of media articles in the same years

media articles; and positive annual report sentences and unfavourable media articles, is strong, with correlation coefficients of 0.520, p < 0.05, and 0.450, p < 0.05, respectively. While this year-by-year correlation is interesting, it may be that specific issues in the media generate a greater corporate annual report response than other issues covered by the media. This issue will be investigated shortly.

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6.2 Results of testing H1 The first hypothesis posits a relationship between the total print media coverage given to attributes of BHP’s social and environmental performance and the total levels of corporate social disclosure in their annual reports. Table III provides the results of the testing of the hypothesis for each of the five major themes. The above table presents results of tests for the correlation across each of the 15 years for each general theme. H1 is supported in the themes of environment (correlation coefficient 0.644), and human resources (correlation coefficient 0.578), both with p < 0.05. These are the two issues with the greatest level of media attention and annual report disclosures. A measure of correlation was also obtained for 15 of the 49 specific issues under examination (see the Appendix for details of each of the issues identified under each of the five major themes). These 15 issues recorded 694 of the total annual report sentences (78 percent of all sentences), and 570 media articles (97 percent of the total). With hindsight, the application of 49 categories to this one company was excessive, and as a result, a number of issues could not correlate. Perusal of the 34 issues which attracted no, or very minimal, media attention indicated that, with only three exceptions[16], they received no, or minimal annual report disclosure. This is what would be expected in terms of the hypothesis – with limited concern (as proxied by media attention) there is an expectation that there is limited incentive to provide disclosures. Table IV presents the relationship and level of significance for each of the specific issues for which a correlation statistic was calculated. Environment. There was a modest rise in media attention and annual report disclosures in the years 1989-1995, and a pronounced rise in both occurring from 1996. A correlation of 0.6441, significance 0.005, is found for the environment category.

327

Total Environment Energy Human resources Community involvement Others

Spearman rank-order correlation coefficient

Significance (one-tailed test)

+0.9000 +0.6441 +0.3236 +0.5786 +0.0481 –0.3270

0.019 0.005 0.120 0.012 0.432 0.117

Note: This table correlates the number of annual report sentences over the 15 years of the study, with the number of media articles in the same years, for each of the five themes

Table III. Correlation by theme between annual report sentences and media articles – H1

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Individual issues Environment Pollution (issue no. 1) Standards and regulations (issue no. 2) Prevent/repair damage (issue no. 4) Awards (issue no. 9) Review/impact studies (issue no. 14) Energy Conservation awards (issue no. 24) Human resources: Employee health and safety (issue no. 27) Employment of minorities (issue no. 28) Employee training (issue no. 29) Employee remuneration (issue no. 31) Employee morale (issue no. 34) Industrial relations (issue no. 35) Other (issue no. 36) Community involvement Donations (issue no. 37) Aid or compensation (issue no. 47)

Spearman rank-order correlation coefficient

Significance (one-tailed test)

+0.3850 +0.7787 +0.6235 +0.1722 +0.3660

0.078 0.000 0.006 0.270 0.090

+1.0000

0.000

+0.5786 –0.2709 +0.3484 +0.0628 –0.3347 +0.2752 +0.0576

0.012 0.164 0.102 0.412 0.111 0.160 0.419

Table IV. –0.3359 0.096 Correlations between +0.9898 0.001 annual report sentences Note: This table correlates the number of annual report sentences over the 15 years of the and number of media study, with the number of media articles in the same years, for each individual issue that articles for individual recorded a correlation in testing issues – H1

Within the environment theme, Table IV shows that four specific sub-issues correlate with values of p < 0.10, these relating to pollution, standards and regulations, prevention or repair of damage, and review or impact studies. In considering the respective levels of media attention it is interesting to note that issues associated with the prevention or repair of damage, pollution, and review or impact studies attracted the greatest level of media attention from among the 16 environment sub-issue disclosure categories. The fourth issue with a significant correlation, standards and regulations, ranked as number six in terms of media attention. These four sub-issues within the general theme of environment were also the four issues that attracted the highest level of annual report disclosure (issues associated with repair or damage to the environment attracted the highest level of media attention as well as representing the environmental issue with the greatest amount of annual report disclosure). These results, for the environment theme in total, and for four of its issues, support H1 in that these categories record positive correlations ranging from 0.366 to 0.778, with values of p < 0.10. Those environmental issues not directly supporting the hypothesis are those with minimal media coverage and minimal annual report disclosures. Interestingly, whilst the company dedicated some space in the annual report to environmental awards, the awards attracted little media attention, perhaps reflecting a view that the media tends to focus on

negative attributes of corporate performance (or perhaps, that the media considered the awards to be trivial). Energy. The theme of energy attracts minimal attention, with media articles appearing only from 1995 and an annual report response in 1996 alone. The Spearman’s Rank-order correlation coefficient of 0.3236 (significance 0.12), results entirely from the information on energy conservation awards in 1996. While the general lack of attention to the overall energy theme is interesting, the general absence of data over the years for the theme does not allow a conclusion which supports the first hypothesis. Human resources. The data for human resources resulted in a Spearman’s rank-order correlation coefficient between total media articles and total annual report sentences of 0.5786 at a significance level of 0.012. The sub-issue associated with employee health and safety also produced an association significant at the 10 percent level. The analysis of the total result offers evidence to support H1, with further confirmation supplied by health and safety issues. Employee health and safety attracted the greatest level of media attention within the human resources theme as well as representing the human resources issue with the greatest amount of annual report disclosure. Community involvement. Media articles mentioning BHP’s involvement with the community are infrequent, with the majority of the 1995 and 1996 articles arising from compensation and support considerations for the people of the Fly River who were severely affected by the mining operations of Ok Tedi, an organisation in which BHP has an ownership interest. The sporadic pattern of media attention and annual report disclosure led to an absence of an overall association (correlation coefficient 0.048, p = 0.432). However, disclosure of aid and compensation issues to communities affected by corporate activities correlated strongly (coefficient 0.989, p < 0.001) in the years when the Ok Tedi operations were receiving adverse media exposure. A conclusion supporting H1 cannot be drawn from the results obtained in this theme, although there is a significant association for the disclosures relating to the aid and compensation issues – the issues attracting the greatest level of media attention within the theme of community involvement. Other. Under the ‘‘other’’ theme, two media articles on the subject of corporate governance, and an average of 3.5 sentences for ten of the 15 annual reports on BHP’s general social responsibility were recorded. Testing did not reveal an association between media articles and annual report disclosures for this theme. As a concluding comment in relation to H1 the results show that the specific issues attracting the greatest level of media attention were also generally the issues which had the greatest amount of annual report disclosure. 6.3 Results of testing H2 H2 predicts that higher levels of unfavourable media attention given to BHP’s social and environmental implications will result in higher levels of positive social and environmental disclosure in the annual reports. Of the total 892

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Table V. Correlation by theme between positive annual report sentences and unfavourable media articles – H2

annual report sentences collated for the study, 783 were positive in nature, as compared to 464 of 588 media articles portraying an unfavourable impact on society or the environment (or both)[17]. Table V presents the results of the aggregate testing of the two variables across the five general themes, where the overall relationship resulted in a Spearman’s rank-order correlation coefficient of 0.4508, significance 0.046. The results for the total, and the environment and human resources themes, are significant (p < 0.05). Additionally, nine of the individual issues produced an association, of which five were significant (p < 0.10), as shown by Table VI. These nine issues recorded 401 (51 percent) of the positive annual report sentences and 457 (98 percent) of the unfavourable media articles.

All themes Environment Energy Human resources Community involvement Others

Significance (one-tailed test)

+0.9898 +0.6640 – +0.4604 –0.4901 –

0.046 0.003 – 0.042 0.032 –

Note: This table correlates the number of annual report sentences over the 15 years of the study, with the number of media articles in the same year, for each theme; Sufficient data were not available to produce a correlation for the themes of energy (zero unfavourable media articles) and others (zero unfavourable media articles)

Individual issues

Table VI. Correlations between positive annual report sentences and number of unfavourable media articles for individual issues – H2

Spearman rank-order correlation coefficient

Environment Pollution (issue no. 1) Standards and regulations (issue no. 2) Prevent/repair damage (issue no. 4) Review/impact studies (issue no. 14) Energy Human resources: Employee health and safety (issue no. 27) Employment of minorities (issue no. 28) Industrial relations (issue no. 35) Other (issue no. 36) Community involvement Aid or compensation (issue no. 47)

Spearman rank-order correlation coefficient

Significance (one-tailed test)

+0.3684 +0.8126 +0.5179 0.3167

0.088 0.000 0.024 0.125

+0.4188 –0.1590 +0.3367 +0.0577

0.060 0.286 0.110 0.419

0.6274

0.006

Note: This table correlates the number of annual report sentences over the 15 years of the study, with the number of unfavourable media articles in the same years, for each individual issue

Environment. At the general level of environment a Spearman’s rank-order correlation coefficient 0.6640 is produced, significance p = 0.003. Three specific sub-issues are also strongly correlated (p < 0.10), namely: (1) pollution (Spearman’s rank-order coefficient of 0.3684, significance 0.088); (2) standards and regulations (Spearman’s rank-order coefficient of 0.8126, significance 0.000); (3) prevention or repair of damage (Spearman’s rank-order coefficient of 0.5179, significance 0.024). The above three issues attracted the greatest amount of negative media attention and were also the issues within the theme of environment that recorded the greatest amount of positive annual report disclosure. The theme’s results, and those of three major categories, offer support for H2. Energy. Only 11 annual report sentences were provided in total across all years (all positive). Consistent with the hypothesis (and the minimal corporate disclosures) there were no negative media articles on the theme of energy for BHP, and consequently no association was derived. Hence, for this theme, there was no statistical support for H2. Human resources. Prominent over the period were safety issues in the oil industry (1989), the Moura disaster (1995), and the proposed Newcastle plant closure (1997). Significant results were obtained for the overall total of the human resources theme (correlation 0.4604, significance 0.042) and health and safety issues (correlation 0.4188, significance 0.060). Health and safety issues attracted the greatest amount of negative media attention within the human resources theme as well as providing the greatest amount of positive annual report disclosures within the theme. The aggregate result for the human resources theme and the result for the sub-issue of health and safety support H2. Community involvement. Similar to the overall total for this theme, unfavourable media articles and positive annual report responses are very infrequent, only occurring in a limited number of years. For eight of the 11 sub-issues within the community involvement theme there was no unfavourable media attention recorded in any of the years, with these same eight issues each attracting a maximum of one sentence of positive annual report disclosure across all the years of the study. The resulting association between the unfavourable media attention and the positive annual report disclosures is negative and hence not in accordance with H2. Despite the total theme result, the issue associated with aid or compensation to local communities affected by operations (e.g. Ok Tedi), produced a Spearman’s rank-order correlation coefficient of 0.6274, significance 0.006. Issues associated with aid or compensation attracted the greatest amount of negative media attention within the community involvement theme. Hence while the results pertaining to the sub-issue of aid or compensation issues provides results consistent with H2, the results of the theme in total do not support H2.

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6.4 Time lags As prefaced earlier, one objective of this study is to examine the possible existence of time lag effects in social and environmental disclosure. Both Brown and Deegan (1998) and O’Donovan (1999) suggest that there could be time lags from media attention to eventual annual report disclosure, and this is explained on the basis that managers react to media attention. This is also consistent with media agenda setting theory which proposes that media attention precedes shifts in the ‘‘public agenda’’. Accordingly, testing was conducted again, relating media attention in time t, to annual report disclosure in time t + 1. The statistical results are presented in Tables VII and VIII[18]. For both hypotheses, the statistical relationship for human resources declined markedly, while the environment theme retained a comparatively stable relationship. However, the absence of significant relationships, and declines in the levels of association for the individual sub-issues of the environment, would suggest that, as for the human resource theme and issues, time lag effects are not in operation. The community involvement theme now records associations in the expected direction for both hypotheses, with the H1 correlation of 0.364 significant, p < 0.100. However, this is entirely due to the aid and compensation issues reported in the 1997 annual report, relating to the (1996) Ok Tedi situation. The finding that time lags did not operate appears quite reasonable. As indicated earlier in this paper, the annual reports of Australian companies

Total Environment Human resources Community involvement Table VII. Test results by theme for time lags – H1

Significance (one-tailed test)

+0.3652 +0.6089 +0.1881 +0.3642

0.100 0.010 0.260 0.100

Note: This table correlates the number of annual report sentences over the 15 years of the study at time t + 1, with the number of media articles in the same years for time t, for each of the above themes

Total Environment Human resources Community involvement Table VIII. Test results by theme for time lags – H2

Spearman rank-order correlation coefficient

Spearman rank-order correlation coefficient

Significance (one-tailed test)

+0.3458 +0.5929 +0.2616 +0.2129

0.113 0.013 0.183 0.232

Note: This table correlates the number of annual report sentences over the 15 years of the study at time t + 1, with the number of unfavourable media articles in the same years for time t, for each of the above themes

typically are not released for approximately ten weeks after balance date. As this study has recorded the media articles by financial year, this gives the companies at least ten weeks (and up to 62 weeks) to make social and environmental disclosures within the annual report in relation to the media attention. 7. Conclusions and implications The results presented in the preceding section display the variable pattern of BHP’s social disclosure over the period 1983 to 1997, the trend to providing greater levels of social and environmental information in recent years, and the disposition to provide mainly positive information. These results are in line with findings of previous research, as is the finding of a predominance of disclosure on the themes of human resources and environment. Marked increases in social disclosure occurred from 1989, and again from 1996. The empirical testing supported the first hypothesis. The second hypothesis, proposing that management would release positive information in response to unfavourable media attention, was also confirmed. Support for both hypotheses was also found for many sub-issues within the various disclosure themes[19] (seven of the individual issues supported H1, and five supported H2). Generally speaking, those sub-issues which attracted the largest amount of media attention were also the issues which provided the greatest amount of annual report disclosures. These results, then, lend support to legitimation motives for a company’s social disclosure and also support O’Donovan’s (1999) conclusions that management make annual report disclosures in response to newspaper coverage[20]. The results appear to support the theorising of Hogner (1982) on US Steel’s reporting, and also suggest that the limiting comments by Guthrie and Parker (1989) on the results of their study of BHP have foundation. In addition, results of the current study support conclusions of other recent studies of the relationship between community concern and corporate social disclosure (for example, Brown and Deegan, 1998), and offers evidence that the findings of O’Donovan (1999) on the perceived responses of management to media attention, is translated into actual social disclosure by the corporate management of BHP. The findings described above, allied with those of O’Donovan (1999) and Brown and Deegan (1998) suggest some companies provide social disclosure information in their annual reports in response to perceived community concerns, as measured by media attention. Further studies, using similar variables to this one, would provide understanding of the extent to which these results are generalisable across other companies and industries. Research which investigated the impact of all forms of media on corporate social disclosure, would also be a contribution to the literature. Associated with that, it may be possible to examine corporate responses in communications other than the annual report. In concluding the paper we can perhaps reflect on the implications of the findings. This paper, and a number of others, have provided evidence that managers disclose information to legitimise their organisations’ place within

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society. This paper also provides evidence consistent with a view that greater media attention stimulates greater corporate disclosure. More specifically, when there is perceived to be adverse public opinion, reporting media such as the annual report are used in an endeavour to bring public opinion back in support of the company. Whether this strategy actually works is not something that we directly consider. There is a vast body of literature which shows that the media can shape community perceptions but there is a general absence of literature on how annual report disclosures, especially those relating to social and environmental issues, impact community concerns. This is an avenue for future research. Further research might consider whether particular disclosures are more successful in altering the opinions of some groups relative to others. Clearly, corporate management must believe that the disclosures make a difference (as O’Donovan’s 1999 interviews indicate). Another avenue for research is to determine whether management considers that some stakeholder groups are more readily influenced by corporate disclosures. Are these groups the ones with which managers are seeking, through annual report disclosures, to establish legitimacy? Further, do managers tend to consider that some groups are more readily impacted by the mass media? Whilst the paper to this point has been of a positive nature, seeking to provide explanation of particular disclosure practices, we can conclude the discussion by considering a normative issue. A broader point we can consider is whether legitimising activities, such as those relating to annual report disclosures, are beneficial to the community. Legitimising disclosures mean that the organisation is responding to particular concerns that have arisen in relation to their operations. The implication is that unless concerns are aroused (and importantly, the managers perceive the existence of such concerns) then unregulated disclosures could be quite minimal. Disclosure decisions driven by the desire to be legitimate are not the same as disclosure policies driven by a management view that the community has a right-to-know about certain aspects of an organisation’s operations. One motivation relates to survival, whereas the other motivation relates to responsibility. Arguably, companies that simply react to community concerns are not truly embracing a notion of accountability. Studies providing results consistent with legitimacy theory (and there are many of them) leave us with a view that unless specific concerns are raised then no accountability appears to be due. Unless community concern happens to be raised (perhaps as a result of a major social or environmental incident which attracts media attention), there will be little or no corporate disclosure. We can return to the earlier point about the lack of evidence to show whether corporate disclosures actually impact or shape public perceptions. If they do, perhaps we can reflect upon whether that would necessarily be a good thing? Cooper and Sherer (1984) argue that legitimising disclosures simply act to sustain corporate operations which are of concern to some individuals within society. To the extent that the corporate social and environmental disclosures reflect or portray management concern as well as corporate moves towards actual change,

the corporate disclosures may be merely forestalling any real changes in corporate activities. Some researchers see legitimising behaviour as potentially quite harmful, particularly if it legitimises activities that are not in the interests of particular groups within society. For example, Puxty (1991, p. 39) states: I do not accept that I see legitimation as innocuous. It seems to me that the legitimation can be very harmful indeed, insofar as it acts as a barrier to enlightenment and hence progress.

Legitimising disclosures are linked to corporate survival. In jurisdictions such as Australia, where there are limited regulatory requirements to provide social and environmental information, management appear to provide information when they are coerced into doing so. Conversely, where there is limited concern, there will be limited disclosures. The evidence in this paper, and elsewhere, suggests that higher levels of disclosure will only occur when community concerns are aroused, or alternatively, until such time that specific regulation is introduced to eliminate managements’ disclosure discretion. However, if corporate legitimising activities are successful then perhaps public pressure for government to introduce disclosure legislation will be low and managers will be able to retain control of their social and environmental reporting practices. Notes 1. To put BHP Ltd in its broader context, as at 31 May 1997 BHP Ltd had total reported assets of A$36,735 million and employed in excess of 61,000 employees (BHP Ltd 1997 Annual Report). In 2001, BHP was party to a merger and became BHP Billiton. 2. According to McCombs and Shaw (1994, p. 378) the dominant view in the mass communication literature prior to media agenda setting theory being embraced in the 1970s and thereafter, was that the media merely reinforces pre-existing attitudes. Since that time, however, agenda setting studies numbering in the hundreds (Shaw and Martin, 1992) have been undertaken and media agenda setting theory still remains a dominant theory in the mass communication literature. 3. This indicator was constructed by Ader (1993) from measures of air pollution, oil spills and solid waste disposals per year and was derived by reference to the publications Environmental Quality and Characterization of Municipal Waste in the United States 19602000. 4. Arguably, one might expect that many of the activities of large corporate entities, and the implications thereof, would be unobtrusive to the majority of people within a particular country (although this might not be the case in smaller ‘‘company towns’’) thereby enabling the media to shape opinions about large corporations. 5. Whilst we have explained the proposed linkage between the media agenda and the public agenda we have not explored the important issue of what actually drives the media agenda in the first place (for example, who are the ‘‘gatekeepers’’?). This interesting issue is deemed to be outside the scope of this paper. 6. A major limitation of the Brown and Deegan (1998) study, and one that we attempt to overcome in this study, was that rather than considering specific environmental issues the authors identified all organisation-related environmental media articles and all annual report environmental disclosures of the sample companies and thereafter examined the association between the two. Specific environmental issues (such as pollution, and environmental awards) were not separately considered.

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7. But of course, all theories of human behaviour can be expected to represent simplifications of reality given the complexity that is typically associated with human decision making processes. 8. Whilst the social contract is considered to be an implicit agreement, some of the expectations held by society, and therefore embodied within the ‘‘contract’’, will be codified in law and therefore explicit. As indicated previously, different managers will have different perceptions about what is embodied within the ‘‘social contract’’ and this different perception might, at least in part, explain why different policies are adopted by different organisations. 9. Consistent with the previous discussion in this paper, it should be acknowledged that legitimacy theory, as applied in the social and environmental reporting literature, generally suffers from an underdeveloped degree of resolution. Discussions of the relationship between societal values and perceptions of corporate operations implicitly assume that there is some form of unified public or societal opinion. This is a simplifying theoretical assumption, given that it is reasonable to accept that society is made up of different groups (or stakeholders) with different views and different abilities or powers to have their views ‘‘heard’’. Whilst we effectively maintain this simplifying assumption in this paper, we make a further assumption (untested) that the media will have an impact on people from different groups (consistent with Shaw and Martin, 1992), or perhaps more to the point, that managers believe that the media can impact a variety of audiences (towards the conclusion of this paper we raise this issue as one worthy of further research). 10. The other forces were: legal/regulatory requirements; industry and market standards; industry reputation; political opinion; pressure group attention; attitudes of customers, consumers, employees, investors, and the community. 11. Like a number of studies which have preceded this work, we also focus on the disclosures being made by the organisation and not the reactions of the readers of the information. Whilst we are not directly concerned with whether the disclosures have any actual impacts on community concerns it is nevertheless believed that this is an important area of research which has received relatively scant attention. As Ashforth and Gibbs (1990, p. 177) correctly state, ‘‘despite the problematic nature of legitimacy, most research on the construct has been confined to the means of legitimation and has overlooked the conditions under which such means are or are not successful. Previous work has implicitly assumed that the means indeed produce the desired effects.’’ 12. For a discussion of this, see Krippendorff (1980, pp. 129-53). This measure expresses the level of agreement achieved among coders regarding the assignment of units to categories. 13. Choosing 1983 as the starting point of the analysis was fairly arbitrary and was dictated by the fact that we wanted to collect data across a reasonable number of years. We decided to collect data for 15 years, hence we started in 1983. As it turned out, the ABIX data was only available electronically for periods from 1982, hence for practical purposes we have used all the media data that was available, other than for 1982. 14. That is, a score of one was given to each media article that related to a specific issue regardless of the location or prominence of the article. No explicit consideration was given to whether the respective articles were on the front page, the back page, or in the middle of the paper/magazine, and further, no explicit consideration was given to the size of the headline, or the size of the article. It has also been assumed that all the papers/magazines used in the analysis have the same ability to impact community expectations. Whilst the above assumptions might be considered to be simplistic there is little available guidance from the mass media literature upon which to develop a weighting scheme. Future research might consider this issue. 15. The ‘‘years’’ referred to the financial years of BHP Ltd, which run from 1 June to 31 May. As annual reports are generally released up to ten weeks after balance date this gives the organisation up to ten weeks to determine what they will include in the annual report. For issues that are raised by the media early in the financial year the company has more time to determine how it will respond. This does raise the point that where particular issues

have been raised by the media early in the financial year then the company may wish to make a more timely response in media other than the annual report. However, in this study we have restricted our focus to annual reports. Nevertheless, further research might consider this issue. Employee profiles recorded 55 annual report sentences (average 3.6 per year), employee share schemes 43 (average three per year), and other social responsibility disclosures 36, primarily from occasional mission statements. This again supports the view that the media is more likely to write a story that is critical of the company, rather than one that is positive in attitude. If this is the case and represents an actual bias then this is somewhat of a pity because just as bad performance should be criticised, good performance should arguably be praised. Energy and ‘‘Other’’ were not considered given the low amount of media attention and disclosure. Of the total 49 issues being examined, 15 provided a measure of correlation. The remaining 34 issues only attracted 18 media articles over the 15-year period for BHP, and in line with the hypotheses of this study, a correlation with annual report sentences was therefore not expected. This in itself potentially shows that individuals or groups seeking greater corporate disclosure should, as one strategy, explore the possibility of trying to influence the media agenda. As noted previously, however, how the media agenda is ‘‘controlled’’ is not an issue we investigate in this paper. .

16.

17.

18. 19.

20.

References Ader, C.R. (1993), ‘‘A longitudinal study of agenda setting for the issue of environmental pollution’’, Journalism and Mass Communication Quarterly, Vol. 72 No. 2, Summer, pp. 300-11. Ashforth, B.E. and Gibbs, B.W. (1990), ‘‘The double-edge of organisational legitimation’’, Organization Science, Vol. 1 No. 2, pp. 177-94. Blood, R.W. (1981), ‘‘Unobtrusive issues and the agenda-setting role of the press’’, unpublished doctoral dissertation, Syracuse University, New York, NY. Bogart, L. (1984), ‘‘The public’s use and perception of newspapers’’, Public Opinion Quarterly, Vol. 48, Winter, pp. 709-19. Brosius, H. and Kepplinger, H. (1990), ‘‘The agenda setting function of television news: static and dynamic views’’, Communication Research, Vol. 17 No. 2, pp. 183-211. Brown, N. and Deegan, C.M. (1998), ‘‘The public disclosure of environmental performance information – a dual test of media agenda setting theory and legitimacy theory’’, Accounting and Business Research, Vol. 29 No. 1, pp. 21-41. Buhr, N. (1998), ‘‘Environmental performance, legislation and annual report disclosure: the case of acid rain and Falconbridge’’, Accounting, Auditing & Accountability Journal, Vol. 11 No. 2, pp. 163-90. Cooper, D. and Sherer, M. (1984), ‘‘The value of corporate accounting reports – arguments for a political economy of accounting’’, Accounting, Organizations and Society, Vol. 9 Nos 3/4, pp. 207-32. Dearing, J.W. and Rogers, E.M. (1996), Agenda Setting, Sage Publications, Thousand Oaks, CA. Deegan, C.M. and Gordon, B. (1996), ‘‘A study of the environmental disclosure practices of Australian corporations’’, Accounting and Business Research, Vol. 26 No. 3, pp. 187-99. Deegan, C.M. and Rankin, M. (1996), ‘‘Do Australian companies report environmental news objectively? An analysis of environmental disclosures by firms prosecuted successfully by the environmental protection authority’’, Accounting, Auditing & Accountability Journal, Vol. 9 No. 2, pp. 50-67.

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Deegan, C. and Rankin, M. (1997), ‘‘The materiality of environmental information to users of accounting reports’’, Accounting, Auditing & Accountability Journal, Vol. 10 No. 4, pp. 562-83. Deegan, C., Rankin, M. and Voght, P. (2000) ‘‘Firms’ disclosure reactions to major social incidents: Australian evidence’’, Accounting Forum, Vol. 24 No. 1, March, pp. 101-30. Dowling, J. and Pfeffer, J. (1975), ‘‘Organisational legitimacy: social values and organisational behaviour’’, Pacific Sociological Review, Vol. 18 No. 1, pp. 122-36. Ernst & Ernst (1978), Social Responsibility Disclosure: Surveys of Fortune 500 Annual Reports, Ernst & Ernst, Cleveland, OH. Eyal, C.H., Winter, J.P. and DeGeorge, W.F. (1981), ‘‘The concept of time frame in agenda setting’’, Wilhoit, G.C. (Ed.), Mass Communication Yearbook, Vol. 2, Sage, Beverly Hills, CA. Funkhouser, G.R. (1973), ‘‘The issues of the sixties: an exploratory study in the dynamics of public opinion’’, Public Opinion Quarterly, Vol. 37 No. 1, pp. 62-75. Gray, R., Kouhy, R. and Lavers, S. (1995a), ‘‘Corporate social and environmental reporting: a review of the literature and a longitudinal study of UK disclosure’’, Accounting, Auditing & Accountability Journal, Vol. 8 No. 2, pp. 47-77. Gray, R., Kouhy, R. and Lavers, S. (1995b), ‘‘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. Guthrie, J. (1982), ‘‘Social accounting in Australia: social responsibility disclosure in the top 150 listed Australian vompanies’ 1980 Annual Reports’’, unpublished Masters dissertation, West Australian Institute of Technology, Perth. Guthrie, J. and Parker, L. (1989), ‘‘Corporate social reporting: a rebuttal of legitimacy theory’’, Accounting and Business Research, Vol. 19 No. 76, pp. 343-52. Guthrie, J. and Parker, L.D. (1990), ‘‘Corporate social disclosure practice: a comparative international analysis’’, Advances in Public Interest Accounting, Vol. 3, pp. 159-76. Hackston, D. and Milne, J.M. (1996), ‘‘Some determinants of social and environmental disclosures in New Zealand companies’’, Accounting, Auditing & Accountability Journal, Vol. 9 No. 1, pp. 77-108. Harte, G. and Owen, D. (1991), ‘‘Environmental disclosure in the annual reports of British companies: a research note’’, Accounting, Auditing & Accountability Journal, Vol. 4 No. 3, pp. 51-61. Hogner, R.H. (1982), ‘‘Corporate social reporting: eight decades of development at US Steel’’, Research in Corporate Performance and Policy, Vol. 4, pp. 243-50. Hurst, J.W. (1970), The Legitimacy of the Business Corporation in the Law of the United States 1780-1970, The University Press of Virginia, Charlottesville, VI. Ingram, R.W. and Frazier, K.B. (1980), ‘‘Environmental performance and corporate disclosure’’, Journal of Accounting Research, Vol. 18 No. 2, Autumn, pp. 614-22. Krippendorff, K. (1980), Content Analysis: An Introduction to Its Methodology, Sage, Beverly Hills, CA. Lindblom, C.K. (1994), ‘‘The implications of organizational legitimacy for corporate social performance and disclosure’’, Critical Perspectives on Accounting Conference, New York, NY. Lippmann, W. (1965), Public Opinion, Collier-Macmillan Canada, Toronto. McCombs, M. (1981), The Agenda-Setting Approach, in Nimmo, D. and Sanders, K. (Eds), Handbook of Political Communication, Sage Publications, Beverly Hills, CA, pp. 121-40. McCombs, M. and Shaw, D. (1972), ‘‘The agenda setting function of the mass media’’, Public Opinion Quarterly, Vol. 36, pp. 176-87. McCombs, M. and Shaw, D. (1994), ‘‘Agenda-setting function’’, in Griffin, E.M. (Ed.), A First Look at Communication Theory, 2nd ed., McGraw-Hill, New York, NY.

McCombs, M., Danielian, L. and Wanta, W. (1995), ‘‘Issues in the news and the public agenda: the agenda-setting tradition’’, in Glasser, T.L. and Salmon, C.T. (Eds), Public Opinion and the Communication of Consent, Guildford Press, New York, NY, pp. 281-300. Neu, D., Warsame, H. and Pedwell, K. (1998), ‘‘Managing public impressions: environmental disclosures in annual reports’’, Accounting, Organizations & Society, Vol. 23 No. 3, pp. 26582. Neuman, W.R. (1990), ‘‘The threshold of public attention’’, Public Opinion Quarterly, Vol. 54, pp. 159-76. O’Donovan, G. (1999), ‘‘Managing legitimacy through increased corporate environmental reporting: an exploratory study’’, Interdisciplinary Environmental Review, Vol. 1 No. 1, pp. 63-99. Pang, Y.H. (1982), ‘‘Disclosures of corporate social responsibility’’, The Chartered Accountant in Australia, July, pp. 32-4. Patten, D.M. (1992), ‘‘Intra-industry environmental disclosures in response to the Alaskan oil spill: a note on legitimacy theory’’, Accounting, Organisations and Society, Vol. 17, July, pp. 471-75. Puxty, A. (1991), ‘‘Social accountability and universal pragmatics’’, Advances in Public Interest Accounting, Vol. 4, pp. 35-46. Salwen, M.B. (1988), ‘‘Effect of accumulation of coverage on issue salience in agenda setting’’, Journalism Quarterly, Vol. 65, pp. 101-6. Schoenbach, K. and Semetko, H. A. (1992), ‘‘Agenda-setting, agenda-reinforcing, or agendadeflating? A study of the 1990 national election’’, Journalism Quarterly, Vol. 69 No. 4, Winter, pp. 837-46. Severin, W.J. and Tankard, J.W. (1992), Communication Theories: Origins, Methods, Uses in the Mass Media, 3rd ed., Longman, New York, NY. Shaw, D.L. and Martin, S.E. (1992), ‘‘The function of mass media communication’’, Journalism Quarterly, Vol. 69 No. 4, pp. 902-20. Shocker, A.D. and Sethi, S.P. (1974), ‘‘An approach to incorporating social preferences in developing corporate action strategies’’, in Sethi, S.P. (Ed.), The Unstable Ground: Corporate Social Policy in a Dynamic Society, Melville, Los Angeles, CA. Smith, K.A. (1987), ‘‘Newspaper coverage and public concern about community issues: a timeseries analysis’’, Journalism Monographs, No. 101, February. Solomon, A. and Lewis, L. (2001), ‘‘Incentives and disincentives for corporate environmental reporting’’, Asian Pacific Interdisciplinary Research in Accounting Conference, Adelaide, July. Stempel, G.H. III and Hargrove, T (1996), ‘‘Mass media audiences in a changing media environment’’, J&MC Quarterly, Vol. 73 No. 3, Autumn, pp. 549-58. Stone, G. and McCombs, M. (1981), ‘‘Tracing the time lag in agenda-setting’’, Journalism Quarterly, Vol. 58 No. 1, pp. 51-5. Tilt, C.A. (1994), ‘‘The influence of external pressure groups on corporate social disclosure: some empirical evidence’’, Accounting, Auditing & Accountability Journal, Vol. 7 No. 4, pp. 47-72. Trumbo, C. (1995), ‘‘Longitudinal modeling of public issues: an application of the agenda-setting process to the issue of global warming’’, J&MC Monographs, No. 152, August. Weber, R.P. (1985), Basic Content Analysis, Sage Publications, Beverly Hills, CA. Winter, J. and Eyal, C. (1981), ‘‘Agenda-setting for the civil rights issue’’, Public Opinion Quarterly, Vol. 45, pp. 376-83. Zucker, H.G. (1978), ‘‘The variable nature of news media influence’’, in Ruben, B.D. (Ed.), Communication Yearbook 2, New Brunswick, NJ, pp. 235-46.

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Appendix. Categories of social and environmental disclosure used in this study (49 in total) A. Environment Environmental pollution 1. pollution control in the conduct of the business operations; capital, operating and research and development expenditures for pollution abatement;

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2. statements indicating that the company’s operations are in compliance with environmental laws and regulations; recognition of the need to comply with society standards and regulations; 3. statements indicating that pollution from operations has been or will be reduced; 4. prevention or repair of damage to the environment resulting from processing or natural resources, e.g. land reclamation or reforestation, e.g. OK Tedi and its results; 5. conservation or natural resources, e.g. recycling glass, metals, oil, water and paper; 6. using, or researching, recycled materials; 7. efficiently using materials resources in the manufacturing process; 8. supporting anti-litter campaigns; 9. receiving an award relating to the company’s environmental programmes or policies; 10. preventing waste. Aesthetics 11. designing facilities harmonious with the environment; 12. contributions in terms of cash or art/sculptures to beautify the environment; 13. restoring historical buildings/structures. Other 14. undertaking environmental impact studies to monitor the company’s impact on the environment; conducting reviews of performance, employing specialist consultants; 15. wildlife conservation; 16. training employees in environmental issues. B.

Energy 17. conservation of energy in the conduct of business operations; 18. using energy more efficiently during the manufacturing process; 19. utilising waste materials for energy production; 20. disclosing energy savings resulting from product recycling; 21. discussing the company’s efforts to reduce energy consumption; 22. disclosing increased energy efficiency of products; 23. research aimed at improving energy efficiency of products; 24. receiving an award for an energy conservation programme; 25. voicing the company’s concern about the energy shortage; 26. disclosing the company’s energy policies.

C. Human resources 27. Employee health and safety. This broad category includes issues associated with:

.

reducing or eliminating pollutants, irritants, or hazards in the work environment;

.

promoting employee safety and physical or mental health;

.

disclosing accident statistics;

.

complying with health and safety standards and regulations;

.

receiving a safety award;

.

establishing a safety department/committee/policy;

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conducting research to improve work safety;

.

providing low cost health care for employees;

.

compensation, litigation or enquiries, related to safety;

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providing information on industrial action related to health and safety.

28. Employment of minorities or women. This broad category includes issues associated with: .

recruiting or employing racial minorities and/or women;

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disclosing percentage or number of minority and/or women employees in the workforce and/or in the various managerial levels;

.

employment of youth or local community personnel;

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information on apprenticeship schemes;

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establishing goals for minority representation in the workforce;

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programme for the advancement of minorities in the workplace;

.

employment of other special interest groups, e.g. the handicapped, ex-convicts or former drug addicts;

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disclosures about internal advancement statistics.

29. Employee training. This broad category includes issues associated with: .

training employees through in-house programmes;

.

giving financial assistance to employees in educational institutions or continuing education courses;

.

establishment of trainee centres.

30. Employee assistance/benefits. This broad category includes issues associated with: .

providing assistance or guidance to employees who are in the process of retiring or who have been made redundant;

.

providing staff accommodation/staff home ownership schemes;

.

providing scholarships for employees’ children;

.

providing recreational activities/facilities.

31. Employee remuneration. This broad category includes issues associated with: .

providing amount and/or percentage figures for salaries, wages, PAYE taxes, superannuation;

.

disclosing workers compensation arrangements;

.

any policies/objectives/reasons for the company’s remuneration package/ schemes.

32. Employee profiles. This broad category includes issues associated with:

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providing the number of employees in the company and/or at each branch/ subsidiary;

.

providing the occupations/managerial levels involved;

.

providing the disposition of staff – where the staff are stationed and the number involved;

.

providing statistics on the number of staff, the length of service in the company and their age groups;

.

providing per employee statistics, e.g. assets per employee and sales per employee;

.

providing information on the qualifications of employees recruited.

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33. Employee share purchase schemes. This broad category includes issues associated with: .

providing information on the existence of or amount and value of shares offered to employees under a share purchase scheme or pension programme;

.

providing any other profit sharing schemes.

34. Employee morale. This broad category includes issues associated with: .

providing information on the company/management’s relationships with the employees in an effort to improve job satisfaction and employee motivation;

.

expressing appreciation or recognition of the employees;

.

seeking employees’ opinions and input to planning;

.

providing information on the stability of the workers’ jobs and the company’s future;

.

providing information on the availability of a separate employee report;

.

providing information about any awards for effective communication with employees;

.

providing information about communication with employees on management styles and management programmes which may directly affect the employees.

35. Industrial relations. This broad category includes issues associated with: .

reporting on the company’s relationship with trade unions and/or workers;

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reporting on agreements reached for pay and other conditions;

.

reporting on any strikes, industrial actions/activities and the resultant losses in terms of time and productivity;

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providing information on how industrial action was reduced/negotiated.

36. Other. This broad category includes issues associated with: .

improvements to the general working conditions – both in the factories and for the office staff;

.

information on the re-organisation of the company/discussions/branches which affect the staff in any way;

.

the closing down of any part of the organisation, the resultant redundancies created, and any relocation/retraining efforts made by the company to retain staff;

.

reporting industrial action associated with a reduction in employees;

.

information and statistics on employee turnover;

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information about support for day-care, maternity and paternity leave.

D. Community involvement 37. Donations of cash, products or employee services to support established community activities, events, organisations, education and the arts.

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38. Summer or part-time employment of students. 39. Sponsoring public health projects. 40. Aiding medical research. 41. Sponsoring educational conferences, seminars or art exhibits. 42. Funding scholarship programmes or activities. 43. Other special community related activities, e.g. providing civic amenities, supporting town planning. 44. Supporting national pride/government sponsored campaigns. 45. Supporting the development of local industries or community programmes and activities. 46. Recognising local and indigenous communities. 47. Providing aid or compensation to communities around their operations. E.

Others 48. Corporate objectives/policies: general disclosure of corporate objectives/policies relating to the social responsibility of the company to the various segments of society; disclosing corporate governance practices. 49. Other disclosing/reporting to groups in society other than shareholders and employees, e.g. consumers, any other information that relates to the social responsibility of the company.

(Adapted from Hackston and Milne (1996), with changes in italics).

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The current issue and full text archive of this journal is available at http://www.emeraldinsight.com/0951-3574.htm

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344 Received September 2001 Revised January 2002 Accepted March 2002

Environmental disclosures in the annual report Extending the applicability and predictive power of legitimacy theory Gary O’Donovan Victoria University, Melbourne, Australia Keywords Environment, Disclosure, Case studies Abstract 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 quasiexperimental 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.

Introduction Given current corporate practices, not one wildlife reserve, wilderness or indigenous culture will survive the global market economy. We know that every natural system on the planet is disintegrating. The land, water, air and sea have been functionally transformed into repositories for waste. There is no polite way to say that business is destroying the world (Hawken, 1993, p. 3).

Accounting, Auditing & Accountability Journal, Vol. 15 No. 3, 2002, pp. 344-371. # MCB UP Limited, 0951-3574 DOI 10.1108/09513570210435870

It is commonly acknowledged that the main aim of for profit corporations is to generate acceptable returns for their shareholders. Hawken’s statement emphasises the emergent, if not already accepted, belief that large corporations have to satisfy a broader group of interested stakeholders, whose interests are more than just financial. The increased use and application of the term ‘‘the triple bottom line’’ (Elkington, 1999) in the corporate arena, to explain a corporation’s financial, social and environmental performance and its link to the idea of sustainable development, is one indication of this increased awareness. Corporations are social creations and it has been argued that their existence depends on the willingness of society to continue to allow them to operate (Reich, 1998). The idea of a social contract between business and individual members of society suggests that, while the main aim of a business is to make profits, it also has a moral obligation to act in a socially responsible manner (Shocker and Sethi, 1973). This obligation is the basis of an intangible social agreement or contract between business and society. The idea of a social

contract is an integral part on which ‘‘social theories’’ such as stakeholder Environmental theory (Clarkson, 1995; Mitchell et al., 1997; Roberts, 1992), legitimacy theory disclosures in the (Guthrie and Parker, 1989; Mathews, 1993; Patten, 1992; Sutton, 1993), annual report accountability theory (Gray et al., 1995) and political economy theory (Buhr, 1998; Guthrie and Parker, 1990) have been developed in an attempt to explain various aspects of corporate social behaviour. While it has been argued that 345 these are not fully fledged theories and that they are still being developed, they do, however, provide useful frameworks for studying corporate social behaviour (Gray et al., 1996). The distinction between these theories is often blurred and there appears to be a great deal of overlap. All are concerned with interplay between the corporation and its stakeholders as it is encompassed in the idea of the social contract. The main distinction between them is the viewpoint from which they are observed and tested. ‘‘Bourgeois’’ political economy theorists (Gray et al., 1996) hypothesise that management disclosure decisions are linked to a broad range of interconnected political, social and economic influences and that legitimacy theory and stakeholder theories are more specific theories developed within a political economy framework. Stakeholder theory is based and tested on the direct effect that stakeholders have on management decisions about a corporation’s activities and disclosures (Roberts, 1992). Accountability theory is based on the rights of the principal (stakeholder) to require information (Gray et al., 1995). Legitimacy theory is analysed from a managerial perspective in that it focuses on various strategies managers may choose to remain legitimate (Deegan et al., 2000; Patten, 1992). Gray et al. (1996) argue that legitimacy theory is a variant of stakeholder theory, which adds conflict and dissension to the picture and can be employed to explain more specific information about corporate social practices. Legitimacy is the theoretical perspective adopted in this paper. Information about its composition, nature and implications in relation to social and environmental disclosures is well covered in a number of existing publications[1], hence reference to its background and to recent studies will be limited here. Legitimacy theory is derived from the concept of organisational legitimacy, which has been defined as: . . . 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 (Dowling and Pfeffer, 1975, p. 122).

Legitimacy theory posits that the greater the likelihood of adverse shifts in the social perceptions of how an organisation is acting, the greater the desirability on the part of the organisation to attempt to manage these shifts in social perceptions. In order to remain legitimate, organisations may conform with or, in a number of different ways, attempt to alter social perceptions, expectations, or values as part of a legitimation process (Dowling and Pfeffer, 1975; Lindblom, 1994). It is generally agreed, that if a corporation changes its activities or attempts to alter other’s perceptions of its activities, these must be

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accompanied by disclosures (Deegan et al., 2000; Cormier and Gordon, 2001). If not, the intended audience will be unaware of what it is the company is doing or trying to achieve and legitimacy will be problematic. Suchman (1995) contended that the choice of legitimation tactics and public disclosures an organisation makes will differ depending on whether it is trying to gain, maintain or repair legitimacy. The extent to which relationships between these variables exist has not been tested. In this context it is argued that studies about whether voluntary social and environmental annual report disclosures are related to legitimacy motives have, to some extent, stagnated. If ‘‘legitimacy theory’’ is to develop at a micro level and to continue to provide useful insights in understanding motivations for the disclosure of social and environmental information, these relationships must be understood. The main purpose of this paper is to refine the use and application of legitimacy theory by investigating possible links between: a potentially legitimacy threatening environmental issue/event; the choice of legitimation tactics, resulting in annual report disclosures, and whether the purpose of the choice of tactics is to gain, maintain or repair legitimacy. The approach taken in this paper is deliberately more functionalist than critical. It attempts, in an exploratory way, to discover ways in which micro components of legitimacy theory can be identified and how they effect disclosure decisions. The remainder of this paper is presented as follows. A description of the basic principles involved in managing legitimacy is followed by a discussion on the types of legitimation tactics related to particular legitimation purposes (gain, maintain, repair). The specific tactics/disclosure approaches chosen for use in this investigation are introduced next along with an explanation of the importance of the annual report as a means of communicating the tactics. A description of the method and data analysis techniques adopted for the practical part of the investigation is then provided and is followed by a discussion of the findings. The paper concludes with a discussion of some limitations in interpreting the findings, opportunities for further research and an evaluation of the practical and theoretical importance of the findings. Managing corporate legitimacy It is acknowledged that legitimacy is conferred by outsiders to the corporation, but may be controlled by the corporation itself (Ashforth and Gibbs, 1990; Buhr, 1998; Dowling and Pfeffer, 1975; Elsbach, 1994; Elsbach and Sutton, 1992; Pfeffer and Salancik, 1978; Woodward et al., 1996). This indicates that changes in social norms and values are one motivation for organisational change and also one source of pressure for organisational legitimation. The illustration in Figure 1 adopts the perspective that threats to present or potential legitimacy emanate from a corporation’s negative association with an issue/event (Brown and Deegan, 1999; Nasi et al., 1997). The area marked X in Figure 1 represents congruence between corporate activity and society’s expectations of the corporation and its activities, based on social values and norms. Areas Y and Z represent incongruence between a corporation’s actions

Environmental disclosures in the annual report 347 Figure 1. Issues/events and corporate legitimacy

and society’s perceptions of what these actions should be. These areas represent ‘‘illegitimacy’’ or legitimacy gaps (Sethi, 1978). The aim of the corporation is to be legitimate, to ensure area X is as large as possible, thereby reducing the legitimacy gap. A number of legitimation tactics and disclosure approaches may be adopted to reduce the legitimacy gap. The status of a corporation’s legitimacy may be difficult to establish, given that a corporation’s legitimacy is based on social perceptions and values which can and do change over time. In order to manage legitimacy, corporations need to know how legitimacy can be gained, maintained or lost. At a broad level, Wartick and Mahon (1994) suggest that legitimacy gaps may arise because: . corporate performance changes while societal expectations of corporate performance remain the same; . societal expectations of corporate performance change while corporate performance remains the same; and . both corporate performance and societal expectations change, but they either move in different directions, or they move in the same direction, but with a time lag. Corporations whose legitimacy is, or may become, elusive can only successfully manage legitimacy by identifying important ‘‘manageable’’ issues/events at the same time as identifying groups of stakeholders who have the necessary attributes to be able to confer or withdraw legitimacy on the corporation in respect of those issues/events (Neu et al., 1998). It is posited that once legitimacy is threatened, a corporation will embark on a process of legitimation targeted primarily at those groups who it perceives to be its ‘‘conferring publics’’ (O’Donovan, 2000), those who have the necessary stakeholder attributes (Mitchell et al., 1997) to confer or withdraw legitimacy. Terms such as relevant publics (Buhr, 1998; Lindblom, 1994; Neu et al., 1998), constituents (Bansal, 1995) and social actors (Ashforth and Gibbs, 1990; Deephouse, 1996; Pfeffer and Salancik, 1978) have been used to describe stakeholders who may be potentially influential in determining an organisation’s legitimacy. The term ‘‘conferring publics’’ is both a tightening and amalgam of these terms.

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If senior management perceive that legitimacy is threatened, then legitimacy theory can now be described as: the greater the likelihood of adverse shifts in a corporation’s conferring publics’ perceptions of how socially responsible a corporation is, the greater the desirability on the part of the corporation to attempt to manage these shifts in social perceptions. This description includes a number of variables that need to be identified and unpacked, including the ways that ‘‘adverse shifts’’ arise and how a corporation might ‘‘manage’’ these shifts (see Table I). If a corporation consciously changes its activities, one would assume that managers would be aware of possible effects on legitimacy caused by these changes. In some circumstances, however, identifying the status of one’s legitimacy can be difficult because a corporation could lose legitimacy even though it does not change its activities. This may happen to a corporation because: (1) of a change in the composition of its conferring publics; (2) its conferring publics’ values alter because of: .

evolving social awareness (Elsbach and Sutton, 1992);

.

regulatory or institutional pressures (Deegan and Gordon, 1996);

.

media influences (Ader, 1995);

.

interest group pressures (Tilt, 1994);

.

corporate crises (Marcus and Goodman, 1991).

Each of these could be important in isolation or may be interconnected, causing a flow-on effect. For example, media or interest group pressures could cause regulatory or institutional pressures, which could lead to an evolving social awareness on the part of an entity’s conferring publics. Contemporary social issues/events are precursors to legitimacy threats (Brown and Deegan, 1999; Response/tactic A. Avoid

B. Attempt to alter social values C. Attempt to shape perceptions of the organisation Table I. Possible response/ tactics to legitimacy threats

D. Conform to conferring publics’ values

Sample tactics: oil company involved in a significant oil spill causing environmental damage (a) Do not enter public debate on the affects or aftermath of the oil spill; (b) Do not publicise what may be perceived as negative information Educate the public on the risks associated with transporting oil and the positive uses of oil with respect of standard of living measures (a) Reiterate past social and environmental achievements of the company; (b) Indicate the company did not breach any current legislative guidelines for transport oil Announce an immediate inquiry into the cause of the spill and assure the public that any measures necessary to ensure this type of accident does not happen again will be undertaken

Patten, 1992). In relation to these issues/events, for a corporation to manage Environmental legitimacy effectively, it must: disclosures in the . identify its conferring publics; annual report .

.

.

establish what are its conferring publics’ social and environmental values and perceptions of the corporation (public pressure variables); decide on the purpose or aim of any potential organisational response to legitimacy threats; and, decide what tactics and disclosure options are available and suitable for managing legitimacy, related to the purpose of the organisational response.

It is beyond the scope of this paper to investigate specific public pressure variables and to identify the nature and composition of particular conferring publics. The practical part of the investigation is concerned with identifying links between the purpose of the organisational response, the choice of legitimacy tactics and related annual report disclosures. The purpose of the corporate response to legitimacy threats: gain, maintain or repair? It has been argued that the choices of legitimation tactics are to some extent dependent upon the different purposes or aims of any organisational response (Ashforth and Gibbs, 1990; Oliver, 1991; Suchman, 1995). Legitimation techniques/tactics chosen will differ depending on whether the organisation is trying to gain or to extend legitimacy, to maintain its level of current legitimacy or to repair or to defend its lost or threatened legitimacy. If a large corporation moves into a new, largely uncharted, area for itself and its stakeholders it will face the task of gaining legitimacy, either for the propriety of the new activity in general, or for management’s own validity as managers. This is a ‘‘liability of newness’’ (Ashforth and Gibbs, 1990). In attempting to gain legitimacy, management would tend to be proactive. They have advance knowledge of the change which could possibly threaten the organisation’s legitimacy. Because of this they should, in most instances, be able to control the dissemination of information. In general the task of maintaining legitimacy is thought to be far easier than either gaining or repairing it. According to Ashforth and Gibbs (1990, p. 183): . . . once conferred, legitimacy tends to be largely taken for granted . . . Reassessments of legitimacy become increasingly perfunctory if not mindless.

The challenge for management in maintaining legitimacy is to identify that conferring publics’ needs and wants change over time. Legitimacy represents a relationship with stakeholders that the organisation must keep current. Organisations need to observe, or even anticipate, change and protect past accomplishments if they are to maintain their legitimacy (Suchman, 1995).

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A potential problem arises if one is to test which tactics are used to maintain legitimacy. A distinction needs to be made between corporations with different levels of legitimacy to maintain. If a corporation is accepted as a good corporate citizen, acts responsibly or even in a proactive manner in regard to social issues, the public will have certain expectations in relation to the organisation’s social and environmental activities. The less ‘‘legitimacy’’ an existing organisation has to begin with, the less it needs to maintain. Oliver (1991) points this out in reference to institutional pressures on corporations. She asserts that when an organisation’s performance and survival are only moderately dependent upon the good opinion of the public (e.g. weapons manufacturers), avoiding the issue may be the extent of an organisation’s response to institutional rules and expectations. In the reverse situation, if an organisation that promotes itself as extremely socially and environmentally responsible were to maintain its legitimacy, it would need to ‘‘keep one step ahead’’ of what its conferring publics would expect of it. Repairing legitimacy has been related to different levels of crisis management (Davidson, 1991; Elsbach and Sutton, 1992). The task of repairing legitimacy is, in some ways, similar to gaining legitimacy. If a ‘‘crisis’’ is evolving proactive strategies may need to be adopted, as has been the case for the tobacco industry during the last two decades (Pava and Krausz, 1997). Generally, however, the main difference is that strategies for repairing legitimacy are reactive, usually to an unforeseen and immediate crisis, whereas techniques to gain legitimacy are usually ex ante, proactive and not normally related to a crisis. An environmental accident of the magnitude of the Exxon Valdez oil spill is an example of a crisis that warranted repairing legitimacy. It is argued that, in this situation, legitimation tactics suitable to gain or maintain legitimacy would tend to be less useful, as they would already appear to be discredited to a great extent. The occurrence of the crisis itself implies that any previous legitimation techniques were: . . . nothing more than puffery regarding performance (Ashforth and Gibbs, 1990, p. 183).

The majority of empirical research into managing legitimacy has been concerned with responses to issues or events that were widely publicised and brought the industry or corporation in question into the public spotlight. These studies have, in the main, been concerned with organisational responses consistent with the purpose of repairing or defending legitimacy (for example, see Elsbach, 1994; Sutton and Callahan, 1987). Moreover, much of the research seeking to explain the increase in environmental disclosures in annual reports, using a legitimacy framework, has also been linked to ‘‘negative’’ events or crises (Patten, 1992; Deegan and Rankin, 1996; Walden and Schwartz, 1997), conducted ex post and consistent with attempts to repair legitimacy. An evaluation of the literature in this area suggests that the organisational response will take on a different form and will have different characteristics, depending upon the purpose of the response. It is contended that the different

purpose and different characteristics will result in different legitimation tactics Environmental and disclosure approaches being used. There has been a lack of research into disclosures in the the types of tactics/strategies and disclosures used to gain or maintain annual report legitimacy. These areas are given consideration in the practical part of this investigation. Communicating legitimation tactics: environmental disclosure and the annual report Literature on managing legitimacy both explicitly and implicitly states that controlling and communicating tactical responses is one means of managing legitimacy (Dowling and Pfeffer, 1975; Lindblom, 1994; Sethi, 1978; Suchman, 1995). The annual report has been the major communication medium and data source for researchers investigating motivations for environmental disclosures (Gray et al., 1995; Unerman, 2000). The annual report has long been considered to be a major public document, which is a pivotal presentation by a company and has significant influence on the way financial markets and the general public perceives and reacts to a company (Anderson and Epstein, 1995). It has been argued that the inclusion of voluntary information in the annual report can be, and is, used by managers to send specific signals and messages to the public (Salancik and Meindl, 1984). It has also been emphasised that the inclusion of information in the corporate annual report is used to persuade readers to accept management’s view of society (Amernic, 1992) and that annual reports are both reflective and constitutive of a wider set of societal values (Dyball, 1998). These views are consistent with management using the annual report for legitimation purposes. It has been recognised that corporations voluntarily disclose social and environmental information in the annual report to send messages to ‘‘society’’ and other corporate stakeholders about their social and environmental actions and activities (Deegan et al., 2000; Frost and Wilmshurst, 1998; Gibson and O’Donovan, 2000). Corporate management identified a list of perceived benefits to the corporation in reporting environmental information to diverse groups of stakeholders (Coopers & Lybrand Consultants, 1997). The benefits included: aligning management’s values with social values; pre-empting attacks from pressure groups; enhancing corporate reputation; providing opportunities to lead debates; securing endorsements; demonstrating strong management principles; and demonstrating social responsibilities. These assertions were supported in empirical work undertaken by Brown and Deegan (1999), O’Donovan (1999) and Simmons and Neu (1998), who concluded that the annual report is used by management to respond to public pressure, especially in response to negative media reports. Moreover, in interviews with senior corporate managers, O’Donovan (1998) discovered that management saw the use of the annual report as a way of correcting misconceptions the public may have formed about a company/industry and its environmental activities. One interviewee saw the annual report as a way of:

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. . . allaying public fears about the industry . . . we can educate the public about what we do in regard to environmental issues and do this from our point of view (O’Donovan, 1998, p. 97).

From an annual report user’s perspective, research indicates that stakeholders want to see an increase in corporate environmental disclosures in the annual report (Dierkes and Antal, 1985; Anderson and Epstein, 1995). In the most comprehensive study to date in Australia, Rankin (1996) found that 68 percent of the stakeholders she surveyed sought environmental information from the annual report in the first instance, with 43 percent seeking this information from other sources. The results of this survey highlight the importance of the annual report as a source of environmental information. More specifically, Tilt (1994) discovered that members of environmental groups, such as Greenpeace and the Australian Conservation Foundation, considered the annual report as the main source when seeking information about a corporation’s environmental performance. The emergence of stand-alone environmental reports in the late 1990s (KPMG, 1999), has led to questions about the relative importance of the annual report as the main medium a corporation chooses to disclose environmental information (Unerman, 2000). However, Gibson and O’Donovan’s (2000) study found that the amount of environmental information disclosed in the annual reports of Australian companies from 1983 to 1997, was still on an upward trend at the end of 1997, despite a number of the companies in the study producing separate environmental reports from 1994 onwards. O’Donovan (1999) also discovered that managers believe that the audiences for separate environmental reports are different than those of annual reports and that the emergence of these reports will result in more detailed information in the stand-alone reports which will often be cross-referenced to annual reports. The implication was that the necessity for annual report disclosures was unlikely to decrease, and may in fact increase. It is acknowledged that in situations where issues/events require more immediate and widespread responses to legitimacy threats, other means of communication including media releases and advocacy advertising may be used instead of, or in conjunction with, the annual report (Zeghal and Ahmed, 1990). Nonetheless, the main focus of this study is the corporate annual report. In evaluating the methods used in prior research on legitimacy theory and social disclosures, only a few researchers (Buhr, 1998; Campbell, 2000; O’Donovan, 1999; O’Dwyer, 2000) have used methods to gather qualitative data about management’s views and perceptions, related to disclosure decisions, directly from management. The majority of the research conducted to confirm legitimacy motives for disclosures has used ex post content analysis[2] of annual reports and/or other published data in an attempt to establish a relationship between increased disclosures and environmental issues/events. Using ex post data alone is limited in usefulness as they only allow for explanations about data that were actually disclosed. Gathering data, directly from management, about their perceptions and from an ex ante perspective is more useful in evaluating reasons for certain environmental disclosures and, more importantly, why decisions not to include environmental information were made. The predominant

use of content analysis alone in extant research has not extended the testing of Environmental legitimacy theory to the choice of specific micro-legitimation tactics or the disclosures in the legitimacy purpose. This is conducted in this investigation and many of the annual report limitations are overcome by the qualitative interview methods used to collect data and the ex ante nature of the questioning adopted. Method The primary data source was interviews with six senior managers from three ‘‘suitable’’ large Australian companies. The managers were from companies which operate in the mining (BHP Ltd), chemical (Orica Ltd) and paper and pulp (Amcor Ltd) industries. Stakeholders and environmentalists, in particular, view these three industry groupings as being amongst the most likely to have a detrimental impact on the environment (Elkington, 1994) and are considered to be ‘‘dirty’’ companies (Gorman, 1992). Each of these companies was the largest Australian public company, by market capitalisation as at 30 June 1998, within the industry group. These companies were the leading disclosers of environmental information via the annual report within the industry group for the years 1983-1997 (Gibson and O’Donovan, 2000). The aims of the investigation were to ascertain disclosure choices, the reasons for choices and manager’s perceptions about the issues/events that precipitated the choices. The in-depth interviews consisted of a series of closed and open-ended questions and they were designed to generate responses relating to a series of factors described in four vignettes, developed by the investigator and provided to the interviewees. These vignettes were used to describe scenarios involving hypothetical environmental issues/events and fictitious corporations. The environmental issues/events were chosen by the investigator and were allocated to a response designed to: gain, maintain a high level of, maintain a low level of, and repair, legitimacy. The basis of each vignette (gain, maintain, repair) was not made known to the interviewees. Secondary data sources which included: extant literature on legitimacy theory; media reports about current environmental issues; media reports linking the companies in the study to environmental issues; and prior annual reports of the companies, were extensively scrutinized to help build ‘‘realistic’’ vignettes. An integral part of the interviews required the interviewees to make a choice as to the likelihood of adopting different types of annual report disclosures (legitimation tactics), to rank them, in response to the issue/event and to explain why the rankings were made[3]. The interviews were conducted with six senior personnel, one from Amcor, three from BHP and two from Orica. The people were senior managers directly responsible for the decision to include and the writing of environmental disclosures in the annual reports of the companies for which they worked (O’Donovan, 1997). A list of the environmental issues/events supplied, response purposes and the legitimation tactics/types of annual report disclosures used for the four vignettes is included in Table II. One of the vignettes and related questions, related to gaining legitimacy, is provided in the Appendix. Answers to the

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Table II. Fictitious environmental issues/ events, purpose of response and intention of disclosure approach

Vignette 1 ABC Co Ltd

Legitimation tactic/ intention of annual Fictitious environmental Designated purpose report disclosure approaches provided issue/event of response

Decision to introduce new environmentally damaging technology Vignette 2 Recycling – decision to XYZ Cosmetics Ltd be made about using plastics instead of recyclable paper Vignette 3 Water pollution – Military Hardware Ltd housing estate being planned where corporation currently operates Vignette 4 Large oil spill in Ashforth Refining Ltd Australian capital city

Gaining

A. Avoid

Maintaining – high

B. Attempt to alter social values

Maintaining – low

C. Attempt to alter perceptions of the corporation

Repairing

D. Conform to expectations

closed questions for each vignette were completed by the interviewer on a template, during the interviews as the respondent answered. The vignettes were presented in the same order (1 to 4 – Table II) for each interviewee. While it is acknowledged that the presentation order of the vignettes may have influenced disclosure choices, the consistency of order reduced the possibility of getting less comparable responses. The interviews were audio-taped and were subsequently transcribed for analysis purposes. Each interview lasted approximately one hour. Using the vignettes in this way allowed the respondents to indicate, ex ante, which legitimation tactics they would be likely to choose in given situations and most importantly, why choices were made and others were not. By collecting information on an ex ante basis, relevant information about the thinking, perceptions and thought processes of management was more likely to be discovered than would be the case if management were responding solely about why past disclosures were made. It is argued that using the vignettes also allowed for the likelihood of getting more ‘‘honest’’ responses, given the interviewees were not responding to sensitive disclosure issues related directly to their own corporations. In turn, the interviewer was able to ‘‘push’’ a bit harder for answers than otherwise might have been the case if the questions were corporation specific. The interviewees were very experienced in composing, editing and compiling environmental disclosures for the annual report in the companies for which they worked. The fact that the situations, companies and industries in the vignettes differed from the interviewees’ companies does not contaminate the findings of the study, although it is acknowledged that some institutional pressures may differ between industries. Nonetheless, it is contended that the

legitimacy tactics and disclosure approaches provided in this exercise were Environmental generic enough to be useful and relevant for the purposes of this study. disclosures in the Data analysis The interview data were analysed in two distinct stages: first using quantifiable analysis techniques for the closed questions; and second, using qualitative techniques to search for recurring themes from the open-ended answers. Answers to closed questions, which utilised a Likert scale for responses, were analysed by aggregating and averaging the responses for display purposes. Further, a technique based on an analytic hierarchy process (Saaty, 1980) was used to provide a systematic means of quantifying decisionmaker perceptions in situations involving primarily qualitative data. A ‘‘tradeoff’’ concept was also used where users’ perceptions were captured on a systematic pairwise basis across the variables in the structure (Weil et al., 1996). In this investigation, for each annual report disclosure approach under consideration, the interviewee was required, first, to indicate a preference for a particular disclosure approach; and second, to provide a measure of preference towards the disclosure approach. The ‘‘trade-off’’ linked the likelihood of choosing an annual report disclosure to a ranked preference. Answers to the open-ended questions were initially placed in a ‘‘question-byquestion’’ matrix that allowed the reduction and display of the interview data in a form which assisted in identifying key points and recurring themes. The matrix design allowed for the inclusion of selected quotations from the interviews considered pertinent to the question and, where applicable, researcher memos and notes were included to assist in uncovering recurring themes and patterns. Finally, to bring the data together, a qualitative-quantitative linkage technique known as ‘‘quantizing’’ (Miles and Huberman, 1994) was used. A twovariable conceptually ordered display matrix was the quantizing tool developed. Developing the matrix helped to reduce, combine and display the quantitative and qualitative data in a form which aided in identifying relationships between the specific purposes of the corporate response (gain, maintain, repair) and the choice of legitimation tactics resulting in annual report disclosures. It is important to note that the ‘‘cases’’ in the developed matrix were the specific purposes of gaining, maintaining (high), maintaining (low) and repairing legitimacy, not the interviewees or the corporations. The known variable was the purpose of the corporate response and the four ‘‘cases’’ (gain, maintain – high, maintain – low, repair) were ordered on that variable. The intention of the matrix design was to aid in establishing relationships between these purposes and several aspects (mainly the alternative disclosure approaches) of the lesserknown variable, the intention of the annual report disclosures. When examining the two-variable conceptually ordered display matrix, if the analysis did not indicate clear patterns or indicated contradictory findings, the investigator reexamined answers to the closed questions and/or the open-ended answers in the interview transcripts in an attempt to help guide the analysis.

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Figure 2. Significance of issues/ events for each legitimacy purpose

Figure 3. Gaining legitimacy: likelihood of choosing and ranking of annual report disclosure approaches

Environmental disclosures in the annual report 357

Figure 4. Maintaining legitimacy (high): likelihood of choosing and ranking of annual report disclosure approaches

Figure 5. Maintaining legitimacy (low): likelihood of choosing and ranking of annual report disclosure approaches

Findings In displaying the findings (Figures 2-6) it should be noted that the interviewees had four disclosure approaches to rank and that these were scaled to five for display purposes. This was done to allow for easier comparison with both the significance of the issues/events and the likelihood of choosing a response, both of which had five response choices. Figures 2-6 are used as ‘‘pictorial

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Figure 6. Repairing legitimacy: likelihood of choosing and ranking of annual report disclosure approaches

indicators’’ for the reader and no statistical significance is tested or should be placed on the average rankings and likelihoods displayed in the Figures. Although the findings are based on an amalgamation of the quantitative and qualitative, space limitations precluded using as many of the respondents’ direct quotations as was considered desirable to represent the findings. Selected direct quotations are used where appropriate to represent the general thrust of the open-ended responses. Where these are included in the paper, the letters A-D, in brackets in the quotations, correspond to the specific approach being discussed (Table II). In establishing the significance of the issues/events supplied (Figure 2), it was not surprising that the event that caused immediate negative public reaction (Vignette 4 – Ashforth Refining Ltd), which required legitimacy to be repaired, was considered the most significant of the four issues/events. Also predictable were the responses which related to maintaining legitimacy. The interviewees considered that the corporation with low legitimacy to begin with (Vignette 3 – Military Hardware Ltd) would not see the issue of polluting a creek which ran through a planned housing estate as being important to the social standing of the corporation. Conversely, they considered that XYZ Cosmetics Ltd (Vignette 2), which was portrayed as being environmentally responsible, would view the relatively much lower environmental impact issue of using non-recyclable packaging material, as being between very and extremely significant. The issue/event related to gaining legitimacy was also considered to be very significant. This result was, perhaps, a little unexpected, given the ‘‘newness’’ of the issue and the current lack of public awareness about it. Nevertheless, the

magnitude of the potential environmental damage coupled with an awareness Environmental of the potential negative effects of the issue becoming public knowledge, disclosures in the contributed to the level of significance given to the issue. annual report The results relating to gaining legitimacy (Figure 3) indicated that attempts to alter social values were most likely to be adopted and conforming to social values least likely. In this scenario, the environmental issue was set up in such a way 359 that its environmental impact was not known by anybody outside the senior managers of the corporation. Attempting to alter social values is a proactive strategy that suggests the corporation may wish to get its message across before the issue becomes more ‘‘public’’ and less controllable by the corporation itself. The high likelihood given to the avoidance approach was not unexpected considering that the general public did not know the issue in the case and it is logical to think that the corporation would wish to restrict the public’s knowledge of this event as long as it could. When ranking the approaches, however, this choice did lose favour relative to the intention of altering social values. This suggests that while making no disclosure was attractive, the significance of the issue prompted a more proactive response, rather than a reactive one. In many ways, however, these two most preferred choices are at odds. The avoidance approach implies a management style of secrecy, a donothing approach or an attempt to buy some time, while the attempt to alter social values can be seen as a proactive attempt by the corporation to confront the issue and bring it into the open, by putting the corporation’s own positive interpretation on it. Reasons to make no disclosure were best summed up by the following quotation: . . . I figure in this corporation that, as a manager, you would go the no disclosure mode. (A) I mean you have nothing to gain by disclosing this now.

Two factors emerged in respect of attempting to alter social perceptions. First, the environmental issue in the case was seen to be substantial enough to deserve more than just a ‘‘window dressing’’ approach of merely highlighting the past social and environmental achievements of the corporation; and second, it was noted that this approach could be chosen in conjunction with attempts to alter social values, or as a disclosure option, not necessarily linked to this, or any other specific, environmental issue/event. You might do (C) anyway, but you may be more likely to do this if you wanted to soften the audience for the future.

It was clear that the least preferred disclosure approach was to conform to what ‘‘society’’ expected. This was not unexpected as the facts of the case indicated that the decision had been made and the economic viability of the corporation was questionable if the new technology was not used. References to shareholders, governments and employees, in relation to the significance of the issue, suggested that another reason that this was clearly the least supported choice was that ‘‘society’’, as a homogeneous group, was not an important stakeholder in respect of gaining legitimacy.

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The second vignette was designed to portray a corporation with a high level of legitimacy to maintain. While not having anywhere near the environmental impact of the situation described in the first vignette, the issue/event was deemed to be more significant. Clearly the disclosure approach least likely to be chosen was to avoid the issue and make no disclosure (Figure 4). Each respondent identified that the reputation and beliefs of this corporation determined it would not be an option to avoid any environmental issue brought to its attention. There was not a distinct preference for any of the other three approaches, as indicated by the closeness of the average likelihood of choosing these approaches. The ranking of the approaches failed to clarify the situation. This demonstrated that, while the issue was very significant, no one legitimation tactic and disclosure approach was clearly preferable to maintain the high level of legitimacy the corporation enjoyed. Attempting to alter social values appeared to confirm that the interviewees perceived that XYZ believed it enjoyed a high level of legitimacy. The feeling was that it would be unlikely to risk losing this unnecessarily and therefore the decision about the environmental impact of the packaging decision would not have been made in the first place without due consideration of its environmental reputation and legitimacy. The popularity of this disclosure approach indicated that the interviewees believed that XYZ was a corporation confident enough of its image to speak from a position of knowledge and authority. Attempting to alter social perceptions of the corporation and conforming to society’s wishes were also possible options and were both ranked accordingly. An example of the common argument put forward in support of choosing the conforming approach was: Yes we are going to respond to public opinion. We’re definitely going to do that, because that is the basis on which we survive (D).

The ‘‘closeness’’ between the preferred approaches, along with the qualitative analysis in this case, clearly highlighted indecision about which approach to take, but just as clearly indicated that, perhaps because of the indecision, including more than one of the approaches was most likely. All but one of the six respondents suggested that they would consider using all three of the approaches. This was best explained in the response: I think the way to remedy this issue is to simply explain the practical social and economic reasons for decisions on the banning of our normal paper packaging in favour of plastic (B). We would then go on to talk about environmental initiatives the corporation’s adopting (C) as part of the same disclosure. I think then we could say, because it flows on quite simply, that if the public opinion doesn’t like the approach we’ve taken, then we’re happy to change it (D). But clearly, we thought that we’re acting on customer feedback. Perhaps we haven’t been – haven’t made the right judgement there, but the tone definitely would be indicating that if the public opinion had been misread by us or the position misjudged, we’d certainly change our attitude to it. We would probably use all these approaches.

The vignette relating to maintaining a low level of legitimacy produced markedly different results from the one designed to test responses relating to a perceived high level of legitimacy. This issue/event was considered to be only

of moderate significance (Figure 2). The general reasons given for this related Environmental to the low existing legitimacy of the corporation, the fact that it appeared to disclosures in the have government support and because the issue/event was unlikely to affect annual report economic performance greatly. One would expect a corporation with the characteristics portrayed in this vignette not to be too concerned about legitimacy motives in annual report 361 disclosures. The ideas of communicating a message consistent with intentions to conform to social values and attempts to alter social values, were not likely to be chosen. These two approaches were, almost without exception, the two lowest ranked and least likely options (Figure 5). Avoidance (making no disclosure) and attempting to alter society’s perceptions were most preferred. A recurring theme in arguments supporting no disclosure was that the corporation was complying with all of the current laws and regulations, therefore it did not need to do any more than that to maintain whatever ‘‘poor’’ reputation it already had. I think it’s highly unlikely you’d make any disclosure. This corporation does not need to do anything as it has a poor image anyway (A). This corporation does not need to make any disclosures. They have nothing to gain (A).

While making no disclosure was the most popular choice, the idea of disclosing something to deflect attention about the issue was also considered very likely. It seems that the main reason for this appeared to be that at some point in time managers believed a stance ought to be taken. This stance did not seem to be directly concerned with the existing level of legitimacy of Military Hardware, which was acknowledged to be of little importance, but more of an approach consistent with an ‘‘enough is enough’’ approach and the corporation is not solely to blame. If the corporation sought to align itself with the institutions that support it (governments and government authorities), knowing the public do not approve of its activities, they are in essence cultivating a thought in the public arena that perhaps the corporation is not at fault. The corporation has institutional support for its activities, so perhaps it is those institutions that are to blame and the expectations placed on the corporation to act above and beyond the current requirements are not realistic. Well if the corporation’s going to dispose of waste that way, I would look at sharing the blame. In a way you’re putting a bit of it onto the EPA because the EPA’s saying it’s OK to do it that way (C).

This ‘‘shared’’ blame approach indicated that decoupling strategies were also given some prominence by interviewees, confirming the idea elaborated by Lindblom (1994) that a fifth tactic based on the idea of altering expectations of the corporation was a likely legitimation tactic in this case. In respect of repairing legitimacy, all interviewees indicated the event involving a significant oil spill was extremely significant (Figure 2). Three common themes emerged: first, the disruption the event caused the public;

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second, the fact that it was widely publicised; and third, how this would impact on the reputation of the corporation. The importance of the significance of the event for this purpose was more important to the choice of legitimation tactics and annual report disclosures than it was for the purposes of gaining and maintaining legitimacy. This is understandable because if the event were not considered to be significant, then, in normal circumstances, there would be no lost legitimacy to regain. From an environmental perspective, the perceived importance of major oil spills, linked to the repercussions of the 1989 Exxon Valdez oil spill, gained some prominence. Three of the interviewees made passing reference to Exxon Valdez and one indicated how important the accident was for oil corporations and the environment in saying: [This issue is] extremely significant. The Exxon Valdez has permanently put oil spills and related effects on the agenda for any corporation associated with major oil spills.

The immediacy and urgency of events causing legitimacy to be repaired also ‘‘demand’’ that corporations respond (react) in a timely manner. As one would expect, avoiding the event was the tactic least likely to be adopted, whereas conforming to social values, albeit symbolically, and altering perceptions were most likely to be chosen. Acknowledging responsibility and reassuring society that all steps will be taken to ensure the event does not recur (conforming), coupled with an account of past environmental achievements (altering perceptions) are, clearly, the most likely tactics to be used (Figure 6). Reasons for choosing the conforming approach centred on the need to be seen to be proactive and to portray the image of a repentant (without directly apologising), responsible corporation and one that was in control of the situation. The thing is what you would end up doing is just saying that it happened and you emphasised what the good things you did about it and what you intend to do (D). You should adopt the open approach and not to try and get out of it. You are at the public’s will a bit here, so don’t rock the boat.

While choosing to conform, a couple of responses indicated a desire to ‘‘decouple’’ the corporation from the event, by linking the dangers of operating in the industry. I think (D) is most likely and I think we’d also indicate a whole-hearted support of external enquiries by authorities into construction standards and maintenance standards for this sort of equipment across the industry, because clearly we’re not doing anything different, but it’s happened to us, and I think the whole industry has to learn from it.

The disclosure approach consistent with altering social perceptions was seen as being supplementary to conforming. While a popular option, it was unlikely it would have been chosen as the sole disclosure. After conforming . . . You then go into saying the corporation does have a good record and that accidents do happen and you will try and minimise these events in the future (C).

Environmental The ‘‘no disclosure’’ approach did not enjoy any support, either as a likely disclosure or as a ranked preference. The main theme discovered was that the disclosures in the annual report managers believed that the public would not let the corporation get away with ‘‘doing nothing’’ or ‘‘staying silent’’. In this context, appearing to be ‘‘doing’’ the right thing was extremely important to the corporation, even if it was not actually doing anything substantive. The unanimous reaction from 363 interviewees was that any issue/event, which attracts strong and immediate negative public reaction, necessitates a quick and very public response from the corporation involved if a loss of reputation is to be averted. Attempts to alter social values by explaining to the public the environmental hazards involved with oil refining, that the public would need to accommodate, garnered some guarded support, but was considered to be a somewhat risky approach. It appears that only those managers who did not feel the need to yield to public pressure would seriously consider this option. Most thought the approach was fraught with danger. It was mentioned a number of times that corporations do not wish to appear to be lecturing society in the wake of negative public sentiment. Conclusions The findings from this investigation continue to support legitimacy theory as an explanation for the decision to disclose environmental information in the annual report. Moreover, the applicability of legitimacy theory was enhanced during this investigation. The collection of open-ended interview data, directly from managers and from an ex ante perspective, enabled the discovery of more explicit reasons for environmental disclosure decisions than has previously been the case with much of the extant research into social and environmental reporting. At a micro-level, the predictive capacity of legitimacy theory has been enhanced. The findings from the research are summarised in the legitimation disclosure response matrix (Table III). The matrix indicates how likely it is that certain legitimation tactics, in the form of an annual report disclosure approach,

Purpose of response Gaining Maintain – high Maintain – low Repair

Significance of issue/event to co. High Medium High Medium High Medium High Medium

Legitimation tactic/intention of annual report disclosure approach Alter Avoid Alter values perceptions Conform Likely Very likely Likely Unlikely Very unlikely Very likely Unlikely Possibly Likely Possibly Very likely Inconclusive Very unlikely Unlikely Unlikely Unlikely

Likely Very unlikely Possibly Possibly Likely Very likely Likely Possibly Very likely Very unlikely Likely Unlikely Very likely Very likely Very likely Likely

Table III. Legitimation disclosure response matrix

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will be chosen based on the perceived significance of an environmental issue/ event to the corporation and the particular purpose of the legitimation response. It was clear from the findings that the significance of an environmental issue/ event has a major affect on environmental disclosure decisions. Only two levels of significance are included in the matrix, high and medium. The findings indicated that if an issue/event was of low significance, it would not, in most circumstances, be considered a threat to a corporation’s legitimacy and would not normally warrant the use of legitimation tactics and specific annual report disclosures. Columns 3 to 6 represent the four categories of annual report disclosures related to the legitimation tactics formulated for the purposes of this investigation. Rows 3 to 7 represent the conclusions from this investigation in relation to how likely it is that the five legitimation tactics/annual report disclosure approaches will be adopted in relation to the purpose of the corporate response and the significance of the issue/event to the corporation. A five-point qualitative scale was used to indicate the likelihood of a disclosure approach being adopted. The labels used in this scale in the matrix were very likely; likely; possibly; unlikely; and very unlikely. The overarching conclusion reached as to why corporations disclose environmental information was that environmental disclosure decisions were made on the basis of presenting the corporations in a positive light. This outcome came through repeatedly in the data analysis and is consistent with results of prior research (Deegan and Gordon, 1996; Deegan and Rankin, 1996; Simmons and Neu, 1998). This suggests that the decision usefulness value of voluntary environmental annual report disclosures for users of annual reports may be questionable, despite research suggesting that the annual report is a major source of environmental information for stakeholders (Rankin, 1996; Tilt, 1994). This is borne out by the likelihood that the annual report disclosure approach intended to alter perceptions would be chosen irrespective of the purpose of the corporate response and the significance of the event. This tactic/approach was the only one of the four tactics/annual report disclosure approaches that was, at least, ‘‘likely’’ to be adopted in response to every issue/event. This reinforces the idea that the annual report is a public relations document and is used by management to portray a positive picture of a corporation’s social and environmental performance. It suggests that the information content of environmental disclosures in the annual report is general rather than specific, unlike other forms of communication (e.g. media releases, stand-alone environmental reports). It might be also be argued that the managers’ target audiences are those that are less knowledgeable about, or less interested in specifically using, environmental information in the annual report. This apparent lack of substance in current environmental reporting in the annual report, however, may not be as misanthropic as it first appears. If one compares the quantity and quality of corporate environmental disclosures today with those of 20 years ago, it might be argued that a transformation in corporate thinking and action is taking place. Evidence of this transformation is found in the increased production of separate annual environmental reports

(KPMG, 1999). Whether this ‘‘transformation’’ has more to do with symbolism Environmental than substance is an area that could be researched further. disclosures in the Results from this investigation have led to the addition of specific annual report components to the theory and, it is argued, enhanced the predictive power of legitimacy theory in relation to why certain annual report disclosures are made. The contents of the legitimation disclosure response matrix could be expressed 365 as hypotheses and tested further in order to establish the extent of relationships between the identified variables and manager’s intentions for making ex post annual report environmental disclosures. The ‘‘results’’ in the matrix could also be used as a basis to indicate if corporations’ tactics are changing over time, perhaps indicating a shift from symbolic to more substantive disclosures, which may be more consistent with a corporation truly attempting to become more legitimate. The results from this study and the framework adopted could be used to assist in making judgements as to the ‘‘value’’ and usefulness of environmental disclosures in the annual report. Limitations and opportunities for further research From a theoretical perspective, it should be noted that concentrating on legitimacy theory, as an explanation for increased environmental disclosures, does not invalidate the likelihood that other social theories have explanatory power as well. The imprecise distinction between legitimacy, stakeholder and political economy theories should continue to be examined and explained. Care should also be taken in generalising too much from the results of this study. The study is exploratory in nature and while the methods used delivered a great deal of useful qualitative data, it must be remembered that the results were based on six in-depth interviews with personnel from three companies. There are two methodological caveats to be noted in relation to the findings. First, in order to be able to test legitimacy theory at a micro-level, it was considered necessary that the researcher choose the environmental issues/ events, which precipitated legitimacy threats. Second, the researcher also supplied the legitimation tactics and annual report disclosure approaches from which the interviewees had to choose. If this had not been done it is doubtful that the objectives of the investigation could have been achieved. On an intra- and inter-industry basis, individual corporations have different characteristics; social and environmental goals; perceptions of the importance of social and environmental goals to their conferring publics; and other external pressures on them at any point in time. These perceptions and pressures will also change over time. It is posited that these different characteristics, goals, perceptions and external pressures, which may often be unrelated to an environmental issue/event at the time the issue/event is at its peak importance, will influence the decision to disclose environmental information and the choice of specific annual report disclosure approaches. The effect these external pressures had on the choice of annual report disclosures was not tested in this study. Moreover, at any point in time, corporations have multiple issues/events to deal with, and multiple conferring publics’ views to manage in relation to

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these issues/events. The levels of interconnectedness and the effect of multiple issues/events and multiple conferring publics’ views were not tested for during this investigation. There are a number of directions, related to this investigation, in which research could proceed. While this investigation used environmental disclosures as a proxy for public pressure and ultimately, legitimacy, the methods adopted in this investigation could be used for any issue/event that has the potential to have a social impact on a corporation. In this investigation, the annual report was identified as being the major way corporations communicated social and environmental information to various stakeholders. One could use the methods adopted in this research to identify how other means of communication are used in managing legitimacy. For example, the effect that the publication of standalone environmental reports and the use of the World Wide Web has had on the quantity and quality of annual report disclosures and the choice of legitimation tactics is an area which appears timely to research further. The authority of any theory is often connected to its longevity (Eisenhardt, 1989). Longitudinal studies could be conducted, using a combination of interviews with management and ex post annual report/environmental report content analysis, to see if increased environmental disclosures continue to be explained by legitimacy theory. Moreover, this should allow researchers to discover to what extent legitimation tactics/disclosure approaches used in this investigation continue to be used and this may lead to the identification of additional legitimation tactics and disclosure approaches. An obvious extension of legitimacy theory is to establish whether the adoption of legitimation tactics and annual report disclosures has the desired effect on its intended audiences. In other words, to what extent do legitimation tactics work? To do this, future researchers would need to collect data from groups at whom management target legitimation tactics (conferring publics), and discover the groups’ views, before and after the legitimation process. Only very limited research has been conducted in this area to date (Elsbach, 1994). Notes 1. For a detailed explanation and summary of many of the studies linking social and environmental disclosures to legitimacy theory see O’Donovan (1999). 2. Abbot and Monsen (1979, p. 504) defined content analysis as: ‘‘a technique for gathering data that consists of codifying qualitative information in anecdotal and literary form into categories in order to derive quantitative scales of varying levels of complexity’’. 3. The vignettes were piloted on a senior manager from a large water corporation and a fellow university academic. Questions were asked of these people as to the ‘‘reality’’ of the vignettes and appropriateness of the disclosure approaches developed. The vignettes were amended in response to concerns raised during the pilot testing. References Abbott, W.F. and Monsen, R.J. (1979), ‘‘On the measurement of corporate social responsibility: self reported disclosures as a method of measuring corporate social involvement’’, Academy of Management Journal, Vol. 22 No. 3, pp. 501-15.

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Weil, S., Clark, M. and Wegner, T. (1996), ‘‘Measuring students perceptions of the design features of a computer-aided learning program in introductory accounting’’, paper presented at AAANZ Annual Conference, Christchurch, July. Woodward, D.G., Edwards, P. and Birkin, F. (1996), ‘‘Organizational legitimacy and stakeholder information provision’’, British Journal of Management, Vol. 7, pp. 329-47. Zeghal, D. and Ahmed, S.A. (1990), ‘‘Comparison of social responsibility information disclosure media used by Canadian firms’’, Accounting, Auditing & Accountability Journal, Vol. 3 No. 1, pp. 38-53. Appendix. Vignette and interview questions – gaining legitimacy. ABC Company Limited Scenario You have been identified as a senior person responsible for the decision to include (or not include), environmental information in the annual report. When answering the following questions in these fictitious cases, you should adopt an approach consistent with what you perceive to be the corporate culture and social standing of the company as described in the case. Case 1. ABC Company Ltd, is a large mining company, whose head office is in Brisbane. It has been operating profitably in Australia and overseas for over 60 years. With the recent sustained, and most likely permanent, fall in commodity prices, the company has been looking for new, more cost efficient ways of operating. The company has, after many months of investigation and deliberation, only today, decided to use an extremely new technology that will cut the cost of mining activities very significantly. The probable side effects of the new technology indicate that any land used for mining will become unusable by humans and uninhabitable by animals for at least 50 years from the time the mining operations cease. At this stage the company has not decided what geographic locations will be chosen to utilise this new technology. The new technology and its impacts have not been widely publicised to this time. At this stage the mainstream news media have not reported the issue at all. Only the senior engineers and senior management personnel of the company are fully aware of the future profits to be gained and the potential environmental impacts of the use of this technology. It is planned to begin implementing this new technology within the next two years. Questions: (1) How significant do you believe the environmental issues or events, as described in the case, are to the social standing of the company? Circle one answer only. .

Extremely significant.

.

Very significant.

.

Significant.

.

Moderately significant.

.

Not significant.

Can you elaborate as to reasons for your choice? (2) With respect to an annual report disclosure, would the magnitude of the issues or events in this case, result in the likely intervention of senior executive directors in the: .

decision to include or not include a disclosure in relation to this issue or event, (circle one answer only) YES . . . . . . . . . . . . NO Please explain your answer

Case 1. Disclosure approach

5

4

3

2

1

Make no disclosure Highlight the negative economic and social effects of not changing to the new technology Concentrate on past social and environmental achievements of the company Highlight that, if public opinion dictates, your company will not continue using the new technology

.

371

tone and actual wording of the annual report disclosure YES . . . . . . . . . . . . NO

Case 1. Disclosure approach

Rank

Make no disclosure Highlight the negative economic and social effects of not changing to the new technology Concentrate on past social and environmental achievements of the company Indicate that your company is a responsible corporate citizen and, if populist public opinion dictates, your company will cease plans to use the new technology

Please explain your answer (3) Indicate how likely you would be to adopt each annual report disclosure approach listed below, in response to the environmental issues or events identified in the case. Tick only one box under each disclosure approach (5 is highly likely, 4 likely, 3 possibly, 2 unlikely, 1 highly unlikely). (4) You are deciding on a disclosure strategy for the annual report in relation to the environmental issues raised in the case. Place a number in each box ranking your choice from 1 (most likely), 2, 3, 4 (least likely). Place a number in each box. Why did you rank these in the order you did?

Environmental disclosures in the annual report

The current issue and full text archive of this journal is available at http://www.emeraldinsight.com/0951-3574.htm

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Securing organizational legitimacy An experimental decision case examining the impact of environmental disclosures Markus J. Milne University of Otago, Dunedin, New Zealand, and

Dennis M. Patten Illinois State University, Normal, Illinois, USA Keywords Investment, Decision making, Toxic waste, Liability, Chemical industry, Disclosure Abstract This paper explores the role that environmental disclosures might play in producing a legitimating effect on investors within the context of the chemical industry. By way of an experimental decision case it examines effects of negative, and the offsetting effects of positive, environmental disclosures surrounding chemical firms’ liabilities for toxic waste site liabilities. The paper outlines the theoretical bases for the process of organizational legitimation, and sets the decision experiment in a detailed historical analysis of the toxic waste problems of the 1970s that led to the enactment of legislation requiring clean up and imposing significant liabilities on chemical firms. The results from the decision experiment, which indicate that under some circumstances positive disclosures can restore or repair an organization’s legitimacy, are discussed in the context of the earlier theoretical and historical analysis. This is the worst company I’ve ever worked with. They lied, they seized a camera from one of our men, they obfuscated facts and hid information. I couldn’t believe the dumping at Montague. It was incredible that they would dump that stuff on the ground. They argue that they were operating ‘‘state-of-the-art’’ disposal. The heck they were. Dr James Truchan, Michigan State Department of Natural Resources Investigator commenting on Hooker Chemical’s disposal of 20,000 barrels of toxic waste which contaminated 2 billion gallons of groundwater on a 364 acre zone at White Lake during the 1970s. Some toxins were recorded at thousands of times above EPA standards (quoted in Brown, 1979, p. 90).

Introduction The discovery of toxic waste dumps at Love Canal, New York, and ultimately across the USA, eventually led to the passage of legislation, typically referred to as ‘‘Superfund,’’ requiring corporations to become actively involved in remediating the past problems. Initially enacted in 1980 and revised six years later, Superfund legislation created substantial financial and social exposures for all companies associated with hazardous waste sites. Early studies of corporate disclosure of these exposures (e.g. Rockness et al., 1986; Freedman and Stagliano, Accounting, Auditing & Accountability Journal, Vol. 15 No. 3, 2002, pp. 372-405. # MCB UP Limited, 0951-3574 DOI 10.1108/09513570210435889

The authors are grateful for comments received from Alan MacGregor, Rosalind Whiting, Carolyn Stringer, Gregory Liyanarachchi, seminar participants from the Department of Accounting and Finance, University of Strathclyde, Glasgow, an anonymous reviewer for the 2001 APIRA conference, Adelaide, and two anonymous reviewers for AAAJ.

1995), however, reveal that little information was being provided in company financial reports. Perhaps because of the limited disclosure practices, over the late 1980s and early 1990s, accounting standard-setting bodies in the USA began to require more corporate disclosure of hazardous waste remediation exposures and costs. Several studies (e.g. Gamble et al., 1995; Walden and Schwartz, 1997; Patten, 2000) document that, concurrent with the rise in mandated disclosures about Superfund exposures, companies were also increasing the provision of other, more positive environmental information in their financial reports. Patten (2000, p. 108) argues that the additional disclosures were being used by corporations as a tool for increasing their social legitimacy. However, few, if any, of the studies provide any direct evidence on whether or how financial report environmental disclosures are used by external stakeholder groups. Further, most studies fail to differentiate what stakeholder groups are the intended recipients of annual report legitimating disclosures. Similar to Neu et al. (1998), we believe annual reports (and their environmental disclosures) are intended primarily for financial stakeholders. As such, with investors or investment advisors as our ‘‘relevant public,’’ we seek to identify whether required hazardous waste liability disclosures actually impact investment decision making. More importantly, however, we also investigate whether attempts to offset or mitigate the negative image of the required disclosures with additional, more positive, environmental information result in more favorable investment allocations for these firms. In an experimental investment scenario case, a sample of 76 practicing accountants from the USA was asked to recommend how to allocate $20,000 across two fictitious chemical firms. The investment recommendations were to be made independently under both a long-term and a short-term investment time horizon. The hazardous waste remediation disclosures for the firms were manipulated so that one company (the worse performer) was portrayed as having substantially greater exposure than the other (the better performer). However, for one-half of the participants, the environmental disclosure section for the worse performer also included substantial additional environmental disclosures of a potential legitimating nature. Results indicate that under the long-term scenario, significantly fewer investment dollars were allocated to the worse performer. In post-decision questionnaires environmental concerns were identified as a major factor in the decision by a large percentage of the participants. However, the allocations to the worse performer were significantly higher for those participants who had received the off-setting environmental disclosures and who also cited environmental concerns as a factor in the decision. In contrast, under the short-term scenario, our sample participants, apparently interpreting higher environmental exposure as a signal of greater risk, awarded higher allocations to the worse performer. The off-setting environmental disclosures in this case did not significantly alter the decisions. This suggests that, at least for long-term investment settings, the use of legitimating disclosures may be a successful strategy for firms with other exposures. We begin the paper with a detailed review of corporate legitimation.

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Prior literature Organizations, their environments and legitimation Organizations operate within a larger social system or environment as part of a coalition of individuals and sub-coalitions (Cyert and March, 1963). Pfeffer and Salancik’s (1978, p. 257) resource dependence theory of organizations proposes that organizational behavior is an attempt both to comply with the demands of others and to manage the dependencies that create constraints on organizational actions. Negotiating exchanges to ensure the continuation of needed resources is the focus of much organizational action (Pfeffer and Salancik, 1978, p. 258). The more critical and scarce the resources required by the organization, the greater the control over the organization those with the resources possess, and the greater the attention they receive from the organization. An organization’s environment, however, not only provides resources but is also a threat (Perrow, 1970). The utilization of resources from the larger social system, that could otherwise be allocated elsewhere, must be accepted as legitimate by members of that larger system (Parsons, 1960). Patten (1991, 1992) stresses that this perception of legitimacy separately entails both economic (monitored though the marketplace) and social (monitored through the public policy process) realms. Consequently, survival depends not only on such mundane matters as efficiency and profits, but upon the acceptance of output and methods of operation by significant sectors of the organization’s environment (Perrow, 1970). To the extent that the actual or perceived behavior of an organization departs from the social values and norms held by those significant sectors, its legitimacy is threatened (Dowling and Pfeffer, 1975) and a legitimacy ‘‘gap’’ may develop (Sethi, 1975, 1978, 1979). Legitimacy, then, is a conferred status (Perrow, 1970) that, to the extent that it is lacking, may be viewed as a resource (Dowling and Pfeffer, 1975) to be obtained from groups outside the organization. To extend, maintain or defend an organization’s legitimacy, managers engage in a process of legitimation (Dowling and Pfeffer, 1975; Ashforth and Gibbs, 1990; Suchman, 1995). Pfeffer (1981, p. 5) suggests: Management provides rationalizations or reasons that make sense of and thereby explain the organization’s activities. These rationalizations or explanations for behavior are constructed so as to legitimate the organization to its constituents both within and outside its boundaries, in that explanations for activity provide reasons for organizational action that are consistent with social norms, values and expectations for the organization. This legitimation occurs to ensure support not only from the organization’s environment but also to ensure the continued participation and indeed, acquiescence, enthusiasm, and commitment for the organization on the part of its employees or members.

Organizations, then, may seek to change things other than their performance. Through communication they may seek to change the norms, values and beliefs of those external constituents (Dowling and Pfeffer, 1975; Sethi, 1975, 1977, 1978, 1979; see also Lindblom, 1994). Organizations, again by way of communication, may also attempt to appear legitimate by aligning themselves with other symbols, values or institutions which are themselves legitimate (Dowling and Pfeffer, 1975; Jackall, 1988, pp. 134-61). There is also a wide range of mechanisms or tactics that can be deployed to implement either substantive

or symbolic approaches to legitimation. Ashforth and Gibbs (1990), for example, suggest managers may change role performance, alter resource dependencies (e.g. by contracting, interlocking directorships, etc.) and alter institutionalized practices (e.g. by lobbying). Symbolic management may involve espousing socially acceptable goals, denial or concealment of information, redefining means and ends, offering accounts (including ‘‘excuses’’ and ‘‘justifications’’) and offering apologies[1]. The process of legitimation, however, is not only strategic (i.e. within management’s control); another perspective on legitimation emphasizes its institutional nature (Suchman, 1995). Institutionalists (e.g. Meyer and Rowan, 1977; Zucker, 1977; DiMaggio and Powell, 1983; Meyer and Scott, 1983): . . . downplay both managerial agency and manager-stakeholder conflict. In a strong and constraining symbolic environment, a manager’s decisions often are constructed by the same belief systems that determine audience reactions. Consequently, rather than examining the strategic legitimation efforts of specific focal organizations, institutionalists tend to emphasize the collective structuration (DiMaggio and Powell, 1983) of entire fields or sectors of organizational life (Suchman, 1995, p. 576, emphasis in original).

Much management behavior, including attempts to legitimate, may be controlled not by managers but by institutional pressures that produce an ‘‘iron cage’’ and create tendencies towards isomorphism within the organizational field (DiMaggio and Powell, 1983). These pressures, however, may be subtle, pervasive, yet powerful, myths of why organizations ought to exist, and how they ought to behave. Consequently, actions and decisions, including ceremonies and rituals, may occur with little realization. From the institutionalist perspective, legitimacy (and hence resources and survival) is gained by the organization becoming isomorphic with its environment (Meyer and Rowan, 1977). Legitimacy can be enhanced by mentioning institutionalized structures and practices in the accounts that managers provide to external constituencies (Meyer and Rowan, 1977; Elsbach and Sutton, 1992; Allen and Caillouet, 1994; Arndt and Bigelow, 2000). While much of the foregoing analysis suggests a substantive/symbolic division between means of legitimation, it is worth noting that all attempts at legitimation are likely to form part of a ‘‘myth system’’ that is loosely or entirely decoupled (Weick, 1969) from the organization’s ‘‘operational code’’ (Reisman, 1979). In legitimating the organization, senior management provide a buffer between the organization and its environment (Thompson, 1967; Ginzel et al., 1992). Managers, for example, may provide accurate accounts of a variety of institutionalized practices to reduce pollution (e.g. environmental committees, ISO 14000, audits, etc.), but such initiatives may actually do little to change the ‘‘real work’’ of the organization (see, e.g. Dalton, 1959; Jackall, 1988; Kanter, 1977; Bowles, 1991). Such initiatives may simply be an elaborate and convincing fac¸ade designed or adopted to conceal the ‘‘back stage’’ activities from prying eyes (Jackall, 1988, pp. 162-90; Punch, 1996, pp. 213-47). Consequently, whether legitimating initiatives occur as a result of management desire or institutional pressure, and whether they involve pure symbolism or

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substantive activity, they may mean little in terms of significantly changing the organization’s activities. As illustrated above the conceptual issues involved with legitimation are complex, but which organizations have low legitimacy, or why? And from whom do organizations seek legitimacy? More specifically, to whom do managers direct their legitimating attention, and when? Ginzel et al. (1992) suggest both identity-enhancing and identity-threatening events lead to impression management behavior. The former provide opportunities for image enhancement, while the latter, which are seen to center around faulty decisions, inattention to emerging problems or neglect of ethical responsibilities, threaten the organization’s legitimacy and create a need for image repair. Sethi (1977) suggests the source of a legitimacy gap may involve changing societal expectations that result from a gradual awareness of some matter or other that becomes objectionable. Tobacco companies, for example, started coming under fire as more information was gleaned about the potential health effects of cigarette smoking (Miles and Cameron, 1982). Alternatively, a legitimacy gap may arise out of new information that is suddenly gained about an organization, particularly if it differs from the organization’s image. Bowles (1991) suggests that organizations have ‘‘shadows’’ that constantly threaten to reveal themselves, and some organizations, and their primary actors, are under close and persistent monitoring and evaluation (Sutton and Galuic, 1996). Such information, consequently, may result from within the organization, i.e. part of its ‘‘operational code’’ becomes revealed by a whistle-blower, journalists or other activists. Alternatively, the organization may suffer some accidental, controversial or crisis event (Elsbach, 1994; Allen and Caillouet, 1994). Consequently, events precipitating the opportunity or need for legitimation and impression management can be both gradual and sudden, both anticipated and unanticipated (Ginzel et al., 1992). Further emphasizing this variability, Mitchell et al. (1997), in exploring ‘‘who and what really counts’’ within a theory of stakeholder identification, suggest that the expectations of the ‘‘dominant’’ stakeholders – those perceived by managers to have power and legitimacy – will typically ‘‘matter’’ to managers. When these groups also have a claim that is perceived to be urgent, however, they become ‘‘definitive’’ and managers are considered to have a clear and immediate mandate to attend to their claim. However, as they note (Mitchell et al., 1997, p. 879), ‘‘stakeholders change in salience, requiring different degrees and types of attention depending on their attributed possession of power, legitimacy, and/or urgency, and that levels of these attributes (and thereby salience) can vary from issue to issue and from time to time.’’ Bansal and Roth (2000) contribute further to our understanding of legitimation by developing a model grounded in management’s explanations that proposes three basic motivations for ‘‘greening’’ the firm: competitive advantage, legitimation, and environmental responsibility. Firms classified with a legitimation motive for adopting environmental initiatives tended to emphasize survival, compliance with norms and regulations, a stakeholder

focus, the costs and risks associated with noncompliance, thwarting impending legislation, imitating and following others in the industry. Furthermore, the legitimation motive tended to manifest itself in terms of regulatory compliance, networking with interest groups and impression management.

Securing organizational legitimacy

Examples of legitimation as shown by the data included complying with legislation, establishing an environmental committee or environmental manager position to oversee a firm’s ecological impacts and advise senior management, developing networks or committees with local community representation, conducting environmental audits, establishing an emergency response system, and aligning the firm with environmental advocates (Bansal and Roth, 2000, p. 727).

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Three primary variables (issue salience, field cohesion, and individual concern) are theorized to influence firm motives, and Bansal and Roth posit that all three act positively on those firms seeking legitimacy from their environmental initiatives. Salient issues were those that were perceived by the firms as certain (impacts easily determined, quantified or costed), transparent (easily attributed to the firm), and emotive (elicit an emotional response from constituents) and these tended to produce the greatest reactions. Salient issues were perceived as threatening legitimacy and profitability. Field cohesion is largely defined following the institutionalist framework outlined earlier (e.g. DiMaggio and Powell, 1983) and focuses on the ‘‘intensity and density of formal and informal network ties between constituents in an organizational field’’. Field cohesion is strengthened by negative images of the industry’s ecological impacts and by the activities of industry associations. As Bansal and Roth (2000, p. 730) suggest: Fields labeled as ‘‘dirty’’, such as oil, chemicals, mining and forestry industries, were under intense scrutiny. As a result, field members colluded either through formal arrangements, such as industry associations or through informally monitoring each other’s ecological responses. Industry associations further promote field cohesion by transferring information about ‘‘best practices’’, lobbying government to adjust legislation and regulations, and collectively managing an industry’s image.

Firms in highly cohesive fields were strongly motivated by legitimacy concerns since often their survival depends on the behavior of all field members. Firms tended to conform to the industry norms, since standing apart from the industry’s behavior on green initiatives was both difficult, because of information sharing and informal sanctions, and seen as undesirable, because individual corporate superior performance ratcheted up the standards for others and so costs for all. Finally, while individual concern (leadership, values, etc.) was a powerful factor in explaining why some firms were motivated by a desire to be ecologically responsible, these firms tended to operate in less cohesive fields and so were less constrained by their institutional context. Individual concern served to reinforce the legitimation motive within firms from highly cohesive fields. Legitimation, then, is a process that results from the interaction of organizations and their environments. From one perspective, legitimation is grounded in a behavioral or resource dependence theory of the firm. This theoretical perspective emphasizes the criticality of resources, the need for management attention to be paid to those who control such resources, and, consequently, on the power, legitimacy and urgency of claims as perceived by management of those

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constituents controlling the resources. Precipitating issues or events have the ability to become urgent or salient to some stakeholders, so threatening the organization’s legitimacy, its access to resources and so survival. Such issues or events may temporarily lift stakeholders to a definitive status that requires management’s more immediate attention. Such attention may involve actions and decisions that result in performance change, but it will also involve symbolic and impression management. From another perspective, legitimation is grounded in institutional theory with its emphasis on institutional pressures to conform. From this perspective firms are found to develop and adopt structures, procedures and personnel that signal conformity, credibility and so legitimacy to outside audiences and the rest of the organizational field. Field cohesion – the intensity and connectedness of organizational members – serves to increase the threat to legitimacy and reinforce legitimation. While the outcomes of such institutional pressures are largely ‘‘other’’ controlled, management may control their communication. Bansal and Roth (2000, also see Elsbach, 1994) illustrate how the strategic and institutional perspectives can serve as complementary explanations for firms’ attempts to legitimate. Hazardous waste, ‘‘Superfund’‘ and disclosure Ever since Carson’s (1962) Silent Spring predicted the apocalyptic loss of nature from the use of synthetic chemical pesticides, concerns have been raised about the efficacy and legitimacy of the chemical industry. Carson concerned herself with the insidious mutagenic and carcinogenic effects of such chemicals as DDT. Recently, Colburn et al.’s (1996) Our Stolen Future raises the spectre of such compounds altering our hormones, fertility and fundamentally our ability to reproduce and survive. If the manufacture and use of such chemicals were not enough, the past three decades have seen a series of industrial incidents and disasters, most notably the 1984 Bhopal chemical leak, in which individuals have either been killed outright or exposed to potentially lethal chemicals[2]. While incidents such as Bhopal might be put down to human error, there is nothing accidental about the thousands of toxic chemical waste sites that have been discovered across the USA over the past 30 years. From the infamous toxic dump at Love Canal, to sites across the country, Brown (1979) charts in excruciating detail the effects of the appalling and contemptible behavior of chemical firms, and their waste disposal companies. To illustrate, Brown documents, and later congressional hearings confirmed, that Hooker Chemical executives had known about the possible health effects of its toxic dumps at Love Canal for years and chose to ignore them[3]. Even the EPA, which in 1979 estimated the existence of at least 51,000 waste sites, itself came under fire for not doing enough. For example, one grand jury claimed the government at all levels had fostered ‘‘actual and potential criminality and profiteering’’ by its response to hazardous waste which has been characterized by ‘‘ignorance, neglect, laxity, and fractionalization of responsibility’’ (quoted in Brown, 1979, p. 329). Certainly, the sheer cost of dealing with the hazardous waste clean-up problem was a factor in the lack of action. EPA estimates in 1979 suggested

that providing a permanent solution would cost $26 million at each site. Based on only the 1,700 worst sites this suggested an overall cost of $44 billion. Since neither the EPA nor the federal government had this kind of money, the Carter Administration proposed raising an emergency ‘‘superfund’’ of $1.6 billion over four years to begin the clean-up process. The vast majority of the fund (80 percent) was to come from taxing chemicals, with the rest from federal and state government. In response to Carter’s call, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), typically referred to as Superfund, was enacted in 1980, and subsequently amended in 1986 by the Superfund Amendment and Reauthorization Act (SARA)[4]. Under the Superfund process, the EPA enters potentially hazardous sites on its database as it becomes aware of them (in 1995, over 36,000 sites were listed). Following preliminary assessments and site inspections, the sites are scored using a Hazard Ranking System that permits some sites to be placed on the National Priorities List (NPL). In 1995, 1,200 sites were listed on the NPL. Only sites on the NPL are eligible for funding and long-term remedial action. Once listed, a series of steps including damage assessment, remedial design, and eventually remedial action lead to site clean up. The clean-up process is cumbersome and one estimate puts the average time elapsed between database listing and clean up at 12 years, with being on the NPL to clean up at eight and a half years (Revesz and Stewart, 1995a, b). As at 1990, Congress had authorized a total of $15.2 billion to fund the clean up, and by 1992 the EPA had cleaned up 111 sites, with work in progress at a further 400 sites. Some estimates now put the total clean-up cost of all NPL sites at over $100 billion and maybe as high as $400 billion with no likely completion before the year 2020. Average clean-up costs at NPL sites are $30 million (see Barnett, 1994; Revesz and Stewart, 1995a, b). Consequently, corporate liability under Superfund can be potentially enormous. Under existing legislation, liability is strict (demonstrating fault or negligence is not required), retroactive (sites before 1980 are caught), joint and several. These latter aspects of the statute mean potentially responsible parties (PRPs – who might include current and previous site owners, operators, substance generators, waste disposers, and transporters) are equally liable for the damage and clean-up costs unless they can show the harm and clean up is clearly divisible. Moreover, where parties are no longer in existence, or financially incapable of meeting their obligations, the remaining parties must meet the ‘‘orphan’’ share of the costs. PRPs are typically identified and notified during the EPA’s preliminary assessment. Barth and McNichols (1994, p. 179) identify nearly 1,500 Compustat firms as PRPs, with some of these identified as PRPs on as many as 61 Superfund sites. The chemical industry had 32 firms identified with ten or more sites, almost three times the number of such companies as any other industry classification. In the early years, the EPA would organize the feasibility and assessment work, hire a contractor to clean up, pay for the clean up from the Superfund and then seek reimbursement from the PRPs. Now, however, PRPs are typically undertaking the bulk of the remedial investigations, feasibility studies, remedial

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designs and remedial action work as a result of settlements with the EPA. Barth and McNichols (1994, p. 184) note that while being identified as a PRP is usually sufficient to indicate a probable liability, estimating the liability is likely to involve considerable uncertainty. Site complexity, remediation alternatives, changes in remediation technology, clean up standards, the number and financial viability of other PRPs, the availability of records on site dumping by PRPs, the uncertainly of insurance cover, and the protracted period over which litigation and negotiation might take place, all create liability estimation difficulties. Nonetheless, some firms’ liabilities will run into tens of millions, if not hundreds of millions, of dollars. DuPont’s 1997 annual report, for example, reports ‘‘At December 1997, the company’s balance sheet included an accrued liability of $561 million . . . Approximately 78 percent of the company’s environmental reserve was attributable to RCRA and similar remediation liabilities and 22 percent to CERCLA (Superfund) liabilities.’’ In spite of the substantial financial exposure the Superfund legislation created for chemical and other firms, disclosures of liabilities are a relatively recent phenomenon. Early studies of financial report disclosure indicated little hazardous waste remediation information was being provided. For example, Rockness et al. (1986, p. 182) examined the 1983 annual reports for 21 major US chemical companies and report that only four included any mention of hazardous waste exposures and none disclosed Superfund information. In a more general study, Freedman and Stagliano (1995) report that while well over half of their 193 sample firms included on the EPA’s National Priorities List included mention of Superfund in their 1987 annual reports, only 48 provided any type of quantitative information relative to Superfund exposures. Of course, a substantial body of literature suggests firms will seek to avoid such disclosures for fears of communicating negative images of the organization and devaluing the firm (see e.g. Deegan and Rankin, 1996; Chan and Milne, 1999). The lack of forthcoming disclosure noted above, in conjunction with the growing realization of the seriousness of the hazardous waste problem, may have been what led to increased investor demands for corporate environmental information. For example, Epstein (1992), in a survey of US shareholders, reports that over 80 percent wanted environmental disclosures included in the annual report because investors have long-term social and financial concerns that environmental problems could lead to substantial increases in costs, regulation, and government fines. In response to these demands, or perhaps only because of the increasing liabilities firms now faced as a result of toxic dumping and the subsequent Superfund legislation to clean it up, the standard setting bodies in the USA began to require more information disclosure. The Securities and Exchange Commission (SEC), in its Financial Reporting Release No. 36, issued in May of 1989, provided a Superfund-related item as a specific example of recommended Management Discussion and Analysis (MD&A) disclosure. Four years later the SEC provided further guidance on the reporting of environmental liabilities in its Staff Accounting Bulletin 92. The Financial Accounting Standards Board,

although not promulgating any statements of accounting standards on the subject, has issued two relevant Emerging Issues Task Force (EITF) reports. EITF Issue No. 90-8 addresses the expensing or capitalization of contamination treatment costs, and EITF Issue No. 93-5 provides guidelines for recognizing environmental liabilities and the impact of potential recoveries on related losses. Finally, and most recently, the American Institute of Certified Public Accountants in its Statement of Position 96-1 requires corporations with environmental remediation liabilities to specifically disclose those items, as well as other environmental cost information, in the annual report. The increased disclosure of environmental liability exposures clearly would appear to signal threats to corporate economic legitimacy. Less obvious, perhaps, is that these disclosures also increase the threat to firms’ social legitimacy. Disclosure also forces companies to acknowledge they have acted poorly with respect to environmental matters, and this could trigger additional negative responses from regulators, consumers, or environmental groups, among other potential stakeholders, which in turn may result in yet tougher and more costly regulation. Because of this threat to the social legitimacy of the organizations, firms have an incentive to offset or mitigate the negative image portrayed through the required disclosures with information exhibiting other, presumably more positive, aspects of environmental performance. There is indeed evidence that this did occur. To illustrate, Gamble et al. (1995), Walden and Schwartz (1997) and Patten (2000) all report a concurrent rise in the provision of other (positive) types of environmental information in US corporations’ financial reports over the period in which negative environmental liability disclosures are being required. Patten (2000), in particular, examines the change in the disclosure of Superfund-related exposures in corporate financial reports from the mid-1980s to the mid-1990s for a sample of 95 US companies. He documents a significant increase in this disclosure. However, he also notes a significant increase in the provision of other, more positive environmental disclosures as well. Furthermore, Patten reports a statistically significant correlation between firm-specific changes in Superfund disclosures and changes in other environmental disclosure. Patten argues that the increase in the disclosure of more positive environmental information by US firms is due to the companies’ attempts to offset or mitigate the negative impact of the remediation-related disclosures. Appendix 1 provides several extracts of such chemical firms’ annual report disclosures. Despite these findings, several issues remain unresolved within this literature. For example, few of the studies provide any direct evidence on whether or how such annual report disclosures are used by the external stakeholder groups that are perceived as the intended recipients of such legitimating disclosures. This is often left assumed, or secondary evidence, such as Tilt’s (1994) survey of pressure groups, is often relied upon instead. Similarly, many studies tend to treat ‘‘stakeholder groups’’ as a homogeneous group of intended recipients of annual report disclosures, and fail to identify the ‘‘relevant publics’’ of such reports (see Pfeffer and Salancik, 1978; Lindblom, 1994), or, identify ‘‘definitive’’ stakeholders’ claims (Mitchell et al., 1997). A notable exception, however, is Neu et al. (1998,

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p. 279) who suggest environmental disclosures in annual reports are likely to be targeted at the organization’s most important relevant publics, with financial stakeholders and regulators identified as those most important publics. Environmentalists are seen as a secondary public, while the general public, Neu et al. (1998) suggest, can be reached by other media such as organizational advertising. Likewise, no evidence is introduced in this literature that indicates the influence of environmental disclosures on external stakeholder or pressure groups, or that management perceives such disclosures could influence such external groups. While the coincidence of ‘‘other’’ environmental disclosures with negative liability disclosures observed by Patten (2000) is certainly indicative of management’s attempts to neutralize the negative impact of such information, we have little direct evidence, whether it does or whether it was ever intended to. As Pfeffer and Salancik (1978, p. 194; see also Lindblom, 1994) note, organizational legitimacy is a state or condition that is conferred upon the organization by groups or individuals external to it. It is not something that necessarily arises from organizations pursuing strategies of legitimation, for those strategies may fail. In some respects, then, the literature on social and environmental disclosures has tended to focus on only a part of the organizational legitimacy story. The focus has largely been upon what firms are doing with information rather than upon whom the actual or intended recipients might be, and what they are or are expected to be doing with the information. This emphasis seems to conform with Ashforth and Gibbs’ (1990, p. 177) more general observation that: Despite the problematic nature of legitimacy, most research on the construct has been confined to the means of legitimation and has overlooked the conditions under which such means are or are not successful. Previous work has implicitly assumed that the means indeed produce the desired effects.

In this study, we attempt to partially overcome some of these issues, albeit in a very limited way, by focusing on whether chemical firm annual report environmental disclosures influence investment decisions. Because these firms are now required to disclose contingent liabilities relating to hazardous waste sites, some of which run into tens and hundreds of millions of dollars, they are forced into communicating and reinforcing their environmental problems to annual report users. While annual reports may be used by a variety of external groups, like Neu et al. (1998) we believe such reports (and their environmental disclosures) are largely intended for financial stakeholders. However, because the disclosure requirements for toxic waste offences force companies to acknowledge environmental problems, they also create a need to reassure investors that the firm is managing its exposure to the social environment. With investors or investment advisors as our chosen ‘‘relevant public’’ for annual reports, we seek to determine whether the hazardous waste liability information now required to be disclosed actually impacts investment decision-making. Second, and more importantly, though, we investigate whether attempts by chemical companies to portray social legitimacy by way of accompanying positive environmental disclosures result in more favorable investment decisions for these firms. Our

study, then, provides an examination of the effect of one type of legitimation behaviour, information disclosure, as it is communicated by the annual report to a specific stakeholder group, namely potential investors. Research method Similar to Chan and Milne (1999), an experimental investment scenario was used to generate data. The advantage of such an approach is the ability to manipulate the variables of interest (in this case the levels of environmental disclosure) to more directly measure potential impacts. As an experiment, participants are not making real-world allocation decisions and, consequently, the external validity of the results can be called into question. The precise meaning of ‘‘external validity’’, however, is far from clear-cut, and there has been much debate over the possible limits of experimental results, most notably in the field of psychology[5]. Aronson et al. (1985), for example, distinguish between ‘‘experimental’’ and ‘‘mundane’’ realism in experiments. Experimental realism, they suggest, occurs where the situation is involving to the subjects, where they are forced to take it seriously, and where it has an impact on them (Aronson et al., 1985, p. 482). Mundane realism, on the other hand, occurs to the extent that events occurring in the research setting are likely to occur in the normal course of the subjects’ lives, that is, in the ‘‘real world’’ (Aronson et al., 1985, p. 482). Simply matching features (actors, contexts, behaviors) that are present in the real world to one’s experimental situation may not necessarily contribute to the external validity of the findings, for such features may be largely surface orientated and unimportant in producing the effects (Berkowitz and Donnerstein, 1982, p. 249). A difficult, and perhaps irresolvable issue for those using experiments (and for those seeking to criticize them), however, is being able to distinguish between incidental or non-essential similarity between experimental and real conditions, and similarity in terms of essentials (Locke, 1986, p. 7). Essential similarities will produce experimental realism and so increase the generalizability of the experiment’s findings, but discovering what these are is problematic. In our experiment below, for example, we use real accountants, but we do not use real money. We also carefully control and provide largely real but limited information sets. We then require our subjects to make decisions in one sitting. While to include or omit some features is simply choice, our desire to examine the impact of certain information has ensured we have had to sacrifice other features (e.g. allowing subjects to gather their own sets of information to make their decisions). Consequently, to what extent we have accidentally or deliberately included or excluded essential features, and so increased or reduced the external validity of our findings, is not something we can know from a single experiment. Indeed, and more generally, many writers on methodology (see e.g. Campbell and Fiske, 1959; Hunter et al., 1982; Lindsay and Ehrenberg, 1993; Lindsay, 1995; McGrath et al., 1982) have suggested that findings from single studies cannot be regarded as ‘‘evidence’’ or ‘‘knowledge’’ of anything. To these writers, only through careful replication and the accumulation of convergent results can

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empirical knowledge gain credence. It is for this reason, rather than because they have simply been generated from an experimental method, that we suggest our results should be viewed with caution and as indicative of investor behavior. Sample Consistent with previous studies of investment actions involving environmental disclosures (see e.g. Belkaoui, 1980; Chan and Milne, 1999), practicing accountants were used as the sample participants for this study. The advantage of using accountants in an investment study is summarized by Chan and Milne (1999, p. 262), who note that ‘‘individuals who possess a significant degree of experience in accounting are more likely to understand financial reporting practices and the accounting information contained in the annual report than ‘unsophisticated’ investors.’’ Consequently, we believe such participants will enhance the internal validity of the study. For this investigation, 12 different US-based firms agreed to have employees with accounting backgrounds participate in the study. All participation was voluntary and the experiment was administered on individual rather than company time. In total, the investment experiment was administered, either by one of the project co-authors or by a trained assistant, to 76 sample participants. Table I presents demographic data on the members of the sample[6]. n

Table I. Summary of sample (n = 76) participants’ descriptive data

Gender Female Male Education No college degree Bachelors’ degree Masters’ degree Law doctorate Professional experience (years) 10 Age (years) 59 Self-reported investment experience None Very limited Moderate Considerable Extensive

34 42 1 64 9 2 13 25 18 20 48 15 8 4 1 7 34 24 9 2

Task The experiment was administered in two steps. First, participants were given a statement of the task indicating they were being asked by a friend to help allocate $20,000 of investment money across two firms[7]. Because Chan and Milne (1999) report that the use of environmental information appeared to vary across long-term and short-term investment scenarios, participants were asked to make the allocation under two differing sets of assumptions. The first set of assumptions indicated that the allocation was being made as a long-term investment with a goal of long-term growth. Under the second set of assumptions, the time frame for the investment holdings was given as short term, with a goal of potential speculative gain. The order in which the two scenarios were presented to the participants was varied so that one-half of the sample was given the long-term scenario first and the other half had the shortterm scenario presented first. No order differences were detected in the results. Participants were also given summary financial statements and a Management Discussion and Analysis (MD&A) for each of the two firms. While the firms (Benzocorp and Midwest Chemical) are fictitious, the financial statements and MD&As were constructed based on a review of more than 25 US chemical firms’ annual reports for 1997 and 1998 and are meant to be representative of mid-range firms in the industry. The statements were designed to make the firms similar in regard to financial attractiveness[8]. Similar to the procedure used with regard to the scenarios, the company order in which the data was presented to the participants was varied. No order effects were noted in the results. The manipulation variable for this study was the environmental disclosure section of the MD&A. As required by current US reporting standards, both Benzocorp and Midwest Chemical included Superfund-related disclosures in their MD&As. However, the magnitude of exposure was designed to be greater for Midwest Chemical. This was conveyed by disclosing that Midwest Chemical had more Superfund sites (32 as opposed to nine for Benzocorp), greater estimated total potential cost (projected total exposure of $50 million to $90 million in contrast to $15 million to $23 million for Benzocorp), and higher annual expenditures (a three-year average of $9.2 million whereas Benzocorp’s three-year average was only about $4.2 million)[9]. If negative environmental information does impact investment decision making, the average allocation to Midwest Chemical (the worse environmental performer) would be expected to be significantly lower than the allocation to Benzocorp. In order to test the legitimation arguments associated with the provision of positive or neutral environmental information, one-half of the sample participants received an MD&A for Midwest Chemical (the worse environmental performer) that included substantial additional environmental disclosures of an offsetting or mitigating nature. The information included was based on a review of the categories examined for in previous studies of environmental disclosure (e.g. Walden and Schwartz, 1997; Patten and Nance, 1998; Patten, 2000), and similar to those extracts shown in Appendix 1. If these additional, voluntary disclosures do offset or mitigate the negative impact of

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the required remediation information, the investment dollars allocated to Midwest Chemical would be expected to be higher for the participants with the more extensive disclosures in the MD&As than for those participants with MD&As not containing the legitimating disclosures. In summary, then, one-half of our experimental respondents randomly received financial statements and MD&A (including statements of environmental liabilities and costs) for each of Benzocorp and Midwest Chemical, and were asked to make two independent investment decisions under assumptions of long-term and short-term conditions. The other half were instructed to make the same two independent investment decisions. They randomly received the exact same information for each of Benzocorp and Midwest Chemical, except that in Midwest Chemical’s MD&A statements we included some extra positive information on Midwest’s current and future environmental performance. The environmental information provided to the two groups is shown in Appendix 2. To examine the effects of the differential environmental liability information across our two companies, we combined the two sub-samples of respondents and examined (mean) differences in amounts invested in each company. This was done separately for the long- and short-term investment assumptions (see Tables II and III). To examine the effects of the positive, off-setting information provided on Midwest to one-half of the respondents, we compared the (mean) amounts invested in Midwest by each of our sub-samples. We did this separately for the long- and short-term investment assumptions (see Tables IV and V). Participants were not told what the purpose of the study was and they were given up to one hour to analyze the statements and make the two allocation decisions.

Panel A – total sample (n = 76) Benzocorp Midwest Chemical

Mean amount invested ($)

Std dev. ($)

11,890 8,110

4,769 4,769

Panel B – participants citing environmental criteria (n = 68) Benzocorp 11,929 4,799 Midwest Chemical 8,701 4,799

t-statistica

Mann-Whitney Z-scorea

4,887 (0,000)

4,934 (0,000)

4,687 4,821 (0,000) (0,000) Panel C – participants citing environmental criteria in ‘‘top three’’ (n = 48) Benzocorp 12,545 5,049 Table II. Midwest Chemical 7,455 5,049 4,939 4,637 Comparison of amounts (0,000) (0,000) invested in Benzocorp a and Midwest Chemical Note: The t-statistic reports for a test of the difference between mean investment amounts in Benzocorp and Midwest Chemical, while the Mann-Whitney Z-score reports an equivalent Corporation under the non-parametric test. One-tailed significance levels are reported in parentheses beneath the long-term investment statistical measures scenario

Panel A – total sample (n = 76) Benzocorp Midwest Chemical

Mean amount invested ($)

Std dev. ($)

8,546 11,454

5,758 5,758

t-statistica

Mann-Whitney Z-scorea

–3,113 (0,002)

3,062 (0,002)

Panel B – participants citing environmental criteria (n = 68) Benzocorp 9,518 5,718 Midwest Chemical 10,482 5,718

–0,892 (0,374) Panel C – participants citing environmental criteria in ‘‘top three’’ (n = 48) Benzocorp 10,409 5,903 Midwest Chemical 9,591 5,903 0,563 (0,575)

0,684 (0,494)

Mean amount invested ($)

Std dev. ($)

t-statistica

Mann-Whitney Z-scorea

8,776 7,443

5,246 4,204

1,223

0,972

(0,113)

(0,162)

Panel B – participants citing environmental criteria Legitimacy disclosures (n = 34) 9,147 5,206 No legitimacy disclosures (n = 6,995 4,157 34)

1,884 (0,032)

Panel C – participants citing environmental criteria in ‘‘top three’’ Legitimacy disclosures (n = 25) 8,640 5,453 No legitimacy disclosures (n = 6,166 4,324 23)

1,731 (0,045)

387

–1,003 (0,316)

Note: aThe t-statistic reports for a test of the difference between mean investment amounts in Benzocorp and Midwest Chemical, while the Mann-Whitney Z-score reports an equivalent non-parametric test. Two-tailed significance levels are reported in parentheses beneath the statistical measures

Panel A – total sample Legitimacy disclosures (n = 38) No legitimacy disclosures (n = 38)

Securing organizational legitimacy

Table III. Comparison amounts invested in Benzocorp and Midwest Chemical Corporation under the short-term investment scenario

Table IV. Comparison of amounts invested in Midwest (0,049) Chemical Corporation by participants receiving MD&A with 1,743 and without legitimating disclosures (0,041) under the long-term (continued) investment scenario 1,656

The second step in the experiment centered on gathering feedback information on why the participants made the allocations they did. After completing the allocation decisions, all participants were given a questionnaire that asked them to indicate and rank (independently for the short-term and long-term scenario allocations) all factors that they relied on in making their decisions. Seven potential factors, including ‘‘environmental concerns,’’ were listed on the

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Mean amount invested ($)

Std. dev. ($)

t-statistica

Mann-Whitney Z-scorea

10,816 12,092

6,246 5,231

–0,966

–0,861

(0,337) Panel B – participants citing environmental criteria Legitimacy disclosures (n = 28) 8,670 5,493 Table V. No legitimacy disclosures (n = 12,268 5,459 –2,440 Comparison of amounts 28) invested in Midwest (0,018) Chemical Corporation Panel C – participants citing environmental criteria in ‘‘top three’’ by participants Legitimacy disclosures (n = 18) 8,528 5,527 receiving MD&A with No legitimacy disclosures (n = 10,867 6,275 –1,138 and without 15) legitimating disclosures (0,264) under the short-term investment scenario

(0,389)

388

Panel A – total sample Legitimacy disclosures (n = 38) No legitimacy disclosures (n = 38)

–2,289 (0,022)

–1,169 (0,242) (continued)

questionnaire in alphabetic order. The form also had spots for three additional ‘‘other’’ items. This additional information provided the ability to further break down each of our sample groups into those who clearly indicated environmental concerns played some part in their decision making. Panels B and C in each of Tables II through V provide analysis based on the breakdown of the sample groups. Finally, for each of the three most important factors, the participants were asked to explain how the item impacted their decision[10]. Results Table VI provides a breakdown of how the issue ‘‘environmental concerns’’ was ranked by sample participants under both the long-term and the short-term scenarios. As noted in the table, 48 of the 76 sample members (63 percent) ranked ‘‘environmental concerns’’ either first, second or third in terms of the Rank

Table VI. Sample (n = 76) participants’ rankings of the importance of 22environmental concerns’’ in the longterm and short-term investment decision scenarios

1 2 3 4 5 6 7 8 Not noted

Long-term n

Short-term n

13 16 19 6 4 7 2 1 8

9 9 15 7 7 6 1 1 20

importance it played in their investment allocation under the long-term scenario. Only eight participants did not cite it as influencing the decision at all. However, under the short-term scenario environmental concerns appeared to have less impact. To illustrate, 20 participants (26.3 percent) did not cite environmental concerns as influencing the investment decision. Further, only 33 sample members (43 percent) cited it as being one of the top three factors. In general, therefore, it appears that, consistent with the results presented by Chan and Milne (1999), environmental factors may have more relevance to investors under long-term investment strategies. Table II presents the comparisons for mean allocations across the two sample companies under the long-term investment scenario. Panel A of Table II shows the results for the total sample. As noted in Panel A of Table II, the mean allocation to Benzocorp (the better environmental performer) was $11,890 and the mean allocation to Midwest Chemical was $8,110. Both parametric (t-test on the difference in the means) and non-parametric (Mann-Whitney test) tests indicate the difference in allocation is statistically significant. Panels B and C of Table II, respectively, report the breakdown in allocations for only those sample members citing environmental concerns as a factor in the decision (n = 68), and only those citing environmental concerns as one of the top three factors in the decision (n = 48). The results for these sub-groups are essentially identical to the overall sample results. The results summarized in Table II suggest, as expected, that the negative environmental information did influence the investment decisions where long-term growth was the desired outcome. Interestingly, the results for the short-term investment scenario are not consistent with those reported above. As noted in Panel A of Table III, the sample participants, on average, allocated significantly higher amounts to Midwest Chemical, the worse environmental performer. The mean allocation to Midwest Chemical was $11,454 in contrast to a mean allocation of $8,546 to Benzocorp. However, it must also be noted that those who cited environmental concerns as influencing the decision (reported in Panel B of Table III) did have a lower mean allocation to Midwest Chemical than for the overall sample. Indeed, for those sample participants who cited environmental concerns as one of the top three factors, the mean allocation was actually higher to Benzocorp than to Midwest Chemical (see Panel C of Table III). However, this difference in the mean allocations is not significantly different. Comparing Tables II and III, then, at a minimum, it appears that the influence of negative environmental information differs across investment time horizons. Results for the impact of legitimating disclosure Table IV presents the comparisons of the amount allocated to Midwest Chemical (the worse environmental performer) under the long-term scenario separated by those who received the additional legitimating environmental disclosures in Midwest’s MD&A and those who did not. Results for the entire sample (presented in Panel A of Table IV) indicate that those receiving the

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legitimating disclosures did allocate a higher amount to Midwest Chemical than those who did not receive the additional disclosures, but the difference in the mean allocations is not statistically significant. However, when only those respondents who cited environmental concerns as impacting the investment decision are included in the analysis the differences in allocation are significantly different. Panel B of Table IV indicates that for this sub-group, the mean allocation to Midwest Chemical was $9,147 for those with legitimating disclosures in contrast to a mean allocation of $6,995 for those without. Both parametric and non-parametric tests indicate a significance level at p < 0.05, one-tailed. The results are similar for those who cited environmental concerns as one of the top three factors in the decision (shown in Panel C of Table IV). As noted in Panel C of Table IV, the mean allocation for these respondents was $8,640 for the group with legitimating disclosures and $6,166 for the participants who did not have offsetting disclosures in the MD&A. This difference is also statistically significant at p < 0.05, one-tailed. Overall, these results suggest that under a long-term investment strategy, the additional and positive environmental disclosures did appear to reduce the negative effects of the required environmental disclosure for those sample participants who indicated that environmental concerns influenced their investment allocations. In contrast to the results under the long-term scenario, the additional and positive disclosures did not appear to have much influence when the investment strategy was short term. Results, presented in Table V, indicate that allocations to Midwest Chemical were actually higher where no legitimating disclosure had been included than where it had been. This is not perhaps unexpected, given that the analysis above indicated the negative environmental information disclosures did not lead to lower investments in Midwest Chemical (relative to Benzocorp) under the short-term strategy. Discussion This study used an investment decision experiment to test whether environmental disclosures on Superfund-related remediation exposures, as required by US financial disclosure standards, influence investment decisions. In addition, it sought to examine whether additional voluntary positive disclosures offset such negative disclosures for one group external to the organization: namely, potential investors. Consistent with similar investment decision experiments involving accountants and environmental disclosures by Belkaoui (1980) and Chan and Milne (1999), the results show a significant difference of behavior across investment strategies, a point also observed in Harte et al. (1991). As expected, in the long term most investors on average sought to avoid Midwest Chemical, and the result was most noticeable for those citing environmental concerns. Clearly, the long-term risks and potential liabilities associated with Midwest’s environmental performance are much greater than for Benzocorp. In the short run, however, a number of investors appear to not only have ignored the environmental liability information, but taken it as an indication to invest more into Midwest. On the basis of the pilot survey, we

might have expected a ‘‘non result’’ in which the Superfund disclosures were treated as evidence of potential and future liabilities and ignored, with approximate equal sums being placed in each firm. However, note that not only have all groups, including those who cite environmental concerns, increased their average stake in Midwest (compare Tables II and III) under the short run, but there is clearly a group of investors who appear to have significantly ‘‘rewarded’’ Midwest for its previous delinquent behavior. These observations are consistent with Chan and Milne’s (1999, p. 274) experimental investment decision study in which they observed that: Consistent with Friedman’s (1962, 1970) argument, Belkaoui (1980) observed that accountants under a short-term strategy tended to avoid the firm making expenditures on pollution abatement. Actively seeking to invest in a firm who is avoiding its social responsibilities, however, seems to stretch even Friedman’s argument, but presumably breaching emission limits and paying the fines for doing so could be considered to be operating within the ‘‘rules of the game’’.

Why accountants should behave this way is not entirely clear, but several of our respondents reveal that they have interpreted the worse environmental performance of Midwest Chemical as a signal of risk and were willing to reward risk in the short term. In essence, it appears the information is signaling something about the management’s attitude towards risks. Several post-task comments with regard to environmental concerns, for example, suggest: ‘‘I found Midwest Chemical to be more risky than Benzocorp,’’ and ‘‘I recommended Midwest Chemical for [the short-term investment] for this factor.’’ Another more directly noted ‘‘Midwest seems more risky with its environmental accrual, which I equate to be a potential (sic) good investment for a single person with short-term growth in mind.’’ Note, however, that this kind of short-term risk-seeking behavior appears limited to about a quarter of our respondents. The impact of the additional and positive disclosures under a long-term investment strategy appear to be off-setting for the vast majority of our respondents, although, comparing panels A and B in Table IV, not for those eight respondents who failed to cite environmental concerns in their decisionmaking. This raises the question whether the positive disclosures have led to significant increases in the average amounts invested in Midwest because they have communicated real reductions in risk, because they have distracted investors’ attentions from the risks and liabilities associated with the Superfund sites, or both. Wokutch and Spencer (1987, p. 70), in examining corporate philanthropic giving and criminal activity, suggested: The cynical view is that they [companies] are using the contributions as a public relations tool to create a positive image which glosses over their criminal record. The other explanation is that they are sincerely trying to atone for their transgressions. It is very difficult, if not impossible, to ascribe one single motivation for philanthropic contributions. It is even possible that both of these motivations are in operation in a single company.

Likewise, difficulties arise in unpacking the precise interpretations our respondents may have placed on the additional and positive environmental disclosures. Nonetheless, several things can be noted. First, while the positive

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disclosures certainly communicate likely actual improvements in current and future pollution control, and so reduced risks and costs associated with those, they in no way reduce the actual risks and liabilities associated with the past pollution problems of the hazardous sites. Consequently, either our respondents have rationally rewarded the firm for risk reductions associated with current or future pollution, or they have been distracted into believing the risks have been reduced for the hazardous sites. For our groups it is entirely possible both effects have occurred. Chan and Milne (1999), however, failed to note any investment reward under a long-term strategy for their experimental firm disclosing current state-of-the-art pollution abatement technology and methods, suggesting perhaps the distraction explanation is not entirely without merit. A second point is that corporate attempts at legitimation are not only confined to empty (and relatively costless) public relations exercises. As was noted in the earlier literature, legitimation may involve bringing the organization’s output, methods, and goals into conformity with views of what is appropriate and going on to publicize such achievements to its relevant publics. In other words, because firms are undertaking real expenditures in an apparent attempt to clean up their environmental behavior, we should not assume that such behavior is also not some cynical attempt to appear legitimate. Capital expenditures on clean-up equipment and other introduced procedures may provide ideal identity-enhancing opportunities (Ginzel et al., 1992; Tombs, 1993, p. 139), and even spending $millions more on equipment than is required by law may be seen as worth the cost in terms of improved relations with stakeholders (Prakash, 2000). A firm’s managers may consider its state of legitimacy to be so poor that to do, and to be seen doing, less than making real changes is simply not considered feasible. Indeed, there is much evidence to suggest that this is precisely the situation the chemical industry now faces, and has done so for some time[11]. Even so, some firms, as the extracts in Appendix 1 show, are capable of ‘‘milking’’ even their modest achievements for all they are worth. Third, because the ‘‘social mechanisms for assessing the legitimacy of an output are quite clumsy’’, ‘‘outsiders’’ are largely reliant upon ‘‘the good conscience of the powerful people who run and direct large corporations, to maintain an adequate level of legitimacy . . .’’ (Perrow, 1970, p. 101)[12]. Or, to put it another way, it is often difficult to break through the ‘‘myth system’’ to reveal the underlying ‘‘operational code’’ (Reisman, 1979). King and Baerwald (1999) note that the objective assessment of a firm’s environmental performance is virtually impossible. Many environmental assessment organizations (e.g. the Council on Economic Priorities) have limited resources, and many government databases, (e.g. Toxic Release Inventory) are not easily used to accurately assess relative firm impacts on the environment. The result is that even committed environmental assessment organizations often have to ‘‘take short cuts and use proxies for environmental impact’’ (King and Baerwald, 1999, p. 315) and that the ‘‘association between environmental disclosures and ‘environmental performance’ is always equivocal and partial’’ (Neu et al., 1998, p. 279).

Consequently, for the reasons just discussed, we suggest ‘‘outsiders’’ face great difficulties in unraveling whether Midwest’s behavior and disclosure is representative of a ‘‘cynic’’ or ‘‘repenter’’, and a strategy of releasing additional positive statements alongside required negative disclosures of environmental liabilities could well meet with some success. Under a short-term investment strategy, however, the additional positive disclosures have failed to produce an offsetting effect. In fact, they have actually ensured less money was invested in Midwest than in the absence of such disclosures. In short, the additional disclosures have made matters worse for Midwest. While such a result seems counter-intuitive, it can perhaps be explained in terms of the costs associated with, and signaled as part of, those disclosures. We suspect Midwest has been punished for its expenditures on pollution abatement equipment, expenditures that are largely assured of providing no short-run returns. Consequently, as Chan and Milne (1999) observed with some of their accountants, but as we find much more prevalent here, in the short run firms are punished for what are seen as excessive and unnecessary expenditures. Ashforth and Gibbs (1990) have proposed that legitimation may be ‘‘doubleedged’’ and that in their attempt to defend their legitimacy, low legitimacy organizations may act clumsily, nervously or overact. They thereby ‘‘protest too much’’ and signify the opposite of what they intended. By overstating their case in a self-aggrandizing or inflammatory manner, or by making claims that exceed what a high legitimacy organization would claim, organizations may fail to persuade. It appears from our experimental case, however, that whether particular actions and/or disclosures are perceived by external constituents to be ‘‘overacting’’ depends upon the constituents’ decision framework. What appeals to and persuades our respondents looking to the long term seems to have the opposite effect for many of them when looking to the short term. Emphasizing the potential complexity and problematic nature of voluntary environmental disclosures, then, we have shown in an investment decisionmaking context that particular impression management or disclosure strategies could potentially help secure legitimacy for an organization, but they also may not. Conclusions Findings from this experimental study indicate that positive environmental disclosures as provided in chemical firms’ annual reports could serve more than empty public relations exercises. By juxtaposing positive messages with the required communication of significant liability exposures, the results indicate positive investment reactions that offset the negative effects of such liabilities. Such reactions, however, are only found when decision makers faced a long-term investment strategy. When faced with a short-term strategy, the offsetting messages in fact appeared to exacerbate the negative liability message, and further turned investors away to the other company. Whether chemical firms are in fact releasing additional positive voluntary disclosures

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alongside their Superfund liabilities with the intent of maintaining or regaining their organizational legitimacy is not something we have tested in this study. Nonetheless, as was noted earlier, much circumstantial and indirect evidence suggests that this is a distinct possibility, and to the extent that firms are pursuing such ends, our results seem to echo Ashforth and Gibbs’ (1990) point that legitimation may indeed be double-edged and produce unintended countereffects. Of course, it also needs to be acknowledged that all of the results produced in this study occur from a controlled and contrived experiment. It also needs to be recognized that this study is confined to an examination of risk and return image management as it relates to toxic waste liabilities created under US Superfund legislation and as perceived by potential investors. We have investigated the impact of positive environmental disclosures in countering negative reactions associated with the potential financial losses that may be born by potential investors as a result of the historic environmental impacts of the firm. While the disclosures may have averted negative reactions to our chemical firm on environmental or moral grounds, from the nature of our experimental respondents, their decision task, and their comments this seems unlikely. Consequently, we do not believe our results can be generalized to situations involving potential investors (e.g. ethical investors) or other stakeholder groups who have concerns over chemical firms’ environmental, social or ethical behavior. The US legislative context, and the magnitude and pervasiveness of the liabilities it has created within the chemical industry for historic and long-standing cumulative misbehavior, may also limit the generalizability of our results. The analysis provided within this study suggests several directions for further research. One obvious possibility involves work that further explores the impact of disclosures on various audiences. Experimental frameworks and other methods (e.g. structured interviews) could be used to examine to what extent annual report disclosures and other forms of corporate communication are successful at changing the image of the firm’s environmental, social and/or ethical behavior in the eyes of constituents other than financial stakeholders. Experimentation with issues other than toxic waste liabilities in other contexts could also ultimately permit some assessment of the extent to which positive disclosures generally offset negative ones. Similarly, experiments could assess whether more subtle symbolic messages that fail to communicate institutional adaptations produce similar levels of offsetting impact compared to those signifying more concrete changes. The institutional theory of legitimation, outlined in the earlier section, also suggests possibilities for further work. Institutionalism, particularly in fields with high levels of cohesiveness, suggests high levels of conformity and mimetic behavior leading to isomorphism. Consequently, within fields such as chemicals, oil, and mining in contrast to others, one might expect to observe much less variability in their social and environmental narratives. If firms have adopted initiatives and rituals to seek legitimacy as institutionalism predicts, then these are likely to be similar and consequently should be reflected as so in

organizational communications (e.g. corporate environmental reports). Institutional theory, then, provides a basis to examine the nature of corporate messages, the extent to which they reflect organizational adaptations, and the extent to which such adaptations approach conformity in certain fields. Similarly, working backwards from a careful content of analysis of corporate environmental reports or other impression management messages, it may be possible to determine to what extent firms are pursuing competitive advantage, legitimation and ecological responsiveness motives as suggested by Bansal and Roth’s (2000) model. Finally, and consistent with Mitchell et al.’s (1997) arguments, much more work needs to be done on exploring management’s perceptions of stakeholders, their power, legitimacy and the urgency of their claims, and how management seek to identify and address such issues both through communication and other behaviors. Notes 1. Further expanding on the means that organisational actors might use to tactically or strategically defend (or assert) the identities that others (ought to) assign to them and their organizations is a literature referred to as ‘‘impression management’’ (see for example, Staw et al., 1983; Tedeschi and Melburg, 1984; Ginzel et al., 1992; Elsbach and Sutton, 1992; Elsbach, 1994; Sutton and Galuic, 1996; Mohamed et al., 1999). 2. While the gas and chemical explosion at Union Carbide’s Bhopal plant in India in 1984 is perhaps the most notable incident since it killed at least 1,700 people and permanently injured 20,000 (see for example, Shrivastava, 1992; Jasanoff, 1994; Pearce and Tombs, 1998, pp. 194-219), there have been numerous others. For example, at Seveso, Italy, 1976, thousands of residents were exposed to a poisonous cloud of dioxin. In 1973, the entire community of Times Beach, Missouri, had to be permanently relocated after it was discovered the roads had been tainted with dioxin. 3. Brown (1979, pp. 82-96), for example, provides evidence from a testifying ‘‘whistle-blower’’ that employees were instructed to ignore routine chlorine gas emissions at White Lake as if they were steam, and ‘‘play dumb’’ to any resident complaints of such emissions. Employees were told that ‘‘this is not a chocolate factory . . . we got to make money.’’ Internal memoranda from plant environmental engineers acknowledged that ‘‘laboratory records indicate that we are slowly contaminating all wells in our area . . . to the point of being toxic to animals or humans’’ and yet little was done because ‘‘other companies solutions were so expensive . . .’’. 4. For detailed descriptions of the provisions of this legislation, its effects, and its success, see for example, Revesz and Stewart (1995a, b), Dalton (1995), and Barnett (1994). 5. The authors are grateful to Gregory Liyanarchchi for alerting them to this literature, and interested readers should follow up his work at http://www.commerce.otago.ac.nz/acty. 6. Both parametric (t-test on differences in means) and non-parametric (Mann-Whitney) tests were used to examine for significant differences in responses across sample classifications. Comparisons were made for: under 30 versus over 30; bachelor’s versus advanced degrees; five or fewer years of experience versus more than five years of experience; ten or fewer years of experience versus more than ten years of experience; no or very limited investment experience versus moderate or more investment experience; and moderate or less investment experience versus considerable and extensive investment experience. There were no statistically significant (at p < 0.10, two-tailed) differences in allocations in any of the comparisons.

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7. The amount of money to be invested was arbitrarily determined with three factors in mind. First, we wanted the amount to be large enough that allocating it across two companies rather than just investing in one was potentially attractive. Second, we wanted the sum to be meaningful in relation to the overall portfolio amounts as identified in the scenario. Finally, we wanted an amount that would seem believable for people in the positions identified in the scenario. Informal feedback from pilot test participants (see [8]) indicated the investment amounts were believable. 8. Given the relatively exploratory nature of this investigation it was decided to focus on an investment decision where financial attractiveness between choices was comparable. In essence, the argument here is that if environmental information is likely to have an influence it would be easier to isolate that in a setting where there are not confounding financial factors. As such, the two companies’ data were designed to be similar in terms of investment appeal. A pilot test using the financial data without the environmental disclosures on a sample of 20 senior and graduate level accounting students indicated no statistically significant (at p < 0.10, two-tailed) differences in allocations across the two experimental firms under either a long-term or a short-term investment horizon. 9. Kinder, Lydenberg, Domini and Company (KLD), a US ethical investment screening organization, provide ratings on firms according to their social and environmental performance. For each dimension covering community, employees, diversity, natural environment and product safety, KLD has developed criteria to which it assigns ratings of –2 (major concern) to +2 (major strength). For the natural environment dimension, companies with current liabilities for hazardous waste sites that exceed $50 million are awarded a rating of –2 (see for more details, Domini Social Investments, 1997). Furthermore, in all cases where environmental performance or exposure was addressed in the comments on the post-task questionnaire, Midwest Chemical was identified as being a worse performer or facing more environmental exposure than Benzocorp. It appears, therefore, that the manipulation was successful in this regard. 10. Complete copies of the decision task instructions, the experimental financial statements (including the environmental disclosures) for both companies, and the post evaluation questionnaire, are available upon request from the authors. 11. By its own admission, the chemical industry during the 1980s and 1990s was suffering such a crisis of public confidence that it needed to change the reality as much as the image to maintain its legitimacy (see for example, Trowbridge, 1987; Bruel, 1991; Di Meana, 1990; Tombs, 1993; Gunningham, 1995; Pearce and Tombs, 1998, pp. 175-83). In our experiment, Midwest spends about 3 percent of its annual capital expenditures on pollution abatement. This sum is quite considerably below average industry estimates made during the 1990s of between 10-25 percent (Cowe, 1991; Liardet, 1991; McGavin, 1991). Moreover, even where companies spend considerable sums of money on abatement equipment, there is no guarantee such expenditures will translate into safer and cleaner operations. Lack of staff training and management expediency, for example, can both serve to undermine or circumvent such measures as was noted at the Hooker Chemical company (but also see, for example, Jackall, 1988; Smith and Tombs, 1995; Punch, 1996). 12. Mintzberg (1983, p. 111) too makes a similar point when he refers to the fact that due to their enormous power, managers have to be to an extent ‘‘trusted’’. As he notes, ‘‘without honest and responsible people in important places, we are in deep trouble.’’ This is not to suggest that we, Mintzberg or Perrow, believe that firms should not be regulated, but to note the difficulties involved in controlling them (see also, Heilbroner, 1972; Smith, 1993). References Allen, M.W. and Caillouet, R.H. (1994), ‘‘Legitimation endeavors: impression management strategies used by an organization in crisis’’, Communication Monographs, Vol. 61 No. 1, pp. 44-62.

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Dowling, J. and Pfeffer, J. (1975), ‘‘Organizational legitimacy: social values and organizational behavior’’, Pacific Sociological Review, Vol. 18 No. 1, pp. 122-36. Elsbach, K.D. (1994), ‘‘Managing organizational legitimacy in the California cattle industry: the construction and effectiveness of verbal accounts’’, Administrative Science Quarterly, Vol. 39 No. 1, pp. 57-88. Elsbach, K.D. and Sutton, R.L. (1992), ‘‘Acquiring organizational legitimacy through illegitimate actions: a marriage of institutional and impression management theories’’, Academy of Management Journal, Vol. 35 No. 4, pp. 699-738. Epstein, M. J. (1992), ‘‘The Annual Report card’’, Business and Society Review, Spring, pp. 81-3. Freedman, M, and Stagliano, A.J. (1995), ‘‘Disclosure of environmental cleanup costs: the impact of the Superfund Act’’, Advances in Public Interest Accounting, Vol. 6, pp. 163-76. Friedman, M. (1962), Capitalism and Freedom, Chicago University Press, Chicago, IL. Friedman, M. (1970), ‘The social responsibility of business is to increase profits’’, The New York Times Magazine, 13 September, p. 33. Gamble, G.O., Hsu, K., Kite, D. and Radtke, R.R. (1995), ‘‘Environmental disclosures in annual reports and 10Ks: an examination’’, Accounting Horizons, September, pp. 34-54. Ginzel, L.E., Kramer, R.M. and Sutton, R.I. (1992), ‘‘Organizational impression management as a reciprocal influence process: the neglected role of the organizational audience’’, Research in Organizational Behaviour, Vol. 15, pp. 227-66. Gunningham, N. (1995), ‘‘Environment, self-regulation and the chemical industry: assessing responsible care’’, Law & Policy, Vol. 17 No. 1, pp. 57-109. Harte, G., Lewis, L. and Owen, D. (1991), ‘‘Ethical investment and the corporate reporting function’’, Critical Perspectives on Accounting, Vol. 2, pp. 227-53. Heilbroner, R.L. (1972), ‘‘Controlling the corporation’’, in Heilbroner, R.L., Mintz, M., McCarthy, C., Ungar, S.J., Vandiver, K., Freidman, S. and Boyd, J. (Eds), In the Name of Profit, Doubleday, New York, NY. Hunter, J.E., Schmidt, F.L. and Jackson, G.B. (1982), Meta-analysis: Cumulating Research Findings Across Studies, Sage, Beverly Hills, CA. Jackall, R. (1988), Moral Mazes: The World of Corporate Managers, Oxford University Press, New York, NY. Jasanoff, S. (Ed.) (1994), Learning From Disaster: Risk Management After Bhopal, University of Pennsylvania Press, Philadelphia, PA. Kanter, R.M. (1977), Men and Women of the Corporation, Basic Books, New York, NY. King, A. and Baerwald, S. (1999), ‘‘Using the court of public opinion to encourage better business decisions’’, in Sexton, K., Marcus, A.A., Easter, K.W. and Burkhardt, T.D., Better Environmental Decisions: Strategies for Governments, Businesses, and Communities, Island Press, Washington, DC. Liardet, G. (1991), ‘‘Public opinion and the chemical industry’’, Chemistry & Industry, 18 February, pp. 118-23. Lindblom, C.K. (1994), ‘‘The implications of organizational legitimacy for corporate social performance and disclosure’’, paper presented at the Critical Perspectives on Accounting Conference, New York, NY. Lindsay, R.M. (1995), ‘‘Reconsidering the status of tests of significance: an alternative criterion of adequacy’’, Accounting, Organisations & Society, Vol. 20 No. 1, pp. 35-53. Lindsay, R.M., and Ehrenberg, A.S.C. (1993), ‘‘The design of replicated studies’’, American Statistician, August, pp. 217-28. Locke, E.A. (1986), Generalizing From Laboratory to Field Settings, Lexington Books, New York, NY.

McGavin, B. (1991), ‘‘Going green – but what about the workers?’’, Employment Gazette, January, pp. 11-19. McGrath, J.E., Martin, J. and Kulka, R.A. (1982), Judgement Calls in Research, Sage, Beverly Hills, CA. Meyer, J.W. and Rowan, B. (1977), ‘‘Institutionalized organizations: formal structure as myth and ceremony’’, American Journal of Sociology, Vol. 83 No. 2, pp. 340-63. Meyer, J.W. and Scott, W.R. (Eds) (1983), Organizational Environments: Rituals and Rationality, Sage, Beverly Hills, CA. Miles, R. and Cameron, K. (1982), Coffin Nails and Corporate Strategies, Prentice-Hall, Englewood Cliffs, NJ. Mintzberg, H. (1983), ‘‘The case for corporate social responsibility’’, The Journal of Business Strategy, Vol. 4 No. 2, pp. 3-15. Mitchell, R.K., Agle, B.R. and Wood, D.J. (1997), ‘‘Toward a theory of stakeholder identification and salience: defining who and what really counts’’, Academy of Management Review, Vol. 22 No. 4, pp. 853-86. Mohamed, A.A., Gardner, W.L. and Paolillo, J.G.P. (1999), ‘‘A taxonomy of organizational impression management tactics’’, Advances in Competitiveness Research, Vol. 7 No. 1, pp. 108-30. Neu, D., Warsame, H. and Pedwell, K. (1998), ‘‘Managing public impressions: environmental disclosures in annual reports’’, Accounting, Organizations and Society, Vol. 23 No. 3, pp. 265-82. Parsons, T. (1960), Structure and Process in Modern Societies, Free Press, New York, NY. Patten, D.M. (1991), ‘‘Exposure, legitimacy and social disclosure’’, Journal of Accounting and Public Policy, Vol. 10 No. 4, pp. 297-308. Patten, D.M. (1992), ‘‘Intra-industry environmental disclosures in response to the Alaskan oil spill: a note on legitimacy theory’’, Accounting, Organizations & Society, Vol. 17 No. 5, pp. 471-5. Patten, D.M. (2000), ‘‘Changing superfund disclosure and its relation to the provision of other environmental information’’, Advances in Environmental Accounting and Management, Vol. 1, pp. 101-21. Patten, D.M. and Nance, J.R. (1998), ‘‘Regulatory cost effects in a good news environment: the intra-industry reaction to the Alaskan oil spill’’, Journal of Accounting and Public Policy, Vol. 17 Nos 4/5, pp. 409-29. Pearce, F. and Tombs, S. (1998), Toxic Capitalism: Corporate Crime and the Chemical Industry, Ashgate, Aldershot. Perrow, C. (1970), Organizational Analysis: A Sociological View, Tavistock Publications, London. Pfeffer, J. (1981), ‘‘Management as symbolic action: the creation and maintenance of organizational paradigms’’, in Cummings, L.L. and Staw, B.M. (Eds) Research in Organizational Behaviour, Vol. 3, JAI Press, Greenwich, CT, pp. 1-52. Pfeffer, J. and Salancik, G.R. (1978), The External Control of Organizations: A Resource Dependence Perspective, Harper & Row, New York, NY. Prakash, A. (2000), Greening the Firm: The Politics of Corporate Environmentalism, Cambridge University Press, Cambridge. Punch, M. (1996), Dirty Business: Exploring Corporate Conduct, Sage, London. Reisman, M. (1979), Folded Lies, Free Press, New York, NY. Revesz, R.L. and Stewart, R.B. (1995), ‘‘The superfund debate’’ in Revesz, R.L. and Stewart, R.B. (Eds) (1995), Analyzing Superfund: Economics, Science, and Law, Resources for the Future, Washington, DC. Revesz, R.L. and Stewart, R.B. (Eds) (1995), Analyzing Superfund: Economics, Science, and Law, Resources for the Future, Washington, DC.

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Rockness, J., Schlachter, P. and Rockness, H. (1986), ‘‘Hazardous waste disposal, corporate disclosure and financial performance in the chemical industry’’, Advances in Public Interest Accounting, Vol. 1, pp. 167-91. Sethi, S.P. (1975), ‘‘Dimensions of corporate social performance: an analytical framework for measurement and evaluation’’, California Management Review, Spring, pp. 58-64. Sethi. S.P. (1977), Advocacy Advertising and Large Corporations, DC Heath, Lexington, MA. Sethi, S.P. (1978), ‘‘Advocacy advertising – the American experience’’, California Management Review, Fall, pp. 58-64. Sethi, S.P. (1979), ‘‘A conceptual framework for environmental analysis of social issues and evaluation of business response patterns’’, Academy of Management Review, Vol. 4 No. 1, pp. 63-74. Shrivastava, P. (1992), Bhopal: Anatomy of a Crisis, Paul Chapman, London. Smith, D. (1993), ‘‘The Frankenstein syndrome: corporate responsibility and the environment’’, in Smith, D. (Ed.), Business and the Environment: Implications of the New Environmentalism, Paul Chapman, London. Smith, D. and Tombs, S. (1995), ‘‘Beyond self-regulation: towards a critique of self-regulation as a control strategy for hazardous activities’’, Journal of Management Studies, Vol. 32 No. 5, pp. 619-36. Staw, B.M., McKechnie, P.I. and Puffer, S.M. (1983), ‘‘The justification of organizational performance’’, Administrative Science Quarterly, Vol. 28, pp. 582-600. Suchman, M.C. (1995), ‘‘Managing legitimacy: strategic and institutional approaches’’, Academy of Management Review, Vol. 20 No. 3, pp. 571-610. Sutton, R.I. and Galuic, D.C. (1996), ‘‘Consequences of public scrutiny for leaders and their organizations’’, Research in Organizational Behavior, Vol. 18, pp. 201-50. Tedeschi, J.T. and Melburg, V. (1984), ‘‘Impression management and influence in the organization’’, Research in the Sociology of Organizations, Vol. 3, pp. 31-58. Thompson, J. (1967), Organizations in Action, McGraw-Hill, New York, NY. Tilt, C.A. (1994), ‘‘The influence of external pressure groups on corporate social disclosure: some empirical evidence’’, Accounting, Auditing & Accountability Journal, Vol. 7 No. 4, pp. 47-72. Tombs, S. (1993), ‘‘The chemical industry and environmental issues’’, in Smith, D. (Ed.), Business and the Environment: Implications of the New Environmentalism, Paul Chapman, London. Trowbridge, M.E. (1987), ‘‘Getting the balance right’’, Chemistry & Industry, 21 September, pp. 647-50. Walden, W.D. and Schwartz, B.N. (1997), ‘‘Environmental disclosures and public policy pressures’’, Journal of Accounting and Public Policy, Summer, pp. 125-54. Weick, K.E. (1969), The Social Psychology of Organizing, Addison-Wesley, Boston, MA. Wokutch, R.E. and Spencer, B.A. (1987), ‘‘Corporate saints and sinners: the effects of philanthropic and illegal activity on organizational performance’’, California Management Review, Vol. 24 No. 2, pp. 62-77. Zucker, L.G. (1977), ‘‘The role of institutionalization in cultural persistence’’, American Sociological Review, Vol. 42, pp. 726-43. Appendix 1. Examples of actual chemical firm annual report disclosures relating to the environment In some instances, chemical companies lead reference to their Superfund and other environmental liabilities with positive statements of their responsibility and effectiveness of management systems. In other instances, all reference to liabilities is left in the financial notes, and only positive statements appear in the Management Discussion and Analysis sections of the

annual reports. Extracts from Dow and DuPont illustrate the former strategy, while those from Geon and Rohm & Hass illustrate the latter approach. Dow Chemical Company (1997 Annual Report) Environment. Dow’s global operations are subject to increasingly stringent laws and government regulations related to environmental protection and remediation. Dow’s environmental responsibilities and potential liabilities receive direct and ongoing scrutiny by management to ensure compliance with these laws and regulations. Dow’s Environmental Management Standard clearly defines the overall environmental management system, performance objectives and design requirements needed to minimize the long-term cost of environmental protection as well as comply with these laws and regulations. It is Dow’s stated policy that all global operations and products meet Dow’s Environmental Management Standard or their country’s laws and regulations, whichever is more stringent. Assessments are used by management to continually measure and report Dow’s progress against this standard and its performance objectives. Since 1996, the company has received third party certification at three of its European sites confirming Dow’s environmental management systems meet ISO-14001 and Eco-Management and Auditing System (EMAS) specifications. It has been Dow’s policy to adhere to a waste management hierarchy that minimizes the impact of wastes and emissions on the environment. First, Dow works to eliminate or minimize the generation of waste and emissions at the source through research, process design, plant operations and maintenance. Second, Dow finds ways to reuse and recycle materials. Finally, unusable or non-recyclable hazardous waste is treated before disposal to eliminate or reduce the hazardous nature and volume of the waste. Treatment may include destruction by chemical, physical, biological or thermal (incineration) means. Disposal of waste material in landfills is considered only after all other options have been thoroughly evaluated. Dow has specific requirements for wastes that are transferred to non-Dow facilities. Wastes that are recycled, treated or recovered for energy off-site represent less than 2 percent of the total amount of wastes reported as part of the Pollution Prevention Act. Dow’s policy of on-site wastes treatment has resulted in less than 10 percent of its total environmental liability being directed at remediation under federal or state Superfund statutes. In 1996, Dow announced a number of voluntary global environmental, health and safety (EH&S) goals for the year 2005. Included are goals to reduce emissions and wastes by 50 percent: (1994 base year) and EH&S incidents by 90 percent. Most performance metrics are on or ahead of the goal schedule. The goals, as well as other performance data, can be found in Dow’s 1997 EH&S progress report . . . Dow has been named as a potentially responsible party (PRP) under federal or state Superfund statutes at approximately 45 sites. Dow readily cooperates in remediation where its liability is clear, thereby minimizing legal and administrative costs. However, at several of these Superfund sites, Dow has no known involvement and is contesting all liability; at many others, Dow disputes major liability, believing its responsibility to be de minimis. Because current law imposes joint and several liability upon each party at a Superfund site, Dow has evaluated its potential liability in light of the number of other companies which have also been named PRPs at each site, the estimated apportionment of costs among all PRPs and the financial ability and commitment of each to pay its expected share. Management has estimated that the company’s remaining liability for the remediation of Superfund sites at 31 December 1997, was $11 million, which has been accrued. In addition, receivables of $19 million for probable third-party recoveries have been recorded related to Superfund sites. Other recoveries for past expenditures are possible since Dow has numerous insurance policies secured from carriers at various times that may provide coverage at different levels for environmental liabilities. The company is currently involved in litigation to determine the scope and extent of such coverage. In addition to the Superfund-related liability referenced above, Dow had an accrued liability of $272 million at 31 December 1997 related to the remediation of current or former Dow-owned

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sites. The company had not recorded as a receivable any third-party recovery related to these sites. In total, Dow’s accrued liability for probable environmental remediation and restoration costs was $283 million at 31 December 1997, compared with $265 million at the end of 1996. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the company has accrued liabilities, although the ultimate cost with respect to these particular matters could range up to twice that amount. It is the opinion of the company’s management that the possibility is remote that costs in excess of those accrued or disclosed will have material adverse impact on the company’s consolidated financial statements. The amounts charged to income on a pretax basis related to environmental remediation totaled $90 million in 1997, $60 million in 1996, and $89 million in 1995. The charges for 1997 included future incremental operations, maintenance and management costs directly related to remediation as a result of the adoption of a new accounting standard (see Note B to the Financial Statements). Capital expenditures for environmental protection were $77 million in 1997, $80 million in 1996 and $80 million in 1995. DuPont (1997 Annual Report) Environment matters. DuPont operates manufacturing facilities, petroleum refineries, natural gas processing plants and product-handling and distribution facilities around the world. These facilities are significantly affected by a broad array of environmental laws and regulations. Company policy requires that all operations fully meet or exceed legal and regulatory requirements. DuPont facilities worldwide are run in accordance with the highest standards of safe operation, even where those standards exceed the requirements of local law. DuPont has also implemented voluntary programs to reduce air emissions, curtail the generation of hazardous waste, decrease the volume of wastewater discharges and improve the efficiency of energy use. The costs of complying with complex environmental laws and regulations, as well as internal voluntary programs, are significant and will continue to be so for the foreseeable future. These costs may increase in the future, but are not expected to have a material impact on the company’s competitive or financial position. In 1997 DuPont spent about $330 million for environmental capital projects either required by law or necessary to meet the company’s internal waste elimination and pollution prevention goals. The company currently estimates expenditures for environmental-related capital projects will total $300 million in 1998. Significant capital expenditures may be required over the next decade for treatment, storage and disposal facilities for solid and hazardous waste and for compliance with the Clean Air Act (CAA) and its 1990 Amendments. Until all new CAA regulatory requirements are known, considerable uncertainty will remain regarding future estimates of capital expenditures. Total CAA capital costs over the next two years are currently estimated to range from $20 million to $200 million. Estimated pretax environmental expenses charged to current operations totalled about $700 million, before insurance recoveries, in 1997 as compared to about $800 million in both 1996 and 1995. These expenses include the remediation accruals discussed below, operating, maintenance and depreciation costs for solid waste, air and water pollution control facilities and the costs of environmental research activities. The largest of these expenses resulted from the operation of wastewater treatment facilities and solid waste management facilities, each of which accounted for about $170 million. About 72 percent of total annual expenses resulted from the operations of the company’s Chemicals, Fibers, Polymers, Life Sciences and Diversified Business segments in the US. Remediation accruals. DuPont accrues for remediation activities when it is probable that a liability has been incurred and reasonable estimates of the liability can be made. These accrued liabilities exclude claims against third parties and are not discounted. Much of this liability results from the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA, often referred to as Superfund), the Resource Conservation and Recovery Act (RCRA) and similar state laws that require the company to undertake certain investigative and remedial

activities at sites where the company conducts or once conducted operations or at sites where company-generated waste was disposed. The accrual also includes a number of sites identified by the company that may require environmental remediation, but which are not currently the subject of CERCLA, RCRA or state enforcement activities. Over the next one to two decades the company may incur significant costs under both CERCLA and RCRA. Considerable uncertainty exists with respect to the costs and under adverse changes in circumstances, potential liability may exceed amounts accrued as of 31 December 1997. Remediation activities vary substantially in duration and cost from site to site depending on the mix of unique site characteristics, evolving remediation technologies, diverse regulatory agencies and enforcement policies and the presence or absence of potentially liable third parties. Therefore, it is difficult to develop reasonable estimates of future site remediation costs. At 31 December 1997, the company’s balance sheet included an accrued liability of $561 million as compared to $586 million and $602 million at year-end 1996 and 1995, respectively. Approximately 78 percent of the company’s environmental reserve at 31 December 1997 was attributable to RCRA and similar remediation liabilities and 22 percent to CERCLA liabilities. During 1997, remediation accruals of $54 million, offset by $55 million in insurance proceeds, resulted in a credit to income of $1 million, compared to credits of $9 million and $79 million in 1996 and 1995, respectively, also resulting from insurance recoveries. Geon Company (1997 Annual Report) A year for environmental superlatives. It is difficult to overstate Geon’s environmental successes in 1997. We had our best year ever in terms of reportable chemical releases and permit exceedances, which we reduced by a full 50 percent in our North American Operations. Eight sites operated with no exceedances or releases. In this elite category are the Avon Lake Technology Center and the Avon Lake, Long Beach, Louisville, Niagara Falls, Pedricktown, Plaquemine, and Terre Haute plants. Pedricktown passed the four-year mark for perfect compliance. Continued recycling and solid waste reduction initiatives at all Geon plants diverted wastes from landfill disposal and produced significant savings for the Company. In 1996, these combined efforts eliminated 14.5 million pounds of material from landfills and yielded savings of $700,000. We do not yet have comparable figures for 1997, but we believe we have sustained this positive trend. Worthy of mention is LaPorte, which achieved a 40 percent reduction in waste-water treatment plant solid waste generation and a greater than 90 percent reduction in overall waste. Eight plants and the Avon Lake Technology Center met criteria for Geon’s W.C. Holbrook Environmental Award of Excellence. To qualify a site must demonstrate compliance with the national emission standard for hazardous air pollutants for vinyl chloride, prevent exceedences/ releases and meet specified targets for waste reduction. Employees win recognition for Geon. Agencies, governmental organizations, trade associations and safety councils honoured Geon last year for commendable environmental and safety performance in 1996. Among the highlights: .

For the ninth consecutive year, Geon received the Canrail Diamond Drop Award for flawless shipping. The award recognises companies that ship at least 1,000 rail cars of hazardous material during the year without a shipper caused release. Geon is the only shipper in the nation to be honoured every year since the award’s inception.

.

The Vinyl Institute presented a special award to Deer Park for ten consecutive years of perfect compliance with national emission standards for vinyl chloride.

.

For minimizing air pollutant emissions, the Henry, LaPorte, Louisville, Niagara Falls and Pedricktown plants earned the Vinyl Institute’s Environmental Achievement Award. Safety Performance Awards went to LaPorte, Pedricktown and Scotford for outstanding worker safety records.

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Rohm & Hass (1997 Annual Report) New milestone in the ISO 14001. Another indicator of how well a facility manages environmental performance is the International Standards Organisation’s ISO 14001 Standard. Under ISO 14001, a rigorous review that can take several years to complete may lead to certification congruent with international standards. In 1997, the Latin American region became the first to earn ISO 14001 certification at all of its facilities: Apizaco, Mexico; Barranquilla, Columbia; and Jacarei, Brazil. The company’s other ISO 14001-certified plants include Grangemouth, Scotland; Jarrow, England; Landskrona, Sweden; Mozzanica, Italy; Tudela, Spain and West Hill, Canada. Numerous other Rohm and Hass facilities worldwide are moving toward ISO 14001 certification. Pollution prevention. A report on environmental releases and off-site transfers of waste from United States facilities for calendar year 1996 was given to the US Environmental Protection Agency in August 1997. In confirmed that the company’s goal of reducing air emissions by 75 percent from 1987 levels. Moreover, it showed that Rohm and Hass reduced its overall impact on the environment (emissions to air, water and land as well as off-site transfers for disposal) by 69 percent between 1987 and 1996, a period when production at its US facilities increased by 62 percent. These efforts did not go unnoticed. Two Pennsylvania plants (Bristol and Philadelphia) were among a number honoured by Pennsylvania Governor Tom Ridge with ‘‘The Governor’s Award for Environmental Excellence’’ for their pollution prevention efforts. In addition, the company received its second ‘‘Environmental Champion Award’’ from the EPA for its development of Seanine marine antifoulant, a product of the Biocides business. Outlook. The disappointing 1997 safety results demand that the company redouble its efforts to regain the positive momentum of prior years. Workplace accidents are simply unacceptable. The company is confident it can move forward on its journey to an accident-free work environment. The ongoing challenge of achieving environmental improvements requires that we discover new ways to minimise our impact. One way to achieve this is to focus future efforts on sitespecific ‘‘Environmental Improvement Objectives’’ developed by manufacturing facilities in concert with the businesses and local communities. This approach has been adopted to replace the former ‘‘percent-reduction’’ model. Finally, the company is determined to remain in the forefront of responsible corporate behaviour. While the challenges are significant, the resolve and determination of Rohm and Hass employees worldwide are up to the challenge. Appendix 2. MD&A environmental extracts used in decision experiment Treatment Group 1 (n = 38) Benzocorp. Environmental matters. As of 31 December the Company has been identified as a potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act (the federal Superfund law) or equivalent state statutes at nine sites around the country. In addition, the company is currently undertaking corrective actions pursuant to the Resource Conservation and Recovery Act at a number of additional company-owned sites. It is the company’s policy to accrue environmental investigatory and noncapital remediation costs when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. While there is considerable uncertainty with respect to total potential costs under CERCLA, RCRA, and similar statutes, the company estimates future remediation costs will range from $15 million to $23 million. The balance sheet as of 31 December includes an accrual of $ 23 million. Remediation expenditures were $4 million, $3.5 million, and $5 million, over the past three years, respectively. Midwest Chemical. Environmental. Midwest Chemical, like most companies in the chemical industry, is a party in various government enforcement actions at former waste disposal sites. The company has been cited as a ‘‘potentially responsible party’’ at 32 federal or state Superfund sites. The company is also undertaking corrective actions at some of its manufacturing facilities. Remediation related expenditures were $9.4 million in 1999, $11.2 million in 1998 and $6.6 million

in 1997. Due to the inherent uncertainties associated with investigative and remediation activities it is difficult to estimate what the company’s total projected exposure might be. However, based on current data, the company believes the range of potential liability is between $50 million and $90 million. The company has accrued $50 million as of 31 December 1999. Treatment Group 2 (n = 38) Benzocorp. As for Treatment Group 1. Midwest Chemical. As for Treatment Group 1, except the following paragraph was added and preceded the above paragraph. Midwest Chemical has a strong commitment to protecting the environment and the company’s policies and practices are designed to ensure compliance with existing laws and regulations. The company is continuing its program of updating manufacturing facilities to further reduce their negative environmental impacts. Capital expenditures for pollution abatement and control equipment, company-wide, were $3.2 million in 1999 and $2.8 million in 1998. Projected environmental capital expenditures for 2000 are projected at $3 million. Toxic releases into the environment for 1998, as reported to the Environmental Protection Agency, were slightly higher than they had been in 1997. However, when adjusted for increased manufacturing activity, average releases showed a slight decline. This is the fifth straight year that releases adjusted for manufacturing activity have declined. Relative to 1987 base year releases, the company has reduced toxic emissions by more than 60 percent. The installation of new scrubbers at the Alton, Illinois and Topeka, Kansas facilities was completed in 1999, which should lead to further substantial reductions in air emissions at both plants. In addition, the company’s environmental audit program is now fully operational. Midwest Chemical is continuing to strive to be an exemplary environmental citizen.

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The current issue and full text archive of this journal is available at http://www.emeraldinsight.com/0951-3574.htm

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Managerial perceptions of corporate social disclosure An Irish story

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Brendan O’Dwyer

University College Dublin, Blackrock, Ireland Received November 2000 Revised October 2001 Accepted December 2001 Keywords Social accounting, Disclosure, Corporate policy, Ireland Abstract This paper interprets managerial perceptions of corporate social disclosure (CSD) presence and absence through the lens of organisational legitimacy theory. Evidence from indepth semi-structured interviews with 29 senior managers in 27 Irish public limited companies is presented. It is one of the few studies to use interview-based evidence in attempts to understand the motivations for CSD and responds to calls for more empirical work of this nature in the CSD literature. The paper extends and interrogates the use of legitimacy theory to infer motivations for CSD by presenting a narrative which contemplates conceptions of legitimacy as both a process and a state while endeavouring to understand the motives for CSD. In this manner, the paper furnishes a more complex, complete, and critical story of the motives for CSD. The perspectives suggest that while CSD may occasionally form part of a legitimacy process, ultimately this is misguided as it is widely perceived as being incapable of supporting the achievement of a legitimacy state. Consequently, for many managers, the continued practice of CSD is deemed somewhat perplexing. The paper reflects on the implications of these findings for future CSD research and practice.

Introduction Corporations in many Western capitalist economies often provide substantial economic benefits to communities/localities. In return, the wider society supplies them with numerous critical resources in the form of access to employees, natural resources, infrastructure, customers, and legitimacy (Bailey et al., 2000, 1998, 1994; Reich, 1998). It has therefore been maintained that corporations are social creations whose very existence depends on the willingness of the wider society to endure and support them (Cannon, 1994; Reich, 1998). Consequently, they are deemed to agree to perform various socially desired actions in return for their acceptance as legitimate institutions in society (Dowling and Pfeffer, 1975; Guthrie and Parker, 1989; Suchman, 1995). It has been suggested that this corporate quest for legitimation can result in the formulation of several (often) strategic tactics aimed at convincing the wider society that an organisation is a legitimate institution (Deephouse, 1996;

Accounting, Auditing & Accountability Journal, Vol. 15 No. 3, 2002, pp. 406-436. # MCB UP Limited, 0951-3574 DOI 10.1108/09513570210435898

Special thanks to Gordon Boyce, Mary Canning, Craig Deegan, Rob Gray, James Guthrie, Graeme Harrison, Hugh McBride, Jill McKinnon, Dave Owen, Chris Patel, Carol Tilt, Jeffrey Unerman and two anonymous reviewers for highly helpful comments on earlier drafts of this paper. The author is also grateful to participants at research seminars at Deakin University, Flinders University, Royal Melbourne Institute of Technology, University of Southern Queensland, Macquarie University and Nanyang Technological University. The financial assistance of The Irish Accountancy Educational Trust and the Dublin City University Business School research committee is also warmly appreciated.

Dowling and Pfeffer, 1975; Gray et al., 1996; Suchman, 1995; Woodward et al., 1996). Many of these tactics tend to concentrate on changing or controlling the public perception of an organisation in response to threats to its legitimacy arising from social pressure (Bansal and Roth, 2000; Neu et al., 1998; O’Donovan, 1999). The disclosure of information regarding corporations’ social impacts, commonly referred to as corporate social disclosure (CSD), has been identified as one tactic that may enable companies to influence these perceptions (Buhr, 1998; Clarke and Ogden, 2000; Deegan et al., 2000, 1999; Neu et al., 1998). Although there is increasing evidence of reporting in other media (Zeghal and Ahmed, 1990), research into CSD tends to concern itself chiefly with disclosures via the corporate annual report. While 20 years or more of empirical investigation of CSD worldwide (Gray et al., 1995) has provided ample evidence of the extent of this practice, it was only recently that the first detailed longitudinal study of CSD was undertaken in Ireland[1] (O’Dwyer and Gray, 1998). This study endeavours to extend this contribution to Irish and wider international CSD research by striving to understand in depth the motivations driving CSD in Ireland. It is also motivated by contemporary evidence of corporate malpractice within the Irish business environment which has led to threats to the legitimacy of aspects of the Irish business sector (The Irish Times, 1999, 1998a; Kearney and Murphy, 2000; O’Toole, 1999). The primary purpose of this study is to examine managerial perceptions of the motives for CSD[2]. These perceptions are interpreted using a broad organisational legitimacy theory lens. The study makes a number of contributions to the literature engaged in attempts to comprehend the motives for CSD. First, it is one of the few studies to use managerial perspectives in efforts to understand CSD (see Buhr, 1998; O’Donovan, 1999). It therefore fills a research gap in this literature given there is an absence of the use of rich indepth qualitative evidence to interpret CSD. By providing an account of an engagement with corporate management the study also responds to Gray’s (forthcoming) request for more accounts of the results of these engagements in the social accounting literature. Second, the study is somewhat unique in that it not only focuses on perceptions of CSD presence but also investigates perceptions of CSD absence as it is contended that these perceptions enable one to examine managerial motivations concerning CSD in greater depth. This approach is influenced by the results of prior research into Irish CSD practice which indicates a relative absence of CSD compared to many other western European countries (O’Dwyer and Gray, 1998). Furthermore, by conducting this ‘‘enquiry of absence’’ (Choudhury, 1988, p. 555), this approach broadens the ‘‘presence’’ orientation of prior investigations of CSD. Third, the evidence presented extends the prior use of legitimacy theory in efforts to understand CSD. Much prior research tends to exclusively interpret CSD as forming part of a legitimacy process. However, in doing so, it neglects to contemplate whether CSD actually contributes to the attainment of a state of legitimacy (Ashforth and Gibbs, 1990; Deephouse, 1996). By illuminating perspectives which

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deliberate on both of these conceptions of legitimacy in an attempt to understand CSD (legitimacy as a process and a state), this paper furnishes a more complex, complete, and critical story of the motives for CSD through the lens of organisational legitimacy theory. Elements of the narrative presented also challenge the seemingly pervasive explanatory power of legitimacy theory with respect to CSD proposed by prior research. In the above manner, the study adds significantly to our understanding of CSD and therefore represents a substantial addition to, and extension of, the international literature engaged in efforts to interpret the motives for CSD. The remainder of the paper is organised as follows. The next section briefly introduces the Irish context and delineates the results of recent research investigating Irish CSD practice. A discussion of organisational legitimacy theory and its use to interpret the motivations driving CSD then ensues. This is succeeded with a detailed description of the research method employed. The interview findings are then presented and deliberated upon. These findings are discussed and the study concludes with some reflections on their implications for future Irish CSD research and practice. The Irish context In the past decade, Ireland has experienced substantial economic growth and tremendous social change. While many of these changes have been little different from those that have occurred in most of the industrialised world, the sheer pace of change in Ireland has been exceptionally rapid and contrasts, particularly in the economic sphere, with the experience of most mainland European countries (Gardiner, 1999; Norton, 1999; Sweeney, 1998). Nevertheless, despite the primarily positive image created by these (particularly economic) changes, there is evidence that the legitimacy of elements of the Irish business sector has come under increased scrutiny from a sceptical media and public. Revelations involving questionable business practices, alleged payments of substantial sums of money by prominent businessmen to Cabinet members (including a former Prime Minister), and widespread tax evasion by leading business people and companies have fuelled increased distrust of the business sector from many quarters (The Economist, 1999; The Irish Times, 1999, 1998b; O’Toole, 1999). The impact of these disclosures tends to heighten awareness of an historical lack of attention to, and discussion of, corporate social responsibility and CSD in Ireland (Alderson and Kakabadse, 1994; Hoven Stohs and Brannick, 1999, 1996; Murphy, 1995, 1994). Contemporary Irish CSD practice O’Dwyer and Gray (1998) investigated the CSD practices of the top 50 public limited companies (plcs) in Ireland over five years from 1991 to 1995. The results of their study indicate that the detailed practice of CSD in Ireland was not widespread and, with regard to environmental disclosure (a subset of CSD), significantly less evident than in most other western European countries. The limited evidence of disclosure was primarily influenced by the minimal

legislative guidance that exists in Ireland with any voluntary disclosure being, for the most part, lacking in detail and providing little information of substance[3]. Furthermore, there was no overall evidence of increasing trends in voluntary disclosure, while total CSD actually declined slightly as a proportion of the corporate annual report over the period[4].

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Organisational legitimacy In referring to the concept of organisational legitimacy, Dowling and Pfeffer (1975, p. 122) observe that organisations endeavour to establish symmetry between the social values associated with or implied by their operations and the social norms of acceptable behaviour in the larger social system or environment they are part of. In so far as these two value systems are congruent they speak of organisational legitimacy. Organisational legitimacy can be conceptualised as both a process and a state (Deephouse, 1996). For example, if there is an actual or potential disparity between organisational and social values, organisational legitimacy will be endangered and a legitimacy ‘‘gap’’ may develop (Sethi, 1979, 1977). Organisations may then undertake various actions as part of a legitimation process (Ashforth and Gibbs, 1990; Suchman, 1995) aimed at establishing congruence between their values and those of the wider society in order to achieve the state or condition of organisational legitimacy (Gray et al., 1996). This state or condition is ultimately conferred by ‘‘social actors’’/‘‘relevant’’ publics (Buhr, 1998; Lindblom, 1994; Neu et al., 1998; Pfeffer and Salancik, 1978) with the power to determine the organisation’s legitimacy (Deephouse, 1996). Organisational legitimacy theory is based, in many respects, on the concept of a social contract (Gray et al., 1988; Patten, 1992, 1991; Shocker and Sethi, 1974; Woodward et al., 1996) between business and the wider society, whereby ‘‘business [is deemed to] agree to perform various socially desired actions in return for approval of its objectives, other rewards and its ultimate survival’’ (Guthrie and Parker, 1989, p. 344). A clear link between organisational legitimacy and organisational survival is therefore evident (Bansal and Roth, 2000). Actions by corporate management aimed at fulfilling the social contract comprise part of the legitimation process (Gray et al., 1995; Lindblom, 1994) involving the adoption of ‘‘strategic postures’’ (Post, 1978) aimed at convincing the wider society that the organisation is socially responsible and therefore legitimate (O’Donovan, 1999). These legitimation strategies may be focused on gaining, maintaining or repairing legitimacy (Suchman, 1995) and they may conform with, or in various ways endeavour to change, social perceptions, expectations, or values (Lindblom, 1994). In recent times, organisational legitimacy has become increasingly important, as well as more difficult to attain, due to ‘‘. . . the intersection of fractionalized social values, well-organised and vocal interest groups, and the necessity to operate in a competitive global economy’’ (Neu et al., 1998, p. 266). This suggests that managing an organisation’s legitimacy has never been more problematic.

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CSD and organisational legitimacy management Legitimacy management depends heavily on communication between the organisation and its various ‘‘relevant’’ publics (Suchman, 1995). The literature therefore suggests that voluntary CSD through the corporate annual report may help to resolve some of the problems surrounding the attainment of organisational legitimacy (Ader, 1995; Brown and Deegan, 1998; Neu et al., 1998). In this vein, CSD has been deemed to constitute a form of reaction to factors/pressures in a company’s environment (often focused on repairing legitimacy) in which the organisation seeks either passive acquiescence or active support for its operations (Suchman, 1995). This conception of legitimacy asserts that managers favour ‘‘the flexibility and economy of symbolism [as opposed to] more substantive responses’’ (Suchman, 1995, p. 6) in seeking to legitimise corporate activities and is the conception of legitimacy most used to interpret the motivations for CSD[5]. Developing legitimacy theory explanations of the motivations for CSD A plethora of recent studies have sought to use legitimacy theory in order to explain the motivations for CSD in the annual report. The majority of these studies have made exclusive use of content analysis techniques in order to infer managerial motivations for CSD (especially environmental disclosure) (O’Donovan, 1999) as part of an assessment as to whether legitimacy theory appropriately explains these motivations[6]. For example, the evidence gathered has subsequently been used to test if CSD forms part of a quasistrategic legitimation process with most studies finding some support for its explanatory power on this basis (see Deegan et al., 2000, 1999; O’Donovan, 1999; Wilmhurst and Frost, 2000)[7,8]. Content analysis based studies, however, investigate only part of the organisational legitimacy story as applied to CSD. Organisational legitimacy is conferred on organisations by groups or individuals external to it (Lindblom, 1994) and securing legitimacy is frequently problematic (Clarke and Ogden, 2000); hence, legitimation strategies may fail (Milne and Patten, 2001; Ashforth and Gibbs, 1990). These studies make no attempt to consider, due to their specific objectives and methods, whether CSD, if motivated in this vein, actually contributes to the attainment of a state of organisational legitimacy. In other words, they do not address the question as to whether CSD acts as a successful legitimation strategy; do the means (CSD as part of a legitimacy process) produce the desired effects (a legitimacy state)) (Ashforth and Gibbs, 1990)[9]? Furthermore, many of these studies portray ‘‘relevant’’ publics more often than not as a homogeneous set of CSD users all combining to confer legitimacy on a threatened organisation by having their norms, values and beliefs changed by CSD. Neu et al. (1998); (see also Mitchell et al., 1997)), however, indicate the need to consider the multiplicity of external publics (and their oft competing interests) when thinking about organisational legitimacy and assert that environmental disclosures are directed at important and supportive ‘‘relevant’’

publics (or those perceived to have power and legitimacy (Mitchell et al., 1997)) not at peripheral and ‘‘critical’’ publics. Oliver (1991) argues that if the demands of, for example, environmentalists conflict with the demands of more powerfully perceived financial stakeholders then it makes tactical sense for an organisation to dismiss or at best ‘‘minimally appease’’ the formers’ demands. ‘‘Low effort’’ symbolic gestures, such as the provision of elementary environmental disclosures, may therefore be used to demonstrate minimal appeasement as an alternative to outright defiance[10]. This implies that minimal as opposed to detailed environmental disclosures may be more likely to form part of a legitimacy process aimed at appeasing the concerns of less powerful ‘‘relevant’’ publics. As outlined earlier, in most cases, prior attempts at interpreting CSD have neglected to seek the perspectives of senior company managers who can influence the production (or otherwise) of social information in the corporate annual report[11]. Consequently, this has led to potentially illuminating perspectives which may enhance and/or critique the legitimacy theory ‘‘story’’ of CSD being ignored in efforts to interpret its practice. Using evidence derived from in-depth interviews with corporate managers as to their perceptions of the motivations for voluntary CSD, this paper develops a more complete, complex and critical ‘‘story’’ of the motives for CSD through the lens of organisational legitimacy theory. Furthermore, by using evidence of CSD practice subsequent to the interviews (see O’Dwyer, 2001a), the pertinence of legitimacy theory interpretations of CSD in certain circumstances is challenged. The perspectives also illuminate the complexity and occasional confusion underpinning the motives for CSD. Research method The evidence in this study was collected using semi-structured in-depth personal interviews with 29 senior executives in 27 Irish plcs[12]. The primary objective of these interviews was to obtain detailed insights into perceptions of CSD through the corporate annual report[13]. The interviews were guided by a small number of broad open-ended questions (see Appendix)[14] and were conducted by the researcher on the interviewees’ company premises (with three exceptions). The interviews ranged from 45 minutes to one and a half hours in duration. Interviewee profile There were three primary reasons for selecting senior executives for interviews. First, all interviewees had some input into the formulation of the corporate annual report, in most cases performing a review function, and it was perceived that this might have exposed them to the issue of CSD at some stage. Second, individuals at a senior level could be expected to have a broad perspective on their organisation’s operations and may thus be viewed as being able to address questions investigating perceptions of CSD. Third, the majority of the interviewees worked for companies that formed part of the sample of

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companies used in the O’Dwyer and Gray (1998) study, thereby facilitating the use of this study’s results in informing the questions and interpreting the perspectives procured[15]. The interviewees worked in six industry sectors covering all of the major company sectors quoted on the Irish Stock Exchange (see Table I).

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Conducting the interviews A standard definition of CSD was included in a letter sent to the interviewees seeking an interview[16]. Before commencing each interview, the nature of the research was again outlined to each interviewee. It was stressed that it was the interviewees’ opinions that were being sought, that there was no quest for ‘‘right’’ or ‘‘wrong’’ answers to the questions, and that no prior ‘‘technical’’ knowledge of any kind was either assumed or required[17]. The semi-structured interview is ‘‘a process in which the interviewer focuses her questions on some limited number of points. She may range quite widely around a point, but this would be done only as a means of getting the required information on that particular point’’ (Smith, 1972, p. 119). While this imposed some structure on the interview situation (as well as helping frame the subsequent analysis), I was conscious not to directly ‘‘put things into the [interviewees’] mind[s] but to access the[ir] perspective[s]’’ (Patton, 1990, p. 278, emphasis added). It was important that the questions were open-ended in order to invite the interviewees to participate in a conversation (Maykut and Morehouse, 1994), albeit a guided one (see Table II). Most interviewees covered the areas in the interview guide without the need for much direction, with perspectives on each of the questions addressed occurring at different stages in each ‘‘conversation’’[18]. Evidence analysis Of the 29 interviews, 25 were recorded by tape and subsequently transcribed[19]. The interview analysis constituted a pervasive activity throughout the life of the study. For example, throughout the interview collection phase, ongoing analysis

Table I. Interviewees’ role and industry sector

Industry sector

FD

C

Financial and other services Manufacturing/processing Retail and leisure Exploration/extractive Printing Food and drink Miscellaneous Total

5 2 3 2 1 1 0 14

0 1 0 0 1 1 1 4

Role of interviewee CEO S 1 0 0 2 0 0 0 3

1 1 1 0 2 0 0 5

M

Total

2 1 0 0 0 0 0 3

9 5 4 4 4 2 1 29

Note: FD = finance director or equivalent; C = chairperson or equivalent; CEO = chief executive officer; S = company secretary; M = general manager. A total of 26 males and three females were interviewed

Interviewee Sector

Total CSD

Vol. CSD

Vol. HR

Env.

Trend in Com. Vol. CSDa

FD1 FD2 FD3 FD4 FD5 FD6 FD7 FD8 FD9 FD10 FD11 FD12 FD13 FD14 C1 C2 C3 C4b CE01 CE02 CE03 S1 S2 S3 S4 S5 M1 M2 M3

1.96 2.89 0.81 1.38 2.88 0.91 1.16 1.44 0.88 2.15 3.10 1.38 0.10 1.14 0.10 1.09 0.63 N/A 2.15 2.05 0.30 5.02 2.72 1.60 1.09 1.98 2.89 2.88 2.54

0.38 1.41 0.12 0.08 0.52 0.03 0.12 0.16 0.19 0.25 2.06 0.20 – 0.08 0.03 0.15 0.06 N/A 0.25 1.17 0.15 1.62 1.04 0.06 0.15 1.05 1.41 0.52 –

0.30 1.28 0.12 0.08 0.45 0.03 0.12 0.16 0.04 0.11 2.06 0.20 – 0.08 0.03 – 0.06 N/A 0.11 0.61 – 1.14 1.04 0.06 – 1.05 1.28 0.45 –

– 0.13 – – – – – – 0.15 0.14 – – – – – 0.15 0.20 N/A 0.14 0.56 0.15 0.48 0.15 – 0.15 – 0.13 – –

0.08 – – – 0.07 – – – – – – – – – – – – N/A – – – – – – – – – 0.07 –

Manufacturing/processing Manufacturing/processing Financial and other services Retail and leisure Financial and other services Exploration/extractive Food and drink Printing Exploration/extractive Financial and other services Financial and other services Retail and leisure Retail and leisure Financial and other services Food and drink Manufacturing/processing Printing Miscellaneous Financial and other services Exploration/extractive Exporation/extractive Printing Printing Financial and other services Manufacturing/processing Retail and leisure Manufacturing/processing Financial and other services Financial and other services

Stable Stable Stable Increase Increase Stable Stable Increase Increase Increase Stable Decline Stable Increase Stable Decline Decline N/A Increase Increase Stable Decline Stable Increase Decline Decline Stable Increase Stable

Notes: Vol. CSD denotes voluntary CSD; HR denotes human resources disclosure; Env. denotes environmental disclosure; Com. denotes community-related disclosures. Data based on a content analysis of the most recent annual reports of the interviewees prior to their respective interviews using the content analysis instrument from the O’Dwyer and Gray (1998) study. All community and environmental disclosures were undertaken on a voluntary basis as there are no regulations requiring their disclosure in Ireland. aIndication as to whether the volume of voluntary CSD in annual report has increased, remained stable or declined compared to year prior to interview. All disclosures reflected either positively or neutrally on a disclosing company. There was no evidence of CSD that reflected badly on a disclosing company. Voluntary CSD was predominantly qualitative in its orientation. b This manager was the chairperson of a number of different public limited companies

was aided by: extensive notes taken during and immediately after interviews; tape-recorded reflections on interviews; listening to interview tapes while travelling; and the recording of an inner dialogue reflecting on the interviews in a separate journal[20]. This, in effect, provided a provisional running record of analysis and interpretation. Initial readings of early transcripts throughout the interview collection phase also meant that in subsequent interviews certain

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Table II. Volume of voluntary CSD in interviewees’ corporate annual reports

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issues that appeared to be arising from these readings could be probed more deeply. In conducting the post-interview analysis, the broad areas addressed in the interview guide provided a framework/template from which a detailed analysis of transcripts could proceed. In total, the transcripts were read on ten separate occasions after data collection had ceased[21]. The first and second indepth reading of each transcript was undertaken with the tape of the interview running ‘‘as emphasis, mood, intonation and so on can crucially elaborate meaning’’ (Jones, 1985, p. 58). Using the interview guide as a broad framework, each transcript was subsequently re-read and any themes emerging at this stage within this framework were recorded beside the relevant section of the interview transcript in bright red marker using a set of intuitively derived codes for each apparent theme (see Miles and Huberman, 1994; Patton, 1990; Tesch, 1990; Miles, 1979)[22]. A detailed summary of each interview was also prepared after the third reading highlighting emerging themes and providing general observations on the conduct of each interview[23]. The process of coding facilitated the reduction of the transcript evidence, and also provided a means of interacting with and thinking about the evidence thereby encouraging processes of reflection. Simple mind (cognitive) maps were also prepared for each interview in order to support or, in some cases, challenge the themes identified. These also helped in the search for any apparent contradictions in the initial themes derived from the transcript evidence[24]. Detailed matrices summarising the themes/codes identified in each transcript (Miles and Huberman, 1994) were then developed in order to visually display the themes emerging when the initial codes were developed. These displays aided in identifying patterns in the interview evidence as a whole (Huberman and Miles, 1994; Miles and Huberman, 1994) with the predominant codes/themes becoming evident partially by mapping the relative incidence of different codes[25]. Examining the matrices enabled the recognition of regularities, patterns and explanations in the evidence collected. Table III provides an example of one such matrix summarising perceptions on the motives for CSD presence, a core issue addressed in the interview guide[26]. It is important to recognise that while the most common recurring themes in the data were easily determined using the matrices, I was careful to avoid presenting a ‘‘smoothed set of generalizations that may not apply to a single ‘interview’’’ (Huberman and Miles, 1994, p. 435) and made strenuous efforts to preserve the uniqueness of certain individual interviews. The detailed field notes, mind maps, tape-recorded reflections, memos, interview summaries, and journal were then revisited and analysed in conjunction with a study of the final summary matrices. This led to the formulation of an initial ‘‘thick description’’ (Denzin, 1994, p. 505) of the interview findings using the interview guide questions as a loose framework. Segments of transcripts were organised according to the core codes identified[27].- Quotations deemed to represent a particular code/theme were then selected from these transcript segments in order to add richness to the findings developed. An organisational legitimacy theory lens was subsequently used to interpret the evidence as this lens enabled one to

Core code/ interviewee FD1 FD2 FD3 FD4 FD5 FD6 FD7 FD8 FD9 FD10 FD11 FD12 FD13 FD14 C1 C2 C3 C4 CE01 CE02 CE03 S1 S2 S3 S4 S5 M1 M2 M3 Total

P1

P2

p p p p

p p

p p p

p

P3

P4

P5

P6

P7

P8

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p

415

p p p

p p p p p p p

p p

p p p

p

p p p p

p p

p p p p p

18

p

p p

p p p p p

p p p

p p

p

p

p

16

6

4

4

2

2

2

Notes: FD = Finance director or equivalent; C = Chairperson; CEO = Chief executive officer; S = Company secretary; M = General manager

encapsulate the core issues emanating from the analysis in a coherent narrative. This narrative is furnished in the forthcoming section. Interview findings Overview of findings The interview evidence reported in this paper relates to the managers’ perceptions of the motivations for CSD presence and absence. Throughout the interviews, it was apparent that managers perceived the existence of various legitimacy threats/gaps in the Irish context and, on probing, elaborated on these in depth. The perceptions of these threats/gaps are described in the next section. Given this evidence, the succeeding section presents perspectives suggesting first, that CSD may operate as part of a proactive symbolic legitimation process

Table III. Example of ‘‘core’’ code matrix disaply – broad issue: potential motives for CSD presence

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for certain companies and second, that it has acted as part of a reactive legitimation process in specific environmentally sensitive companies[28]. However, further probing of aspects of the above two perspectives, aided by an examination of perceptions of CSD absence, indicates an overwhelming perception of CSD as an unsuccessful legitimation mechanism. Therefore, while CSD is sometimes perceived as being employed as part of a legitimacy process, its employment in this manner is ultimately viewed as failing to aid in securing a state of legitimacy for organisations. Furthermore, despite the predominant view that CSD is incapable of facilitating the achievement of a state of legitimacy, research into CSD practice subsequent to the interviews (O’Dwyer, 2001a) reveals that many of the interviewees’ companies continue to engage in some form of CSD. In conjunction with the interviewees’ perspectives, this questions the pervasive explanatory power of legitimacy theory with respect to the motives for CSD when considering the Irish context. Perceptions of general and specific legitimacy threats Of the 29 managers, 28 stressed that Irish companies had to cope with major social pressures from communities/pressure groups and the media and that these possessed the potential to impair economic interests. Half of these interviewees believed strongly that the capacity of any external pressure to impact negatively on a company’s economic wellbeing was enhanced by the nature, particularly the small size, of Ireland’s social, political and economic environment. This was viewed as increasing companies’ sensitivity to social pressure thereby encouraging a responsive approach. These unique features of the nature of the Irish environment were perceived as exposing companies to potential legitimacy threats: In Ireland you obviously are more open to pressure than a relatively grey anonymous company in London . . . here it is much more visible, so you are open to more pressure [and] if you are perceived to be doing well you are a relatively soft touch for a pressure group (FD3).

One chairperson, who was extremely dismissive and intolerant of what she perceived as extreme external pressure on business in Ireland, claimed that: . . . this is a small country and every informed person knows most business actions and business people. This can lead to social pressure to be socially responsible. Companies would be exposed to more pressure than in the US or the UK. The pressures are greater due to everybody knowing everybody else and everybody knowing all the politicians . . . often foreigners are amazed at how easy it is to get access to politicians (C4).

A company secretary spoke of Irish pressure groups ‘‘putting pressure on us to state exactly what we are doing in Colombia’’ (S1). An extremely experienced chairman (C2) of two companies, who was a veteran of many trade union disputes prior to Ireland’s recent economic boom, was adamant that ‘‘[Irish] society need[ed] to be reassured’’ about business activities, and spoke with begrudging admiration of the ‘‘extreme passion’’ and ‘‘power’’ of environmental pressure groups. The ‘‘vast’’ experience of one company chairman had apparently taught him that ‘‘if you don’t give something back to the

community, you are going to create conditions in which there will eventually be an uprising of the workers or something, so it’s in your own interests to do it’’ (C3). Less experienced managers were not as adamant in their comments regarding the degree of external pressure but nevertheless expressed some concern regarding its extent, its potential negative business consequences, and the necessity of responding to it. While perceptions of general legitimacy threats to business emanated from managers in most sectors, industry specific threats were extremely prominent for managers in environmentally sensitive companies and focused on explicit ‘‘relevant’’ publics. The specific ‘‘relevant’’ publics continually referred to encompassed local communities, environmental pressure groups and the media (particularly the print variety). One manager in the exploration/extractive sector whose company had suffered from adverse media exposure just prior to his interview, and who was quite reticent throughout, felt that ‘‘some of the pressure involve[d] outrageous claims’’ (FD6) although he would not provide specific examples. A company secretary who emphasised a compelling personal commitment to environmental protection disparaged environmental pressure groups as he viewed them as ‘‘self appointed guardians of the environment with no mandate other than one they have devised themselves’’ (S1). Another manager, working for a company that had come under severe attack in the media with regard to environmental issues and suggestions of political favours, was aggressively dismissive of these claims and castigated ‘‘the [Irish] media [for] tend[ing] to slate certain aspects of business’’ (FD2), while his colleague found media and environmental group pressure ‘‘ridiculous’’ and ‘‘irritating’’ (M1). An exploration/extractive CEO was also wary of ‘‘a strong environmental lobby against mining’’ akin to ‘‘a jihad, a holy war for some of the members’’ (CEO3). External pressure/threats were therefore primarily perceived negatively and somewhat dismissively. They clearly troubled many managers who somewhat reluctantly recognised a need to be responsive as these potential threats could impact on the interests of what was widely perceived as their primary relevant public, the financial stakeholders. Companies with a publicly perceived environmental impact felt especially threatened and therefore compelled to respond. One manager suggested that the ‘‘increasing concern with the environment [meant that] all Irish industry [wa]s [now] paying a lot more attention to the environment’’ (M1) as opposed to in the past when ‘‘a lot of [Ireland’s] economic development was at the expense of niceties’’ (C2). He rather ruefully accepted that these ‘‘niceties’’ now had to be attended to in a more affluent environment in which enhanced external pressures existed. One CEO emphasised that his bank (the second largest in Ireland) recognised the need to ‘‘open up some dialogue with these people [consumer pressure groups’’[29] (CEO 1). Nevertheless, despite the above overriding perspectives, seven interviewees did note that their particular industry sector and/or relative size (ranging from a bottle manufacturer to a small mining company) protected them, to some extent, from social pressures and concomitant legitimacy threats.

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I think that it [low profile company sector] certainly protects us from social pressures and I guess we are probably comfortable with that because the business doesn’t require it (FD1). I do think that the Irish community will expect more from a large organisation like X (large bank) than, say, Y (small food company) (M2).

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These initial perceptions highlight the perceived existence of strong external threats to the general legitimacy of business interests in the Irish context and also to the specific legitimacy of certain industry sectors such as the printing and exploration/extractive sectors. As noted earlier, given these perceived legitimacy gaps, organisational legitimacy theory would suggest that CSD is one means by which companies might seek to manage these perceived threats or repair any apparent damage caused by them. Given the perceived legitimacy threats outlined above, the evidence presented in the following sections illuminates perceptions which initially appear to provide support for, but ultimately challenge, the pervasive explanatory power of legitimacy theory with respect to the motivations underpinning CSD practice among plcs in Ireland. These perspectives also highlight the need for the recognition of the complexity and confusion which occasionally underpins the motives for CSD. CSD – Part of a symbolic legitimation process Proactive symbolic legitimation? – rationalising other companies’ motivations The managers were questioned directly as to why they believed CSD was undertaken by companies generally (see Appendix). Many managers initially conversed in broad terms regarding how they perceived other companies’ motivations, particularly those not working in environmentally sensitive sectors. They seemed keen to avoid discussing their own companies’ experiences, where relevant, at least until directly questioned. Some prefaced their answers with expressions such as ‘‘I suppose the motivations might be . . .’’ or ‘‘I can only make a guess . . .’’ or ‘‘I’m not too sure but . . .’’ suggesting a sense of mild bemusement regarding the existence of CSD generally in the first place. Most rationalisations perceived the presence of CSD in other companies as being primarily motivated by its potential to influence public perceptions by promoting a particular corporate image in the face of the widely perceived increased industry and public pressures described above. It was deemed potentially ‘‘opinion influencing [and] either defensive or proactive to ensure [companies] didn’t get attacked’’ (CEO1) and focused on providing ‘‘reassurance’’ (FD13) to external parties. Proactive motivations were continually referred to in the context of other companies’ probable motivations: Companies [may] want to give this greater perception that they are benign companies, that they are not big bad wolves that are making so many millions or whatever (FD4).

CSD as proactive symbolism Few managers perceived that CSD, motivated in the above manner, reflected actual responsibilities/activities undertaken. It was widely viewed as a form of

symbol (Buhr, 1998, Patten, 1992), especially by managers in the printing and exploration/extractive sectors:

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. . . most companies are interested . . . to be seen to have some sort of social conscience . . . I might like to pad my accounts by putting in all kinds of things about the environment and safety at work practice, but it is nothing to do really with social responsibilities as I see it (C3).

One CEO in the exploration/extractive sector (CEO3) went as far as to state that ‘‘much of the business environmental agenda [partially encompassing CSD] is a hoax . . . and it basically comes down to enlightened self-interest’’ while another asserted that ‘‘disclosure has nothing to do with responsibility [as it] merely adds padding to the accounts’’ (CEO1). A manager who had been very cynical about CSD generally throughout his interview claimed that in other companies ‘‘it [was] all ‘touchy feely’ stuff really, without any hard examples’’ (FD2) as opposed to his own company’s attempts to make CSD ‘‘more real and practical by providing concrete examples’’ (FD2). The latter view is borne out by the consistent use of examples in the environmental disclosure section of his company’s annual report. There were some, albeit far from prevalent, exceptions to these viewpoints focusing on the symbolic as opposed to substantive nature of CSD. One chairperson was adamant that ‘‘companies have obligations to the community’’ (C3) and suggested that CSD was undertaken in order to indicate to the wider society that companies possess motives moving beyond ‘‘mere’’ profit generation. He was keen to indicate that CSD, in his experience, did in fact reflect actual activities being undertaken in companies (especially his own company, although it engaged in very little voluntary CSD). Throughout the interviews, it became evident that when managers spoke of these proactive symbolic motivations for CSD in other companies, many were struggling somewhat to persuade themselves of the appropriateness of these rationalisations. Many of these managers worked for companies engaging in very minimal amounts of CSD and they often appeared to be attempting to convince themselves (and the interviewer) that proactive engagement in CSD, aimed implicitly at maintaining legitimacy, was the most logical reason for other companies engaging in this practice. For example, in four instances, these interviewees looked to the interviewer seeking confirmation of this perspective asking ‘‘well, would you not agree?’’, implying that for them the motives for CSD generally may have been somewhat mystifying despite the external pressures alluded to above. This apparent lack of conviction was probed in depth and is revisited later in the narrative in order to explore the underlying reasons for its existence. CSD as a reactive legitimation process Managers working in environmentally sensitive sectors were initially more forthcoming about the initial motivations for CSD in their own companies. This may have been influenced by the fact that many of them worked for companies who had engaged in CSD in the recent past, although with varying degrees of

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depth and consistency (O’Dwyer and Gray, 1998). They emphasised reactive motivations underpinning CSD. The perceptions of potential legitimacy gaps outlined earlier apparently motivated companies in these more publicly exposed sectors to engage reactively in CSD through the annual report as part of attempts to repair perceived lost legitimacy. This was primarily aimed at legitimising corporate activities in order to defend against any perceived possible threats or interference to business operations. There was much less ambiguity and greater conviction about these managers’ responses in this reactive vein given many were conversing specifically about motives within their own companies. Environmentally sensitive sectors – experimenting with CSD as part of a reactive legitimation process Perceptions of recent increased public and industry awareness of the environment in Ireland had apparently impacted on the decisions of some companies to disclose environmental information in their annual reports in response to specific legitimacy threats from the media and pressure groups. This was particularly evident among the four managers in the exploration/ extractive sector who were especially aware of the need to communicate with local communities ‘‘in order to educate and inform people about the industry’’ (FD9). One CEO in this sector (CEO3) accentuated the ‘‘importan[ce] [of] keep[ing] the local community completely briefed . . . because where there is a lack of information, ignorance . . . and fear takes over [and] it becomes very difficult to deal with [an issue] rationally’’. Both the above managers had experienced community opposition in both the Irish and international context. However, it is important to highlight that environmental disclosure in their companies’ annual reports was often insubstantial. External pressure was largely perceived as having led ‘‘to a greater awareness in industry generally to report on environmental matters’’ (FD2), with companies keen to ‘‘put across a message especially if [they] were sensitive to the environment’’ (S2). Eleven interviewees in these sectors stressed the need to be particularly aware of these trends and indicated that local communities were a powerful ‘‘relevant’’ public with the ability to impact on activities. These interviewees indicated that their companies had responded to perceived pressures by engaging in environmental disclosure ‘‘in a defensive manner’’ (CEO2) in order to ‘‘spell out in general what the thoughts of the[ir] compan[ies] [we]re regarding [their] policy towards the environment’’ (M1). . . . environmental issues have become far more significant over the last five years, particularly in the whole acquisition area. If [we] acquire a company now . . . one of the first things that you want to be sure of is that there are no environmental problems, that whatever it is, the soil, before you start building, the soil is clear, that your emissions are right . . . and for that reason environmental reporting has become much more important (C3).

An analysis of the most recent annual reports of these 11 managers (see Table II) indicates that ten of them worked for companies who had engaged in environmental disclosure in their most recently issued annual reports at the

time of the interviews. However, a review of reporting in their companies from the O’Dwyer and Gray (1998) study indicates a number of years where environmental disclosure is absent. A company secretary in a major printing company was also at pains to point out that their extensive reporting on the environment in the past (in one year (1993) devoting over half of their annual report to environmental issues) was a direct (and somewhat reluctant) response to increased environmental awareness and pressure: . . . we did not have the theme of the environment in 1982 because nobody gave a [damn] about the environment in 1982, we do now . . . you are always going to be subliminally influenced by the current flavour of the month, street talk or whatever pressures happen to exist (S1).

The evidence presented above lends support to interpretations of CSD practice (particularly the environmental disclosure subset) which perceive it as a firm/ industry-specific reactive legitimation mechanism (Gray et al., 1996) influenced by the social values of the community in which a business operates (Deegan and Rankin, 1996). However, despite these perceptions, both the quality and consistency of disclosure in most of these managers’ companies was poor over time (O’Dwyer and Gray, 1998) and some had ceased reporting or only reported minimal amounts of generalised environmental information in their most recent annual reports (see Table II). Elements of the following section probe this apparent inconsistency. Securing legitimacy – the counterproductive nature of CSD The perspectives presented thus far indicate perceptions of the motives for CSD as part of either a proactive or reactive legitimation process. As such, they do little to challenge prior interpretations of CSD claiming it is motivated by a desire to legitimate company operations. However, two aspects of these rationales lent themselves to increased and critical scrutiny. First, as already noted, many managers, particularly those employed outside environmentally sensitive sectors, focused almost exclusively on suggesting motivations for CSD in companies other than their own. They indicated that CSD may have been motivated by a perceived necessity to proactively influence potentially unwelcome pressure through the use of a legitimation symbol such as CSD. Yet, they appeared hesitant, unsure, and lacking in conviction when outlining these perspectives and needed to be coaxed into talking about their own companies’ motivations (although admittedly many of these companies engaged in very little CSD)[30]. Second, as noted above, while managers in environmentally sensitive sectors indicated their use of CSD in a reactive manner, an examination of trends in environmental disclosure in their companies and in companies generally (O’Dwyer, 2001a; O’Dwyer and Gray, 1998) highlights poor quality disclosures containing minimal information as well as an absence of consistency in reporting (evidence of companies reporting in one (or more) year(s) and subsequently ceasing to report).

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Elaboration on the above two aspects of the narrative presented thus far was facilitated by examining the managers’ perceptions of the motives for CSD absence. Managers directed the conversation towards consideration of whether CSD, if used as part of a legitimacy process, succeeded in securing a state of legitimacy. The forthcoming sections illuminate perceptions which question whether CSD among plcs in Ireland is primarily motivated by ‘‘strategic’’ legitimation objectives, particularly as CSD is widely perceived as being incapable of contributing to the achievement of a state of organisational legitimacy. CSD as proactive symbolic legitimation? – probing an absence of conviction in perspectives As outlined above, the first issue that lent itself to critical scrutiny and probing in the interviews was the hesitancy and uncertainty indicated in the initial proactive legitimation motivations espoused by many managers (particularly those working in non-environmentally sensitive sectors). When probed, several of these managers admitted that while they could only rationalise CSD in other companies on the basis of some form of proactive legitimation mechanism, within their own companies, they failed to see how it could successfully confer legitimacy on their organisation, if and when potential threats existed, hence the widespread absence of detailed voluntary CSD in many of these companies. Perceived cultural suspicion A number of managers claimed that while they appreciated CSD did exist to some extent, and while it may have been part of a process motivated by attempts to legitimise certain activities, its successful pursuit, in terms of the achievement of a state of legitimacy, was, in their view, unlikely in the Irish context and could even prove counterproductive. It was contended that CSD would not be viewed favourably or as convincing by its intended target audience (or ‘‘relevant’’ public), be it the general public, pressure groups, the government or even shareholders. A manager in a major lending institution, which did not engage in voluntary CSD, and had suffered extreme media pressure in the early 1990s regarding home evictions and accusations of irresponsible lending, felt ‘‘Irish people’’ needed a lot of convincing: . . . I don’t know what [CSD] does for you . . . whether it really convinces Irish people one way or the other I’m not really sure (M3).

There was a widely held perception that, culturally, ‘‘Irish people’’ tended not to seek credit for their so-called ‘‘good deeds’’. Many managers felt that if companies took credit for exercising a social responsibility or explicitly claimed to be socially responsible through engaging in CSD, those whom they might be trying to convince might question their real motives. Cynical and questioning interpretations of CSD were to be expected and reflected elements of ‘‘the selfpromoter’s paradox’’ (Ashforth and Gibbs, 1990, p. 186) whereby ‘‘audience’’ interpretations of CSD diverge from organisational expectations or desires.

These perspectives reflected a concern that, in Ireland, CSD ‘‘may be seen as being somewhat undignified’’ (FD3) and as ‘‘not the done thing’’ (C1). In a similar vein, a perceived ‘‘disdainful [attitude] towards business’’ (CEO3) from sectors of the media and the wider society meant that there was a perception of a history of Irish business producing as little information as possible for external consumption. Therefore, many claimed that any form of CSD would normally only provide the minimum required, which mainly involved complying with legislation and little else. This viewpoint was prevalent among more experienced managers who outlined past resistance to information disclosure (both financial and otherwise) by their own companies: I think in a funny way [that] we have always been a little cagey in this country, that we only produce the information we have to produce . . . Generally speaking, I think we are pretty poor in this country at giving information . . . [CSD] would just be to make people aware of what we have done but we don’t want to ‘‘crow’’ about it as [there is] this inherent begrudgery that we see in this country. If somebody tries to tell you they are great, people like to knock them (FD4).

While most of these managers appeared dubious about the ability of CSD per se to act as a successful legitimation mechanism, for a number of them, the use of the corporate annual report as the CSD medium actually heightened this scepticism. To them, the corporate annual report often represented an inappropriate medium for CSD as it was deemed either too long and costly already and therefore did not need extra detail on CSD included therein, or it was perceived as being rarely read by the various ‘‘relevant’’ publics. Recent evidence of CSD in Ireland subsequent to the interviews (O’Dwyer, 2001a), indicates that many of the interviewees’ companies continue to engage in (albeit minimal) CSD despite the overriding perceptions above that, if motivated by concerns surrounding organisational legitimacy, it will fail to achieve a legitimation state. This tends to challenge whether CSD is primarily motivated by concerns surrounding organisational legitimacy. The second issue which warranted critical scrutiny revolved around reconciling the poor quality and inconsistency of environmental disclosure by environmentally sensitive companies (disclosure present for one (or more) year(s) and then disappearing) with the perceptions which suggested this form of reporting was sometimes used as part of a defensive/reactive legitimation process by these companies. These perceptions provide further evidence of CSD as a failed or inappropriate legitimation vehicle given its perceived failure to help in securing a state of legitimacy for many of these environmentally sensitive companies. Specific sectoral legitimacy failure – the case of environmentally sensitive companies Managers in environmentally sensitive companies who outlined their reactive use of environmental disclosure as a legitimation tactic expanded fulsomely on why this form of disclosure was often first, inconsistent and, second, extremely poor in its quality.

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Inconsistent trends in environmental disclosure – CSD as part of a misguided legitimacy process The aforementioned managers contended that their experience of environmental disclosure engagement had exposed them to even greater demands and increased scepticism. Apparent quests for legitimacy effectively backfired due to these disclosures being used in many instances as a stick with which to beat them. For example, one manager employed by a company that in the early 1990s had emphasised a responsibility to the environment as one of its corporate objectives, indicated that the company had experienced particular difficulties with this and other disclosed commitments to the environment in its annual report. These disclosures, while primarily geared towards defending against perceived threats to his organisation’s legitimacy, ended up exposing it to greater pressure and increased scrutiny. This led to difficulties complying in practice with what they were disclosing and eventually resulted in environmental disclosure being discontinued. As the disclosures, which were positive in their nature and not overly comprehensive, were not perceived as reflecting actual performance (suggesting symbolic as opposed to substantive disclosure), the perceived legitimacy gap actually widened: We in fact dropped environmental reporting . . . because we felt we had occasions where people had used it as a hostage to fortune, saying basically, ‘‘well you’ve said this, why are you doing that?’’ . . . It was only over the next year or two that we recognised the realities of some of the environmental issues that happened on the ground . . . we realised [that] it is all very well to be making public statements on one area, but on the ground there were some difficult issues being dealt with and we were maybe just sticking our chin out and people were taking advantage to have a shot (FD7).

This illustrates the ‘‘self promoter’s paradox’’ referred to above which tends to lead to the removal of CSD from a company’s legitimation arsenal (Suchman, 1995). Furthermore, reporting in one year was sometimes perceived as making it difficult to avoid reporting in future years with ‘‘management . . . find[ing] themselves locked into something which was intended as a one off’’ (C2). These perspectives reflected a lack of long term commitment to CSD if it failed to immediately fulfil its perceived potential to contribute to the achievement of a legitimation state. It was seen as something that was undertaken, at best, in a one-off vein, perhaps as a short-term response to a particular issue: I suppose it could be the case that [companies] might be worried about becoming a hostage to fortune if they do this now when things are ‘‘goodish’’ if you like, that they may feel we are going to have to continue on doing this. I think that’s one of the concerns that people would have about their annual report, if we do it this year we will always have to continue on doing it, or you’ll find the press saying, well what’s wrong with [name of company] this year, they did it last year and are not doing it this year . . . I would think that they may be concerned that they are going to be held to this for the future (FD13).

Six other interviewees, mainly in companies with explicit environmental impacts, concurred with this reason for reticence towards CSD and contended that if a company engaged in CSD it would merely increase demands and

heighten suspicion. For example, in relation to a perceived resistance to disclosing information on charitable donations (which is not required by Irish law), one company secretary noted:

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It is self protection almost . . . it’s like winning the lottery, you are going to have a million begging letters and so you’re never going to be able to satisfy people (S3).

As noted previously, given perspectives of this nature, it is questionable whether recent evidence of continued (albeit minimal) CSD subsequent to the interviews (O’Dwyer, 2001a) is motivated by legitimacy concerns. However, in the case of managers in environmentally sensitive companies, a potential motivation informed by legitimacy concerns, but taking into account ‘‘relevant’’ publics’ relative power, presents itself (see Neu et al., 1998; Mitchell et al., 1997). The following section furnishes this evidence. Poor quality environmental disclosures – minimal appeasement Managers in environmentally sensitive sectors had little sympathy for environmental pressure groups’ concerns and invariably considered these as conflicting with the needs of financial stakeholders. For some of these managers, the poor quality CSD used to react to legitimacy threats reflected an implicit dismissal of the environmentalists’ claims. It was aimed at ensuring these allegations were not given too much exposure as this might cause concern among more powerful ‘‘relevant’’ publics such as fund institutions. Therefore, rather than outrightly defying environmentalists’ claims (a risky tactic given these groups were clearly perceived as having some power), as Oliver (1991) suggests, these minimal disclosures appear representative of low effort symbolic gestures aimed at demonstrating minimal appeasement of these external demands. More detailed disclosure could have implicitly granted some legitimacy to these claims and potentially caused concern among more powerful ‘‘relevant’’ publics, such as fund managers. For example, eight managers (most of whom worked in environmentally sensitive sectors), suspected that detailed, comprehensive disclosures provided these criticisms with an air of (implicit) legitimacy they did not warrant by increasing their prominence. To try and counteract it [external pressure relating to a social issue] by [providing] a more detailed exposition in the case of the annual report would be counterproductive by lending credibility to the issue (FD2).

There was an element of defiance in these perspectives suggesting that detailed CSD was far from an ideal means with which to succeed in attaining a legitimation state. One manager contended that issues of this nature eventually disappeared and that avoiding reporting or reporting minimal detail regarding them accelerated their dissolution: The issue arises, the issue [eventually] goes away, but if you write it in your annual report it is there forever and people are saying to you why did you do this three years ago? (FD8).

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I don’t feel I need to address it in my annual report because the reality, [as far as the company is concerned] is there isn’t an issue . . . [reporting] leaves people with the impression that there is more of an issue than there actually is.(CEO2).

Evidently, these managers could only rationalise using CSD as part of a legitimation process if it possessed the potential to maintain or defend organisational legitimacy. Given they viewed this as highly unlikely, they either refrained from engaging in its practice altogether or merely engaged in negligible disclosure (O’Dwyer 2001a; O’Dwyer and Gray, 1998) aimed at minimal appeasement of environmental pressure groups. Discussion and conclusions The principal purpose of this paper is to examine managerial perceptions of the motivations for CSD in the Irish context. The study focuses on perceptions of both CSD presence and absence as it is contended that these perceptions enable one to examine managerial motivations regarding CSD in greater depth, especially given the results of prior CSD research in Ireland (O’Dwyer and Gray, 1998). This is one of the few studies to use managerial perspectives in attempts to understand CSD, thereby responding to Gray’s (forthcoming) request for more accounts of the results of engagements with corporate management in the social accounting literature. The narrative presented extends the prior use of legitimacy theory in efforts to understand CSD. This is achieved through the illumination of perspectives which reflect on whether CSD is motivated as part of a legitimacy process as well as considering its potential to lead to the achievement of a state of legitimacy. By presenting a narrative which deliberates on both of these conceptions of legitimacy in attempting to understand CSD (legitimacy as a process and a state), the paper furnishes a more complex, complete, and critical story of the motives for CSD. Fragments of this narrative also challenge the seemingly pervasive explanatory power of legitimacy theory with respect to CSD suggested by prior research. In the above manner, the study adds significantly to our understanding of CSD and therefore represents a substantial addition to, and extension of, the international literature engaged in efforts to interpret the motives for CSD. The perspectives gained suggest that while CSD may occasionally form part of a legitimacy process, ultimately this is doomed to failure in that a state of legitimacy is rarely attained. In fact, CSD is often perceived as possessing the potential to engender rather than diminish societal scepticism in an environment where public pressure is keenly felt by many organisations. In many instances, attempts at legitimation, especially through environmental disclosure, have been greeted with increased scepticism and heightened public demands for action regarding environmental issues. Rather than responding to these increased demands through engaging in further (or better quality) CSD, some companies, apparently identifying the futility of using CSD as a legitimation vehicle, have ceased to engage in its practice (O’Dwyer and Gray, 1998). Hence, it is widely perceived that for these reasons many companies

avoid engaging in CSD. Furthermore, those that have engaged in its practice with legitimacy motives in mind are deemed unlikely to continue to do so. This would appear to suggest that there may be something unique about the Irish context, in comparison to, say, the Australian context where O’Donovan (1999) found that managers did consider annual report CSD to be useful to maintaining or re-establishing legitimacy. This uniqueness appears to derive from a more cynical, demanding and questioning public that leads to a perception of CSD being doomed to fail as a legitimation vehicle, especially if there is little substance to it. Nevertheless, despite the above perspectives, voluntary CSD (in the form of environmental disclosure) persists in many of the interviewees’ companies (O’Dwyer, 2001a). If it is widely perceived as failing to achieve a state of legitimacy, then its continued existence may be due to motives that lie outside legitimacy theory explanations. Certainly, among this group of managers, unless CSD succeeds in fulfilling some form of legitimacy role, it is viewed as having little purpose given this was the prime motive most managers could rationalise for its presence. While some managers alluded to concerns for accountability to the wider society, there was little in the perspectives that suggested any motives outside those of a symbolic self-interested nature. In fact, the perspectives imply that CSD is not viewed as a significant reporting activity to any great extent and its continued practice in the Irish context was often deemed somewhat mystifying for many managers. This study reports on the perceptions of 29 senior managers and, therefore, any consideration of the findings can only be attributed to these individuals. Furthermore, the interviews took place at a time when many of the corporate scandals mentioned earlier were emerging and it was evident that these were uppermost in the minds of several managers who strongly emphasised the need for confidentiality in the treatment of their perspectives. This may have influenced some to conclude that CSD might be counterproductive (particularly to the achievement of organisational legitimacy) given the widespread scepticism accorded to many business pronouncements around this time. In addition, the perceived impact of the small Irish market suggests that members of society might easily ascertain whether there was a correlation between responsible business actions and CSD, thereby leading to a reluctance to engage in CSD if there was little substance to it. This would indicate that any attempts to change perceptions without changing behaviour might be open to embarrassing failure in this context, hence the widespread perception of CSD as an inappropriate legitimation vehicle. These results have important implications for any attempts to develop CSD in Ireland in the near future. For example, O’Dwyer (2001b, 2000) argues that CSD becomes difficult to justify from a societal perspective if it cannot be seen to promote the public as opposed to the corporate (private) interest. The perspectives presented here suggest that CSD is unlikely to evolve in Ireland in this vein given the general absence of any consideration of its potential to ‘‘develop higher levels of organisational transparency [and] stakeholder

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accountability’’ (Owen et al., 1997, p. 195). Furthermore, the managers’ perception of a cynical and questioning public suggests that enhancing the credibility of CSD will also be vital if it is to develop successfully in Ireland. Given that there appears little likelihood of extensive openly accountable CSD emerging on a voluntary basis in the near future in Ireland, this suggests that some form of regulation may be necessary in order to promote more extensive and better quality reporting in the interests of the wider society as opposed to corporate (private) interests. Due to the general absence of research into CSD in the Irish context, this paper suggests some potential avenues for future research. For example, given the lack of CSD evident in the O’Dwyer and Gray (1998) study along with the reluctance of many managers to engage in its practice, it may be helpful to ascertain if there is a demand for this information in this context. The lack of reporting may reflect an absence of any clear demand from both the financial markets via analysts and from members of the wider society, despite perceived pressure for responsible actions, given that the latter were often perceived as treating such reporting with scepticism and cynicism. In effect, research needs to determine the extent of the demands for social accounts. Furthermore, and relatedly, the perspectives of these company stakeholders as to their information requirements in relation to CSD need to be obtained (see Azzone et al., 1997). The issues addressed might include the areas to be covered by CSD, the type of reporting required (quantitative, qualitative or a mixture of both), the preferred reporting medium, as well as perspectives on how to enhance the credibility of the information produced. Any future development of CSD in Ireland needs to be informed by these perspectives. Notes 1. Reference to ‘‘Ireland’’ in this paper refers specifically to The Republic of Ireland. 2. Note that it is perceptions of voluntary CSD in particular that are examined given companies have discretion with regard to whether they engage in these disclosures or not. 3. This is also a common reason for a lack of disclosure in many other western European and Australasian countries. 4. Recently, O’Dwyer (2001a) has conducted an investigation into the environmental disclosure practices of Irish plcs and public sector bodies subsequent to the interviews conducted as part of this study. Where relevant, these findings are used to help interpret the findings presented in this study. 5. The corporate annual report has been deemed a particularly effective legitimating medium in a symbolic vein. For example, narrative disclosures in annual reports can ‘‘be used to send the ‘right message’ to relevant publics and to shape the way various publics know or feel about [a] corporation’’ (Neu et al., 1998, p. 269). This provides organisational managers with an ideal opportunity to develop a specific organisational image for these ‘‘relevant’’ publics in order to gain, maintain or repair organisational legitimacy (Suchman, 1995). 6. For instance, in order to ascertain if disclosures form part of a legitimation strategy aimed at deflecting public criticism or scrutiny (repairing legitimacy), data has been collected on the extent of CSD (primarily in corporate annual reports) in various countries and/or companies and then tested for correlations with a number of content based measures of public pressure. These measures include the size of a company or industry (deemed to

7. 8.

9.

10.

11.

12.

13.

14.

15. 16.

17.

represent its exposure to public pressure) (Adams et al., 1998), as well as measures of societal concern regarding corporate activities, represented by: measures of media coverage (Brown and Deegan, 1998; Neu et al., 1998); changes in membership of environmental groups (Deegan and Gordon, 1996); and major events involving an industry or company, including environmental prosecutions (Deegan et al., 2000; Deegan and Rankin, 1996; Guthrie and Parker, 1989; Patten, 1992). For a review of a number of these studies, see Buhr (1998, p. 167) and O’Donovan (1999, pp. 69-76). Guthrie and Parker’s (1989) study of CSD in 100 years of annual reports by a dominant Australian mining/manufacturing company failed to confirm legitimacy theory as the primary explanation for CSD. However, while corporate legitimacy was not deemed a rationale for overall CSD, there was some indication that this provided the rationale for the environmental disclosure subset of CSD. The importance of considering the latter element of the story is as follows. If CSD is motivated through its use as part of a legitimacy process but ultimately fails in this role, then one might expect, using a legitimacy theory interpretation of the motivations for CSD, a cessation in CSD following failure. If CSD does continually transpire (as is the case in many western European countries), despite evidence of failure, then the use of legitimacy theory to explain the motives for CSD is challenged somewhat. As we shall see, the perspectives gained in this study address this aspect of the legitimacy theory story as applied to CSD. This lends support to the notion that increased, detailed environmental disclosure in response to such criticism implicitly grants legitimacy to environmentalist claims, ‘‘something [an] organisation [may] not want to do’’ (Neu et al., 1998, p. 272). While there are very few examples in the CSD literature that use these perspectives in order to attempt an understanding of the motivations for CSD, some recent studies have moved in this direction (see O’Donovan, 1999; Adams, 1999; Buhr, 1998). Two interviewees were not working for plcs at the time the interviews took place. Of these, one was working for a plc when initially contacted, but had since moved to a large private company. This interviewee had been in this new post for approximately four weeks at the date of the interview. The other interviewee’s company had, in the previous five years, been de-listed but the interviewee had been the chairperson of this company throughout the years it was a quoted company. Letters were sent to 45 senior corporate executives requesting interviews. These letters included a brief curriculum vitae of the researcher along with a broad outline of the research being undertaken and the issues to be addressed. This enabled each interviewee to consider these issues prior to their interview and to seek clarification, if required. Those who were unable to accommodate an interview claimed they found a lack of time to be the primary obstacle, given their senior management positions. There was no direct evidence of any potential interviewee being resistant to the research being undertaken. The questions were designed to encourage a broad conversation. They were not formulated to specifically interrogate the applicability or otherwise of legitimacy theory in interpreting the motivations for CSD. There was no mention of legitimacy theory by the interviewer during the interviews (see Appendix 1). There were only two interviewees who did not work for companies included in the sample for the CSD content analysis. The interviews also addressed the managers’ perceptions of corporate social responsibility. Where these perspectives assist in explaining the perceptions of CSD, they are also addressed in the narrative presented in the next section.. This was undertaken in order to avoid the possibility that interviewees might provide less than truthful responses due to a desire not to appear lacking in knowledge.

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18. During each interview detailed notes were taken, and immediately after each interview reflections on the interview were tape-recorded and written up. These reflections dealt in particular with the interviewee’s demeanour throughout the interview, covering issues such as rapport established, reaction to probing, apparent conviction in responses, inconsistencies in responses and general attitude to the research issue under study. I was also alert to potential inconsistencies between interviewee perspectives and evidence of CSD in their companies’ most recent annual reports (see Table II) and in the reports analysed in the O’Dwyer and Gray (1998) study. Where these were identified, interviewees were probed on the reasons for this. 19. Four interviewees declined to have their interview tape-recorded. Detailed notes were taken throughout and immediately after these interviews. 20. This journal was constantly at my side as reflections and insights do not usually announce themselves in advance, they often happen by chance and need to be recorded immediately. The journal was, in effect, a depository for all kinds of stray ideas in a constant search for some form of insight. 21. Prior to these readings, the transcripts were checked with the tape recordings to ensure complete accuracy in the transcription process. 22. Miles and Huberman (1994, p. 56) describe codes as ‘‘tags or labels for assigning units of meaning to the descriptive . . . information compiled during a study. Codes are usually attached to ‘chunks’ of varying size – words, phrases, sentences or whole paragraphs, connected or unconnected to a specific setting’’. The codes developed in this study were grouped under the major question areas included in the interview guide (see Appendix 1). For example, codes were compiled under major themes such as: the motives for CSD presence; the motives for CSD absence; and the desirability of CSD. To illustrate, when analysing motives for CSD absence in the transcripts (coded SDN), numerous codes were initially derived by the author. Examples included: SDN/Aud: ‘‘not a broad enough audience’’; SDN/FM ‘‘irrelevant to fund managers’’; SDN/T ‘‘the timescale between events and reporting can be very long’’. The ‘‘SDN’’ element of the code indicates that this is a perspective on motives for CSD absence. The latter part of the code (e.g./Aud) attempts to indicate the perceived reason given for CSD absence. Note, that while the interview guide questions provided a template, they did not constrain the search for stand-alone codes and I was open to other overriding themes emanating throughout the transcript analysis. A second separate ‘‘memo’’ file was also maintained in order to record observations and reflections on the meaning of the data as a whole as the analysis proceeded. 23. These notes were also informed by the detailed observations recorded immediately after each interview on tape and in writing. 24. During the later transcript readings, special significance was placed on locating cases that would tend to conflict with the initial codes/themes that had emanated from the data at the earlier stages of the analysis (what Silverman (2000, p. 180) terms ‘‘deviant-case analysis’’). This helped to provide some protection against ‘‘the presentation of ‘unreliable’ or ‘invalid’ (Miles, 1979, p. 590) evidence’’ (see Patton, 1990, pp. 462-4). 25. The initial ‘‘open’’ codes (such as, SDN/Aud etc.) were recorded manually in tabular/matrix form (see Table III for the initial table format) and each code was linked back to the relevant page on each transcript it was derived from. Using this tabular/matrix format, I could visualise how many times various codes were identified both in individual transcripts and in the overall 500 or more pages of transcription. Subsequently, these codes were further refined and relationships between the individual codes were developed. Similar codes were aggregated into what were termed ‘‘core’’ codes in order to collapse the numerous individual codes into manageable proportions. The ‘‘core’’ codes emerged ‘‘as aggregates of the most closely interrelated (or overlapping) [initial] open codes for which supporting evidence [wa]s strong’’ (Parker and Roffey, 1997, p. 228). For example, a ‘‘core’’ code that developed relating to motives for CSD absence was SDN/CP- indicating that CSD

26.

27.

28. 29.

30.

was perceived as being counterproductive. This consisted of numerous initial ‘‘open’’ codes including, among others: SDN/Cu ‘‘cultural suspicion’’; SDN/PG: ‘‘increased demands from pressure groups’’; and SDN/Leg: ‘‘could confer legitimacy on dubious external claims’’. These ‘‘core’’ codes were also displayed in tabular form as matrices (see Table III for the eight core codes relating to the motives for CSD presence expressed in the interviews). The matrices enabled me to visualise the relative incidence of ‘‘core’’ codes in all transcripts. Note, this was merely a device for organising the evidence and was designed to aid, not constitute the analysis. Initial matrices of this type were further reformulated in great detail in order to discover if interviewees’ industry sector, company size or role had any apparent impact on their perspectives. A copy of each transcript was taken and all segments of the transcript which had been coded in red marker (the initial ‘‘open’’ codes) were physically separated (by cutting them up). This separated these portions of evidence from their interview context, a process Tesch (1990) terms ‘‘de-contextualisation’’. All similar transcript segments (representing different ‘‘open’’ codes) cut from each separate transcript were then filed together in transparent plastic sheets with the ‘‘open’’ code name clearly identified on each sheet (e.g. SDN/Aud). These separate sheets were then filed according to the ‘‘core’’ code they belonged to in separate clearly marked box files. This enabled easy access to relevant segments of transcripts when selecting quotes to add richness to the description of the findings. These encompass companies in the exploration/extractive, printing, manufacturing/ processing and food and drink industry sectors. Implicit in these perspectives was a view of a conflict between the needs of non-financial stakeholders and financial stakeholders such as individual shareholders and fund institutions. There was no evidence of any recognition that the multiplicity of non-financial external publics may themselves have competing interests (see Milne and Patten, 2001; Mitchell et al., 1997; Neu et al., 1998) which would make any response to their concerns and its potential success more problematic. The managers proposed legitimacy as a potential motivation for CSD. The interviewer did not have any explicit prior theory in mind when conducting the interviews.

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Guthrie, J. and Parker, L.D. (1989), ‘‘Corporate social reporting: a rebuttal of legitimacy theory’’, Accounting and Business Research, Vol. 19 No. 76, pp. 343-52. Hoven Stohs, J.H. and Brannick, T. (1996), ‘‘Irish managers’ perceptions of business ethics’’, Irish Business and Administrative Review, Vol. 17, pp. 83-93. Hoven Stohs, J. and Brannick, T. (1999), ‘‘Codes and conduct: predictors of Irish managers’ ethical reasoning’’, Journal of Business Ethics, Vol. 22 No. 4, pp. 311-26. Huberman, M. and Miles, M.B. (1994), ‘‘Data management and analysis methods’’, in Denzin, N.K. and Lincoln, Y.S. (Eds), Handbook of Qualitative Research, Sage, Thousand Oaks, CA. (The) Irish Times (1998a), Editorial, February 5. (The) Irish Times (1998b), Editorial, June 4, p. 17. (The) Irish Times (1999), Editorial, September 24, p. 15. Jones, S. (1985), ‘‘The analysis of depth interviews’’, in Walker, R. (Ed.), Applied Qualitative Research, Gower, Aldershot. Kearney, C. and Murphy, G. (2000), ‘‘Crony capitalism and the Celtic Tiger: does the Irish Body politic need cleansing?’’, paper presented at the Political Studies Association of Ireland annual conference, Cork, October. Lindblom, C.K. (1994), ‘‘The implications of organizational legitimacy for corporate social performance and disclosure’’, paper presented at the Critical Perspectives on Accounting Conference, New York, NY. Maykut, R. and Morehouse, R. (1994), Beginning Qualitative Research: A Philosophical and Practical Guide, The Falmer Press, London. Miles, M.B. (1979), ‘‘Qualitative data as attractive nuisance: the problem of analysis’’, Administrative Science Quarterly, Vol. 24, December, pp. 590-601. Miles, M.B. and Huberman, A.M. (1994), Qualitative Data Analysis, Sage, Beverly Hills, CA. Milne, M.J. and Patten, D.M. (2001), ‘‘Securing organizational legitimacy: an experimental decision case examining the impact of environmental disclosures’’, Proceedings of the Third APIRA Conference, Adelaide, July. Mitchell, R., Agle, B. and Wood, D. (1997), ‘‘Toward a theory of stakeholder identification and salience: defining the principle of who and what really counts’’, Academy of Management Review, Vol. 22 No. 4, pp. 853-86. Murphy, P.E. (1994), ‘‘European managers’ views on corporate ethics’’, Business Ethics: A European Review, Vol. 3 No. 3, pp. 137-44. Murphy, P.E. (1995), ‘‘Top managers’ views on corporate ethics’’, Irish Marketing Review, Vol. 8, pp. 61-72. Neu, D., Warsame, H. and Pedwell, K. (1998), ‘‘Managing public impressions: environmental disclosures in annual reports’’, Accounting, Organizations and Society, Vol. 23 No. 3, pp. 265-82. Norton, R. (1999), ‘‘The luck of the Irish’’, Fortune, Vol. 140 No. 8, pp. 194-220. O’Donovan, G. (1999), ‘‘Managing legitimacy through increased corporate environmental reporting: an exploratory study’’, Interdisciplinary Environmental Review, Vol. 1 No. 1, pp. 63-99. O’Dwyer, B. (2000), ‘‘Evidence and the public interest before expediency: critical commentary on ‘Could environmental reporting shadow financial reporting’ by Aris Solomon’’, Accounting Forum, Vol. 24 No. 2, pp. 223-30. O’Dwyer, B. (2001a), The State of Corporate Environmental Reporting in Ireland, ACCA, London. O’Dwyer, B. (2001b), ‘‘The legitimacy of accountants’ participation in social and ethical accounting, auditing and reporting’’, Business Ethics: A European Review, Vol. 10 No. 1, pp. 27-39. O’Dwyer, B. and Gray, R.H. (1998), ‘‘Corporate social reporting in the Republic of Ireland: a longitudinal study’’, Irish Accounting Review, Vol. 5 No. 2, pp. 1-34.

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Oliver, C. (1991), ‘‘Strategic responses to institutional processes’’, Academy of Management Review, Vol. 16, pp. 145-79. O’Toole, F. (1999), ‘‘The treason of the elite in a culture of corruption’’, The Irish Times, 2 October, p. 14. Owen, D.L., Gray, R.H. and Bebbington, J. (1997), ‘‘Green accounting: cosmetic irrelevance or radical agenda for change?’’, Asia Pacific Journal of Accounting, Vol. 4 No. 2, December, pp. 175-98.

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Parker, L.D. and Roffey, B.H. (1997), ‘‘Methodological themes: back to the drawing board: revisiting grounded theory and the everyday accountant’s and manager’s reality’’, Accounting, Auditing & Accountability Journal, Vol. 10 No. 2, pp. 212-47. Patten, D.M. (1991), ‘‘Exposure, legitimacy and social disclosure’’, Journal of Accounting and Public Policy, Vol. 10, pp. 297-308. Patten, D.M. (1992), ‘‘Intra industry environmental disclosures in response to the Alaskan Oil spill: a note on legitimacy theory’’, Accounting, Organizations and Society, Vol. 17 No. 5, pp. 471-5. Patton, M.Q. (1990), Qualitative Evaluation and Research Methods, Sage, Beverly Hills, CA. Pfeffer, J. and Salancik, G. (1978), The External Control of Organizations: A Resource Dependence Perspective, Harper and Row, New York, NY. Post, J.E. (1978), Corporate Behavior and Social Change, Reston Publishing, Reston, VA. Reich, R.B. (1998), ‘‘The new meaning of corporate social responsibility’’, California Management Review, Vol. 40 No. 2, Winter, pp. 8-17. Sethi, S.P. (1977), ‘‘Dimensions of corporate social performance: an analytical framework’’, in Carroll, A.B. (Ed.), Managing Corporate Social Responsibility, Little Brown, Boston, MA. Sethi, S.P. (1979), ‘‘A conceptual framework for environmental analysis of social issues and evaluation of business response patterns’’, Academy of Management Review, Vol. 4 No. 1, pp. 63-74. Shocker, A.D. and Sethi, S.P. (1974), ‘‘An approach to incorporating social preferences in developing corporate action strategies’’, in Sethi, S.P. (Ed.), The Unstable Ground: Corporate Policy in a Dynamic Society, Melville, CA. Silverman, D. (2000), Doing Qualitative Research: A Practical Handbook, Sage, London. Smith, J.M. (1972), Interviewing in Social and Market Research, Routledge and Keegan Paul, London. Suchman, M.C. (1995), ‘‘Managing legitimacy: strategic and institutional approaches’’, Academy of Management Review, Vol. 20 No. 3, pp. 571-610. Sweeney, P. (1998), The Celtic Tiger: Ireland’s Economic Miracle Explained, Oak Tree Press, Dublin. Tesch, R. (1990), Qualitative Research: Analysis Types and Software Tools, The Falmer Press, Basingstoke. Wilmhurst, T.D. and Frost, G.R. (2000), ‘‘Corporate environmental reporting: a test of legitimacy theory’’, Accounting, Auditing & Accountability Journal, Vol. 13 No. 1, pp. 10-26. Woodward, D.G., Edwards, P. and Birkin, F. (1996), ‘‘Organizational legitimacy and stakeholder information provision’’, British Journal of Management, Vol. 7 No. 4, pp. 329-47. Zeghal, D. and Ahmed, S.A. (1990), ‘‘Comparison of social responsibility information disclosure media used by Canadian firms’’, Accounting, Auditing and Accountability Journal, Vol. 3 No. 1, pp. 38-53.

Further reading Adams, C.A. and Harte, G. (1998), ‘‘The changing portrayal of the employment of women in British banks’ and retail companies’ corporate annual reports’’, Accounting, Organizations and Society, Vol. 23 No. 8, pp. 781-812. Coffey, A. and Atkinson, P. (1996), Making Sense of Qualitative Data: Complementary Research Strategies, Sage, Thousand Oaks, CA. Creswell, J.W. (1998), Qualitative Inquiry and Research Design: Choosing Among Five Traditions, Sage, Thousands Oaks, CA. Deegan, C. and Rankin M. (1997), ‘‘The materiality of environmental information to users of annual reports’’, Accounting, Auditing & Accountability Journal, Vol. 10 No. 4, pp. 562-83. Denzin, N.K. and Lincoln, Y.S. (1994), ‘‘Introduction: entering the field of qualitative research’’, in Denzin, N.K. and Lincoln, Y.S. (Eds), Handbook of Qualitative Research, Sage, Thousand Oaks, CA. Gill, J. and Johnson, P. (1997), Research Methods for Managers, PCP, London. Lillis, A.M. (1999), ‘‘A framework for the analysis of interview data from multiple field sites’’, Accounting and Finance, Vol. 39, pp. 79-105. McKinnon, J. (1988), ‘‘Reliability and validity in field research: some strategies and tactics’’, Accounting, Auditing & Accountability Journal, Vol. 1 No. 1, pp. 34-54. Taylor, S.J. and Bogdan, R. (1984), Introduction to Qualitative Research Methods, Wiley, New York, NY. Appendix. Semi-structured interview guide Note: The initial part of each interview discussed conceptions of corporate social responsibility. This then led into a discussion of CSD. The following broad (often overlapping) open-ended questions were used to guide the ensuing discussion. Reminder for interviewer: Provide interviewees with CSD definition. (1) Collect some non-threatening background information, engage in general conversation about interviewee’s industry and his/her role. Explain the nature of the research and ask if any clarification is required. (2) Indicate where you have come across CSD in your working life? (3) Why, in your opinion, do Irish companies, in general, engage in CSD through the corporate annual report? Potential probes: .

pressures;

.

sccountability;

.

legislation;

.

public relations.

(4) Discuss your company’s experience of engaging (or not engaging) in CSD? (5) Why do you believe your company engages in CSD (if relevant)? (6) Given evidence of an absence of substantial CSD in Ireland, why, in your opinion, might Irish companies be resistant to engaging in CSD through the corporate annual report? .

Why, do you believe there is a widespread absence of CSD?

.

Why, in your opinion, is disclosure of such poor quality?

.

(Where relevant) Why does your company not engage in CSD?

The above overlapping questions formed a basis around which each interview evolved. Other issues were raised where they appeared relevant, with the emphasis focused on allowing the

Corporate social disclosure

435

AAAJ 15,3

436

voices of the interviewees to be clearly heard. The questions varied in the order in which they were asked but the CSD section of the interviews always commenced with the first broad question on the list above. Interviewees were encouraged to provide examples where these were deemed relevant and background information was also obtained prior to and during each interview. The wording of the questions also varied at times, as questions often had to be asked spontaneously in order to maintain the flow of conversation within a particular area. Each interview aimed to cover all of the broad areas addressed in the above guide. p – Reason specifically addressed by the interviewee. P1 to P8 represent ‘‘core’’ codes. They were derived from numerous similar individual codes and ‘‘collapsed’’ into single all-encompassing codes. Note, matrices of this type merely provided a guide to aid analysis, they did not constitute the analysis per se. They are merely an organising device used to reduce the volume of detail in the interview transcripts to manageable and visually amenable proportions. The incidence of codes should not be taken to represent emphasis, depth of feeling, use of specific examples etc. P1: Proactive enhancement of corporate image/corporate PR/marketing, through demonstration of good citizenship and dampening of ‘‘big bad wolf’’ image of companies. P2: Response to increased industry and public awareness. P3: Opportunity to address employees. Can help to improve morale. [Only alluded to extremely briefly in each case]. P4: Disclosure may appease ethical investors and a company may obtain investment from wider sources. P5: Companies who can benefit economically from appearing socially responsible can demonstrate social responsibility and economic success. A virtue can be made out of what some may see as a necessity. For example, reporting on the use of environmentally friendly products. P6: CEO or chairperson may express a desire to engage in CSD. P7: May enable a company to obtain some influence in the form of a quid pro quo arrangement with government. P8: It is fashionable and may be undertaken due to subtle peer pressure.