Legitimacy theory

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The theoretical basis of CC has a similar normative flavor as that of CSR and largely takes an ethical perspective on the rights, responsibilities and partnerships of businesses. The concept particularly owes a lot to social contract theory, rather than stakeholder theory as in CSR (Garriga & Mele, 2004), which further stresses the integration of businesses within society at large as opposed to theories that take organizations themselves as the primary level of analysis.

Much like CSR, however, corporate citizenship has been interpreted and used differently by various scholars. Matten and Crane (2005) identify two main strains of CC theory: one that describes CC as strategic philanthropy and another that equates CC with CSR. In response, they map out a more precise theory that unpacks “citizenship” into the administration of social, civil and political rights conventionally ensured by governments. Thus, corporations are not

considered citizens themselves but rather the gatekeepers for real citizens to exercise their rights.

By contrast, Moon et al. (2005) suggest that corporations might qualify as citizens based on their participation in civic processes, and Carroll (1998) classifies corporations as citizens based on four responsibilities they share with private citizens: the responsibility to be profitable, to obey the law, to engage in ethical behavior, and to give back through philanthropy.

3.3 Legitimacy Theory

Corporate social responsibility and corporate citizenship theory both help to define this study’s place in the existing literature, but a greater emphasis on descriptive approaches within these theories gives us a better idea of the mechanism that governs the relationship between multi-sector initiatives and EMS development in Taiwan’s EAF steel industry. First, legitimacy theory explores the self-interested motivation for businesses to respond to societal pressures. The theory has been a popular explanation for corporate environmental disclosures since the early 1980s (O’Donovan, 2002) and has been a mainstay in accounting research throughout the 1990s and early 2000s. According to Suchman (1995: 574), “legitimacy is a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions.” In other words, businesses gain legitimacy when a society perceives that their actions are in alignment with the dominant moral expectations of the time. From the perspective of the firm, ensuring legitimacy becomes a context-based scheme of image management (Branco & Rodriguez, 2006). Thus, in particular regions or during historic periods where environmental values have not been adopted, heavily

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polluting businesses can operate with their social legitimacy intact.

Suchman (1995) breaks legitimacy theory down into two separate classes: institutional legitimacy and organizational legitimacy. The broader macro-theory of legitimacy, institutional legitimacy theory, describes how organizational structures (capitalism, government, religion) gain wide acceptance from society. On this level of analysis, legitimacy more or less equals institutionalization, and legitimized systems seem “natural” and “meaningful” (Suchman, 1995:

576). Both the macro-level and organizational theory of legitimacy involve special consideration for so-called crises of legitimacy, in which an incident occurs that severely dampens an

institution or firm’s reputation in a community, thereby diminishing its command of valuable resources. This study and the majority of research on CSR looks at legitimacy on an

organizational level (with the business as the central unit of analysis instead of society at large), which in the literature involves a variety of concepts stemming from social contract theory in political science to resource dependence theory, new institutionalism, and management theory (Barkemeyer, 2007).

The root of organizational legitimacy theory is “a process, legitimation, by which an organization seeks approval (or avoidance of sanction) from groups in society” (Kaplan, 1991:

370) in order to obtain resources (Suchman, 1995) and prevent losses. Other studies (Branco &

Rodriguez, 2006) repackage the search for approval as a kind of pursuit of congruence:

“Organizations seek to establish congruence between the social values associated with or implied by their activities and the norms of acceptable behavior in the larger social system in which they are a part,” (Matthews, 1993: 350).

Legitimation and the search for approval are also commonly characterized as the fulfillment of a

“social contract⁷⁶” between the business and society (Branco and Rodriguez, 2006; Huang &

Kung, 2010). The actions that constitute legitimation strategies are particularly important for businesses, but they do not necessarily entail attempts to woo societal favor. Wood and Jones

76 Although it may not be explicitly and officially stated, a social contract constitutes those mutual responsibilities that members of a society must respect and execute in order for that society to function. For example, in most societies worldwide, individuals and institutions have a mutual responsibility to develop the next generation to lead the world, to preserve environmental bounty for posterity and future use as well as to take care of the sick and otherwise

disadvantaged. Social contracts have binding power in that they provide sufficient justification for stakeholders to permit or veto firm operations (Huang and Kung, 2010). This highlights the fact that the source of firm legitimacy lies primarily outside of the firm.

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(1995) explain that the methods businesses use to legitimate themselves depend on which stakeholder they want to address, and Branco and Rodriguez (2006: 236) add that “high visibility” industries and those with a big environmental impact are under more pressure to legitimate themselves, particularly by disclosing more CSR information than the competition.

Lindbloom (1994, cited in Gary et al., 1996) outlines four possible legitimation strategies that firms may adopt when their legitimacy is in question:

1. Seek to educate stakeholders about the organization’s intentions to improve performance.

2. Seek to change the organization’s perception of the event (without changing performance).

3. Distract attention away from the issue of concern.

4. Seek to change external expectations of the organization’s performance.

The above strategies are salient when firms need to “repair” their legitimacy after a negative incident, but most businesses operate in a more neutral zone of “gaining” or

“maintaining” their legitimacy (Suchman, 1995; O’Donovan, 2002). In general, these more neutral legitimation strategies involve public relations and publicity campaigns centered around laudable firm behavior. In particular, businesses publicize annual reports to emphasize the financial gains they generate for shareholders, or they report key environmental indicators and employee benefits. In the media, firms may purchase ad space to build public awareness of their philanthropic work. They may also emphasize the number of local people they employ to win hearts and minds. Legitimacy enhancing activities may also precede incidents, including pending environmental legislation or stricter regulations, in order to mitigate the negative impact of these changes (Huang & Kung, 2010). In sum, legitimation can be described as a dynamic, cyclical process that describes how businesses respond to varying levels of societal approval; some scholars label stages in this process according to whether a firm is “gaining,” “maintaining,” or

“repairing” its legitimacy status. Similarly, Figure 6 depicts legitimation as a four-stage process:

Figure 16: Four stages of legitimacy

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Source: Tilling, 2004

Again, social acceptance of a firm is not just abstract or psychological; a key motivation for firms pursuing legitimation is to gain access to resources. Resources are “all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by the firm”

(Barney, 1991: 101), which includes subsidies, property rights, and contracts from the public sector, patronage from customers, investment from the financial sector, and much more.

Moreover, Hearit (1995) emphasizes that these resources that are “necessary for survival” are key indicators for measuring legitimacy. For example, the legitimacy of a business might be loosely calculated based on levels of consumer support, political approval, and other assets at a firm at different points in time or between multiple, comparable firms at the same point in time.

Suchman (1995: 575-6) defines legitimacy itself as a resource that businesses need to operate.

Finally, Hart (1995) broadens traditional notions of limited corporate resources by focusing on environmental resources and environmental services in the firm; during a crisis of legitimacy, for example, a business might lose its privileges to use local environmental services (like water for waste disposal).

Legitimacy theory helps to conceptualize how and why firms seek societal approval. The following paragraphs explain stakeholder theory, which explores the constituents of societal approval and how businesses keep track and prioritize which societal cues merit a response.

While many of the examples of CSR, corporate citizenship and legitimation described above involve disclosure, philanthropy and public relations work, this research focuses on initiatives that require less superficial measures; investment into environmental technology and

environmental practices take capital, expertise, and operational adjustments, and only the most significant stakeholders and pressures to legitimize will bring about this level of commitment.