Legitimacy Theory and Its Testing †Free Samples For Students

Question: Discuss about the Legitimacy Theory and Its Testing. Answer: Introduction Each and every company is required to maintain the good corporate governance and is required to follow the generally accepted accounting policies and the relevant accounting standards. In case the company does not follow then it will end up with the failure. In the literature review, the companys mandatory or the voluntary disclosures have been discussed with reference to the base theory which is known as the Legitimacy Theory. The presence of the legitimacy theory is very essential in every business whether it is trading or manufacturing. The main focus has been laid down on the theoretical and the practical applications that are being followed by the company. It is related to the climate change that the country in which the company operates is facing. Two variables have been considered one is voluntary management (dependent) and other one is legitimacy crisis (independent). At first the motivational factors has been detailed and after that the literature review has been conducted with the hypothesis testing. The main aim or issue of the literature review is that what are the guidelines issued by the Government regulations and what motivates the companies to follow them. They follow it mandatorily or voluntarily. With this aim the review has been divided into the different headings and the subheadings. The issue of maintaining the climate in its original condition is very important in current scenario. In the todays world every company is emitting the carbon and thus is becoming the reasons for the climate change. The motivation of considering the issue for discussion has come from the below two factors: The major source of the carbon emissions are the companies operating in different parts of the World. Every company shall work in such a manner that the carbon emissions shall be at the minimum and shall not affect in any manner to the society and the environment of the country. For doing this the company has started making voluntary disclosures as to how much they have emitted during the year and how the financial performance of the company has been affected by such emission. On practical note, till now the Government has not made it mandatory for the companies to disclose the carbon emissions. In order to survive in the market the companies are required to disclose it so as to gain the interest of the stakeholder of the company. Data has been obtained from the Carbon Disclosure Project. The theory that has been underlined over the study is the Legitimacy theory. The theory aims that the company shall follow all the guidelines and the policies of the government authorities and shall disclose all the financial and non financial information of the company in the Annual report and other reports annexed to the annual report. In the current scenario, the companies are more convenient with the disclosure of the information for the user of the financial statements. Earlier researches have been conducted which has been done in relation to social contracts and the accounting by following the auditor and auditee relationship. Literature Review Social Contracts - The term social contract implies the arrangement or the agreement that is entered into between the two parties. In the context of this literature review the social contract is the arrangement entered into between the government and other stakeholders of the company and the company. The basic premise of the social contract is that the company is required to protect the stakeholders of the company and the society from the negative effects of the working of the company in the country. For instance the social and environmental effects like carbon emissions, production of hazardous gases, etc. If light is thrown in the history of the World, the social contract was first entered into by the people of the country with the king so as to protect them from the acquirers outside the state. The basic objective is to save the life of the people staying and residing in that country (Baker, 2013 and Cruess, 2008). Legitimacy Theory - The word legitimacy is single but it has relevance in almost all the fields. The term shall be considered all the time and in performance of every task. It provides the belief that the work that has been done has been so performed within the pre defined rules and regulations and the underlying policies (Burlea, 2013). It is also said that if the work has not been performed as per the rules and regulations then the work so performed is tend not to be legitimate. The similar case applies to the different companies operating across the World. They have entered into the social contracts with the society and environment and the government and therefore, they have the responsibility to provide all the useful information to the stakeholders of the company. The legitimacy theory is based on the three theories namely Institutional, Management and the stakeholder theory (Donaldson Preston, 2005). According to the institutional theory, the company is required to follow the predefined rules and regulations for the performance of the work; the management theory entails that all the work shall be integrated and focused towards the accomplishment of the common goals and the stakeholder theory states that the company shall perform its activities in such a way that the wealth of the shareholder shall be increased and the other stakeholders interest shall, be considered as the top priority. In such sense, the theory of legitimacy covers all the aspects which are required by the Carbon Disclosure Project. Following the legitimacy theory, most of the companies have started disclosing all the relevant information in their annual report and the corporate social responsibility statement along with the sustainability report. In the current scenario, the companies know that it is very necessary to reduce the carbon emission and save the environment and the society. In order to survive in the market, the companies are required to disclose how much emission they have made during the year. By following the industry norms, some companies have targeted the percentage above which the carbon shall not be emitted from the operations of the company. The setting of target by the companies to reduce the carbon emission is the part of the technique known as the Carbon Management. The companies set the minimum target and disclose it publically by making it available on the website of the Government under the Climate Disclosure Project. Sometimes setting the target and disclosing the carbon emissions have been seen as wrongful. It is because of the attitude of the company then it has while performing the work. The setting of the target is itself an example of the commitment made by the company towards the compliance wi th the reduced carbon emissions as laid down in the Carbon Disclosure Project. There are two types of companies which disclose all the information. One is good company which discloses all the information in the view that the company will be able operate in the industry and will have good reputation and by disclosing the same the company will not be in any danger situation. The other company is the company which in actual emits carbon in excess of the industry norms and discloses the relevant information in the view that the disclosure of any kind of information will not give negative effects but non disclosure of the information may lead to the penalty and thus they discloses it. All disclosures are required to be made under the Carbon Disclosure Project. Although it has not been made mandatory but the companies have started following it voluntarily (Rahman, 2014). Through this theory, the companies will be motivated to present the true and the fair financial position to the stakeholders of the company and also the correct non financial information. Out of the largest G 500 companies, 288 companys data have been used for the analysis and thereafter the hypothesis has been developed. The first hypothesis for which the model has been developed is that there is the clear and the positive relationship between the carbon risk management and the disclosure by the companies. 297 companies have not been considered because of the reasons that they have not disclosed the information about the carbon emission. Carbon Disclosure Scores have been found using the two proxies (Najah, 2011). One is the Carbon Disclosure Leaders Index, 2009 and other one is the Carbon disclosure score which is based on the report of the company Sustainability report forming part of the annual report of the company. The first proxy has been developed by the Big Audit firms. Following the hypothesis testing, Carbon disclosure project performance methodology has been used wherein the final score obtained by the companies are calculated using the percentage formula which helps in assessing the performance of the company. After that the regression method has been adopted and on the basis of the regression method adopted on the hypothesis, the results have been obtained. The result of the first hypothesis is that the carbon risk management is directly linked with the carbon disclosure made by the management of the company. Thus, the legitimacy theory makes the company to disclose all the information. References Burlea S, (2013), Legitimacy Theory available on https://www.researchgate.net/publication/303928907_Legitimacy_Theory accessed on 30/08/2017. Baker E, (2013), Social Contract, Essays by Locke, Hume and Rousseau Read Books Ltd., p 34 -43 Cruess R L, (2008), Expectations and obligations: professionalism and medicines social Contract with society. Perspectives in Biology and Medicine, 51(4), 79-598. Donaldson T, Preston, L. E, (2005), The stakeholder theory of the corporation: Concepts, Evidence, and implications Academy of management Review 20(1), 65-91. Najah M, (2011), Are Climate Change Disclosures an indicator of superior climate change risk management, available at https://mams.rmit.edu.au/myfzrqb7lhvw1.pdf accessed on 30-08-2017 Rahman N, (2014), Exploring the Relationships between the Carbon Disclosure and the Performance, Journal of Social and Behavioral Sciences, 164, pp 118-125