Early attempts in the 1980s to explain why firms disclose environmental information associated environmental disclosure with environmental performance. Studies from this time present conflicting results (e.g. Ingram & Frazier 1980; Wiseman 1980; Wiseman 1982; Rockness 1985). Ullmann (1985) argues that one reason for the inconsistency was a lack of theory. As such, this researcher emphasised the importance of conceptualisation and the operationalisation of terms. Since the late 1980s, more attention has been placed on theoretical approaches to examine firm incentives for environmental disclosure (e.g. Freedman 1990; Roberts 1991; Patten 1992; Walden 1993; Deegan & Rankin 1996; Barth et al. 1997; Wilmshurst & Frost 2000; Deegan 2002; O'Donovan 2002; Patten 2002a). Most studies from this period have associated firm disclosure incentives with one of two perspectives—social or economic motives.
The social perspective of environmental disclosure rests mainly with legitimacy theory (Guthrie & Parker 1989; Elsbach & Sutton 1992; Patten 1992; Mathews 1993), stakeholder theory (Roberts 1992; Clarkson 1995; Mitchell et al. 1997), social contract theory (Shocker 1973) and accountability theory (Gray et al. 1988; Gray 1992). The economic perspective of environmental disclosure has two main branches—voluntary disclosure theory (Mitchell 1994; Yue et al. 1997; Clarkson et al. 2006) and political cost theory (Walden 1993; Bae 1998; Ahmad et al. 2003; Patten & Trompeter 2003; Nurhayati et al. 2006).
1. Social Perspective of Environmental Disclosure
Social theories that have emerged in the past decade are generally rooted in the concept of a social contract (e.g. Shocker 1973) between a social institution (including a business) and its society. This implies that corporations have an unwritten social obligation to act in the manner society expects (O'Donovan 2002). An ethical or normative approach seems inevitable from the social perspective. In the environmental disclosure context, this means that firms are obliged to undertake environmental initiatives as part of their corporate social responsibility (Deegan 2000; O'Dwyer 2002). Legitimacy theory and the managerial perspective of stakeholder theory also take a positive approach. They recognise how corporations undertake different strategies to manage the influence of different stakeholders and prioritize more powerful stakeholders.
Social theories view the disclosure of environmental information as a communication tool. This tool is used by corporations to convey their accountability and social responsibility and to maintain the legitimacy of operations that affect the environment and society. The following sections outline the approaches to corporate environmental disclosure from the social perspective—namely, stakeholder theory, accountability theory and legitimacy theory.
Stakeholder Theory
The principal focus of stakeholder theory is that corporations practicing stakeholder management will be relatively successful in conventional performance terms (e.g., profitability, stability and growth) (Donaldson & Preston 1995). Mitchell (Mitchell 1994) describes stakeholder theory as an attempt to identify which groups are stakeholders deserving or requiring attention and which are not. Their influence in the corporation’s survival is highly recognized in social theories that seek to explain why corporations undertake environmental initiatives. Stakeholders include customers, suppliers, employees, shareholders, competitors, regulators, community and other elements of society. By identifying each stakeholder group and its interests, management is able to respond to the issues that might affect its existence (Clarkson 1995).
Stakeholder theory can be broken down into branches—the positive/managerial branch and the ethical/normative branch. The positive branch posits that organisations will respond to stakeholders asymmetrically, favouring the powerful or those who can have significant impact upon the organisation (O'Dwyer 2002). From a managerial perspective, the focus of stakeholder theory is to gain approval for corporate decisions by groups whose support is required for the firm to achieve its objectives (Tricker 1983). On the other hand, the ethical branch argues that ‘all stakeholders have the right to be treated fairly by an organisation, and that issues of stakeholder power are not directly relevant’ (Deegan 2000).
In other words, the managerial perspective focuses on the identification of important stakeholders and the assessment of such importance in attempts to achieve corporate objectives. The positive branch is similar to the economic perspective of environmental disclosure in that corporate decisions are based on the interests of the parties with the greatest influence or power. Meanwhile, the ethical branch is opposed to the assumptions of self-interest used in the economic perspective and views the issue normatively. However, both elements of stakeholder theory recognise the potential influence of stakeholders on a company’s prospects.
Accountability Theory
Accountability theory is based on the relationship between principals and agents. In this sense, this theory is similar to agency theory, which is also part of the economic perspective of environmental disclosure. However, while the underlying principle of agency theory is the self-interest of the agents and principals, accountability theory focuses on the responsibility of the party given the account (i.e., the agent) to undertake actions to the other party giving such account (i.e., the principal). Accountability theory does not consider the self-interest of the parties involved.
Similar to the ethical branch of stakeholder theory, the framework of accountability theory indicates the use of an ethical approach. For example, the theory assumes that the agent must act in a manner which the principal approves of (or at least does not disapprove of) and they must report how such action was undertaken (O'Donovan 2002). In the environmental disclosure context, that corporations provide information to stakeholders involves some sort of obligation of the agent (i.e., the company) to the principal (i.e., society). This theory does not consider the influence of shareholders, to whom management might perceive greater accountability. This might be justified by treating management and shareholders as either a single party (which may be appropriate if there is a majority shareholder) or as two different parties with congruent objectives.
Legitimacy Theory
Stakeholder influence is also acknowledged in legitimacy theory. According to this theory, a legitimacy gap is created when there is conflict between a firm’s economic pursuits and the norms, values, beliefs and definitions held by the surrounding society (Suchman 1995). When such a gap is seen or noticed by society, a firm becomes politically visible. Bowen (2000) argues that organisations are visible when they can be easily seen by relevant constituents and that they must respond to constituent demands and perceptions in order to maintain their social legitimacy (Oliver 1991; Goodstein 1994)
However, because society’s perceptions are involved in assessing norms, values and beliefs, legitimacy theory also suggests that management can influence stakeholders’ perceptions by adopting different strategies. Lindblom (1994) classifies these strategies into four categories:
a) educating stakeholders about the company’s intentions
b) .changing stakeholder perceptions of issues/events
c) distracting or manipulating attention away from the issue/event of concern
d) changing external expectations about the company’s performance.
Lindblom (1994) also argues that communication is a key factor for a company to be able to carry out any of these strategies for the stakeholders. Environmental reporting is one means of communication that enable companies to maintain the congruence between firm intentions and societal perceptions on environmental issues and, thus, reduce their environmental visibility.
The ethical perspective of this argument is apparent, particularly at point (1), where a company is assumed to have intentions or motives. This is also consistent with the accountability framework (Gray et al. 1988) that promotes the moral responsibility of companies to make corporate social disclosures to all stakeholders beyond the minimum requirements legally mandated, such as voluntary environmental initiatives and disclosures.
However, legitimacy theory also suggests that in an attempt to reach congruence between the company’s objectives and societal perceptions, a company can either substantially or symbolically comply with these societal demands (Savage et al. 2000). Substantial compliance means conducting substantive activity that involves a real, material change to organisational goals, structures and processes or socially institutionalized practices. Symbolic compliance means carrying out symbolic activity that does not involve real changes but attempts to portray corporate activities as compatible with societal norms and values. The former means that the company would improve its actual performance and communicate the results to stakeholders whereas the latter is similar to the legitimation strategies suggested by Lindblom (1994). In essence, the social perspective of environmental disclosure explains firm strategies to respond to societal demands and, hence, reduce their environmental visibility.
2. Economic Perspective of Environmental Disclosure
Most studies of environmental disclosure that adopt the economic perspective employ the theories of: (1) proprietary cost; or (2) political cost. Both theories are similar to each other and underpinned by the same self-interest assumption of positive accounting theory. However, their emphases are somewhat different. The proprietary costs of voluntary disclosure include all types of costs associated with the dissemination of proprietary information, including those imposed by the competitors in a market entry game. Political cost theory focuses on the political components of the proprietary costs as the incentive for visible companies to disclose environmental information.
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