Legitimacy Theory and Its Relationship to CSR
First, let’s look at the theory of legitimacy. Legitimacy theory states that organizations continuously try to ensure that they carry out activities in accordance with societal boundaries and norms (Deegan et al., 2002). This legitimacy theory focuses on the company’s interactions with society. Where this theory means that the organization is also part of the community where an organization should pay attention to the norms that apply in the social community. It was also stated that this theory was carried out in the hope of gaining legitimacy from the community around the company. This is reinforced by the statement of Dowling and Pfeffer in Ghozali and Chariri (2007), legitimacy is important for organizations, the boundaries set by social norms and values, and reactions to these limits encourage the importance of analyzing organizational behavior by paying attention to environment. Ghozali and Chariri (2007) also state that the underlying theory of legitimacy is the social contract between the company and the community where the company operates and uses economic resources.
Legitimacy itself is a psychological state of partiality of people and groups of people who are very sensitive to the symptoms of the surrounding environment. Community legitimacy is a strategic factor for the company in order to develop the company in the future. This can be used as a vehicle to construct the company’s strategy, especially related to efforts to position itself in an increasingly advanced society. The characteristics if the company or organization has been legitimized by the community (legitimacy) is in accordance with the rational and legal framework in the community. (Ponny, 2011). Legitimacy can be seen as something that society gives to a company or something that companies expect from society. According to Ang and Marsella (2015), currently the demands for companies are not only oriented towards financial gain but also have concern for the community and the environment because the company has benefited from the utilization of a resource, so that the profits obtained are returned to the community and the environment. . In addition, companies can indirectly strengthen the legitimacy they get from the community and have an impact on the value of the company in the eyes of investors and the wider community by disclosing social responsibility.
Legitimacy theory is closely related to stakeholder theory. Gary, Kouhy and Lavers (1994) in Rahmawati (2012) argue that legitimacy theory and stakeholder theory are theoretical perspectives within the framework of political economy theory. Because the influence of the wider community can determine the allocation of financial resources and other economic resources, companies tend to use environmental performance and disclosure of environmental information to justify or legitimize company activities in the eyes of the public. Unlike stakeholder theory which states that companies and their management act and make reports according to the wishes and powers of different stakeholder groups (Ulman, 1982 in Rahmawati, 2012) legitimacy theory focuses on the interaction between companies and society. In a dynamic society, there are no sources of institutional power and the need for permanent services. Therefore, an institution must pass the test of legitimacy and relevance by showing that the community does need the services of certain companies and groups that benefit from the awards they receive, which have the community’s approval. If the company feels that its legitimacy is being questioned then it can take several resistance strategies, namely: 1) The company may seek to educate and inform stakeholders about the changes happens in the company. 2) The company can try to change the view stakeholders without changing the company’s behavior. 3) The company can try to manipulate stakeholder perceptions by deflecting attention stakeholders from the issue of concern to other related issues and interesting. 4) The company may seek to replace and influence expectations of external parties about the company’s performance. In legitimacy theory, organizations must continually demonstrate have operated in behavior that is consistent with social values.
There is a term called legitimacy gap, this is an illustration of the difference between the values adopted by the company and the values of the community where the company will be in a threatened position. The legitimacy gap will arise if the company is not sensitive to the impacts that may arise from the company’s activities and the expectations of the community towards the company and is only oriented towards generating the maximum profit (Ang and Masella, 2015). This is where CSR is needed in order to minimize the legitimacy of the gap by increasing the compatibility between company operations and community expectations. Legitimacy can be said as a benefit or potential source for companies to survive (Ashforth and Gibbs 2 1990; Dowling and Pfeffer 1975; O’Donovan 2002) in (Imam and Anis, 2014: 443). Through the existence of this legitimacy theory, it is hoped that companies in carrying out CSR activities will no longer be a compulsion that has a detrimental impact on the company, but this becomes the basis for companies to create social harmony in accordance with norms and values in society so that company legitimacy can be achieved.
CSR (Corporate Social Responsibility) itself is the responsibility of the company, the responsibility for its activities that affect humans, communities and the environment where humans and communities are located. Basically, the company is not only responsible to shareholders, but also to all parties concerned in it (consumers, employees, creditors, debtors, etc.) who also make important contributions to the company’s success. In Lindawati’s research (2008), CSR is a company’s commitment to make a long-term contribution to a particular issue in society or a better environment. Contributions from this company can be in the form of many things, for example: financial assistance, assistance from experts from the company, assistance in the form of goods, and other assistance. Changes in the level of public awareness regarding the development of the business world in Indonesia have created new awareness about the importance of implementing corporate social responsibility. CSR implies that the company has a moral duty to be honest, obey the law, uphold integrity, and not be corrupt. CSR emphasizes that companies must develop ethical and sustainable business practices economically, socially and environmentally (Hamdani, 2016).
Corporate Social Responsibility (CSR) is used as a company strategy. From CSR, the company will not benefit, what is expected from this activity is a benefit in the form of a company image. According to Untung (2008), companies carry out CSR in various forms and targets, this shows an increasing awareness that if the company wants to grow sustainably, the company does not only pursue profit but must also maintain social and environmental aspects. Disclosure of CSR in annual reports is one way for companies to build, maintain, and legitimize the company’s contribution from an economic and political perspective (Guthrie and Parker, 1990). This is in accordance with the legitimacy theory based on the understanding of the social contract implied between social institutions and society to achieve the goal of being congruent with the wider community (Ahmad and Sulaiman, 2004).
- Mahmud, M. T. (2019). Legitimacy Theory and its Relationship to CSR Disclosures: A Literature Review. Kyushu University, Graduate School of Economics, Department of Economy and Business, Kyushu
- Archel, P., Husillos, J., Larrinaga, C., & Spence, C. (2009). Social disclosure, legitimacy theory and the role of the state. Accounting, auditing & accountability journal.
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