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Corporate Social Reporting: A Rebuttal ofLegitimacy TheoryJames Guthrie a & Lee D. Parker ba School of Accountancy, University of New South Walesb Flinders University of South AustraliaPublished online: 27 Feb 2012.

To cite this article: James Guthrie & Lee D. Parker (1989) Corporate Social Reporting: A Rebuttal ofLegitimacy Theory, Accounting and Business Research, 19:76, 343-352, DOI: 10.1080/00014788.1989.9728863

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Arcouftring ortd Busif1c~s.s Rcsrardi. Vol:19. No. 16. pp. 343-352. 1989

Corporate Social Reporting: A Rebuttal of Legitimacy Theory* James Guthrie and Lee D. Parker

Abstract-Various rationales have been advanced to explain the phenomenon of corporate social reporting. Among these has been legitimacy theory which posits that corporate disclosures are made as reactions to environmental factors and in order to legitimise corporate actions. This paper reports the results of an historical analysis of social disclosures in 100 years of annual reporting by a dominant corporation in the Australian mining/manufacturing industry. A variable but significant pattern of social reporting is identified and compared with an earlier study of social reporting by US Steel. The results of this study fail to confirm legitimacy theory as the primary explanation for social reporting in the Australian case.

Over the last decade, accounting researchers have turned their attention to the nature of ac- counting as a social phenomenon (Burchell et al., 1980; Tinker et al., 1982). There have been calls for further research into the questions of social factors influencing the historical development of contem- porary accounting practices and the social conse- quences that these have produced (Hopwood, 1980; Burchell et al., 1985). At the same time an array of surveys of corporate social reporting (CSR)’ in contemporary annual reports have been undertaken (Ernst and Ernst, 1979; Trotman, 1979; Guthrie and Mathews, 1985; Cowen, Ferreri and Parker, 1987; Guthrie and Parker, 1989). These surveys have mostly presumed that CSR is a purely contemporary phenomenon. For example, Parker’s (1 986) review of the development of social accounting literature concentrates on the post- 1970 period, arguing that social accounting was very much a child of that period.

There are, however, some isolated examples of research that suggest that CSR has a history of development stretching back over many decades. Lewis et al. (1984) revealed the existence of a body of literature (and practical tradition) concerning corporate financial reporting to employees dating

*The authors are, respectively, lecturer in accounting in the School of Accountancy, University of New South Wales and professor of accounting and finance at the Flinders University of South Australia. They are grateful for advice and comments provided by Cheryl Lehman (Hofstra University), Peter Booth (University of New South Wales), Jill McKinnon and Graeme Harrison (Macquarie University), Barbara Merino (University of North Texas) and Bob Parker (Exeter University).

‘Corporate social reporting (CSR) can be defined as a corporation’s reporting on: (a) the social impacts of its activi- ties; (b) the effectiveness of its social programs: (c) the discharg- ing of its social responsibilities; (d) the stewardship of its own social resources. It has also been variously termed ‘corporate social accounting’, ‘social responsibility accounting’, and ‘social disclosure’ (Parker, 1986).

back to at least 1919. Similarly, Hogner’s (1982) study of US Steel’s reports over eight decades highlights a long and rich history of CSR. Hogner attributes his findings to US Steel’s need to legit- imise itself and its activities.

In examining the history of CSR by an Australian organisation similar to US Steel, this study has two key objectives: first, to determine whether a similar history of CSR is apparent in the Australian steel industry; and, second, to discover whether the pursuit of corporate legitimacy appears to have been a primary rationale for disclosures.

Social reporting at US Steel Hogner (1982) examined annual reports of US

Steel for the years 1901 to 1980 and documented CSR in terms of general comment, statistical record, statistical yearly comparison and nature of activity. The data was then analysed for year to year variation over the eight decades studied.

The study found that what US Steel regarded as reportable corporate social activity varied over time. While particular social activities might be ongoing, inclusion in the annual report was ob- served to be selective-appearing in some years of activity but not appearing for other years of activ- ity. The subjects of disclosure were concentrated upon the areas of human resources and community involvement. Some environmental disclosures ap- peared post-1960. In addition, Hogner found that not all reported information was in the form of ‘good news’.* Some disclosures represented ‘bad news’3 about US Steel social activities, even when considered from the viewpoint of the social norms

”Good news’ refers to reports about corporate activities having a positive, beneficial impact on society.

“Bad news’ refers to reports about activities having a nega- tive, deleterious impact on society or failures in attempts to overcome social problems.

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344 ACCOUNTING A N D BUSINESS RESEARCH

and expectations of the period. On the other hand, little effort was expended by US Steel in appraising its own reported social performance.

Two major conclusions emerge from Hogner’s research. First, US Steel annual reports provide evidence of a rich and extended history of CSR, but with disclosure frequency, particularly with respect to specific information types, fluctuating over time. Thus Hogner (1982, p. 248) concludes that ‘corporate social reporting is an old idea with a practical base’. Second, he frames his obser- vations of US Steel’s CSR in terms of legitimacy theory, arguing that social disclosures constituted a response to societal forces and behaviours. Thus he hypothesised that such disclosures were both motivated by and indicative of corporate needs for legitimacy.

Legitimacy theory reviewed Legitimacy theory posits that corporate dis-

closure reacts to environmental factors (economic, social, political) and that disclosures legitimise actions (Preston and Post, 1975; Hogner, 1982; Lehman, 1983; Lindblom, 1983). This theory is based upon the notion that business operates in society via a social contract where it agrees to perform various socially desired actions in return for approval of its objectives, other rewards and its ultimate survival. It therefore needs to disclosure enough social information for society to assess whether it is a good corporate citizen. In legitimis- ing its actions via disclosure, the corporation hopes ultimately to justify its continued existence (Lehman, 1983).

This theory is largely reactive in that it suggests that organisations aim to produce congruence be- tween the social values inherent (or implied) in their activities and societal norms (Lindblom, 1983). Corporate social disclosures may then be conceived as reacting to the environment where they are employed to legitimise corporate actions.

Researching BHP corporate social reporting This study presents an historical appraisal of

social disclosure made by one of Australia’s largest corporations, Broken Hill Proprietary Company Ltd. (BHP), a company engaged in the steel indus- try. BHP has been a dominant industrial corpor- ation in the mining/manufacturing industry in Australia since its incorporation in 1885, and has a long recorded history which reflects its major impact on Australian social and economic life (Hughes, 1964; Blainey, 1968; Trengove, 1975). It has been, and continues to be, one of Australia’s largest companies engaged in steel production, oil exploration and mining. The study uses an histori- cal and content method approach to the collection, description and analysis of results associated with the social’ information published by BHP in its

reports to shareholders for the past 100 years (from 1885 onwards). The total number of annual and half-yearly reports examined was 177.4

While BHP may have made CSR disclosures through the press from time to time, this study focuses on BHP’s disclosures through the annual report to shareholders for two reasons. First, it can be argued that the annual report is the one commu- nication medium to outside parties over which corporate management has complete editorial con- trol. It is therefore not subject to the risk of journalistic interpretations and distortions possible through press reporting. Second, the focus on annual reports permits comparison of results with those of Hogner’s (1982) study which also focussed on annual reports to shareholders.

Guthrie’s (1983) content analysis interrogation instrument was employed to record CSR across six main themes-environment, energy, human re- sources, products, community involvement and others. To measure the extent of CSR, the ap- proach of page measurement was adopted rather than a specific number count of textual characters (Neimark, 1983). For each report examined, CSR was measured to fit within a quarter page dissec- tion of an A4 page. The amount of CSR did not include photographs and graphics. The measure- ment was rounded to the next quarter page amount so that CSR within 0.01 to 0.25 of a page would be recorded as 0.25. Because of this method of page measurement, the amount of CSR is not intended to be exact but to provide an indication of the trend within reasonable bounds. Page space devoted to CSR was also measured in absolute terms in order to focus the analysis upon the amount of social information disclosed rather than the emphasis placed on social disclosure in relation to all other information types disclosed (as a relational measure such as percent of corporate report length would indicate).

Reliability tests were employed in developing the interrogation instrument (Guthrie, 1983) and a single researcher was employed to code all data from BHP’s annual reports. Observational cat- egories were derived from those employed in earlier descriptive survey^.^ To preserve internal validity, one researcher identified key themes from the history of the Australian economy while the second researcher selected and collated data from BHP annual reports. Each operated independently until completed data sets were compared.

BHP results The frequency of CSR was illustrated graphi-

cally by scatterplots. Figure 1 charts the total sum

4BHP’s corporate reports were issued six monthly till 1918 and then yearly to 1985 (the last period examined for this study).

5Referenced at the beginning of this paper.

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A U T U M N 1989 345

Table 1 Incidence of Social Disclosure by Theme

No. of reports Theme appeared in

Environment 8 Energy 13 Human resources 105 Products 0 Community involvement 86 Others 0 -

Total incidence of disclosure 212 -

Incidence by space measurement unit

(quarter of a page) 10.0 12.5

275.0 0.0

80.0 0.0 -

377.5 ~

of CSR disclosure, revealing a history of growth, decline, and change in CSR rather than just a short period of growth and development. Figures 2 through 5 illustrate the disclosure frequency of

each theme (by page amount) over time. Table 1 presents a summary view of thematic disclosure. It is evident from these figures that there has been a waxing and waning of social disclosure over the

Figure 1 Total CSRD Disclosed

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Figure 2 Environmental Disclosure

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1-1 1 ;

century of BHP reporting. Different themes have been in focus (e.g. human resources) from time to time, whilst others have not appeared at all (e.g. products).

Figure 1 shows that total disclosure over the period studied varied greatly. Pronounced peaks occurred around 1890, 1910 and in the early 1920s, 1940s, 1970s and 1980s. Disclosure levels appear to have been variable, with intervals between peaks ranging from 10 to 30 years. As Figure 2 reveals, environmental disclosure was totally absent until around 1950. It recurred in the early 1970s and 1980s but has remained at a relatively low level. The pattern of energy-related disclosures (Fig. 3) is noticeably different. The bulk of disclosures (albeit at similarly low levels) occurred in the periods 1890-1 9 10 and 1970-mid 1980s. Between those periods, no disclosures were made at all.

Figure 4 reveals human resource disclosures to have been BHP's primary form of CSR, although quite inconsistent over time. Peaks of disclosure occurred around 1890, 1910, the early 1920s and around 1 ?70. Disclosures between the early 1920s

and the 1970s were at much lower levels, and indeed an examination of disclosure peaks reveals a declining overall pattern of human resource disclosure during the period under study. Finally, Figure 5 reveals the pattern of community involve- ment disclosure to have been different again to all the rest. Virtually no peaks and troughs are evident (with the exception of the early 1940s). A consis- tent (though low) level of disclosure occurred in the 1890-mid 1930s period. No disclosures were made in the mid 1940s-1970 period, with disclosures reappearing around 1980.

What can be said about these longitudinal dis- closure patterns overall? Total disclosure as repre- sented in Fig. 1 was driven primarily by BHP's focus upon human resource dklosures as shown in Figure 4. Disclosures of energy, environment and community-related matters occurred at much lower frequency levels. Even with respect to human resources, the disclosure pattern was highly vari- able and in the other three categories significant gaps (i.e. nil disclosure) occurred. Such gaps ranged between 20 and 60 years.

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AUTUMN 1989 347

Figure 3 Energy Disclosure

Comparing US Steel and BHP The analysis of BHP's historical CSR practices

produce similar observations to those concerning US Steel. Both corporations have an extended history of social disclosure but with disclosure frequency, particularly with respect to specific in- formation types, fluctuating over time. While both reported social information over a long period of time, neither made any significant attempt at ap- praising their reported performance in social im- pact terms. Both corporations concentrated their disclosure efforts on the same disclosure cate- gories-human resources and community involve- ment. More recently (post 1960), both have also included environmental issues in their scope of CSR. Historically, both corporations have made 'bad news' disclosures from time to time. US Steel for instance reported reductions in mortgage assis- tance to employees and racially segregated housing construction for employees. BHP reported on strikes and other industrial problems.

Examining legitimacy theory applicability

To assess the applicability of this theory to CSR, a data bank of all major events and issues relating to BHP (and their timing) was assembled from the following: Aungles and Szelenyi (1979); BHP (1960); Blainey (1968); Davidson and Stewardson (1 979); Hughes (1 964); Kennedy (1 980); McLennan (1 974); Sheridan (198 1, 1982); Wills (1963); and Woodward (1952). The longitudinal BHP disclosure frequency graphs were then related to significant concurrent events which occurred in the history of BHP and its immediate environment. For each major category of disclosure (environ- ment, energy, human resources and community involvement), the timing of observed peaks of disclosure was compared with any apparently re- lated BHP activities or socio-economic environ- mental conditions occurring immediately before or during peak periods. A majority of peak disclo- sures associated with relevant events is considered evidence of a legitimising explanation for BHP

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A U T U M N 1989 349

Figure 5 Community Involvement Enclosure

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'-1 -

more recent times but not in earlier periods. As such, this evidence provides somewhat marginal and inconclusive support for a legitimacy theory explanation of environmental disclosure.

Energy Disclosures Figure 3 presents the timing and frequency of

energy related disclosures by BHP. These have been infrequent, with peaks grouped in the 1890-1910 and post-1970 periods. Histories of BHP, the Broken Hill silver, lead and zinc mines, and the Australian iron and steel industry reveal no events or issues of major significance that could be linked to the energy disclosures observed in BHP annual reports. A legitimacy theory explanation of energy disclosure could therefore not be supported.

Human Resource Disclosures Figure 4 presents the timing and frequency of

human resource disclosures by BHP. It is a pattern of high but fluctuating levels of disclosure with a generally declining trend between the 1880s and 1940s and a rising trend (although at a slower rate)

from the 1940s to the 1970s. Peaks of disclosure occurred around the years 1888-1 892, 1909, 1920-21, 1955 and 1968-1972. Four of these high disclosure periods do coincide with or immediately follow significant human resource events in BHPs history. The year 1892 saw an 18 week strike over a switch to piece rates. It proved to be one of the bitterest industrial disputes Australia had known (Blainey, 1968). BHP was also affected by the 1889 strike by the Amalgamated Miners' Association for not having dismissed non-union employees and in reply sent a manifesto to shareholders listing advantages enjoyed by BHP employees. The burst- ing of the 1880s boom saw industrial strife all over Australia in the 189Os, with antagonism between unions and employers taking on the dimensions of a class battle between capital and labour. The strike of 1892 was broken by BHP, but it laid the foundations for BHP's antipathy towards unions and past strikers (Trengove, 1975).

The peak disclosures of 1909 coincide with further industrial relations problems. When metal prices declined in 1908, BHP directors feared the

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350 ACCOUNTING A N D BUSINESS RESEARCH

end of the silver, lead and zinc mines’ profitable life, and displayed a ‘provocative and uncompro- mising hostility to the miners’ demands’ (Hughes, 1964, p. 60). Indeed they attempted to reduce wages, thus precipitating a bitter strike (which the unions labelled a lockout) in 1909 which lasted 20 weeks. The union finally won a wages agreement equivalent to previous arrangements but lost &265,000 in men’s wages during the strike, and with depressed markets BHP was slow to reopen the mine, did not re-engage troublemakers and left 2,500 unionists unemployed (Blainey, 1968; Trengove, 1975).

Human resource disclosures of 1920-1 921 fol- lowed on the heels of a prolonged strike at Broken Hill during 1919-1920 (McLennan, 1974). Indeed after a wave of strikes in New South Wales in 1917, BHP attempted to form a company union along US lines, but this only added further to workers’ hostility towards the company and the move had failed by 1919 (Hughes, 1964). The April to November 1919 strike was called over unhealthy working conditions. Unions won a 35 hour week, no night shift and a pension for 259 employees found by a Royal Commission to be suffering tuberculosis and pneumoconiosis (Blainey, 1968). The commission found that dust disease could occur after only seven years’ exposure and recom- mended compensation, ventilation, water use and other safety procedures. This lead to the Work- men’s Compensation Acts of 1920 and 1922 (Woodward, 1952).

Human resource disclosures in the mid- 1950s again coincided with the incidence of frequent and prolonged stoppages in the 1950s. BHP was adamant in its refusal to bargain with unions on such matters as bonus payments, wanting instead to deal directly with the individual workers. While amenities such as showers, lockers and lunch rooms were improving (due to changing manage- ment attitudes and New South Wales Government regulations), as were steel plant working conditions (with reduced heat, fumes and noise, better protec- tive clothing and elaborate safety systems), BHP was still reluctant to increase wages and vigorously recruited migrant labour to fill its labour shortage (BHP, 1960; Wills, 1963; Hughes, 1964).

An exception to the observed relationship be- tween human resource problems and disclosures is apparent when peak disclosures of the late 1960s and early 1970s are examined. No significant in- dustrial or labour-related disputes or problems were documented for that period. Further excep- tions also appear in another sense. Major indus- trial unrest also affected BHP in the mid-1930s and through the 1940s. In 1936 a strike occurred over BHP’s limiting its employment of skilled workers and increasing compulsory overtime even though unemployed labour was available (Hughes, 1964; Trengove, 1975; Davidson and Stewardson, 1979;

Sheridan, 198 1). These periods of significant indus- trial relations problems do not appear to be related to high frequency human resources disclosures by BHP. The evidence for a legitimacy theory expla- nation of BHP human resource disclosures is there- fore somewhat contradictory. Some periods of major industrial relations difficulties were reflected in increased human resource disclosures by BHP while others were not. In addition, more recent times have seen higher levels of disclosure un- related to any major industrial relations difficulties. Whether BHP made human resource disclosures reactively appears to have been a matter of management choice.

Community Involvement Disclosures Figure 5 presents the timing and frequency of

community involvement disclosures by BHP. These have been noticeably consistent across the years but at a relatively low level. The only major identifiable peak occurred in the early 1940s. The only significant event in BHP history that preceded this was the establishment of what was essentially the BHP town of Whyalla for shipbuilding. As occurred with its smelting operations in the town of Port Pirie, BHP‘s approach to the community differed from its attitude in Broken Hill. As the paternalistic ‘master’ of these company towns it demonstrated a more positive attitude to its com- munity relations (Trengove, 1975; Aungles and Szelenyi, 1979). The relatively consistent (though low) level of disclosure through the 1890-1930 period does not reflect BHP’s differential commu- nity relations policies during that period. Its tenure at Broken Hill in the years 1885 to the 1920s was marked by criticism of BHP’s lack of a sense of community with the town (Trengove, 1975; Kennedy, 1980). In contrast, from 1917 onwards it supported a wide range of positive community support programs in Port Pirie and later in Whyalla. In Port Pirie for example, these included subsidised contributions to accident funds, a dental clinic, an eyesight conservation scheme, charitable donations, housing loans, advice on housing con- struction, playgrounds and nursery (Woodward, 1952). It therefore appears that the pattern of BHP’s community involvement disclosures is not well explained by legitimacy theory. Disclosure does not appear to have been related to any particular events in company history, and re- mained relatively consistent through periods when company policy towards community relations changed significantly.

Legitimacy’s questionable relevance The evidence examined in this historical case

study has failed to confirm legitimacy theory as an explanation of BHP’s CSR over time. In general, little correspondence was found between peaks of

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A U T U M N 1989 35 1

BHP‘s CSR disclosures and key socio-economic events affecting BHP during its operating history. Indeed numbers of significant events were not reported and at other times reporting occurred when no extraordinary socio-economic events ap- pear to have occurred. A relationship between legitimacy theory and disclosure was only mar- ginally supported for environmental issues, un- confirmed for energy and community issues, and subject to contradictory evidence for human resource issues.

Further doubt is cast upon the validity and relevance of legitimacy theory in this case by historians’ observations that in the mid- 1920s BHP grew increasingly secretive and uninformative in its reports and kept politicians at arm’s length. Fur- ther, in the mid-1940s BHP still appeared to have a conservative approach to the media, refusing to comment on issues and problems till settlement had been reached (Trengove, 1975; Sheridan, 1982). That it could be impervious to social press- ure was for instance demonstrated by its refusal to support a welfare plan subscribed to by other mines in Broken Hill in the 1913-1917 period. The company refused appeals from the Hospital Board and the Mine Managers’ Association (Blainey, 1968).

The evidence examined therefore does not sug- gest that legitimacy theory is adequate as a means of explaining BHP’s social disclosures during the period studied. Disclosures observed did not on the whole appear to be made as a consistent reaction to economic, social or political conditions or events. Indeed the company’s tendency towards little or no reporting at some times is inconsistent with a legitimacy theory of management reporting information in an attempt to legitimise its actions in the perceptions of employees, government and the public.

Conclusion This study of CSR has employed historical and

content analysis research methods to investigate the disclosure policies of a major Australian corporate monopoly through the medium of its annual report to shareholders over a 100 year period.

As in the case of US Steel, BHP’s corporate reports were found to exhibit a variable pattern of total social disclosure levels over their history. While disclosures in these companies’ reports to shareholders have occurred over many decades, such disclosures did not extend to any significant attempts at candid appraisal of their social per- formance. Human resource and community involvement were the predominant categories of disclosure for both corporations and both were prepared to disclose ‘bad news’ information from time to time. Thus, the results of this study tend to

support Hogner’s (1982) contention that CSR is a long established practice.

A number of qualifications must be made .with respect to the findings of this study. The testing of legitimacy theory as an explanation for BHP’s social disclosures relied upon the matching of peak disclosure periods with periods of significant social, economic or political events affecting the company. This method imposes a relatively strin- gent test of coincidence that may not account for any unidentified time lags between events and their eventual disclosure in BHP’s corporate reports. In addition the results must be qualified in that the analysis was restricted to CSR via the annual report (albeit as the major medium of corporate communication to outside parties and sharehold- ers). Of course the findings are also limited by their being the product of a particularistic study of one major company.

While Hogner (1982) hypothesised that legiti- macy theory may constitute a primary explanation for US Steel’s social disclosures, this study at- tempted to assess the available evidence for a legitimacy theory explanation of BHP social dis- closures. To that end observed peaks of disclosure frequency over time (for major social themes) were compared against relevant social, economic and political events in BHP and its industrial history in the same or immediately preceding time periods. The analysis failed to confirm legitimacy theory as the primary explanation for CSR in this particular corporate case.

It is evident, then, that in the BHP case, a richer more robust theory is required to explain the observed historical pattern of CSR. Political econ- omy of accounting theory may prove to be another potential candidate for this role. Its proponents (Tinker 1980; Cooper 1980; Cooper and Sherer 1984; Tinker and Neimark 1987) suggest that corporate disclosure is a proactive process of infor- mation provided from management’s perspective, designed to set and shape the agenda of debate and to mediate, suppress, mystify and transform social conflict. This theory recognises the potential for management to tell its own story or refrain from doing so, according to its own self-interest. Whether it can adequately explain CSR will be the subject of further research.

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