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Institutional theory

In document Empirical evidence from Sri Lanka (Page 142-147)

Theoretical framework

5.3. Theoretical perspectives of CSR practice

5.3.3. Institutional theory

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5.3.2.5. Stakeholder theory’s predictions about CSR disclosure motivations In line with stakeholder theory, an organisation might engage in CSR activities and reporting in order to discharge its accountability towards its stakeholders: in the ethical perspective, towards all stakeholders, and in the managerial perspective, towards economically powerful stakeholders. By engaging in the disclosing of CSR information an organisation clearly accepts its stakeholders’ right-to-know about certain aspects of its operations. The provision of CSR information reduces the information asymmetry and places different kinds of stakeholders on a level playing field. In return, an organisation could expect or bring certain benefits such as improving its image/reputation, attracting investors, lowering the cost of capital, improving the retention of existing employees, attracting prospective employees, and improving the relationship with stakeholders in order to gain their support and approval (Deegan, 2009; Gray et al., 1996). All these benefits could be an indirect motivation for CSR disclosure. In a direct, abstract form, according to the managerial branch of stakeholder theory, the CSR disclosure motivation of an organisation is driven by the desire to manage its powerful stakeholders, whereas for the ethical branch, the CSR disclosure motivation is driven by the desire to be accountable to all stakeholders irrespective of their economic power.

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(See for more details, Moll, Burns, & Major, 2006.). The researcher opts to use only one version of institutional theory in this thesis: that is the “macro” version of new institutional sociology. Hereinafter, this version is discussed as institutional theory.

Institutional theory examines organisational forms and explains the reasons for having homogeneous characteristics or forms in organisations which are within a same “organisational field”. DiMaggio and Powell (1983) define an organisational field as “those organisations that, in the aggregate, constitute a recognized area of institutional life: key suppliers, resource and product consumers, regulatory agencies, and other organisations that produce similar services or products” (p.

147). Referring to Oliver (1991), Carpenter and Feroz (2001) highlighted that

“institutional theory views organisations as operating within a social framework of norms, values, and taken-for-granted assumptions about what constitutes appropriate or acceptable economic behaviour” (p. 565). In line with institutional theory, organisations conform within an organisational field, perhaps, due to institutional pressure for change, because “they are rewarded for doing so through increased legitimacy, resources, and survival capabilities” (Scott, 1987, p. 498). DiMaggio and Powell (1983) contend that, once an organisational field is structured, various powerful forces emerge within society, which cause organisations within the field to become more similar to one another.

Two dimensions exist in institutional theory: isomorphism and decoupling. DiMaggio and Powell (1983) consider isomorphism as the concept that best describes the process of homogenisation. They define isomorphism as “a constraining process that forces one unit in a population to resemble other units that face the same set of environmental conditions” (DiMaggio & Powell, 1983, p. 149). Moll, Burns, and Major (2006) break isomorphism into two components: competitive isomorphism and institutional isomorphism. According to Moll et al. (2006), competitive isomorphism is referred to as “how competitive forces drive organisations towards

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adopting least-cost, efficient structures, and practices” (p. 187). Institutional isomorphism can be broken down into three different isomorphism processes such as: coercive isomorphism, mimetic isomorphism, and normative isomorphism (DiMaggio & Powell, 1983).

The first of these processes, coercive isomorphism, relates to external factors, such as shareholder influence, employee influence, and government policy. So, this process arises because of the pressure from powerful or critical stakeholders (upon whom an organisation is dependent) to change an organisation’s institutional practices such as CSR reporting (Deegan, 2009). It is quite evident that the process of coercive isomorphism is related to the managerial perspective of stakeholder theory which focuses on powerful stakeholders. In discussing how coercive isomorphism creates some form of homogeneity within organisations, Deegan (2009) states, “a company could be coerced into adopting its existing voluntary corporate reporting practices . . . to bring them into line with the expectations and demands of its powerful stakeholders (while possibly ignoring the expectations of less powerful stakeholders). Because these powerful stakeholders might have similar expectations of other organisations as well, there will tend to be conformity in the practices being adopted by different organisations – institutional practices will tend towards some form of uniformity” (p. 360).

The second process, mimetic isomorphism, involves organisations trying to emulate or copy other organisations’ practices, mainly to obtain competitive advantage in terms of legitimacy. Uncertainty is one of the powerful forces which encourages imitation (DiMaggio & Powell, 1983). In explaining the reasons for having mimetic isomorphism, Unerman and Bennett (2004) state, “any organisation which failed (at a minimum) to follow innovative practices and procedures adopted by other organisations in [the] same sector would risk losing legitimacy in relation to the rest of the sector” (p. 692). CSR reporting would be one of these innovative practices that could help to maintain and enhance the corporate legitimacy.

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According to DiMaggio and Powell, the third and final isomorphic process is normative isomorphism. It relates to the pressures emerging from common values to adopt particular institutional practices. In relating normative isomorphism with corporate reporting, including voluntary reporting, Deegan (2009) states, “the professional expectation that accountants will comply with accounting standards acts as a form of normative isomorphism for the organisations for whom accountants work to produce accounting reports (an institutional practice) that are shaped by accounting standards. In terms of voluntary reporting practices, normative isomorphic pressures could arise through less formal group influences from a range of both formal and informal groups to which managers belong – such as the culture and working practices developed within their workplace” (p. 362).

It is necessary to indicate that all three isomorphic processes mentioned above lead organisations to adopt similar structures and management practices in their fields, irrespective of their actual usefulness or organisational efficiency (Carpenter &

Feroz, 2001; DiMaggio & Powell, 1983). According to Carpenter and Feroz (2001),

“institutional theory is based on the premise that organisations respond to pressures from their institutional environments and adopt structures and/or procedures that are socially accepted as being the appropriate organisational choice” (p. 569).

In addition to isomorphism, decoupling is the other dimension of institutional theory. This dimension relates to the separation between the external image of an organisation and its actual structures and procedures or practices. An organisation’s actual practices need not necessarily comply with the external expectations.

This separation, which could be an intentional and/or unintentional action of the organisation, is referred to as decoupling (Moll et al., 2006). According to Dillard, Rigsby, and Goodman (2004), “decoupling refers to the situation in which the formal organisational structure or practice is separate and distinct from actual organisational practice” (p. 510). Deegan (2009) in relating decoupling to CSR reporting practice, states “this decoupling can be linked to some of the

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insights from legitimacy theory, whereby social and environmental disclosures can be used to construct an organisational image that might be very different from the actual organisational social and environmental performance. Thus, the organisational image constructed through corporate reports might be one of social and environmental responsibility when the actual managerial imperative is maximisation of profitability or shareholder value” (p. 364).

5.3.3.2. Linking institutional theory to CSR practice

According to Deegan (2009), institutional theory links organisational practices, including CSR practices and other accounting practices, to the values and norms of a society in which an organisation operates. This connection ultimately drives an organisation to a necessity to maintain, gain, and regain its legitimacy. Legitimated structures and/or practices transmit to organisations in a field through coercion, through imitation, and through normative pressures. Through these isomorphic processes, organisations adopt institutional practices (Dillard et al., 2004). Voluntary CSR disclosure and voluntary engagement in CSR activities by an organisation are considered as a part of institutional practice (Deegan, 2009).

Institutional theory is a well-established theoretical perspective in the areas of management accounting, political science, social and organisational change, accounting controls, and financial reporting (Gray et al., 2010). Although institutional theory inherently possesses the capability to help explain CSR compliance by firms (Campbell, 2007), it has not been used much in the CSR literature (Gray et al., 2010). A few studies can be found where the application of institutional theory is used to explain CSR practice (See, for example, Amran &

Siti-Nabiha, 2009; Bansal, 2005; Berrone & Gomez-Mejia, 2009; Campbell, 2007;

Rahaman, Lawrence, & Roper, 2004.).

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5.3.3.3. Institutional theory’s predictions about CSR motivations

According to institutional theory, various forces influence organisations to adopt CSR practices. Here, managers try to conform to norms that are substantially imposed upon them. Thus, in line with the institutional theory, an organisation’s predicted CSR motivation is the desire to become similar to other organisations, by adopting those of their practices which society or particularly powerful groups consider as “normal”.

In document Empirical evidence from Sri Lanka (Page 142-147)