Question

Select Legitimacy theory, Stakeholders theory, institutional theory and discuss whether you believe they are complementary or offer quite different interpretations of how ‘reality is perceived’. •Do you think by adopting a mix of theories we can attain a more informed view of the reasons for management’s behaviour in terms of reporting.

Answer 1

Legitimacy theory states that whatever the actions are of an organization they are treated or assumed to be desired, appropriate for the success of an organization.

Stakeholder theory states that the stakeholders are the most important group for an organization and a business cannot exits or will cease to exist if the stakeholders of an organizations are not happy. The stakeholders are not only the investors of an organization but there group extend to the outsiders such as customer, vendors and the social groups.

Institutional theory states that the organization should follow the rules of an institution to which it belongs. There is a difference between the organization and the institution. Suppose a football club is an organization but the game of football is an institution and all of the organizations should follow the rules of the institutions.

These above explained theories are interrelated with each other’s and are complimentary to each other’s in following ways.

• Legitimacy theory requires that the actions of an organizations are considered to be in the best interest of an organization and in this way the stakeholders are benefited and the institutional rules are also followed. Hence they all are complimentary to each other’s.
• Stakeholder theory states that the stakeholders of an organizations should be given top priority because without their existence the organization would cease to exist. Stakeholders are all those parties that have an interest in the organization and they are benefited by the existence of an organization. So if stakeholders are to be given top priority then the theory of legitimacy and theory of institutional should be followed as legitimacy theory will abide that the every actions is in the good faith of an organization and whatever actions are taken they are as per the institutional rules to which the organization belongs.
• Institutional theory at the last is complementary to both the legitimacy theory and the shareholder theory as this will ensure that the institutional values are followed.

Adopting a mix of these theories are always recommended as the management decisions can be better understand if we know the values of these theories.

Suppose if the management takes some initiative to help the society and makes a donation, this might be not good from the view point of stakeholders as this will reduce the profits but if this is viewed from the institutional theory this is good as the organization has a responsibility toward the society also.

If these theories are applied then management decisions can be better understand as the organization is consists of society, stakeholders, and the institutions.