Legitimacy Theory and Voluntary Environmental Disclosures - Essay Example

Legitimacy Theory Introduction Legitimacy theory is a concept which looks into the actions of corporate organization and the impacts of these actions to the general public. It looks into the social perspectives of these actions and that is why it is mostly considered to be close to the Public Relations theory. Recently most corporate organizations have included environmental disclosures as one of their most important policies not only with the aim of abiding by the laws that require them to do but as a way of getting closer to the consumers in terms of understanding, this has been known to increase profits and improve the general perception of the public towards the corporate. Legitimacy theory argues that organizations are predisposed especially through social contracts to purposely carry out various activities with the aim being appreciated, understood and accepted and that these activities greatly determine the survival of the organization in a particular environment. The development of this theory led to numerous researches to look into the actual ways with which it impacted on a company in general and if at all it was really a credible methodology because mostly it was based on assumptions. Therefore it was imperative that it was evaluated to determine if it had any significant correlation with the success of a company or if the assumptions were just abstract. This led to the construction of legitimization strategies which involved different ways of implementation and approach. There are corporate social and environmental disclosure policies that have been put in pace to guide organization at it was imperative that legitimization theory operates within its context. Organizations are required that they operate within boundaries that are compatible with and promote harmony between them and the surrounding communities. This is done by proving to these communities that the activities carried out by these organizations are legitimate. This is the essence of the legitimacy theory. Therefore it is not the drive for profits that prompt companies to publicize these aspects but a strategy aimed at created harmony between organizations and the communities. Legitimate theory is a concept that considers the organization as being part of the overall environment of a particular community and therefore the existence of any organization should be governed by the will to promote the requirements, objectives and goals of the community. A particular part or perspective of a company exists because there is mutual understanding between a company and the surrounding communities. The surrounding communities in this context means the environment surrounding the company and it ranges from the employees to the population living around the company. It also includes the shareholders who mostly originate from the surrounding environment and whose interests are important to the company. The legitimacy theory accommodates both the internal and the external environment and that is why it is rarely considered to be driven by mere profit making ambitions. Profit making was initially directed at making the shareholders happy. The legitimacy theory came to disapprove this notion because its objectives were not just profit making or geared towards satisfying the shareholders but it is about the idea of creating harmony with the environment with a clear conscience. These aspects led to revolutionizing of the corporate patterns that used legitimization theory for their own profit gains, which was a wrong approach and was a total abuse of the concepts held by the theory. Although the approaches were used to distract the general population, it was apparent that they were short lived and would not survive the kind of scrutiny presented by the public and the government. Failure to comply with the requirements of the surrounding communities may lead to revocation of a company’s contract and lack of supply of human resources and government support. Environmental Disclosures of two companies BHP Billiton is a company involved in many exploration activities including the mining of metals like Iron, magnesium and petroleum products including oil. The company is considered one of the largest mining companies in the world. However the company has faced many challenges because of its inability to inform the general public of its activities. This led the public to sue the company as in the case of Papua New Guinea. The company was involved in exploration activities and in the process the surrounding communities realized that their precious environment was in an imminent danger of destruction. The community therefore filed a judicial complaint of which they successfully won. This shows that the company did not care about their legitimacy with reference to the surrounding communities and continued with exploration without any consideration of the environment whatsoever. This was a total disappointment to the company because most of its mining activities in many countries have proven to be successful. BHP Billiton has managed to register considerable success since the 1990s ranging from areas like South Africa where the organization was involved in aluminum mining, Mozambique where the company was successful in nickel mining and in Australia and Columbia where the organization mined other forms of metals. From the corporate perspectives the organization has also encountered various mergers, for instance in 1991 when the company merged with Broken Hill Propriety Company, which led to the formation of BHP. BHP is a company that has devoted itself to disclosing various financial aspects including remuneration figures a part of its policy. However this disclosure is also limited to the Group Incentive scheme which has proven to be adequate so far. To protect the company from unfair competition from outside the company does not disclose their performance targets under the short term. This disclosure has revealed that the company that the ceiling under the performance target share element of the Group Incentive has satisfactorily spread. However, the lower target does not spread as much compared to the degree of success expected. The company does not also place performance conditions to the predetermined level of award during the holding period because the company does not consider this to be the best practice. According to the company in view of the targets the company has placed, it is apparent that the remuneration is way above the expected value although it is still below average as compared to the sector norms. The Directors were able to one year continuous contracts, with one of the Directors having managed to get a 150% year salary liquidated. In view of this the company has also disclosed that it has plans to amend the Group Incentive strategy currently in use according to a proposal that aims to consider the Group Incentive Plan under a long term scheme. The amendment will do away with the ability of participants to obtain share awards. No further material has been proposed in the disclosure and the company has also declared that this proposal was accepted unanimously, therefore they will be implemented in due time within a convenient time frame. The company considers this degree of disclosure to be very sufficient and with the ability to reward the company optimally. In addition to this the company also has a proposed New Long-Term Incentive Scheme that is aimed at replacing the currently utilized performance share component of the Group Incentive Plan. The company considers this to be the most sufficient course of action. However the company has also revealed that it is a challenging move to even consider, but the reward expected is worth the challenge. There are also concerns over the overall level of wards available which has been placed at the maximum vesting point which is also a challenging move because it is potentially excessive in this context especially when combined with other enumeration schemes. The company in response notes that the average remuneration sector in this perspective is also below the amount that is average for the whole sector. As a result the company has recommended abstention. The company has therefore approved awards to Mr. Goodyear who is a Director of the company. This was done in accordance with the Australian Stock Exchange Listing Rules and regulations, which requires that any awards made to the Directors have to be approved by all members before it can be implemented. The company considers this to be a due course of action; therefore a resolution was made to consider it in future. Mr. Salamon another company Director was also awarded using this method. The Board has also disclosed that it abode with the combined code through out the year which are stipulated under the revised code and which has been satisfactorily reviewed and found wanting by the Board. The board has therefore compiled the provisions and made them available to the public. The Board consists of two executives and eight non executive, of which five are independent. This reveals that the overall audit, remuneration and nomination have been placed at 66%, 75% and 75% respectively. This disclosure provides a comprehensive report concerning the company’s remuneration. The Audit fees for the year 2003 were also been revealed to be standing at a total of $ 9.1 million. The irrelevant non audit fees have also been placed at a total of $ 5.4 million. However there has not been any effort directed at separating and normalizing the audit from the non audit fees. During the 2003annual general meeting BHP announced that it would be reviewing the auditing criteria with reference to the joint audit. The review then proposed the two joint company auditors, PWC and KPMG would be invited on board for a brainstorming session to look into ways to improve the audit process in terms efficiency and cost effectiveness. It emerged therefore from the session that there was no apparent need to continue using a joint audit team and that one audit report was sufficient and furthermore it was also cost effective to the company. Therefore KPMG was subsequently chosen as the company to deal with the remaining half of the audit report that had not been done in that year. The audit report for the ending year which was disclosed established that the company had a turn over of 22,887, 15, 608 and 15,906 for the years of 2004, 2003 and 2002 respectively. Profits before tax were placed at 4,518, 2,925 and 2,727 for the years 2004, 2003 and 2002 respectively. Profits attributable to shareholders was placed 3, 379, 1,901 and 1,690 for the years 2004, 2003 and 2002 respectively. GVM metals disclosed the proceedings of it’s annul general meeting of 2007. During its annual general meeting of 2007, GVM Metals announced to its shareholders that it was changing had been successful in hanging its name and had received the ASIC Certificate of Registration on change of name of the company to Coal of Africa limited. The change was to be effective the next day after the announcement was made. However the names of the registered offices will continue to use their old names. The company decided to disclose the contents of its annual general meeting in accordance with Listing Rule 3.13.2 and section 251AA(2) of the corporations Act. The company’s remuneration report revealed the following: Number % of Vote % of Issued Capital For: 60,932,340 87.55% 28.10% Against: 1,028,882 1.48% 0.47% Abstain: 7,633,001 10.97% 3.52% Discretionary: - - - 69,594,223 100.00% 32.09% The election of the following directors also took place successfully without any dispute during the elections, Ms Nonkqubela Mazwai , Mr Nchakha Molo and election of director Mr Stephen Bywater Importance of Environmental Disclosure An organization may risk being forced out of business as is the case that happened with BHP Billion in Papua New Guinea if it does not disclose some aspects of its operation. For instance the community might decide to take legal action against such an organization when it feels that it is being shortchanged. This impact the organization negatively in terms of financial gains and also denies the company human resources who mostly hail from the society. For instance when the community perceives that the company gains more than it is giving, the company will be viewed as being socially irresponsible. On the other hand when the community realizes that the company has communicated the correct information it might benefit financially especially by obtaining cheap labor from the surrounding society. References GVM Metals share News GVM Announcement Reports and Results. Retrieved on 1st April from www.advfn.com/company-news-LSE/Gvm-Metals. BHP Billion Annual Reviews. Retrieved on 1st April from www.annualreviewbhpbiliton.com Read More