What is Legitimacy Theory and Stakeholder Theory and what are the differences?

Legitimacy and Stakeholder Theories

Because of their many similarities, Legitimacy Theory and Stakeholder Theory (managerial branch) should not be seen as two distinct theories, but rather as two (overlapping) viewpoints on the same subject presented within a ‘political economy’ framework. Stakeholder theory addresses the many stakeholder groups within society and how they may best be handled, rather than society as a whole, as Legitimacy Theory does.

Summary

According to legitimacy theory, an organisation must always strive to ensure that it is regarded as operating within the constraints and norms of the society in which it functions. Legitimacy theorists argue that to preserve its existence, a company would do whatever it takes to justify its operations. The stakeholder theory is concerned with the relationship that exists between an organisation and the many types of stakeholders that make up the organization’s society. Accountability is usually linked to stakeholder theory, which states that an organization’s management is required to be accountable to its many stakeholders and to engage in activities that they feel relevant. Stakeholder theory adds resolution to legitimacy theory’s “social expectations” by taking into account the organization’s society, which acknowledges several stakeholders with competing interests. Legitimacy theory expands on stakeholder theory by focusing on more than simply societal expectations of responsibility. It also engages in a legitimization process, which guarantees that the organization’s behaviour is regarded as conforming to societal norms and expectations from the perspective of various stakeholder groups in society. Institutional theory is concerned with widely established social norms and/or institutional practices that are impacted by the organization’s stakeholders indirectly.

What are the different types of stakeholder theory?

• Stakeholder theory has given rise to several assumptions. They may be found in stakeholder literature in a variety of domains, including strategic management, CSR, business and society, and business ethics. These assumptions, which may be described as follows, illustrate their breadth and give a comprehensive understanding of this theory.
• Stakeholders are recognized from the perspective of a single focus organisation; 
• To fulfil its objectives, an organisation must successfully manage its stakeholders; 
• Stakeholders are divided into many groups, many of which have competing interests.
• An organisation must be able to reconcile the competing interests of stakeholders in its external environment and those in its internal environment.
• Stakeholders exert pressure on an organisation because they anticipate or have an interest in something.
• The ability of stakeholders to exert pressure on a company is determined by their organizational characteristics.
• An organization’s stakeholders have financial, social, and environmental obligations.

Different interpretations and classifications of stakeholder theory may be found in the literature based on the preceding assumptions. Donaldson and Preston (1995), for example, proposed a stakeholder theory taxonomy with three categories: normative, instrumental, and descriptive. Berman (1999) suggested two models, the strategic stakeholder management model and the intrinsic stakeholder commitment model, as another example. Although there are many additional interpretations and classifications of stakeholder theory, the ethical (moral or normative) branch and the management (positive) branch stand out in the literature.

Bucholtz and Carroll discuss the three sorts of stakeholder models, which help us to understand why a stakeholder approach is so important in business and society. The stakeholder model’s three values are:

• Descriptive: The stakeholder model is descriptive in that it gives a vocabulary and concepts for describing organisations, their operations, and their environmental implications. It [stakeholder theory] gives a model outlining what the corporation is, as Donaldson and Preston describe. It defines a company as a collection of mutually beneficial and competing interests with inherent value. Stakeholder Theory is helpful in understanding and managing organisations, which is why the terminology of stakeholder theory is extensively used in industry, non-profits, government, and other sectors.

• Instrumental: The stakeholder model is useful because managing stakeholders should result in the attainment of corporate objectives such as greater profitability, growth, and sustainability. The stakeholder model also enables the testing of the links between managing stakeholders and meeting corporate objectives.
• Normative worth The third feature of the stakeholder model is the assumption that stakeholders are valuable in and of themselves. According to Donaldson and Preston, stakeholder theory acknowledges that stakeholders have genuine stakes incorporate activities based on their interest in the firm and that stakeholders have inherent worth. Stakeholder theory, according to Donaldson, Preston, Carroll, and Bucholtz, is managerial in the broad sense since it is descriptive, allows for predictions, and provides suggestions, all of which contribute to stakeholder management. While stakeholder management necessitates an acceptance that management should consider stakeholders rather than just shareholders, it does not necessitate an uncritical acceptance of all stakeholder interests. Instead, it allows for the identification and analysis of the importance and legitimacy of a stakeholder’s’stake’ in the organisation.

What does the legitimacy theory posit?

To legitimate, the firm’s performance, sustainability reporting and environmental disclosures are made in response to political, economic, and societal pressure.

Organizations always endeavour to guarantee that they function within the constraints and norms of their particular societies, according to legitimacy theory. A corporation would voluntarily report on actions if management believed that those activities were anticipated by the communities in which it works, according to the legitimacy hypothesis. Legitimacy theory is based on the idea that a firm and the society in which it works have a “social compact.”

Who came up with the legitimacy theory?

Organizational legitimacy is described as “a situation or status that arises when an entity’s value system is compatible with the value system of the wider social system of which the entity is a part.”

Organizations must constantly strive to ensure that they are viewed as operating within the bounds and norms of the society in which they operate, according to legitimacy theory. According to legitimacy theory, a “social contract” exists between a corporation and its separate society. This social contract addresses whether an organisation acts within society’s above limits and standards, or just within expectations of society. The conditions of this contract may be both explicit and implicit. Explicit terms are legal obligations, whereas implicit terms are communal expectations. An organisation must guarantee that these criteria are not violated to retain the organization’s good standing in society, which permits it to continue to exist.

In legitimacy theory, society as a whole is considered, rather than individuals individually. As a result, the idea is concerned with the interaction that exists between the organisation and society as a whole. Organizations do not live in a vacuum, and they require ongoing interactions with society. Organizations, for example, get human resources and materials from society and also deliver goods and services to society. Above all, the organization’s waste products are absorbed by society (the natural environment), frequently at no cost to the organisation. According to many experts, organisations have no inherent rights to these advantages; to enable organisations to continue to exist, society would require the benefits to balance the costs to society. According to legitimacy theory, the organisation must meet the expectations of society as a whole, not only the criteria of the owners or investors, as in shareholder theories such as agency theory. According to legitimacy theory, does society allow the organisation to continue operations and assure its existence if only certain expectations are met? To put it another way, the theory contends that “organisations can only continue to exist if the society in which they are based perceives the organisation to be operating to a value system that is commensurate with the society’s value system.” Thus, according to legitimacy theory, an institution’s level of legitimacy is critical to its long-term survival.

However, managing a company in this manner is not always straightforward because society’s diverse norms and expectations are always changing, making alignment with the business’s aims problematic. As a result, a “legitimacy gap” may develop. Unexpected incidents such as a financial scandal, a severe catastrophe, or any act that undermines the organization’s reputation can often result in “legitimization threats.” These types of gaps or dangers might pose a risk to an organisation unless an appropriate legitimization plan is implemented. Lindblom (1994) proposed four legitimization tactics that an organisation may use to justify its operations in the society in which it operates. These four strategies are to: educate relevant stakeholders about the organization’s actual performance; change relevant stakeholders’ perceptions about the underlying issue without changing the organization’s actions; distract or manipulate focus away from the topic of consideration and redirect it to a more favourable issue; and/or change outer standards about the company’s productivity.

Sharing is caring!