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Difference Between Legitimacy Theory and Stakeholder Theory

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

Legitimacy TheoryStakeholder Theory
Theory of Legitimacy Organizations strives to function within their respective communities’ boundaries and norms so that their operations are viewed as “legitimate.” Bounds and norms are not static, thus organisations must be responsive, which is based on the concept of a “social contract.”Any identified group or individual that can influence or is influenced by the success of an organization’s objectives (Freeman and Reed 1983) Shareholders, creditors, the government, employees, employees’ families, local communities, and future generations are all examples.
The terms “legitimacy” and “legitimation” are used interchangeably. Legitimacy is the state or circumstance in which an entity’s value system is regarded to be compatible with that of society. Legitimation is the process of determining whether or not an organisation is legitimate. Corporate disclosures may be part of this ‘process.’ Social Accord Represents society’s tacit and explicit standards for how the organisation should conduct its business. Society permits the organisation to continue operating as long as it satisfies its needs. It may be difficult for the organisation to gain the required support and resources to continue operations, which may result in punishments such as legal limitations, restricted resources, or decreased demand for products. Adapt output, goals, and operational techniques to adhere to legitimacy definitions Attempt to change the notion of social legitimacy via communication so that it aligns with the organization’s current practises, output, and ideals. endeavour to get connected with symbols or concepts that convey legitimacy through communication Make an effort to educate and notify the public about any changes in performance or activity. Attempt to alter perceptions rather than behaviour. attempting to sway public opinion by diverting attention away from the problem and toward other topics make an effort to alter external expectations Each of the aforementioned tactics may be implemented through public disclosure in places like annual reports. Many social responsibility scholars have this viewpoint. The strategic aspect of financial statements and other associated disclosures is highlighted in reporting. Attempts to clarify disclosures by researchers looking at social and environmental reporting procedures. Increased disclosures after social catastrophes or environmental disasters, as well as around proved environmental prosecutions, are part of the portfolio of techniques used to establish or sustain the organization’s credibility.  Higher disclosure over time is linked to increased participation in environmental groups. The majority of the disclosures are good. Legitimacy theoretically, there is a link between corporate transparency and public expectation, and leadership has been shown to rely on information to set community standards.
Theory of Stakeholders Stakeholder Theory has two branches: ethical (moral) or normative branch and positive (managerial) branch. Normative theory – what ‘ought’ to happen An organization’s stakeholders have the right to be treated fairly. Management should run the organisation in the best interests of all stakeholders. Each group deserves to be considered in its own right and has the right to be given information, even if it is not utilized. Stakeholder power issues are not immediately relevant. Accountability is considered when considering rights to information: the duty to provide an account or reckoning of those actions for which one is held responsible accountability involves two responsibilities: to undertake certain actions and to provide a record of those actions reporting is assumed to be a responsibility rather than demand-driven Attempts to explain when corporate management is likely to pay attention to the expectations of specific (strong) stakeholders. More organisation-centred stakeholders recognised by the organisation the amount to which the organisation considers the connection has to be managed in the organization’s interests Stakeholder expectations are thought to influence operating and disclosure rules. Stakeholder influence Organizations do not respond equally to all stakeholders, but the most powerful stakeholder’s power is a function of the stakeholder’s level of control over organisational resources. Labor, money, powerful media, legislative power, and the capacity to influence consumer demand for the organization’s goods and services are all factors to consider. A major responsibility of management is to assess the necessity of fulfilling stakeholder demands to accomplish strategic company objectives. As stakeholder expectations and power relativities vary over time, organisations must alter their operating and reporting approaches. Information, such as financial accounting and social performance data, is a key component in managing stakeholders, and it may be utilised to obtain support or acceptance while also distracting them from their resistance or disapproval.

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.


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.

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References :

[0]Fernando, Susith, and Stewart Lawrence. "A theoretical framework for CSR practices: Integrating legitimacy theory, stakeholder theory and institutional theory." Journal of Theoretical Accounting Research 10.1 (2014): 149-178.

[1]Miles, Samantha. Stakeholder theory classification, definitions and essential contestability. Emerald Publishing Limited, 2017.

[2]Guthrie, James, Suresh Cuganesan, and Leanne Ward. "Legitimacy theory: A story of reporting social and environmental matters within the Australian food and beverage industry." Asia Pacific Interdisciplinary Research in Accounting Conference (5th: 2007). APIRA 2007 Organising Committee, 2007.

[3]Carroll, A. and Buchholtz, A. 2014. Business and Society: Ethics, Sustainability, and Stakeholder Management 9th Revised edition edition.

[4]South-Western College Publishing Donaldson, T. and Preston, L., 1995. The Stakeholder Theory of the Corporation: Concepts, Evidence and Implications. The Academy of Management Review, Vol. 20, No. 1. (Jan., 1995), pp. 65-69.

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