Legitimacy Theory As A Basis For The New CDP Law: Improving Accurate And Timely Carbon Performance Disclosures

Background

Question:

Discuss about the Sustainability Performance and Sustainability Disclosure.

This paper is set to address the question of whether legitimacy theory can act as a base for the new CDP law that requires firms to disclose their actual carbon performance on a quarterly basis. The legitimacy theory posits that the actions of any entity must be appropriate or proper within the system of values, norms, and beliefs within which the entity exists (Comyns, 2012). As such, it is important to measure just how the current law on GHG emissions could work along this. Not so many years ago, it was projected that 400 parts per million for CO2 would be a tipping point as far as climate change was concerned. In the legitimacy theory, and concerning the climate change issue, firms should report their carbon performance and the measures they are taking to reduce it. When organizations demonstrate that they are taking substantial actions in reducing climate change, they gain their ‘legitimacy’ in society. However, many firms fail to report properly and accurately – they only use the media to offer reports that improve their image and ‘legitimacy’ (Comyns, 2012). In this study, the idea is to explore whether the legitimacy theory can act as a basis for the new environmental law to motivate forms to ensure accurate and timely disclosure. 

The previous research on legitimacy theory has not focused on how the ambiguities, in theory, can be addressed (Hahn et al., 2015). There are discrepancies in research on whether the theory motivates firm towards better disclosure considering that there may be positive or negative performance (Apergis et al., 2013). Previous research has not addressed how new local laws can be developed based on this theory so that firms have legal requirements to follow. Further, the issue of mandatory disclosures and how such an approach can motivate accuracy and honesty in reporting have not been addressed in research.

Currently, disclosures are voluntary, and companies are expected to play their ethical mandate in displaying their findings to all. Research has found it vulnerable in the sense that it fails to make the process mandatory where all companies have to adhere to it (Fernando and Lawrence, 2014).

Chu et al. (2013) noted that the organizations must be bound by the social contract with society. Organisations have certain social responsibilities which include sponsorship, education and voluntary disclosure of information. The firm agrees to act in a certain way in line with the values and beliefs of society (Comyns, 2012). This enable firms gain their legitimacy in society and develop positive image. They are accepted morally since their actions are appropriate and desirable to society. These help them to gain customers and labour force

Previous Research on Legitimacy Theory

Increasing steps to reduce carbon footprints has been linked to the higher legitimacy of firms in society. Many firms provide more precise and reasonable carbon disclosures when there is legal requirement. Firms always follow disclosures that are mandatory and the figures are more accurate and timely since there are legal ramifications of failure to disclose, (Comyns, 2012). Firms can use this approach to demonstrate their ability to do things that are proper and beneficial. A positive correlation has been identified between proper actions and legitimacy and this translates to more profit. The more a company discloses precise and accurate carbon emission to the public the better the company will gain in term of image and profits, (Downie & Stubbs, 2013).

In the previous research, there has been the focus on how the legitimacy theory can benefit the disclosures that are related to carbon emissions. In using the legitimacy theory, stakeholders rely on the promise of the social contract to establish how firms should take action against global warming (Chu et al., 2013). The proportion of the effort taken by firms should be in line with their carbon footprint. Every company is entitled to take care of the surrounding environment and take some social responsibilities. This help firms establish positive co-existence with different publics and take responsibility of reducing world global warming effects (Toke, 2017). There is also need to understand how the theory can be relied upon to bring about more strict measures and ensure correct action against the carbon emissions.

The relationship between stringent legislation and compliance is positive – the more stringent the laws, the better the outcomes regarding reporting and disclosure and the less the stringent law the worse the outcomes regarding carbon disclosure. Previous study identified law make it possible for every company to timely and accurately report on carbon emission level and measures the firm is undertaking to reduce this, (Rahmana et al., 2014). In theory, it is important to note that the arguments are logical and they can form a basis for the law forcing companies to disclose their positions and actions in reducing global warming. The legal arguments can be made for the social contract and the requirements identified in theory. The law can define the areas of ‘proper and appropriate action’ and the ‘values, beliefs, and morals’ that a firm exists in (Toke, 2017). It means that there is a high possibility of the theory being used as a basis for making the law.

Mandatory Disclosures

The previous research has indicated that more strict rules and regulatory requirements force companies to achieve better reporting and disclosure (Chu et al., 2013), and legal requirements have penalties that can be instituted to motivate firms and this is connected to the improved performance in reporting and disclosure. Previous studies also shows that the firms attempt to follow the law to remain more legitimate and get appreciation from government and consumers. It was also established that the new laws are likely to motivate firms to compete in showing compliance and this is connected to a better performance in this area. The firm will try to create positive image to public, media, government, society and customers and by doing so improve the level of carbon disclosure, (Kaime, 2014). Accurate and timely disclosure is considered as proxy of carbon disclosure index while legal requirements to direct firm to disclosure are proxy of legitimacy theory.

The law can incentivize companies to improve their approaches in disclosure and possibly motivate them to seek more actions to improve their carbon performance. Firms will try to make can disclosure a priority and even create new departments to deal with carbon performance, and this has a direct link to the positive performance of businesses in the area.

Operational Constructs The enterprises in the businesses that pollute the environment more are typical

Variable	Type of Variable	Indicator	Tools of analysis	Type of analysis
There is also need to understand how the theory can be relied upon to bring about more stringent measures and ensure correct action against the carbon emissions.	Dependent	Accurate and timely disclosure	Percentages Mean score	Descriptive statistics Regression  analysis
The relationship between stringent legislation and compliance is positive – the more stringent the laws, the better the outcomes regarding reporting and disclosure	Independent	Stringent law/legal requirement	Percentages Mean score	Descriptive statistics Regression  analysis

The sample for this research has been taken from a data of 60 companies of different profiles. The sample of the sixty companies was randomly selected. These gave all the companies in the population equal chances of being selected. Companies selection was made with the greatest firms have been picked as a result of their effect on the economies where they play out their operations (Jose & Lee 2007). Second, disclosure practices (particularly natural revelations) of large organizations are wealthier than small and medium measured organizations (Deegan & Gordon 1996; Patten 1991)

H0: If a new law is created based on legitimacy theory, then firms are likely to improve the accuracy and timeliness of their carbon performance disclosures.

H1:  If a new law is created based on legitimacy theory, there will be no change in the accuracy and timeliness of the carbon performance disclosures provided by firms. 

The method of data analysis is descriptive statistics and inferential statistics. Descriptive include measure of location and measure of dispersion which are used to describe the distribution of data.

The data set provide consisted of different companies and also from different countries.

country of the company	Frequency	Percent
Canada	1	1.7
Denmark	2	3.3
Finland	2	3.3
France	1	1.7
Germany	1	1.7
Japan	2	3.3
Netherlands	2	3.3
Spain	2	3.3
Sweden	3	5.0
Switzerland	3	5.0
Taiwan	3	5.0
United Kingdom	9	15.0
USA	29	48.3
Total	60	100.0

The sample selected composed of companies from USA having the largest number of companies represented by 48.3%, United Kingdom 15%, Sweden, Switzerland and Taiwan had 5%, Canada, France and Germany had 1.7% and finally Finland, Netherlands and Spain had 3.3%. This is evident that most of the companies in the population are from USA then followed by United Kingdom.

Type of company	Frequency	Percent
Consumer Discretionary	8	13.3
Consumer Staples	1	1.7
Financials	6	10
Health Care	4	6.7
Industrials	18	30
Information Technology	22	36.7
Telecommunication Services	1	1.7

In the sample selected, 36.7 % of the companies were information technology companies followed by industrials with 30%, consumer Discretionary 13.3%, Financials 10%, Health care 6.7% while Consumers Staples and Telecommunication Services had 1.7%.

Role of Social Contract in Legitimacy Theory

In the graph above, there is considerable change in board role in the issue of discussion between the years 2010 to 2015. According to Simpson (2016), the prevalence of CDP in propagating the disclosure of emission information is helping companies reduce environmental disasters. Aside from that, the figures of executive decisions are a signal to the changing investment and economic trust that many businesses are embarking on. Further, close to 1000 entities have implemented policies on the internal cost of emission in the pipelines (Deatherage, 2011). Moreover, the target of most companies has overwhelmed many of those that were against the move. As a result, it has become a relevant issue for leading global industries to embed climate change objectives within each business strategy.

Responsibility of climatic change with the organization	Frequency	Percent
Board or individual/sub-set of the Board or other committee appointed by the Board	42	70.0
No individual or committee with overall responsibility for climate change	1	1.7
Other Manager/Officer	3	5.0
Senior Manager/Officer	12	20.0
Total	60	100.0

The climatic change responsibility in an organisation has been dedicated to the board committee. The carbon emission has to be in control by all the companies. In the sample selected, most of the companies have delegated these duties to appointed board represented by 70% while only 1.7% hasn’t delegated this responsibility. New laws need to be put in place to allow timeliness and accuracy of reporting.

Most of the businesses have integrated climatic change in their policy. They have set law policy of reducing carbon emission, disclosure method of this policy to the public and also set policy on how to reduce the risk in future. Although some of the business have not come up with an integrated climate change.

Data analysis was done using IBM SPSS software version 22. Inferential statistics are used to make logical conclusion on the data. Analysis of variance and t test are used to test significance of variables under study.  ANOVA was conducted to test the relationship of disclosure score and law integrated in the business at 5% level of significance. Also was used to check risk incorporation in firm and improvement of disclosure score. ANOVA assumes that the data is continuous and normally distributed with equal variance.

H0: If a new law is created based on legitimacy theory, then firms are likely to improve the accuracy and timeliness of their carbon performance disclosures.

H1:  If a new law is created based on legitimacy theory, there will be no change in the accuracy and timeliness of the carbon performance disclosures provided by firms.

The company’s disclosure score can be compared with integrated climate change and determine if their business strategy has catered for accuracy and timeliness. The P-value is 0 thus less than the significance level 0.05 thus we reject the null hypothesis that a new law created based on the legitimacy theory, firms would improve the accuracy and timeliness of their carbon performance hence their would be no change. The new law created wouldn’t improve the accuracy and the timeliness of their carbon performance disclosures.

Relationship between Legitimacy Theory and Climate Change Issue

H0: If a new law is created based on legitimacy theory, then firms are likely to improve the accuracy and timeliness of their carbon performance disclosures.

H1:  If a new law is created based on legitimacy theory, there will be no change in the accuracy and timeliness of the carbon performance disclosures provided by firms. 

The P-value which is 0.019 that is less than 0.05 we reject the null hypothesis and conclude that a new law created based on legitimacy theory will no change in the accuracy and timeliness of the carbon performance disclosures provided by firms. These means that creating a law based on the legitimacy theory the way companies have been having carbon performance disclosures would not change.

In addressing the concerns of theories in the business operations of large corporations, there is a need to focus on the impact of climate change on value creation in companies. The new law based on the legitimacy theory has proved that the accuracy and timeliness of carbon emission disclosure would remain the same. With an open platform for disclosure, it offers an avenue to meet the interests of the population and ensure that the business environment remains stable for the ultimate performance of many companies. Mostly studies address the emission and not putting into consideration the facts on its effect to residents.

Despite the increased number companies most of them are not will to disclose the carbon emission. The challenge, the choice and impact of disclosing carbon emission still lies with the confines of the firm in addressing the impact it will have on its future operation. The research only made use of new law contribution and effects on carbon disclosure level which may be influences by other factors not included in study.

Many scholars still infer the impact of climate issues, corporations are facing the predicament of sinking behind in the turn of addressing market concerns on the rapid change regarding climate. There need to do further research and identify how the firms behaved before and after introduction of new law. Also a survey will be appropriate to assess how the management think disclosure score should be improved.

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