Difference Between Legitimacy Theory and Stakeholder Theory

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

Legitimacy Theory Stakeholder Theory
Theory of Legitimacy Organizations strives to function within their respective communities’ boundaries and norms and 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 grouping or individual that tin can influence or is influenced past the success of an organisation’s objectives (Freeman and Reed 1983) Shareholders, creditors, the regime, employees, employees’ families, local communities, and time to come generations are all examples.
The terms “legitimacy” and “legitimation” are used interchangeably. Legitimacy is the country or circumstance in which an entity’due south value system is regarded to exist compatible with that of social club. Legitimation is the process of determining whether or non an system is legitimate. Corporate disclosures may be part of this ‘process.’ Social Accord Represents society’s tacit and explicit standards for how the organisation should acquit its business. Gild permits the organization to continue operating as long as information technology satisfies its needs. Information technology may be difficult for the organisation to gain the required support and resources to keep operations, which may result in punishments such equally legal limitations, restricted resources, or decreased demand for products. Adapt output, goals, and operational techniques to adhere to legitimacy definitions Endeavor to change the notion of social legitimacy via advice so that it aligns with the organization’s current practises, output, and ideals. endeavour to become connected with symbols or concepts that convey legitimacy through communication Brand an attempt to educate and notify the public virtually whatever changes in performance or activity. Attempt to alter perceptions rather than behaviour. attempting to sway public stance by diverting attention away from the problem and toward other topics brand an effort to modify external expectations Each of the same tactics may exist implemented through public disclosure in places like annual reports. Many social responsibility scholars take this viewpoint. The strategic attribute of financial statements and other associated disclosures is highlighted in reporting. Attempts to clarify disclosures past researchers looking at social and ecology reporting procedures. Increased disclosures after social catastrophes or environmental disasters, too as effectually proved environmental prosecutions, are office of the portfolio of techniques used to constitute or sustain the organization’due south credibility.  Higher disclosure over time is linked to increased participation in ecology groups. The majority of the disclosures are good. Legitimacy theoretically, at that place 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 2 branches: upstanding (moral) or normative co-operative and positive (managerial) branch. Normative theory – what ‘ought’ to happen An organization’south stakeholders have the right to be treated fairly. Management should run the system in the best interests of all stakeholders. Each group deserves to exist considered in its ain right and has the correct to exist given data, even if it is not utilized. Stakeholder ability bug are not immediately relevant. Accountability is considered when considering rights to information: the duty to provide an account or reckoning of those deportment for which one is held responsible accountability involves ii responsibilities: to undertake sure actions and to provide a record of those deportment reporting is assumed to be a responsibility rather than demand-driven Attempts to explicate when corporate management is likely to pay attending to the expectations of specific (strong) stakeholders. More arrangement-centred stakeholders recognised by the arrangement the corporeality to which the organisation considers the connexion has to exist managed in the organisation’s interests Stakeholder expectations are idea to influence operating and disclosure rules. Stakeholder influence Organizations do not reply equally to all stakeholders, just the virtually powerful stakeholder’southward power is a role of the stakeholder’south 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 direction is to appraise the necessity of fulfilling stakeholder demands to achieve strategic visitor objectives. As stakeholder expectations and power relativities vary over time, organisations must alter their operating and reporting approaches. Information, such every bit financial accounting and social performance data, is a key component in managing stakeholders, and information technology may be utilised to obtain support or acceptance while as well distracting them from their resistance or disapproval.

Legitimacy and Stakeholder Theories

Because of their many similarities, Legitimacy Theory and Stakeholder Theory (managerial co-operative) should not be seen equally two distinct theories, but rather as two (overlapping) viewpoints on the same subject field 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 equally a whole, as Legitimacy Theory does.


According to legitimacy theory, an system must always strive to ensure that information technology is regarded as operating within the constraints and norms of the order in which information technology functions. Legitimacy theorists argue that to preserve its existence, a visitor would do whatever it takes to justify its operations. The stakeholder theory is concerned with the relationship that exists between an arrangement and the many types of stakeholders that make upwardly the organization’due south society. Accountability is usually linked to stakeholder theory, which states that an arrangement’s management is required to exist answerable to its many stakeholders and to engage in activities that they feel relevant. Stakeholder theory adds resolution to legitimacy theory’s “social expectations” past taking into account the arrangement’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 organisation’s behaviour is regarded as befitting to societal norms and expectations from the perspective of various stakeholder groups in order. Institutional theory is concerned with widely established social norms and/or institutional practices that are impacted by the organization’south stakeholders indirectly.

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What are the different types of stakeholder theory?

  • Stakeholder theory has given rise to several assumptions. They may be plant in stakeholder literature in a variety of domains, including strategic direction, CSR, business organisation and club, and business ideals. These assumptions, which may exist described equally follows, illustrate their breadth and give a comprehensive agreement of this theory.
  • Stakeholders are recognized from the perspective of a single focus arrangement;
  • To fulfil its objectives, an system must successfully manage its stakeholders;
  • Stakeholders are divided into many groups, many of which accept competing interests.
  • An organization must exist 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 visitor is adamant by their organizational characteristics.
  • An arrangement’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 ii models, the strategic stakeholder management model and the intrinsic stakeholder commitment model, as some other instance. Although there are many additional interpretations and classifications of stakeholder theory, the upstanding (moral or normative) branch and the direction (positive) co-operative 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 concern and society. The stakeholder model’s 3 values are:

  • Descriptive: The stakeholder model is descriptive in that information technology gives a vocabulary and concepts for describing organisations, their operations, and their environmental implications. Information technology [stakeholder theory] gives a model outlining what the corporation is, as Donaldson and Preston describe. Information technology defines a visitor as a drove of mutually benign 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 coming together corporate objectives.
  • Normative worth The third feature of the stakeholder model is the supposition that stakeholders are valuable in and of themselves. According to Donaldson and Preston, stakeholder theory acknowledges that stakeholders have 18-carat stakes incorporate activities based on their interest in the firm and that stakeholders accept 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 direction. While stakeholder management necessitates an acceptance that management should consider stakeholders rather than merely 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’southward’stake’ in the organisation.
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What does the legitimacy theory posit?

To legitimate, the house’south performance, sustainability reporting and ecology disclosures are fabricated in response to political, economic, and societal pressure.

Organizations e’er endeavour to guarantee that they function within the constraints and norms of their particular societies, co-ordinate to legitimacy theory. A corporation would voluntarily report on actions if management believed that those activities were anticipated past the communities in which it works, co-ordinate 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 upwards with the legitimacy theory?

Organizational legitimacy is described as “a state of affairs or status that arises when an entity’s value organisation is uniform with the value organization of the wider social system of which the entity is a part.”

Organizations must constantly strive to ensure that they are viewed as operating inside the premises and norms of the club in which they operate, according to legitimacy theory. Co-ordinate to legitimacy theory, a “social contract” exists between a corporation and its separate order. This social contract addresses whether an organisation acts within order’s to a higher place limits and standards, or just within expectations of gild. The weather of this contract may exist 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 system’s good standing in club, 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 non live in a vacuum, and they require ongoing interactions with society. Organizations, for case, get human resources and materials from society and as well evangelize appurtenances and services to gild. Above all, the arrangement’s waste products are captivated past society (the natural environment), ofttimes at no toll to the organisation. According to many experts, organisations have no inherent rights to these advantages; to enable organisations to go along to be, social club would require the benefits to residual the costs to society. Co-ordinate to legitimacy theory, the organization must meet the expectations of society as a whole, not but the criteria of the owners or investors, as in shareholder theories such as agency theory. According to legitimacy theory, does society permit the organisation to continue operations and clinch its existence if only certain expectations are met? To put it some other way, the theory contends that “organisations can just go along to exist if the lodge in which they are based perceives the organization to be operating to a value organisation that is commensurate with the lodge’s value system.” Thus, co-ordinate to legitimacy theory, an institution’south level of legitimacy is disquisitional to its long-term survival.

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Withal, managing a company in this fashion is not always straightforward considering guild’south diverse norms and expectations are e’er irresolute, making alignment with the business’southward aims problematic. Equally a result, a “legitimacy gap” may develop. Unexpected incidents such as a financial scandal, a severe catastrophe, or whatsoever act that undermines the organization’s reputation can frequently upshot in “legitimization threats.” These types of gaps or dangers might pose a gamble to an organization unless an appropriate legitimization program is implemented. Lindblom (1994) proposed four legitimization tactics that an arrangement may use to justify its operations in the society in which it operates. These iv strategies are to: brainwash relevant stakeholders about the organisation’south actual functioning; change relevant stakeholders’ perceptions almost the underlying issue without changing the organization’south actions; distract or manipulate focus away from the topic of consideration and redirect information technology to a more favourable issue; and/or change outer standards about the company’s productivity.

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