This section presents general theoretical arguments and legislative frameworks specifically enjoining JSE’s SRI firms to behave ethically in their operational activities which are relevant and underpin this study.
2.3.1 Legitimacy Theory
This theory suggests that firms should aim to achieve congruence between financial objectives and the accepted social norms. The concept revolves around an implicit contract between firms and society, agreeing to perform socially desirable actions in return for society’s approval of objectives and ultimate survival (Branco & Rodrigues, 2006; Magness, 2006; Guthrie & Parker, 1989). This is because theoretical literature argues that legitimacy is conferred and controlled by those outside the firm. Matsumura et al, (2011), and Dowling and Pfeffer, (1975)
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argue that firms, being abstract entities created by society, must demonstrate their legitimacy to society to survive in the long run.
Matsumura et al. (2011), and White and Mazur (1994) suggest that firms should not only have to get themselves in environmental shape but should be seen to do so if they are to survive in the long term. Branco and Rodrigues (2006); Magness, (2006); Guthrie and Parker, (1989) argue that since there exists an implicit contract between firms and society, with firms agreeing to perform socially desirable actions in return for society’s approval of objectives and ultimate survival, firms should be seen executing their part of this implicit contract.
The theory is applicable to this study because in the attempt to explore whether JSE’s SRI companies’ engagement in sustainability activities can be said to be out of a pure legitimacy drive or whether financial gains are embedded in environmental activities. If financial gains are found to be the driving force of firms’
sustainability efforts, then one can assume that not all firms engage in sustainability activities for legitimacy purposes as inferred in some literature.
2.3.2 Stakeholder Theory
Theoretical literature (Brammer & Millington, 2008; Munilla and Milles, 2005;
Phillips, 2003; Freeman, 1984) suggests that firms’ success is dependent on the success of management’s ability to manage relationships of firms with its stakeholders. The view renders the conventional idea that the success of the firm is dependent solely upon maximising shareholder value insufficient. Jensen and Meckling, (1976) argued that firms are perceived to be a nexus of explicit and implicit contracts between itself and the various interest groups. This explains why firms undertake environmental and other social engagements seriously in the attempt to fulfilling their part of the contract (Cho & Patten, 2007). Stakeholder theory is applicable to this study because firms are regarded as stakeholders to the
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environment. Hence, the consideration of their sustainability activities is considered alongside their accruable financial benefits as a stakeholder has to benefit from the sustainability that it supports. Amongst empirical studies that have investigated stakeholder effect on firms’ sustainability practices and economic performance include; Misani and Pogutz (2015), Vasi and King (2012), Barnett et al. (2012), Zeng et al. (2011), and Bird et al. (2007).
2.3.3 Political Economy Theory
Buhr (1998) argues that accounting systems act as mechanisms to create, distribute and mystify power based on the economic theory of self-interest. Hence, the emergence of pressure groups creates threats to companies who may face increased government intervention in the form of regulatory action which could create ‘’political costs’’ (Cho & Patten, 2007; Deegan, 2002; Williams, 1999;
Whittred et al., 1996). Watts and Zimmerman, (1978) cited that to prevent government intervention in the form of regulatory action firms resort to lobbying and putting up socially responsible behaviours. It is against this background that Cho and Patten (2007), and Frost (2000) argue that corporate sustainability pro- activeness and disclosures are “pre-emptive’’ and are used to enforce agenda to stave off government’s intervention. Political economy is relevant to this piece of work because the survival of the JSE listed firms could be incidental to the ability to pursue economic gains while adhering to socio-political demands of society. For example, JSE and KING III require listed firms to disclose their sustainability/
environmental performance which encourages listed firms to engage in responsible investments, business practices and operations that gear toward their sustainability development.
2.3.4 Resource-Based Theory
It is believed that differences in firms’ sustainability performance hinges on the availability and capability of resources acquirement (Barney,1991&1986;
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Wernerfelt, 1984), and that firms gain sustained competitive advantage if they possess distinct and valuable resources (Barney, 1991). Cohen and Levinthal (1990), and Direckx and Cool (1989) argue that corporate resources are categorised into those that build a positive reputation over a long period of time that cannot easily be shortened by competitors, or resources built on know-how that can be readily re-combined into new resources, that makes copying by competitors very difficult if not impossible.
Russo and Fouts (1997) argue that firms create sustainable competitive advantage from these resources through opting to reduce pollution by changing design processes that may give a sustainable competitive advantage over firms that only install filtering equipment. Therefore, Branco and Rodrigues (2006) suggest that firms engage in corporate social responsibility due to the competitive advantage they enjoy from social responsibility activities. This confirms that investing in social responsibility activities has consequences for the creation/ depletion of the firm’s fundamental intangible resources.
Resource-based theory is applicable to this study as the environment is a seemingly free resource to firms which, although free, should not unsustainably be exploited. Some empirical studies that have examined how resource capacity and availability influence corporate sustainability performance and economic performance include KI-Hoon and Byung (2015), Endrikat et al. (2014), Qi et al.
(2014), Eccles et al. (2009), and Wahba (2008).
2.3.5 Institutional Theory
Institutional theory is a concept that explains why and how firms behave in a particular manner. The concept is primarily a sociological view of firms’ operational practices and focuses on the relationship between organisations and the environments in which they operate (Scott, 2001; Greenwood & Hinings, 1996;
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DiMaggio & Powell, 1991). The theory posits that corporate structures together with operational practices are directed by pressures from interested parties who expect to see particular practices in operation (DiMaggio & Powell, 1991, 1983).
Deegan (2009) posits that corporate practices and policy responses are situational as they respond to social and institutional pressures in order to conform to prevailing socio-political and economic expectations to maintain legitimacy.
Selznick (1957) cites that institutionalisation provides and promotes value, stability and persistence of a structure over time and provides platforms for firms’ efficiency (Scott, 1987).
Berger and Luckmann (1966) argue that institutions are social structures of reality, and emphasised the symbolic value of institutionalisation citing that organisations adopt certain patterns of behaviour and practice to be considered legitimate in the environments in which they operate rather than to achieve efficiency (DiMaggio &
Powell, 1983; Meyer & Rowan, 1977). Therefore, the motive of efficiency is not sufficient to explain similarities among organisation as postulated by Scott (1987).
Alternatively, Meyer and Rowan (1977) suggest that organisational structures are the reflection of myths of the firms’ environment instead of the demands of their operational activities. This is to say that for firms to be accepted by society, institutional rules, structures and procedures serve as the function of powerful
‘myths’ that firms adopt, in spite of the fact that the institutionalised rules may sometimes conflict with firms’ efficiency (Meyer & Rowan, 1977). Should an organisation choose to enhance internal processes at the expense of society, this may lead to reduced legitimacy and the environment’s support. Institutional theory is relevant to this study as it tends to explain why companies attempt to attain the balance between sustainability engagements and economic performance by developing integrated/ multifaceted corporate structures and policies that help to meet stakeholder demands as well as building internal structures to enhance corporate efficiency. Amongst empirical studies that have their basis rooted in the
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concept of institutionalism and contingency theories sustainability accounting research include Feng et al. (2016), Li (2014), and Dixon-Fowler et al. (2013).
2.3.6 Legislative Framework in South Africa
Regulatory frameworks across nations that enjoin firms to be ethical and carbon emissions conscious in the quest to slow down global climate warming is also said to explain reasons behind firms’ sustainability pro-activeness. Amongst regulatory frameworks that enforce environmental related measures to protect the South African environment relevant to this research include; The National Environmental Management Act, 1998, [as amended] which provides the foundation for the development of policy and regulatory frameworks for Environmental Management in South Africa; Minerals and Petroleum Resources Development Act, 28 of 2002 [as amended], which calls for mining firms to develop an environmental management programme and plan (Chapter 2, part III, sections 51 and 52 of this Act require mining companies to provide for financial costs for rehabilitating the environment after cessation of operations and also to provide for financial costs to mitigate environmental disasters should they occur); and the Proposed Carbon Tax Policy of 2013, which seeks among other things to foster early development and/or implementation of cleaner technology that seeks to enhance the development of technologies for capturing and storing carbon.
Furthermore, KING III (2009) enjoins JSE listed firms to disclose the extent to which their activities have impacted the environment. The disclosure of sustainability impact of JSE’s SRI firms provides the archival data that is used in the analysis of this study.