Generally, institutions can be referred to as accepted value patterns of the common culture (e.g., socio-economic beliefs, norms and practices). These are integrated into different features of social system units, such as education, law, politics and religion (Judge et al., 2008,
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2010). Therefore, institutions can be categorised into two groups: formal institutions (e.g., laws and regulations) and/or informal institutions (e.g., norms and conventions) (Judge et al., 2008, 2010). Institutional theory argues that over time organisations tend to become structured, and to operate in the same way influenced by social norms, symbols, beliefs and rituals, meeting social expectation and being socially accepted (Meyer and Rowan, 1977; DiMaggio and Powell, 1983). Institutionalisation is described as the process of repeating actions over time, given that these actions have similar meanings as perceived by different society members (Scott, 1987). Institutional theory studies the interaction between the organisation and the environment in which it operates. In other words, how can organisations remain stable and enhance their survival prospects by incorporating institutionalised norms and rules (Meyer and Rowan, 1977; DiMaggio and Powell, 1983)? Institutional theory, like most other theories which are used as a theoretical framework for social and environmental accounting research (e.g., resource dependence theory and stakeholder theory), is system oriented. This assumes any organisation affects the society in which it is located as well as being affected by that society (Gray et al., 1995; Chen and Roberts, 2010).
The institutional perception has three structural levels of analysis: social institutions, governance structures and actors in institutional settings (Scott, 2001). First, social (global) institutions have the power to shape the overall institutional context by imposing what is perceived as a socially acceptable system. Over time this imposed system is diffused informally (Judge et al., 2008, 2010). The governance level has also been divided into organisations and organisational sectors or fields (e.g., groups of organisations operating in the same industry), while individuals and groups are represented as actors on the bottom level of Scott’s model.
From the neo-institutional perspective, there are three types of institutional pressure: coercive/regulative, cognitive/mimetic and normative. These pressures can be incorporated to rationalise the diffusion of good CG practices at the company or national levels. Neo- institutional theory argues that companies have to adhere to governmental or other equivalent regulations, such as capital markets, according to the coercive process. Organisations may follow the steps of those which are successful in their field, derived from a mimetic approach. Likewise, in order to gain investors’ confidence, organisations may voluntarily follow conventional practices and norms, according to the normative process (Vaaler and Schrage, 2006; Yoshikawa and Rasheed, 2009). Therefore, institutional theory predicts that organisational practices tend to become isomorphic over time due to these three types of pressure (DiMaggio and Powell, 1983, 1991).
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CG codes, which are issued either by the stock exchange (as in the UK, Australia, Jordan, Saudi Arabia and the UAE) or by investors’ associations (as in Ireland and Germany), lead to coercive isomorphism either because these codes become part of the listing requirements for publicly traded firms or because institutional investors push for firms to comply with them. However, codes which are issued by directors (as in South Africa and Egypt), professional associations (as in Malaysia) and governments are more likely to be endorsed by normative isomorphism, as the companies comply with these codes as legitimate values and norms. Finally, CG codes which are issued by managers’ associations (as in USA and India) are widespread and subject to the forces of mimetic isomorphism because companies try to follow the best practice already established by leading companies.
The motives driving institutional antecedents, which stimulate or constrain the diffusion of a number of organisational practices, can generally be categorised into efficiency (or instrumental) and legitimation (or moral/relational) (Aguilra and Cuervo-Cazurra, 2004, Aguilera et al., 2007; Zation and Cuomon, 2008). Institutional theory predicts the diffusion and/or imposition of a number of corporate practices that are driven either by competition to access economic resources (economic efficiency), and/or by seeking social approval for the right to exist (social legitimacy) (Zattoni and Cuomon, 2008).
Accordingly, the current study aims to apply the generalised neo-institutional theory which incorporates both efficiency and legitimation motives of economic variables operating within an institutional environment (Ntim and Soobaroyen 2013b; Elmagrhi et al., 2016), to explain differences in CG voluntary disclosure practices at both organisational and national levels. First, from a legitimation/moral perspective, corporations can improve their legitimacy and social acceptance by adhering to the regulative institutional pressures to conform to expected social behaviours and international standards (Ashford and Gibbs, 1990; Suchman, 1995). Therefore they gain organisational legitimacy by showing compliance with good CG practices in the form of increased CG disclosure. This facilitates the congruence of corporate goals and norms with those of the larger society. Similarly, economic units can access and maintain good links with corporate stakeholders to improve corporate legitimacy by being involved in or mimicking accepted social behaviour (Mizrachi and Fein, 1999; Aguilera et al., 2007). Furthermore, being involved in transparent CG practices helps firms to legitimise their corporate operations by reducing political costs (Branco and Rodrigues, 2008; Cheng et al., 2008) and improves their ability to access more resources (e.g., raw materials and government contracts) (Jensen, 2002; Kiel and Nicholson, 2003). As a result, neo-institutional theory suggests that corporations can win the support of powerful corporate stakeholders such as
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governments, politicians, shareholders and trade unions, improving their organisational legitimacy by being involved in sound CG practices (Freeman and Reeds, 1983; Freeman, 1984).
On the other hand, the theoretical implications of the efficiency (instrumental) view of neo-institutional theory argue that adhering to coercive, mimetic and normative institutional forces helps economic entities gain critical resources to enhance corporate performance and the overall interests of shareholders (Aguilra, 2007; Chen and Roberts, 2010). Conducting good CG practices mitigates agency conflict by decreasing information asymmetry between management and shareholders (Jensen and Meckling, 1976; Sheu et al., 2010; Leung and Ilsever, 2013), reducing managerial monitoring and bonding costs (Beiner et al., 2006) and helping managers and investors to identify profitable investment opportunities (Bushman and Smith, 2001). As a result, the costs of external capital obtained by the firm are reduced, thereby improving company value (La Porta et al., 2002; Gompers et al., 2003; Durnev and Kim, 2005). Neo-institutional theory has been used at the national level to explain the diffusion and/or imposition of a number of corporate practices. These include differences in the adoption of international accounting and CG standards (Aguilra and Jackson, 2003, Yoshikawa et al., 2007; Zation and Cuomon, 2008), other studies that used neo-institutional theory to explain CSR practices (Ntim and Soobarayen, 2013b), and the compliance with and disclosure of CG practices at company level (Elmagrhi et al., 2016). However, few studies (e.g., Elshandidy et al., 2015) have attempted to adopt neo-institutional theory (efficiency and legitimacy perspectives) at both national and company levels to study the diffusion of CG practices (Yoshikawa and Rasheed, 2009). This motivates the current study to add to the neo-institutional and CG disclosure literature by explaining the main institutional antecedents of the diffusion of CG voluntary disclosure at both organisational and national levels.