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The question why companies involve in voluntary disclosure has partially been discussed before when talking about the objectives of CSR and sustainability reporting. However, when performing an analysis of the development of CSR and sustainability reporting, it is of vital importance to consider theories that explain why management engages in certain reporting practices. According to Deegan and Unerman (2011), there are four major theories that are linked with reporting practices: positive accounting theory (PAT), legitimacy theory, stakeholder theory and institutional theory. Orij (2007) refers to these studies as social

disclosure studies. However, PAT is excluded from the discussion, since its three hypotheses, being bonus plan hypothesis, debt hypothesis and political cost hypothesis are all related to disclosures in financial statements. The three other theories are also often denoted as systems-oriented theories and are to some extent closely related. Under a systems-based perspective, the entity is seen as part of the society in which it operates and thus being influenced by and influencing the society, too. Deegan and Unerman (2011) also state that the three theories consider accounting disclosure policies as strategies to “influence the organization’s relationships with the other parties with which it interacts” (Deegan & Unerman, 2011, pg.

321). This aspect has already been indicated when having discussed the objectives of CSR and sustainability reporting, which will be more explained in the following three subsections.

3.8.1 Legitimacy Theory

The basic assumption of legitimacy theory is that the reporting entity is continuously engaged in activities ensuring that it is perceived as operating within the boundaries and norms of the society in which it operates. This is tightly linked with the concept of the social contract, which is best summarized by Shocker and Sethi (1974, pg. 67), being quoted quite often in the literature (e.g. Deegan & Unerman, 2011; Beesley & Evans, 1978):

Any social institution, and business is no exception, operates in society via a social contract, expressed or implied, whereby its survival and growth are based on: (i) the delivery of some social desirable ends to society in general, and (ii) the distribution of economic, social or political benefits to groups from which it derives its power. In a dynamic society, neither the sources of institutional power, nor the needs for its services are permanent. Therefore, an institution must continually meet the twin needs of legitimizing and relevance by demonstrating that society requires its services and that the groups benefiting from its rewards have society’s approval.

When it comes to the expressed or implied parts of the contract, Gray, Owen, and Adams (1996) make the suggestion that legal requirements make up the expressed parts of the contract while societal expectations make up the implicit parts. Taking Carroll’s (1991) pyramid of social responsibility, one could take the two lower compulsory responsibilities (economic: being profitable, and legal: obeying the law) and consider them as explicit. The upper two voluntary responsibilities (ethical: be ethical, and philanthropic: be a good corporate citizen) could be then considered as implicit. Another implication which Shocker’s and Sethi’s (1974) definition has is that the social contract is a relative concept in relation to time and space (Deegan & Unerman, 2011). The concept of legitimacy gap illustrates it well.

As long as there is a discrepancy between society’s beliefs and expectation of how an entity

shall operate and the perception of how the entity has operated, a legitimacy gap exists. This may result either from changing or evolving expectations within society or from unknown information about the company becoming public (Deegan & Unerman, 2011). Based on Lindblom’ (1993) findings, Deegan & Unerman (2011) list four courses to repair, maintain or gain legitimacy:

 seeking to inform about undertaking changes in the entity’s operations to align the company’s activities with the relevant group’s expectations;

 seeking to alter the perception of the relevant group without performing any changes;

 seeking to alter the perception of the relevant group by directing attention to other issues than the issue in question; and

 seeking to alter the perception of the relevant group and aligning it with the entity’s current activities.

One common way of realising these legitimising strategies is through accounting reports, as already discussed in the section on objectives of CSR and sustainability reports.

3.8.2 Stakeholder Theory

Legitimacy and stakeholder theory are closely interrelated. According to Freeman (1984, pg.

46), a stakeholder is “any group or individual who can affect or is affected by the achievement of the organization’s objectives”. There are several ways of defining, identifying and classifying stakeholders. One way of classifying stakeholders is by distinguishing between primary and secondary stakeholders (Clarkson, 1995). While the primary stakeholder is essential for a company’s survival and without whom the continuous existence is significantly endangered, the secondary stakeholder is not critical for the company’s going-concern. Mitchell, Agle, and Wood (1997) developed a different model based on the stakeholder attributes power, urgency and legitimacy. He classifies stakeholders into dormant (one attribute applicable), expectant (two attributes applicable) and definite stakeholders (power, urgency and legitimacy applicable).

While stakeholder theory focuses on how an entity interacts with certain stakeholders, legitimacy theory focuses on the interaction with the society as a whole. Stakeholder theory has two branches, an ethical (normative) and a managerial (positive) branch. Under the ethical branch, every stakeholder has the right for fair treatment and the right for information about how the entity affects him/her is recognized. By using the accountability model of Gray et al.

(1996) as a basis, Deegan and Unerman (2011, pg. 351) argue that reporting is not driven by demand, but rather by responsibility towards the stakeholders. So, regardless of the power of the stakeholder, no matter whether there is a primary or secondary stakeholder (Clarkson,

1995), whether there is a dormant, expectant or even definite stakeholder (Mitchell et al., 1997), the company deems itself accountable towards all of them and provide the desired information.

A question which arises is whether truly ethical companies can actually follow the ideal of the ethical perspective. Freeman’s (1984) definition of stakeholders, which is often quoted and considered valid, encompasses a potentially very broad and endless group. And according to Mitchell et al. (1997), it is impossible to consider all stakeholders. Thus, it is practically not possible for a company to adopt an ethical approach in interacting with its stakeholders. This implies that companies will always have to prioritize their stakeholders to some extent, on which the managerial branch builds upon.

The managerial branch focuses on explaining when an entity will fulfill the expectations of certain stakeholders. Typically, this is the case when a stakeholder is or becomes powerful based on the previously discussed attributes power, legitimacy and urgency. The more extensive these attributes become the more important the stakeholder becomes for the company and the more it will fulfill the stakeholder’s expectations regarding information provision. Consequently, stakeholders are prioritised or managed.

3.8.3 Institutional Theory

Institutional theory provides an explanation for the phenomenon of organizations tending to take similar forms and characteristics and ultimately becoming homogenous. It includes two major dimensions: isomorphism and decoupling. According to DiMaggio and Powell (1983, pg. 149), isomorphism is “a constraining process that forces one unit in a population to resemble other units that face the same set of environmental conditions”. They have identified three isomorphic processes: coercive, mimetic and normative isomorphism.

Coercive isomorphism occurs as a response to pressure from stakeholders, being formal or informal. Mimetic isomorphism relates to the phenomenon of organizations copying other organizations. Lastly, normative isomorphism relates to convergence processes occurring as a result of changing norms and values. The second dimension of institutional theory, decoupling, refers to a misalignment between an organisation’s actual practices and its publicly announced practices. Even though management may have recognized a need for change or even initiated a change, actual practice may still differ from what is proclaimed by the organisation. Regarding CSR and sustainability reporting, decoupling may be related to legitimacy theory, more precise to one of the legitimising strategies, namely seeking to create an image of the company that is different from reality (Deegan & Unerman, 2011, pg. 369).

3.8.4 How can these theories explicitly help in the upcoming analysis?

These theories can help in explaining certain behaviour and trends related to accountability reporting. Legitimacy theory is very focused on responses of companies on legitimacy gaps and this is related to the activities of an entity and how it reports on that. Hence, this theory may be more suitable in analysing what companies are reporting and what they are actually doing. Still, maybe simultaneous changes in reporting practices by several companies may be explained in the later analysis by legitimacy theory. But especially institutional theory may help explain potential standardizing or converging trends in reporting on CSR and sustainability among airlines. Here, the first dimension, namely isomorphism will be the significant one, because like legitimacy theory, decoupling relates also to the actual activities of an organisation.