Accounting, Auditing & Accountability JournalThe edge of legitimacy: Voluntary social and environmental reporting in Rothmans'1956-1999 annual reportsMatthew V. Tilling Carol A. Tilt

Article information:To cite this document:Matthew V. Tilling Carol A. Tilt, (2010),"The edge of legitimacy", Accounting, Auditing & AccountabilityJournal, Vol. 23 Iss 1 pp. 55 - 81Permanent link to this document:http://dx.doi.org/10.1108/09513571011010600

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The edge of legitimacyVoluntary social and environmental reporting

in Rothmans’ 1956-1999 annual reports

Matthew V. TillingSchool of Business, The University of Notre Dame, Fremantle, Australia, and

Carol A. TiltFlinders Business School, Flinders University, Adelaide, Australia

Abstract

Purpose – The purpose of this paper is to examine the voluntary social and environmentaldisclosures made in the annual reports of Rothmans Ltd between the years of 1955 and 1999. The firstpart of the paper focuses on defining legitimacy theory as it has been used in accounting research,extending the current model of legitimacy that predominates, and discussing the potential of aresource-based approach to testing the theory.

Design/methodology/approach – A qualitative and quantitative approach to analysing annualreport disclosures is presented, and this is one of the few studies to operationalise the variables understudy as measures of resource flows.

Findings – The paper considers legitimacy theory in light of disclosures made by Rothmans. Aninitial analysis provides qualitative examples of expected attempts to legitimatise the corporationgiven the threat posed by the smoking and health debate. Further analysis conducted using aquantitative measure of resource flows controlled by one stakeholder group, contradicts thoseexpected when compared with previous studies, and as a result of this an alternative conceptualisationof legitimacy theory is proposed.

Research limitations/implications – The paper considers one company in one industry andprovides evidence from limited stakeholders groups. The results have implications for further researchon social and environmental reporting that use a legitimacy framework.

Originality/value – The paper provides one of the few studies to attempt to measure resourceflows in order to proxy stakeholder influence on reporting. This therefore provides an alternative tothe more common measures of legitimacy used in previous studies. These have predominantly beenbased on researcher judgement of the categorised text to determine whether they fit certain“legitimacy” criteria.

Keywords Tobacco, Corporate social responsibility, Annual reports, Disclosure

Paper type Research paper

IntroductionIn the effort to understand the motivation of corporations in providing voluntary socialand environmental disclosure a number of theories have been employed. This papercontinues this theme of research through a longitudinal case study conceived as a testof legitimacy theory as it has been described in accounting research. Instead of

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0951-3574.htm

The authors wish to acknowledge the valuable support provided by the CPA Australia infunding this research through their research grant scheme. Also the invaluable support andinput provided by colleagues during seminars at the University of Western Australia, Universityof Tasmania and Flinders University, and participants at the Singapore APIRA conference.

The edgeof legitimacy

55

Received 22 November 2007Revised 20 December 2008

Accepted 8 May 2009

Accounting, Auditing &Accountability Journal

Vol. 23 No. 1, 2010pp. 55-81

q Emerald Group Publishing Limited0951-3574

DOI 10.1108/09513571011010600

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focusing on a range of organisations and industries, the examination of a singlecompany complements previous broader-based studies. Despite the potential forlegitimacy theory to explain a broad range of corporate behaviour, there has beenrelatively little research to date into legitimacy theory except in the context ofenvironmental disclosures.

The tobacco industry presents us with an ideal case to examine legitimacy theory asan explanation for social disclosure, as the industry has faced ongoing threats to itslegitimacy through increased government regulation, heightened community hostility,and threats to its income stream and long-term survival. Tobacco companies have beenexamined in the past (Campbell et al., 2003; Moerman and van der Laan, 2005), but byfocusing on the voluntary social disclosures made in the annual reports of one publiclylisted Australian tobacco corporation, Rothmans Holding Ltd, over a long-time period,this paper provides the potential to observe legitimacy theory in action under changingconditions, as the industry faced these increasing threats.

In addition, utilising Hybels (1995), the paper provides a more robust measure oflegitimacy than previous studies, operationalising the construct of legitimacy usingresource flows. Measures of the resource flows for two stakeholder groups withparticular relevance to the tobacco industry are used: the first stakeholder groupconsidered is the media, who reflect and influence stakeholder perceptions which inturn influence resource flow, measured by the incidence of articles about the tobaccoindustry appearing in the press. The second stakeholder group considered is the state,who use regulation to restrict resource flow, measured by the introduction of additionalsanctions and increases in excise imposed on the industry.

The paper is not intended to address the ethical or health issues associated withthe tobacco industry, although these are referred to below when discussing threats tothe organisation’s legitimacy. Instead it provides an opportunity to focus on theappropriateness of legitimacy theory for understanding disclosure in the annualreport, and to further develop our understanding of accounting as a communicativepractice.

This research adds to existing literature in three additional ways. First, the studylooks at a range of social disclosures, not just the environmental disclosures that havebeen the traditional focus of such research, to test legitimacy theory as an explanationfor disclosure in the annual report. Second, the explicit focus of this research is a firm atthe very “edge of societal legitimacy”. Third, the tobacco industry has seldom beenexamined by accounting academics (other than papers by Campbell et al. (2003) andMoerman and van der Laan (2005) discussed later). Further examination of thissignificant industry (in terms of both economic and political power) is thereforewarranted.

The paper starts with a discussion of the definition of legitimacy theory employed,including an important extension to the predominant model of legitimacy used inprior research. There follows a brief discussion of the tobacco industry in the contextof an increasing threat to its organisational legitimacy. Longitudinal context analysistechniques and statistical correlation are then used to examine the nature ofdisclosures and how they have changed over time. These changes are interpreted inthe context of the legitimacy theory grounded explanation provided earlier, toestablish whether, for this organisation, the theory is able to provide a good fit for theobservations.

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Theoretical frameworkAn overview of legitimacy theory

Legitimacy is a generalized perception or assumption that the actions of an entity aredesirable, proper, or appropriate within some socially constructed system of norms, values,beliefs, and definitions. (Suchman, 1995, p. 574, emphasis in original).

One of the problems of legitimacy theory has been that the term has, on occasion, beenused fairly loosely. This should not be seen as a problem of the theory itself and theobservation could be equally applied to a range of theories in a range of disciplines(Caudill (1997) on the abuse of evolutionary theory). A failure to adequately specifyexactly what is being considered has been identified by Suchman (1995, p. 572, emphasisin original ), who observed that “Many researchers employ the term legitimacy, but fewdefine it”. Hybels (1995, p. 241) comments that “As the tradesmen [sic] of social sciencehave groped to build elaborate theoretical structures with which to shelter their careersand disciplines, legitimation has been a blind man’s hammer.” Legitimacy provides thefoundation for this paper, and in an attempt to address some of these concerns of“fuzziness” a discussion of legitimacy theory, as defined in this paper, will be provided.

There are in fact a number of layers to legitimacy theory. The macro theory oflegitimation, known as institutional legitimacy theory, deals with how organisationalstructures as a whole (business for example, or the government) have gained acceptanceby society at large. “Within this tradition, legitimacy and institutionalisation are virtuallysynonymous. Both phenomena empower organisations primarily by making them seemnatural and meaningful” (Suchman, 1995, p. 576, emphasis in original). In terms ofaccounting research, given the time frames and questions generally being considered,the current business environment, including capitalist structure, type of government,etc. is generally taken as a given, a static context within which the research is situated.

One layer down from the institutional level is “organisational legitimacy” (sometimesreferred to as strategic legitimacy theory or instrumental legitimacy theory, see Driscolland Crombie (2001)). “Underlying organisational legitimacy is a process, legitimation,by which an organisation seeks approval (or avoidance of sanction) from groups insociety. Legitimation may be necessary to ensure an organisation’s continued existence”(Kaplan and Ruland, 1991, p. 370). It is from this level that most accounting researchtends to draw its understanding of legitimacy (although one final layer of resolution thatis useful to consider will be presented in this paper). Dowling and Pfeffer (1975, p. 122)provide a definition of legitimacy is at this level:

Organisations seek to establish congruence between the social values associated with orimplied by their activities and the norms of acceptable behaviour in the larger social systemin which they are a part. In so far as these two value systems are congruent we can speak oforganisational legitimacy. When an actual or potential disparity exists between the two valuesystems there will exist a threat to organisational legitimacy.

It is not the intention of this paper to provide an in-depth critique of legitimacy theoryat this level because, as “the most widely used theory to explain environmental andsocial disclosures” (Campbell et al., 2003, p. 559) it has already been discussed andcritiqued extensively (Bansal and Roth, 2000; Milne and Patten, 2002; Deegan, 2002;Deegan et al., 2002). The focus of this paper however, is on organisational aspects thathave been considered in previous social and environmental accounting literature. Amore detailed review of the levels of legitimacy can be found in Tilling et al. (2008), but

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the following sections concentrate on the final level of resolution of interest in thispaper.

The final level represents a refinement to the organisational level of legitimacy toincorporate specific phases of legitimacy, but before presenting that final level, somediscussion of the means of measuring legitimacy at this level is warranted.

Legitimacy as a resource flowHearit (1995, p. 2) asserts that “legitimacy functions as an organisational resource”.

At its simplest, within the organisational view “legitimacy [is] an operationalresource [. . .] that organisations extract – often competitively – from their culturalenvironments and that they employ in pursuit of their goals” (Suchman, 1995, pp. 575-6,emphasis in original). Legitimacy, just like money, is a resource a business needs tooperate, a view closely tied to the resource-based view (RBV) of the firm. Certainactions and events increase that legitimacy resource, and others decrease it. Lowlegitimacy will have particularly dire consequences for an organisation, which couldultimately lead to the forfeiture of the right (or licence) to operate.

A RBV suggests that resources must be valuable, rare and isolated from imitation orsubstitution (Hoopes et al., 2003). Wernerfelt (1984, p. 172) defines resources as “those(tangible and intangible) assets which are tied semi-permanently to the firm”. This paperthough, is concerned with resources controlled by stakeholders, rather than theorganisation, so while Wernerfelt’s (1984) definition would include the resource flowsconsidered here, the definition of “resource flow” used in this paper goes further toinclude the influence of stakeholders on the firms’ access to traditional resources. Barney(1991, p. 101) says that firm resources include all “assets, capabilities, organisationalprocesses, firm attributes, information, knowledge, etc; controlled by a firm” that enableit to “implement strategies that improve its efficiency and effectiveness”. A furtherdistinction is made by Amit and Shoemaker (1993), who consider that resources can bedivided into resources and capabilities: resources being tradable and non-specific to thefirm; capabilities being firm-specific and used to utilize the resources within the firm, adistinction that has been widely adopted throughout the RBV literature.

Although we can describe a firm as being legitimate, and conceive of levels oflegitimacy, it becomes a very subjective exercise to try and directly measurelegitimacy. This is because although it has concrete consequences, legitimacy itself isan abstract concept, given reality by multiple actors in the social environment. For aresearcher to try and directly establish, or even rank, the legitimacy of variousorganisations would seem to be a necessarily subjective undertaking, preferencing theresearcher’s own views. Hybels (1995, p. 243) rejects “this view because it is based on aconflation of the roles of observer and participant in social science”.

As an alternative, rather than trying to gauge a firm’s legitimacy directly it caninstead, arguably more objectively, be inferred from the fact that being legitimate“enables organisations to attract resources necessary for survival (e.g. scarce materials,patronage, political approval)” (Hearit, 1995, p. 2). Hybels (1995, p. 243) develops this insome detail:

Legitimacy often has been conceptualized as simply one of many resources that organizationsmust obtain from their environments. But rather than viewing legitimacy as something thatis exchanged among institutions, legitimacy is better conceived as both part of the context forexchange and a by-product of exchange. Legitimacy itself has no material form. It exists only

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as a symbolic representation of the collective evaluation of an institution, as evidenced to bothobservers and participants perhaps most convincingly by the flow of resources. [. . .]resources must have symbolic import to function as value in social exchange. But legitimacyis a higher-order representation of that symbolism – a representation of representations.

While much of the legitimacy theory literature focuses on legitimating strategies tosociety as a whole, Hybels (1995, p. 243) argues that good models in legitimacy theorymust examine the relevant stakeholders, and how “Each influences the flow of resourcescrucial to the organisations’ establishment, growth, and survival, either through directcontrol or by the communication of good will”. This resonates particularly well withsocial and environmental disclosure studies as many of these have moved away from alegitimating to society view, towards a legitimating to stakeholders, or “conferringpublics” approach (O’Donovan, 2002). Hybels (1995, p. 244) identifies four criticalorganisational stakeholders, each of which control a number of resources. These aresummarized in Table I.

The media has received considerable attention in the literature (Ader, 1995; Brownand Deegan, 1998). The power of the media has been noted by a number of researchers,including Patten (2002, p. 153), who states:

[. . .] that while increased media attention can certainly lead to the potential for increasedpressures from any of the three sources [dissatisfaction of public; new or proposed politicalaction; increased regulatory oversight], increases in pressure can also arise, particularly withrespect to regulatory oversight.

The public is often discussed in the literature recognising that one of the reasonscompanies try to manage their legitimacy is because it “helps to ensure the continuedinflow of capital, labour and customers necessary for viability” (Neu et al., 1998, p. 265).However, only a few attempt to directly measure the effect of the financial community oncorporate social disclosure (CSD) (Deegan and Rankin, 1997; Milne and Patten, 2002).Findings have indicated that CSD “forestalls regulatory activities by the state that mightoccur in the absence of legitimacy (and) pre-empts product boycotts or other disruptiveactions by external parties [. . .] By mitigating these potential problems, organisationallegitimacy provides managers with a degree of autonomy to decide how and wherebusiness will be conducted” (Neu et al., 1998, p. 265). This is significantly different from theview of Stanton and Stanton (2002, p. 491) who consider legitimacy theory as“corporations [being] controlled by community concerns and values”. Thus, instead oftrying to directly measure legitimacy via subjective interpretation of reporting, it has beenargued that it can be measured in terms of the resources relevant stakeholders provide.

Stakeholder Resources controlled

The media Few “direct resources” however can substantially influence thedecisions of two (if not three) previous groups

The public Patronage (as customer), support (as community interest), labourThe financial community InvestmentThe state Contracts, grants, legislation, regulation, tax (note that the last three of

these could be either a “negative” or “positive” depending on theimplementation)

Table I.Critical organisational

stakeholders

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Researchers have tended to implicitly look for circumstances that (drawing on thedefinition of legitimacy given by Dowling and Pfeffer (1975) cited earlier) create anobvious disparity between the firm and the expectations of society. An example is thecase of the Exxon Valdez oil spill (Patten, 1992). As Deegan et al. (2002, p. 319) haveobserved:

[. . .] when significant events such as a major environmental disaster occur, or when there issustained mass media interest, then it is reasonable to assume that most managers wouldperceive that the organisation’s ongoing legitimacy is threatened.

This still casts legitimacy as a quality of the firm whereas what this paper contends isneeded (and perhaps has not been done enough yet) is to examine more of these eventsand measure their effects on resources. Regulation has been considered in a few papers(Cooper and Owen, 2007; Buhr, 1998) as discussed later. This study attempts to fill thegap by operationalising proxies for some of the resource flows controlled bystakeholders outlined in Table I.

Phases of legitimacyThe final level of resolution within legitimacy theory can be described as a refinementto organisational theory as it suggests that a firm will go through various phases withregard to its legitimacy. There are four generally accepted phases within this strategiclegitimation process (Ashford and Gibbs, 1990; Hearit, 1995). (The model proposed inthis paper adds two additional phases, discussed later.)

Establishing legitimacyThis first phase represents the early stages of a firm’s development and tends to revolvearound issues of competence, which is predominantly about organisational effectivenessto ensure that it meets the needs of its market, and can meet its obligations (Hearit, 1995).Failure to do this will obviously result in a loss of legitimacy with traditionalstakeholders (suppliers, customers, creditors, etc.), but as Hearit (1995, p. 2) points out:

Financial viability, however, is not the sole arbiter of competence; more critically, acorporation must meet socially constructed standards of quality and desirability as well asperform in accordance with accepted standards of professionalism.

Maintaining legitimacyOnce legitimacy has been established, firms generally enter the maintenance phase.Ashford and Gibbs (1990, p. 183), list maintenance activities as including:

. ongoing role performance and symbolic assurances that all is well; and

. attempts to anticipate and prevent or forestall potential challenges to legitimacy.

However, legitimacy is a dynamic construct and thus the maintenance of legitimacy isnot as easy as it may at first appear. The expectations of communities change overtime, requiring a firm to be responsive if it is to continue to be legitimate. One form ofresponse includes reporting or disclosure to inform their publics that they are alsochanging (or reasons for not changing) (Deegan et al., 2002). “Changing activitieswithout communicating such changes is considered to be insufficient” (Deegan et al.,2002, pp. 319-20).

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Extending legitimacyWhile many firms may remain in the maintenance phase, they may encounter a need toextend their legitimacy due to changing circumstances. For example, if an organisation“is entering a new domain of activity or utilizing new structures or processes” (Ashfordand Gibbs, 1990, p. 180). Legitimation activities in this phase are often “intense andproactive as management attempts to win the confidence and support of wary potentialconstituents” (Ashford and Gibbs, 1990, p. 180).

Defending legitimacyThe defence phase is the one that has tended to be the main focus of accountingresearchers, and represents the attempts by organisations to provide some responsewhen their legitimacy is “threatened or challenged” (Ashford and Gibbs, 1990, p. 183).

It is this phase that provides us with an opportunity to examine the crucial linkbetween legitimacy and resources, which is the major focus of this paper. It is likely inthe western capitalist system that almost every corporation will regularly need todefend its legitimacy, by the mere fact that (Hearit, 1995, p. 3):

[. . .] corporations must fulfil both a competence and community requirement to realizelegitimacy [. . .] Satisfaction of stockholder interests often occurs at the expense of communityconcerns (e.g. the despoiling of the environment, the use of labour) while, conversely,responsibility to the larger community often occurs at the expense of the stockholder.

Social and environmental accounting papers focusing (either explicitly or implicitly) onthe defence of organisational legitimacy have tended to draw on Lindblom (1994) whoidentifies four strategies that a company can use to defend its legitimacy:

(1) Change itself. The organisation seeks to inform and educate the “relevantpublics” about actual changes within the organisation.

(2) Change the public. The organisation seeks to change the perceptions of therelevant publics, but does not see a need to change its own behaviour.

(3) Manipulation. The organisation seeks to deflect attention from issues of concernto other issues. For instance, highlighting links with charity.

(4) Misrepresentation. The organisation may go as far as not being totally truthfulabout its activities that are of concern to the “relevant publics”.

These last two strategies, which as seen later in this paper, appear to have beenparticularly relevant to the tobacco industry, are discussed in detail by Ashford andGibbs (1990, especially p. 180). Also Harte and Owen (1991, p. 59) note:

The need for such an enhancement of credibility is suggested by earlier research indicatingthat social information provided within annual reports tends not to be directly related toquality of actual performance and can indeed by positively misleading.

Some interesting additional observations can be noted particularly in light of theirpotential relevance to the tobacco industry. Abrahamson and Park (1994, p. 1302) haveidentified that in terms of the “negative event” which has led to threatened legitimacy,at least one (if not both) of the following communication strategies can be expectedfrom management: “first, officers interpret the negative outcomes that they do reveal toshareholders in ways that shift the blame for those outcomes away from themselves”and “second, officers may conceal negative outcomes entirely”.

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Hearit (1995, p. 6) observes that:

[. . .] re-legitimation [. . .] typically require[s] a dual strategy of a positive and a negativerhetoric. Corporations seek to distance themselves from their illegitimate behaviours and thencreate identifications with the public values they are reputed to have violated.

The paper goes on:

One way to deny wrongdoing is through the use of an opinion/knowledge dissociation, whichchallenges the validity of the charges by redefining them as groundless. Here, a companyasserts that critics’ claims are mere opinions and do not represent fact (Hearit, 1995, p. 7).

He argues that this can be much more effective than a mere denial. Both concealment ofnegative outcomes and knowledge dissociations have been regular techniques employedby the tobacco industry in dealing with the smoking and health issue (Pringle, 1998).

Figure 1 shows a model representing these four phases of legitimacy that a firmmay undergo. The dotted arrows indicate that not all firms enter all phases. Afterdiscussion of the results of the empirical analysis conducted in this paper, this model isexpanded to introduce two additional phases implicated by the observed results. Priorto presentation of the analysis however, it is important to review the prior literature onlegitimacy and annual report analysis.

Literature reviewLegitimacy, accounting and the annual reportThe link between accounting research and legitimacy theory revolves around theannual report and related disclosures. Gray et al. (1995, p. 82) discuss the use of thisfocus on the annual report in some detail and conclude that the focus is justifiable.Their argument is that the annual report is not only a statutory document but also is infact “the most important document in terms of the organisation’s construction of itsown social imagery”. The annual report “uses the tools of management, marketing andcommunication theory to construct a picture of the organisation” (Stanton and Stanton,2002, p. 478). This “picture” is viewed by a wide audience and:

provide[s] organisations with an effective method of managing external impressions. Annualreports are a primary information source for investors, creditors, employees, environmentalgroups and the government” (Neu et al., 1998, p. 269).

This view is also supported by Mangos and Lewis (1995, p. 56) who state that “corporatesocial responsiveness as demonstrated within the content of corporate annual reports isboth a visible and measurable social influence”. They also argue, in terms that could beseen as supportive (or at least suggestive) of legitimacy theory, that:

[. . .] corporate social responsibility is a form of corporate social responsiveness by themanagers of a firm to pressures which they perceive and the managers then attempt toinfluence the social environment. Managers’ accounting choice and literate response in

Figure 1.Phases of legitimacy

MaintenanceEstablishment

Defence

Extension

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annual report form part of the corporate social responsiveness within the economic activity(Mangos and Lewis, 1995, p. 54).

It must be acknowledged, however, that this focus on annual reports is not universallyaccepted. Zeghal and Ahmed (1990, p. 51) have criticised the narrow approach taken bymany researchers as their “research indicates that the description provided by theannual reports of social information disclosure by a company may not be complete”.They claim that companies use many different media to make disclosures, and theselection of media and message are very targeted. By only focussing on one documentsource researchers may be drawing incomplete conclusions. Zeghal and Ahmed (1990,p. 39) state that:

[. . .] one cannot judge corporate performance on social responsibility solely on the basis ofinformation disclosed in the annual reports. Social information disclosure may also take placethrough company staff newspapers, press releases, paid newspaper, television and radioadvertising and company brochures.

Robertson and Nicholson (1996, p. 1099) also express concern about the emphasis onthe annual report, their concern being that:

Cynics of corporate intentions may consider all corporate social responsibility disclosure as“lip service” or “window dressing”. Cynicism seems justified when descriptions of corporatesocial responsibility across a range of annual reports from different companies read asthough they were written by the same person, and are so general as to be meaningless.

In terms of legitimacy theory, however, this paper does not assume any link betweenthe annual report disclosure and actual performance. The annual report is a documentwhere the organisation communicates the information it wishes to have publiclyavailable. “In legitimising its actions via disclosure, the corporation hopes ultimately tojustify its continued existence” (Guthrie and Parker, 1989, p. 344). Also it isacknowledged that examining a range of corporate communications from a legitimacyperspective would be useful, however this paper is limited in scope as, during theperiod under consideration, there were no separate social reports produced by anytobacco company[1] and it was not feasible to obtain internal brochures or advertising.Neu et al. (1998, p. 269) examined the disclosures of Canadian mining companies andconcluded that:

Although organisations utilize a variety of textually-mediated communication media such asbrochures and advertising in an attempt to, inter alia, sustain legitimacy, the annual reportappears to be the preferred method for communicating with the [. . .] relevant publics asopposed to the general public.

Empirical studies of legitimacy theory and CSD in annual reportsOnly a few researchers have specifically undertaken detailed studies examiningevidence of the operation of legitimacy theory in the annual reports of companies.Fewer still have used specific measures of resource flows to establish quantifiableproxies for the measurement of legitimacy. The conclusions have been generallyaffirming (but not always, see below). Buhr (1998) examined a 28 year history of theFalconbridge foundry in Canada and its struggles in managing sulphur dioxideemissions. She concluded that “an evolution in disclosure [in the annual report]supports legitimacy theory” (Buhr, 1998, p. 186).

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In another study (Deegan et al., 2000) five major incidents (including the ExxonValdez oil spill and the Bhopal disaster) provided a context in which to examine theannual reports of related (in industrial terms) Australian firms to see if there had been asignificant change in their social or environmental reporting. They concluded:

The results of this study are consistent with legitimacy theory and show that companies doappear to change their disclosure policies around the time of major company and industryrelated social events. [. . .] These results highlight the strategic nature of voluntary socialdisclosures and are consistent with a view that management considers that annual reportsocial disclosures are a useful device to reduce the effects upon a corporation of events thatare perceived to be unfavourable to a corporation’s image (Deegan et al., 2000, p. 127).

Two studies have been undertaken into the Australian mining company BHP’s annualreport disclosures. The first is one of the earliest studies into the connection beenlegitimacy theory and the annual report. Guthrie and Parker (1989) examined thecorrelation between specific types of annual report disclosures and a detailed history ofsignificant events at BHP. They concluded that (Guthrie and Parker, 1989, p. 350):

The evidence examined in this historical case study has failed to confirm legitimacy theory asan explanation of BHP’s Corporate Social Reporting (CSR) over time. In general, littlecorrespondence was found between peaks of BHP’s CSR disclosures and key socio-economicevents affecting BHP during its operating history.

This became the trigger for Deegan et al.’s (2002, p. 313) study, which given the successof other papers in finding support for legitimacy theory considered “whether there[was] something different about BHP, or whether Guthrie and Parker’s measure forcommunity concern was mis-specified”. They argued that the original Guthrie andParker (1989) paper, by focusing on historical events without contextualisation ofcommunity awareness, had not provided a good measure.

To establish community awareness Deegan et al. (2002) employed media agendasetting theory, which emphasizes the importance of the media in informing the publicabout specific issues. This is closely aligned with the importance of the media in thestrategic conception of legitimacy theory discussed earlier. A study by Ader (1995,p. 310), which specifically examined the salience of environmental issues in the media,but which has wider ramifications, concluded that “The public needs the media to tellthem how important an issue the environment is. Individuals do not learn this fromreal-world cues”. It is also interesting to note that this paper concluded there was not astrong link between actual environmental performance and media interest. AlthoughAder (1995) did not look at how firms reacted to the increased media attention, anumber of papers have found a significant and positive relationship between mediadisclosure (both negative and positive) and both social and environmental reporting.See for example, Cormier and Gordon’s (2001) study of Canadian utility companies. Anearlier paper by Deegan et al. (2000, p. 105) had discussed the links between mediaagenda setting theory and legitimacy theory:

How corporations maintain their legitimacy, perhaps through corporate social disclosure, isinfluenced by management perceptions of the threats to its legitimacy. The source of thesethreats to legitimacy can often come from the media [. . .] Evidence indicates thatmanagement react to adverse media coverage, and use corporate disclosures as a strategy toalleviate the potentially adverse effects caused by negative media coverage.

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Based on an examination of BHP’s social and environmental disclosure and comparisonwith newspaper reports Deegan et al. (2002) concluded that their results showed thathigher levels of print media coverage were associated with higher levels of specific socialand environmental disclosures (and vice versa) made by BHP in its annual reports andthat management did indeed release positive information in reaction to unfavourablemedia attention. They concluded with the observation that “These results, then, lendsupport to legitimation motives for a company’s social disclosure” (Deegan et al., 2002,p. 333).

The tobacco industry and legitimacyOnly a couple of studies have been undertaken that consider social and environmentalreporting in the tobacco industry. Campbell et al. (2003) present a longitudinal study(20 years) of three sectors (including tobacco), and while comparisons must beinterpreted with some caution[2], the methodology is similar enough to discuss thedifferences in results. Whilst similar disclosure patterns to those found in this study forthe tobacco industry are observed by Campbell et al. (2003, p. 574) in the Englishcontext almost opposite conclusions are reached, concluding that legitimacy theory “isdifficult to defend as a possible explanation of social disclosure”. However, theirconceptualisation of legitimacy theory is based on a normative gauge of legitimacy asopposed to a more objective measure as per the work of Hybels (1995) alreadydiscussed – the authors themselves describe their study as a “crude test of legitimacytheory” (Campbell et al., 2003, p. 570). A different measure could deal with the concernsof “perceptions” they raise (p. 562). In addition, as shown later, the fall in disclosure bythe tobacco industry seen as being unsupportive of legitimacy theory by Campbell et al.(2003) has been explained in a legitimacy framework in other contexts (de Villiers andvan Staden, 2006).

Moerman and van der Laan (2005, p. 385) analysed the 2001/2002 Social Report ofBritish American Tobacco (BAT) and concluded that BAT used social reporting as a“management strategy to forestall the introduction of more onerous regulation and toobfuscate or deflect poor social performance”. Their results therefore supported alegitimacy motive for the disclosures due to a threat to their legitimacy.

There can be little doubt that the tobacco industry has faced a consistent andgrowing threat to its legitimacy worldwide since the negative link was establishedbetween smoking and health. The two watershed documents were the 1962 BritishRoyal College of Physicians report and the 1964 Surgeon-Generals Report (USA), whichboth concluded that cigarette smoking was directly related to lung cancer and anumber of other diseases (see discussion in Gately, 2001, esp. Chapter 16). Bothreceived wide ranging publicity, and both had an immediate impact on cigarette sales(Taylor, 1984, see esp. pp. 9-11). This was the starting point for an increasing range oflegislative measures aimed at regulating tobacco use around the world. In theAmerican context Miles (1982, p. xiii) observes that:

The smoking-and-health controversy posed one of the most significant threats in the USbusiness history to the well being of an established industry. It exposed members of thedomestic tobacco industry not only to an unprecedented wave of unwanted scrutiny andpublicity, but to a long and cumulative series of government regulations restricting theirability to do business. It hurt their pocketbooks. It took away their access to the publicbroadcast media. It put warning labels on their products. It forced them into unfamiliar

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domains. And it threatened the careers of their senior managers. Just as important, ittarnished their image and wounded their pride.

Miles (1982, p. xiii, emphasis added ) goes on to add that “In short, thesmoking-and-health controversy amounted to a legitimacy crisis of fundamentalproportions for the tobacco Big Six”. This view is echoed by Davidson (1991, p. 49) whostates that “Perhaps, no industry has been subjected to such serious erosion of itslegitimacy as the tobacco industry”. Both Miles (1982) and Davidson (1991) also discussin a management context the processes by which tobacco companies attempted to meetthis threat, within the broad framework of legitimacy, though no mention is specificallymade of the annual reports of the companies. Internationally, BAT was noted to respondto the World Health Organisation’s “framework convention on tobacco control” byredefining their image as a responsible organisation, proposing a voluntary code formarketing, and by releasing a social responsibility report (Burton and Rowell, 2002, p. 6).“With the release of the [Royal College of Physicians’ and Surgeon-General’s] reportson smoking and health, Australian medical and health organisations immediatelycalled for government action” (Quit, 1995, introduction). Australia appeared to follow asimilar path to the rest of the Western world in terms of the legitimacy crises fortobacco companies.

MethodThis paper presents a longitudinal analysis of Rothmans Holding Ltd (also known asRothmans of Pall Mall), hereafter referred to as Rothmans. The company wasincorporated in Australia in 1955. It was one of a tripartite of firms that dominated theAustralian tobacco market (the other firms being W.D. and H.O. Wills, and PhillipMorris) each with about one third of the market. Its Winfield brand came to be the clearleader in the cigarette market during the 1980s and 1990s (Quit, 1995, The tobaccoindustry in Australia). In 1999 Rothmans announced a merger with W.D. and H.O. Wills,which ultimately led to the delisting of Rothmans as a company and the emergence ofBAT – Australia in 2000. This study only considers the period 1955-1999, theRothmans’ years. Mergers and takeovers bring with them different variables that couldaffect the subject under study, therefore analysis of reporting after the merger is beyondthe scope of this paper. The 43 year period of Rothmans reports provided an opportunityto study the changes in disclosure by one company without possible contaminationthrough the integration of different corporate values, strategies and personnel.This study responds specifically to the suggestions of Hybels (1995, p. 244, emphasisadded):

Rather than engage in the further development of entirely abstract constructions of thelegitimation process, I have advocated focusing on linkages to the concrete details of specificorganizational situations. To this end, I have suggested that, to obtain images of legitimationprocesses, researchers should investigate the flow of resources from organizationalconstituencies as well as the pattern and content of communications.

After an initial qualitative examination of disclosures in the annual report, examined inthe context of relevant events, a more detailed quantitative analysis is undertaken inthe vein suggested by Hybels (1995) above. The method employed to develop thedependent variable (annual report disclosure) is content analysis (Krippendorff, 1980),which has been widely used in studies on annual reports in the areas of social and

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environmental reporting (Guthrie and Mathews, 1985; Guthrie and Parker, 1990;Zeghal and Ahmed, 1990; Hackston and Milne, 1996). While not without its critics,(Riffe et al., 2005), content analysis is considered an appropriate technique in particularcircumstances: when data accessibility is a problem or the investigator is limited todocumentary evidence, or when time or space restrictions do not allow direct access tothe subjects of the investigation (Holsti, 1969). In addition, content analysis is mostappropriate when “[. . .] the subject’s language is crucial to the investigation” (Holsti,1969, p. 17) and when the volume of material to be analysed is large, as it provides asystematic approach to coding and classifying the data (Holsti, 1969). In this study, alarge amount of documentary evidence is available for the 43 year period, and thelanguage used goes directly to the issues of legitimacy being explored.

The content analysis determines “the pattern and content of communications”,described by Hybels (1995, p. 244). The independent variables considered include:media attention (measured in a way similar to studies described earlier, such as Deeganet al., 2002); government sanction; and taxation, which are used to “investigate the flowof resources from organisational constituencies” (Hybels, 1995, p. 244). In addition,profit is included as a control variable as this has been found to be highly correlatedwith social and environmental disclosure in other studies (for a review see Gray et al.,1995)[3].

The following sections outline how each variable was measured. The level ofdisclosure is then correlated with each variable using Spearman’s Rho and presented inthe results section.

Annual report analysisThe Australian annual reports of Rothmans were gathered for the entire time that thecompany was listed in Australia (1955-1999). Reports for the years ended 1956-1998were obtained (43 reports). They were then read in their entirety to identify instances ofvoluntary social or environmental disclosures using a coding scheme based onsentences. Each sentence read was highlighted as being a social and/or environmentaldisclosure or not.

Those sentences identified as social or environmental disclosures were thensub-classified by emergent theme. Only four categories appeared to be present over theentire 43 years (employees, community, health and philanthropy). The distribution ofdisclosure (number of sentences) is shown in Figure 2. The nature of these disclosureswill be discussed in more detail in the first part of the results section that follows. Notethe spike in disclosure in 1980 can be explained by the fact that this was a special 25thanniversary annual report which was much larger than usual.

Dependent variables obtained from annual reports and used in the analysis thatfollow include: disclosure of all social and environmental sentences (disclosure), andsocial and environmental disclosure excluding any employee-related sentences(SocDisc). This second variable was introduced because reports up to the year 1962only included employee-related disclosures, thus exclusion of these allows moreaccurate longitudinal comparisons.

Lagged profit figures, for use as a control variable, were also taken from the annualreports and indexed by the consumer price index to form the profit variable (L-profit).Lagged profit was used rather than current profit to account for the time dimension –social activities, particularly philanthropic activities, are funded from previous year’s

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profits (Gray et al., 1995; Hackston and Milne, 1996) and disrupts any correlationbetween the variables.

The other independent variables (measures of resource flows) are specified formedia and government sanctions as discussed above. A description of theirdevelopment and measurement follows.

Media disclosureMeasurement of attempts by the media to control resources is proxied by the level ofmedia attention the industry received, following Deegan et al. (2002). A measure of thenumber of media articles that was published on tobacco/cigarettes in any given yearwas determined using the Australian Public Affairs Information Service data base.Started in 1955, with the aim of being “a guide to current material on Australianpolitical, economic and social affairs” (preface to the first APAIS volume), the databaseindexes “significant articles” on a variety of subjects (including tobacco and cigarettes)from a range of printed Australian sources including, but not limited to, governmentpublications, newspapers, and magazines. Although representing only a sample ofAustralian sources the database is reasonably indicative of the level of media attentiongiven to a specific subject in a given year.

For each year under study the database was examined using the keywords“tobacco”, “Rothmans”, “cigarettes” and “smoking”. The relevant articles listed wereclassified as being industry (generally neutral or pro-tobacco in tone focused oncommercial issues, usually growing of tobacco), health (clearly focused on the linkbetween smoking and health, also articles on teenage smoking or smoking whilstpregnant), or anti-smoking (not explicitly about the health aspects of smoking butgenerally anti-smoking) based on their title and abstract, (Figure 3). It should be notedthat the range of sources sampled each year changed, so all statistical calculations arebased on this information after converting it to a percentage of all articles, rather thanusing absolute figures.

Figure 2.Number of social andenvironmental sentencesper annual report

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Independent variables used in the analysis obtained from the media disclosuresinclude: the number of articles on “tobacco” expressed as a percentage of total articles(percent articles), and the percentage of articles on “health and tobacco” expressed as apercentage of total articles (HealthArticles).

Government sanctionsIn order to provide a measure of resources controlled by government, proxy (dummy)independent variables were was used for the introduction of government regulation(restriction) and the introduction of a change in excise (excise). These variables wereassigned an initial value of zero. Restriction increased by one each time a new majorregulation is introduced (see the Appendix, for a timetable for the introduction of eachmajor commonwealth regulation of smoking). Excise increased by one each time a risein excise occurs. These proxies provide crude measures of control of resources by thegovernment, and are chosen based on those identified by Hybels (1995). Furtherrefinement of these variables is an important area for future study.

Results and analysisQualitative discussion of the annual report disclosuresBefore undertaking the quantitative analysis of the annual report disclosures it isworth reviewing briefly the relevant content of the reports to present a broad picture oftheir focus. This analysis is in no way intended to be comprehensive but rather tohighlight interesting developments in light of legitimacy theory.

Disclosures relating to employees first appeared in 1958 as a separate section andfollowed a fairly standard pattern most years, generally thanking staff for theircommitment, identifying that the company led the way in training, pay and conditions,and often citing good relations between the company and the unions:

Staff: Being a new Company, a great deal of time has been devoted to training staff, andeverything possible has been done to provide model condition for all employees.

Figure 3.Number of tobacco and

cigarette articles in APAISdatabase

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The enthusiastic team-work in every section of the organization has been outstanding andwarrants special mention (Employee Related Disclosure in 1958 Annual Report).

In 1963 social disclosure of a much more general nature (than just employees) appears.Interestingly, this is the same financial year as the first major adverse report onsmoking and health. A new section was added at the end of the annual report entitled“Helping Australia’s Progress” (pp. 20-2) and within this a page was dedicated to “TheCompany as a Citizen” (p. 22) (Figure 4). It states that “Participation in many fields ofnational and civic interest continues to be a feature of activities”, and goes on to outlinethe Rothmans University endowment fund, and other educational programs withwhich it was involved. There is also discussion of the company’s sponsoring of the1962 Commonwealth Games in Perth and other support given to a range of amateursporting associations. 1964 sees a similar section (p. 18), focusing in that year on thesetting up of the Rothmans National Sport Foundation.

Much more interestingly, in 1964 for the first and last time there is a section of theDirector’s Report headed “smoking and health” (pp. 4-5). In part it says:

This is a highly scientific question and, therefore, a difficult one for the public to understandfully. The great mass of publicity has been directed against cigarette smoking, but very little

Figure 4.Page 22 of Rothmans’ 1963annual report

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publicity has been accorded to statements by many other eminent scientists and doctors whodo not accept the American and British reports as conclusive [. . .] [Such dissention] is anindication of the extreme uncertainty which surrounds the accusations.

This would appear to be an attempt at knowledge dissociation as discussed earlier inthe paper.

From 1966 to 1971 the disclosures remain fairly consistent, focusing on the variousspecific company activities associated with sports, fine arts and education. Then in1972 (the year compulsory health warnings were introduced) there is no mention ofsocial activities. From 1973 onwards the focus shifts to the three Rothmans’foundations (The Rothmans National Sport Foundation, The Rothmans UniversityEndowment Fund and The Peter Stuyvesant Trust for the Development of the Arts).One significant difference is the 1980 annual report, which was presented more as ahistory of Rothmans’ 25 years in Australia. It contained a substantial section oncommunity service (pp. 14-5). In 1995 the last social disclosure is made, referring to thework undertaken by the Rothmans Foundation in Australia, and states that thedecision to close the foundation “was made in light of the adverse impact ofanti-tobacco legislation which had severely hindered the Foundation in its work”. Nomore disclosures of a social kind were made in the annual reports of Rothmans.

The tobacco industry in general, and Rothmans specifically, had one major threat toits legitimacy: the smoking and health issue. Other than in 1964 it choose not to engagewith this issue, instead focusing on community service and charitable works. Thiscould appear to be an attempt to engage in Lindblom’s (1994) third strategy, trying toget the community to accept the company’s legitimacy, not in terms of the health issue,but instead highlighting the organisation’s engagement in good works, thereforetrying to bolster its position as a legitimate organisation without having to engage inchange. Ultimately this would appear to have failed, at least to the extent that theindustry is now highly regulated, scrutinized and taxed, although it continues tosurvive. When there no longer seemed to be value in even trying to defend legitimacy,the analysis suggests the company ultimately gave up its charitable communityinvolvement and reporting on it. This issue is now explored in more detail throughquantitative means.

Quantitative analysis of annual report disclosuresDisclosure and media attention. An initial analysis shows that the variable of interest(disclosure) is not correlated with profit (a factor often examined in accountingliterature as possibly being associated with Social and Environmental Disclosure(Cowen et al., 1987; Hackston and Milne, 1996; Owusu-Ansah, 1998) and is therefore notbiasing results. Against initial expectations however, disclosure is negativelycorrelated with the number of media articles (as a percentage of all articles publishedthat year) at a p , 0.01 (Table II).

This is not easily explained and certainly provides prima facie evidence to rejectDeegan’s assertions regarding legitimacy and media theory in this industry. It isinteresting to note the significant positive correlation between the company’s profitand the number of articles written about the company generally.

Given that the threat to legitimacy came directly from the smoking and healthdebate which started in 1962 (affecting the annual report from 1963 onwards) and, asdiscussed earlier, the company’s response appears to have revolved around increased

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disclosure of a social nature, particularly in regards to philanthropy and corporatecitizenship, a more specific set of correlations is considered. The correlation betweensocial disclosure (excluding disclosures that are employee related) and articles relatingto Tobacco and Health for the period after 1962 are provided in Table III.

Again social disclosure can be seen to be significantly correlated with the number ofarticles relating to health at less than the p ¼ 0.01 level. The concern remains that theyare negatively correlated. This negative relationship between articles and disclosurecontradicts expectations based on previous findings raising the question of whetherRothmans is significantly different from the average firm. Brown and Deegan (1998,p. 33) suggest that legitimacy theory may not be appropriate where:

Disclosure I-Profit %articles

Spearman’s Rho Disclosure (all social and environmentaldisclosure in annual report)

Correlation coefficientSig. (two-tailed)N

i-Profit (accounting profit indexed by CPI)Correlation coefficient 0.019Sig. (two-tailed) 0.900N 44

% Articles (percentage of articles relating totobacco)

Correlation coefficient 20.399 * 0.530 *

Sig. (two-tailed) 0.007 0.000N 44 44

Note: *Correlation is significant at the 0.01 level (two-tailed)

Table II.All disclosure andarticles – correlations forRothmans (1956-1999)

SocDisc Health art I-Profit

Spearman’s Rho SocDisc (social (less employeerelated) disclosure)

Correlation coefficientSig. (two-tailed)N

Health articles (percentage ofarticles relating to health andtobacco)

Correlation coefficient 20.458 *

Sig. (two-tailed) 0.004N 37

I-Profit (accounting profit indexedby CPI)

Correlation coefficient 20.349 * * 0.760 *

Sig. (two-tailed) 0.034 0.000N 37 37

Notes: Correlation is significant at: *0.01; * *0.05 level (two-tailed)

Table III.Specific social disclosuresand health-related articlescorrelations forRothmans (1963-1999)

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[. . .] there is a possibility that dominant players in some industries had strategically plannedthe timing and format of their environmental disclosures in a bid to manipulate or shapecommunity perceptions and concerns [. . .] rather than simply reacting to changes incommunity concerns [. . .] Hence, assuming that a relationship between media attention andannual report environmental disclosures holds across all industries may be a simplisticassumption.

Although the possibility that Rothmans is not simply reacting to media attention,would seem to fairly describe their situation, before accepting this conclusion it isworth considering whether there is an alternative factor operating that is overridingthe normally expected relationship. It is postulated that the introduction of governmentsanctions, such as regulation or taxation, over the period represents control of resourceflows, and these are therefore explored next.

Disclosure and government sanction. Figure 5 shows visually the relationshipbetween disclosure, health articles and a third factor “government regulation” (see theAppendix). This clearly shows the generally downward trend in social disclosure(trend line indicated by dashed-line) and suggests a relationship with governmentregulation (vertical black lines).

When correlations are run using a dummy variable, representing new majorregulation, there does appear to be a correlation, again however, the relationship isnegative (Table IV), and this correlation is stronger than the correlation with mediadisclosure.

Regulation is just one of the resources related to government. Another importantconsideration is taxation. An analysis taking into account change in excise, shows avery strong correlation with social disclosure and, again, the correlation is negative(Table V).

While these results appear to contradict previous studies on firms that aredefending their legitimacy, the negative correlations may not be the surprise they firstappear. An alternative explanation leads us to consider a possible fourth phase oflegitimacy, during which the defensive legitimisation strategies observed in otherstudies are not apparent.

Figure 5.Disclosure, health articles

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Extension of the legitimacy modelConsider that instead of a company defending its legitimacy (the third phase identifiedas part of organisational legitimacy theory earlier in the paper), there is actually afourth phase to consider, that of an organisation losing legitimacy over a period oftime. This view (given previous discussion on the tobacco industry) could be argued tobe an accurate description of the situation faced by the tobacco industry at large, andRothmans particularly. This fits interestingly with some ideas expressed byO’Donovan (2002, p. 350) who argues that:

A potential problem arises if one is to test which tactics are used to maintain legitimacy. Adistinction needs to be made between corporations with different levels of legitimacy tomaintain. If a corporation is accepted as a good corporate citizen, acts responsibly or even in aproactive manner in regard to social issues, the public will have certain expectations inrelation to the organization’s social and environmental activities. The less “legitimacy” anexisting organization has to begin with, the less it needs to maintain.

SocDiscHealthart Restriction

Spearman’s Rho SocDisc (social (less employee related)disclosure)

Correlation coefficientSig. (two-tailed)N

Health articles (percentage of articles relatingto health and tobacco)

Correlation coefficient 20.458 *

Sig. (two-tailed) 0.004N 37

Restriction (dummy variable for each newmajor regulation)

Correlation coefficient 20.521 * 0.784 *

Sig. (two-tailed) 0.001 0.000N 37 37

Note: *Correlation is significant at the 0.01 level (two-tailed)

Table IV.Specific social disclosureand governmentregulation correlationsfor Rothmans (1963-1999)

SocDisc Excise

Spearman’s Rho SocDisc (social (less employee related) disclosure)Correlation coefficientSig. (two-tailed)N

Excise (as a dummy variable)Correlation coefficient 20.550 *

Sig. (two-tailed) 0.000N 37

Note: *Correlation is significant at the 0.01 level (two-tailed)

Table V.Specific social disclosureand government excisecorrelations forRothmans (1963-1999)

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Based on experimental evidence, elicited through a series of vignettes, O’Donovan(2002) found that the lower the perceived legitimacy of the organisation, the less likelyit was to bother providing social and environmental disclosure:

One would expect a corporation with the characteristics betrayed in this vignette [lowlegitimacy, e.g. weapons manufacturer] not to be too concerned about legitimacy motives inannual report disclosures [. . .] A recurring theme in arguments supporting no disclosure wasthat the corporation was complying with all of the current laws and regulations, therefore itdid not need to do any more than that to maintain whatever “poor” reputation it already had”(O’Donovan, 2002, p. 361).

It would appear that this paper, by examining the tobacco industry, has found someempirical evidence of these different disclosure strategies within a single industry whichmoved from relatively high legitimacy to relatively low legitimacy. This provides apotential explanation for the negative relationship between voluntary corporate socialdisclosure and various measures of stakeholder resources (reflecting decreasinglegitimacy), abutting well with legitimacy theory as characterised earlier in the paper.This conclusion is supported in recent work by de Villiers and van Staden (2006, p. 779)who examine the South African mining industries and who find evidence of “reduceddisclosures as a legitimising strategy”. In their paper, de Villiers and van Staden (2006)summarise circumstances when an organisation is likely to reduce its disclosures as alegitimating strategy, and include the circumstance of changing from a phase of gaining(or extending) legitimacy to one of maintaining it. The results of this study suggest thatthis could be extended to include other changes in legitimacy states, such as movingfrom a defence phase, to a loss phase, where managers may “perceive disclosure to beuseless in the legitimation effort” (de Villiers and van Staden, 2006, p. 767).

A firm that is in the loss phase, is then likely to either move to some form ofdisestablishment, or begin to build its legitimacy once again, in a sense returning to theoriginal establishment phase shown in Figure 1. Figure 6 shows the extension thisstudy adds to the model graphically.

ConclusionsThis paper has examined the social disclosures made by Rothmans, in the context of thetobacco industry, over almost 50 years. Its findings, both qualitative and quantitative,are significant in that they add weight to the argument that there is a legitimacy

Figure 6.Extended phases

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motivation, at least in part, underlying the voluntary social disclosures(or non-disclosures) made by firms. The qualitative analysis suggests that thevoluntary social disclosures made in the annual reports of Rothmans may have beenprovided with a view to counteracting the potentially negative consequences to thefirm’s legitimacy of the smoking and health debate, supporting the traditional view thatfirms engage in legitimising strategies, including increased disclosure, when faced witha threat.

Though the initial findings of the quantitative analysis were contrary toexpectations based on previous empirical research, additional review in light of furthertheoretical development could still support a legitimacy explanation for this company,albeit a state of decreasing legitimacy. This conceptualisation of legitimacy, discussedrecently by de Villiers and van Staden (2006), has as yet received little further attentionin the literature. Increased focus on a resource-based understanding of legitimacy, asoperationalised in this paper, may help develop the ideas further and increase ourunderstanding of firms’ social disclosure.

It is interesting to note at this stage that while the study has been limited to a singlecompany, social disclosure by the UK-based tobacco company BAT as indicated inCampbell et al. (2003, Figure 2, p. 569) shows a similar disclosure pattern to that foundin this study. Cursory analysis of the history of the UK legislative environment fortobacco shows a similar evolution to that in Australia. This would seem to providepreliminary evidence that the findings of this study may apply more broadly, at leastin the tobacco industry, and more research on this industry in other countries will beimportant to support or refute this notion.

This paper has contributed to the literature on legitimacy theory by taking theanalysis beyond the use of a subjective analysis of voluntary disclosures as hasappeared in most work of this nature to date, to include a more robust measure oflegitimacy based on resource flows. The results provide a basis for the possibleextension of the legitimacy model to include two additional phases not previouslyconsidered in the literature.

LimitationsLike all studies, this analysis has limitations. The use of a single company, theselection of the time period analysed, and the choice of methods all contribute potentiallimiting factors. Content analysis has been criticised for placing “too much emphasison comparative frequency” (Riffe et al., 2005, p. 36) so more case studies that focus onqualitative information is needed. In addition, the media proxy is based on quantityonly, without attention to the relative quality of the articles which could influence thetype of attention the industry was receiving; this is an area for further research.

There may also be other reasons for the lack of, or reduction in, social disclosure byRothmans, such as the threat of legal action or advice from legal advisors.Notwithstanding these limitations, the study is exploratory in nature and thereforeprovides a number of avenues for future study.

Further researchThe relationship between the resources provided by the range of stakeholdersidentified and falling legitimacy and falling disclosure levels would be interesting toexplore. Other potential explanatory variables might have included cigarette

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consumption figures, employee salaries or share values. In relation to consumptionfigures, it would need to be considered whether the fact that cigarettes, containing atleast one drug (nicotine) which is addictive (this statement would have beencontroversial in the past, but the evidence now seems irrefutable (Henningfield, 1985),would then preclude them as a good measure of legitimacy. Presumably the consumerwould not be as reactive to legitimacy issues, since even if they wished to stop smokingtobacco it may be difficult. It is generally believed that cigarette companies have paidhigher wages to its employees. This could be viewed as a premium that has to be paidto attract employees, particularly as the legitimacy of the industry falls relative to otherindustries. The impounding of legitimacy concerns into share price would also be aninteresting, if technically difficult, study.

In addition, some interesting research questions are raised by this study which morebroadly based studies could examine. Do the statistically significant correlationsbetween voluntary social and environmental disclosure and measured resource flowshold across other industries? Are the relationships for less legitimacy threatenedorganisations positive? If so, at what point does the relationship change from positiveto negative? That is, how illegitimate does a company have to become before itsdisclosure starts to decrease?

Rothmans was taken over by BAT, who now produce an annual “social report”.Analysis of this report for comparison to the findings for Rothmans would be useful todetermine a change in legitimation strategy. Finally, more qualitative analysis,through interviews with those responsible for producing annual reports, and otherreports where social disclosure appears, may provide further illumination of the issuessurrounding legitimacy motivations for disclosure.

Legitimacy theory offers researchers, and the wider public, a way to criticallyunpack corporate disclosures. This knowledge can then be used to provide better andmore useful information to inform decision making by stakeholders. In this waysociety is empowered to have greater control and oversight over the way resources areallocated.

Notes

1. BAT, who merged with Rothmans in 1999, became the first tobacco company to produce asocial report in 2001 (www.bat.com).

2. Campbell et al.’s study was conducted over a different (although overlapping) time period, ona different company, and used word counts as the dependent variable (as opposed tosentences in this paper).

3. Industry has also been found to be highly correlated with social and environmentaldisclosure, but this is not relevant to this study, which considers only one industry.

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Appendix

Corresponding authorCarol A. Tilt can be contacted at: Carol.Tilt@flinders.edu.au

1972 The health warning, “Smoking is a Health Hazard” became compulsory on cigarettepackets in Australia

1975 Federal legislation banning cigarette advertising on television and radio came into effectwith the broadcasting television Act Amendment Act 1976, Section 6

1986 Stronger health warnings were introduced on cigarette packets under the tobacco(warning labels) regulations 1987. The Federal government prohibited smoking on alldomestic aircraft flights under the Air Navigational Act 1920

1987 Four warnings were issued on packets: “smoking causes lung cancer, smoking causesheart disease, smoking damages your lungs, smoking reduces your fitness”

1988 Amendment to the Australian Broadcasting and Television Act, extends bans on directadvertising to include all tobacco products. The Australian Public Service was convertedto a smoke-free workplace

1990 Advertising of cigarettes in magazines and newspapers also ceased due to Federalgovernment legislation under the Smoking and Tobacco Products Advertisements(prohibition) Act 1989. Smoking on international airlines within Australia was bannedfrom 1 September. Cinemas, theatres and concert halls went smoke free under the WAHealth Act 1911 public buildings regulations sections 39 and 58. Smoking was stillpermitted in the foyers and bars

1991 “The Morling Judgement” provides a precedent for courts to deal with claims concerningpassive smoking. Point of Sale Advertising under the Tobacco Control Act 1990prohibits tobacco advertising outside of shops or in view of public places, advertisinglarger than 1 metre £ 1 metre, larger health warning signs

1992 The Federal government announced that all tobacco sponsorship of sport and arts endby 1995/1996. Stronger health warnings and content labelling information on cigarettepackages have been announced to come into effect across Australia by 1993.International airline terminals went smoke free by July. Antonio Cipollone in the USAsuccessfully sued three tobacco companies following his wife’s death from lung cancer,as the tobacco companies have known for many years that there was a link betweencigarette smoking and cancer

1994 Billboard advertising of tobacco products is made illegal under the Tobacco Control Act1990

Source: Adapted from ACOSH web site: www.acosh.org/history.htm

Table AI.Highlights of federallegislation regarding

smoking over the past 40years

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