FINANCIAL REPORTING: LEGITIMACY AS A REASON

A company has legitimacy as a reason for publishing corporate annual reports. However, organisational legitimacy does not occur through merely making a profit and complying with legal requirements. Instead, reference to the existing norms, beliefs and values of society is crucial in ensuring that an organisation has achieved legitimacy. As a device to deliver messages of organisational reality, financial reporting is consequently used to earn legitimacy in the society in which company activities take place (Oliver 1991; Parsons 1956). Hence, in the context of organisational interaction with society, Deegan (2001) claims that: …organisations continually seek to ensure that they operate within the bounds and norms of their respective societies, that is, they attempt to ensure that their activities are perceived by outside parties as being legitimate.

 A company might create an image that is perceived to be in accordance with socially imposed values. The company actively seeks images that have positive values, and avoids negatively valued images (Gardner and Martinko 1988). In doing so, “impression management” might be employed in creating annual reports. Impression management is a social concept, which is defined as “the conscious or unconscious attempt to control images that are real or imagined in social interaction” (Schlenker 1980).  Different impression management strategies can be adopted for different stakeholders (Marcus and Goodman 1991). It is easier for a company to adopt such strategies because there is power asymmetry affecting how much attention different stakeholders receive (Allen and Caillouet 1994). Consequently, actions made visible by powerful stakeholders will be reframed by accounts in annual reports; actions made visible by less powerful stakeholders will be ignored (Neu et al. 1998). In relation to how management seeks legitimacy, it can be argued that PT. ABTBK has been able to show that substantive management— as discussed by Ashforth and Gibbs (1990) is more important than symbolic management as a strategy in gaining legitimacy. The annual report awards and other awards indicated how PT. ABTBK has used corporate annual reports as a medium to gain legitimacy and to increase public confidence in PT. ABTBK. Gaining public confidence plays significant roles in increasing the public image on which PT. ABTBK runs socially acceptable activities. This is consistent with a statement by an employee (Mr F) of PT. ABTBK on 21 September 2004 who said: …an annual report award is important for PT. ABTBK because the award can increase public confidence. This is related to the implementtation of good corporate governance principles.

Similarly, one of the branch office heads on 5 October 2004 claimed that: …an annual report award is very important for us. When people raise questions about PT. ABTBK, the award is the answer. The award tells them that PT. ABTBK has conducted ethical and transparent business.  

 A statement by an assistant manager in the Accounting Division (Mr A) on 3 September 2004 also supported such a claim. He noted that: ... the annual report award is useful for this company for example to enhance the company image. Thus, the society might say, “look, PT. ABTBK is transparent in providing information of its activities to the public”.

 In line with the reason why PT. ABTBK chooses a substantive strategy, it might be useful to consider self-presentation theory. According to self-presentation theory, as Aerts (1994) notes, people (including management) give an explanation for their behaviour that is designed (consciously or not) to defend their claims to positive social identities or images. How people determine coping strategies in their justification is influenced by the nature of what has to be explained and the conditions in which the causal claim are created (Tetlock 1985). Thus, through these behaviours, individuals (including company management) seek to be perceived as successful, competent, trusted, responsible and rational. In the case of PT. ABTBK, the Director of Administration Services on 8 September 2004 argued that: …an annual report award instils pride in us. Internally by winning the annual report award, the directors can use the award as a medium to institutionalise the spirit of fairness and honesty. Externally, the award can be used as marketing media, because the insurance business is a business of trust. The annual report award tells society that PT. ABTBK is credible and can be trusted.  

 The statement shows that trust is an essential part of the search for legitimacy. Shockley-Zalabak, et al. (2003) concluded that trust is a result of communication behaviour, such as delivering accurate and reliable information of company activities, exposing sincere and appropriate openness and giving justification for any decisions. The manner in which a company delivers messages in a corporate annual report is an important point in a corporate communication strategy, whereby trust can be constructed by convincing others that the company is pursuing a socially acceptable strategy (Kohut and Segars 1992). One such strategy that enables a company to seek legitimacy is by including narrative texts in annual reports. The use of narrative texts enables a company to tell the reality of an organisation to a society. Aerts (1994) argues that: narrative accounting reports are one of the means by which corporate management can legitimise the company’s activities and outcomes. Verbal behaviour and more specifically, the way in which facts, events and actions are explained, is important, certainly in external relations, because it defines the essential elements of the corporate performance environment and portrays the normative and empirical bases on which to judge the appropriateness of the company actions.

 In this regard, what PT. ABTBK has conducted is consistent with this view. Indeed, narrative texts have been used by PT. ABTBK to make a true portrait of its historical performance, show insights of its future, and define management capability for the purpose of legitimating its activities. On average, PT. ABTBK takes up 50 pages of every annual report to write narrative texts on the report. How and why a company publishes a corporate annual report is influenced by socially acceptable values. If the company management perceives that their legitimacy is under attack by public concerns, management will react to this by improving the quality of financial reporting, for example, by increasing the level of company disclosure (Brown and Deegan 1998). For the purpose of showing that PT. ABTBK operates in accordance with the social values, its annual reports always deliver messages related to its contributions to the social environment, for example: To maintain social and environmental equilibrium, the company adopts an ongoing effort as a participator in the development of social and community environments (2002 annual report, p. 47). As part of the realisation of the measures reflected by its business ethics, the company at all times makes every possible positive contribution to the environment where it operates... For the purpose of maintaining social and environmental balance, the company makes a continued effort to participate in the construction of a social environment (2003 annual report).

 How PT. ABTBK has practised financial reporting shows that quality financial reporting is published in order to gain legitimacy, rather than simply to provide useful information. Financial reporting has been used as a medium to communicate an organisational reality of PT. ABTBK to the Indonesian society that PT. ABTBK does not break social harmony. As Coy and Pratt (1998) note, an annual report plays an important role in communicating and shaping the reality of the organisation in the public’s mind. How this reality is perceived depends in part on the extent and quality of information provided in the annual report.  PT. ABTBK is committed to such financial reporting practice because it can be used to build “an image of the corporation that ingratiates it with its stakeholders” (Stanton et al 2004), so as to obtain approval by conveying compliance with the normative rules of the institutional environment (Dowling and Pfeffer 1975). Moreover, as Allen and Caillouet (1994) posit, by self-promotion, acclaiming the corporation’s roles, including that of being socially responsible, a company asserts its appreciation for institutional norms and values. What PT. ABTBK has done in its annual report is to declare its support and compliance to institutional norms. As such, financial reporting is designed as a rhetorical story to attract those interested in company activities.