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.
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