Institutional Theory

Institutional (or neo institutional) theory, developed from organizational theory in the late 1970s (see DiMaggio & Powell, 1983; Powell & DiMaggio, 1991; Meyer & Rowan, 1977), also views the organization as a part of broader social system and is also applied in the social and environmental disclosure literature (see Amran & Devi, 2008; Muthuri & Gilbert, 2011; Sobhani et al., 2011; Amarn & Haniffa, 2011; Matten & Moon, 2008; Joseph & Tablin, 2011; Jamali & Naville, 2011). In general, institutional theory focuses on why organizations tend to become similar (in social and environment disclosure) to the other firms operating in the same organizational field18 (DiMaggio & Powell, 1983). In particular, institutional theory emphasizes various institutions: regulatory, normative, and cognitive institutions, which can place coercive, normative, or mimetic pressure on the firms to become similar (i.e. to adopt social and environment disclosure) to other firms operating in the same field (or the institutional environment). Various types of institutions and pressures, mentioned above, are now discussed. Institutions are social constructs and referred to as formal rules, cultural, cognitive, and routine processes which are taken for granted and which enable or constrain a corporation to adopt particular practices e.g. ‘CSR disclosure’.

18“The centre of dialogue and interaction, through which a diverse range of institutions come to bear on field participants, and influence common organizational behaviours and their rationality”(Bebington et al., 2009, p.593).

81 Institutions are defined as “formal rules and taken-for-granted cultural frameworks, cognitive schema, and routinized processes of reproduction; and assumes that actors are motivated more by a logic of appropriateness whereby action is constrained and enabled by cultural frames, schema, and routines” (Campbell, 2006, p.926).

Institutions provide the logic of appropriateness for a particular behaviour of a firm and institutions can be of three types: regulatory, normative, and cognitive (Scott, 2001). Regulatory institutions include rules and regulations set by the state (referred to as hard rules) and those set by industry associations (referred to as soft rules) (Campbell, 2007; Marquis, Glynn, & Davis, 2007). Hard rules can exert coercive pressure on the firm to adopt particular structures and practices, while soft rules are voluntary to adhere. Hence the corporations operating in the environment where stringent regulations are active will more likely to act in a socially responsible way. In terms of CSR disclosure, if stringent regulations related to social and environment responsibility exist in the institutional environment where the firm is operating, the company may disclose CSR information in order to comply with those (government and industry) rules.

Normative institutions set the values and norms, which define the appropriate behaviour of a firm. ‘Values’ are “what is desirable/socially acceptable to pursue”, while ‘norms’ are “desirable ways of acting and being” (Bebbington et al., 2009). Marquis et al. (2007) further explained the norms and values of the society as the rules of a game i.e. “what is right to do around here”. These rules of the game are decided by various actors of the society such as NGOs, media, educational institutions, professional associations, and other social movement organizations

82 (Muthuri & Gilbert, 2011), which set the standards for appropriate corporate socially responsible behaviour. In the case of CSR disclosure, in an environment where normative institutional actors are very active, companies may disclose information in order to conform with normative institutional actors’ (e.g. NGOs and WWF) expectations/demands to gain the normative status. Normative institutions slightly overlap with the moral form of legitimacy, which rests on managerial judgement about whether the activity is “the right thing to do” (Suchman, 1995). This judgment usually reflects belief about whether the activity effectively promotes societal welfare, as defined by the socially constructed value system (Suchman, 1995). Normative institutions actually contribute to defining the socially responsible behaviour (what is right to do around here) of the firm. Thus it overlaps with moral legitimacy.

Cognitive institutions are very subtle and difficult to detect (Bebbington et al., 2009). Cognitive elements include cultural values, identities, and ideologies (Muthuri & Gilbert, 2011), and understanding of these cultural values, ideologies, and identities depend upon managers’ understanding. According to this perspective, corporations’ definition of social responsibility depends upon managers’ perception of these cognitive schemas. Further, cognitive frameworks include common or shared meanings for corporations’ socially responsible behaviour (Muthuri & Gilbert, 2011). For example: corporations supported or built mosques in Bangladesh as a social issue because the local community identified with these religious artefacts (Sobhani et al., 2009). This institution slightly overlaps with cognitive legitimacy, which also rests on cultural frameworks (see Suchman, 1995).

These regulatory, normative, and cognitive institutions can create isomorphic pressure for the corporations to disclose their CSR information. Isomorphism is the

83 process by which one unit of the population tries to become similar to other units of the population operating in the same environment (DiMaggio & Powell, 1983). Similarly, Dillard et al., (2004) referred to isomorphism as the adaptation of institutional practices by an organization. This isomorphic pressure can be of three types: coercive, normative, and mimetic and can be created by regulatory, normative or cognitive institutions operating in the institutional environment, where the corporation is operating (DiMaggio & Powell, 1983). Coercive isomorphism refers to organizations’ adoption of particular structures/procedures or practices in response to pressures of powerful stakeholders such as government, institutional investors, and the media, which create either formal or informal pressure for the firm (DiMaggio & Powell, 1983). These pressures may force, persuade or invite a firm to join a particular practice (DiMaggio & Powell, 1983).

“Coercive Isomorphism results from both formal and informal pressures exerted on organizations by other organizations upon which they are dependent and by cultural expectations in the society within which organizations function. Such pressures may be felt as force, as persuasive, or as invitations to join in collusion” (DiMaggio & Powell, 1983, P.150).

This coercive isomorphism can be linked to the managerial branch of stakeholder theory, according to which companies disclose information in order to conform to the expectations of powerful stakeholders such as government, shareholders and employees (see Section 3.2.2). There are some disclosure studies in which companies disclosed information in response to coercive pressure from powerful stakeholders (Rahaman et al., 2004; Amran & Devi, 2008). A study was conducted

84 by Rahaman et al. (2004) in which Volta River Authority (VRA), a Ghanaian company, disclosed environmental information in order to comply with the requirements of The World Bank (coercive pressure). Similarly a CSR disclosure study conducted by Amran and Devi (2008) found that Malaysian companies disclosed CSR information due to pressure from the government regulatory institution (coercive pressure).

Normative isomorphism refers to organizations’ adoption of procedures/structures or practices due to the process of professionalization and socialization to get normative status (DiMaggio & Powell, 1983). Professionalism has been interpreted in DiMaggio and Powell (1983) as

“Collective struggle of members of an occupation to define the conditions and methods of their work to control the production of producers (Larson, 1977: 49-52), and to establish a cognitive base and legitimation for their occupational autonomy” (p.152).

There are three sources of normative isomorphism: educational institutions (providing formal education), professional networks (providing formal trainings to professionals), and trade associations (developing normative rules for organizations), which shape the behaviour of professional managers and staff (DiMaggio and Powell, 1983). This point was complemented by Amran and Devi (2008), by stating that professional education and professional networks are two factors of professionalism, which create normative pressure on the professionals to adopt a particular practice. This sort of pressures can arise from NGOs (i.e. ILO,

85 WWF, and WHO), educational institutions and social movements19. Corporations can adopt certain activities such as treating employees fairly, training and educating employees, carrying out flood relief efforts, donating funds, sponsoring events, building schools and colleges, treating waste properly, and handling emissions voluntarily in order to achieve a normative status by meeting prevailing normative standards (normative isomorphism). There is a study, not directly related to disclosure, that shows how normative institutions influence managers behaviour. In this study students (who were taught multi-divisional models of organizations as conventional wisdom at elite business schools) adopted multidivisional forms of organization after becoming CEOs (Palmer et al., 1993). This shows that the normative type of institutions may change behaviour of executives who interact with normative institutions. In addition to the above, a sustainability reporting study was conducted by Perez-Batres et al. (2012) in which Mexican local companies which belonged to national sustainability programs (normative institution) were found to be significantly positively related to sustainability reporting. This suggests that corporate executives, members of professional bodies promoting responsible practices, may change their behaviour and disclose CSR information to conform to normative institutional actors’ expectations.

The third form of isomorphism is mimetic isomorphism in which organizations imitate the procedures/structures or practices of another successful organization due to uncertainty in the institutional environment. DiMaggio and Powell (1983, p.151) stated that:

19 _{A campaign to abolish dengue virus from Pakistan OR a campaign to raise funds to help the flood affecties in}

86 “Not all institutional isomorphism, however, derive from coercive authority. Uncertainty is also a powerful force that encourages imitation. When organizational technologies are poorly understood (March and Olsen, 1976), when goals are ambiguous, or when the environment creates symbolic uncertainty, organizations may model themselves on other organizations” (DiMaggio and Powell, 1983, P.151).

Mimetic isomorphism also has ritual aspects (DiMaggio and Powell, 1983), in which organizations try to copy the practices which are considered legitimate.

“Developments also have a ritual aspect; companies adopt these “innovations” to enhance their legitimacy, demonstrate they are at least trying to improve working conditions” (DiMaggio and Powell, 1983, P.151). In mimetic isomorphism, the industrial or institutional environment itself can be the factors of mimetic isomorphism. In other words industry peers or competitors’ pressures may results in mimicry of practices (i.e. CSR disclosure). This is supported by the study conducted by Gray and Bebbington (2000) which shows that the adoption of environmental reporting is partially caused by industry and country of residence. In terms of CSR disclosure practice, companies may disclose CSR information due to industry peers or competitors’ pressures in order to look similar to them.

It has been clearly mentioned in the literature that isomorphism does not have any effect on the efficiency of the organization, but it brings some indirect benefits such as attracting employees, gaining reputation, and others (DiMaggio and Powell, 1983). This point was also complemented by Carpenter and Freoze (2001), who stated that organizations usually adopt practices for legitimacy purposes rather than

87 for their actual usefulness of practices. From the previous discussion of institutions and isomorphic processes, it can be expected that different institutions (i.e. regulatory, normative, and cognitive) can exert any type of pressure: coercive, normative, or mimetic that may force, persuade, or invite the organizations to adopt particular structures/procedures or practices in order to look similar to other firms operating in the same environment. According to DiMaggio and Powell (1983) two or more pressures can occur at the same time and it is impossible to distinguish between these types of pressures. The inseparability of isomorphic pressures was also supported by Unerman and Bannett (2004 cited in Deegan and Unerman, 2011). Thus different institutional settings (i.e. regulatory, normative, and cognitive institutions) affect the relationship between the corporation and its stakeholders (DiMaggio & Powell, 1983; Marquis et al., 2007; Oh et al., 2011). In other words, the way a corporation treats its stakeholders depends upon the presence of effective institutions in the environment where the corporation is operating. Here the term ‘stakeholders’ refer to individuals and groups such as employees, customers, the environment, and local communities, with which the corporation interacts and who have ‘stake’ or vested interests in the corporation.

Apart from isomorphic pressures, institutional theory also introduces a decoupling perspective. ‘Decoupling’ refers to the situation in which the actual practices of an organization differs from the apparent/formal (or externally presented) practices of the same company (Dillard et al., 2004). The company, which is decoupling its actual practices may set vague goals and/or portray ceremonial inspection and evaluation of the company to show conformity with legitimated standards (Kury, 2007). This decoupling perspective of institutional theory can be linked to the legitimacy theory, in which a company can use social and environmental disclosures (an apparent

88 practice) to change public perception in order to be known as a socially and environmentally responsible company, without making any change in actual behaviour/practice. This shows that institutional theory overlaps with legitimacy theory. In the case of CSR disclosure practice, the decoupling behaviour of a corporation can be shown by examining or evaluating the corporation’s actual practices and its (social and environment) disclosure, but this is not the aim of this research. Therefore the decoupling perspective is considered irrelevant here.

As far as the level of analysis is concerned, institutional theory can be applied at three different levels: national (Matten & Moon, 2008), industry (DiMaggio & Powell, 1983), and issues level (Hoffman, 1999 cited in Bebbington et al., 2009; Wooten and Hoffman 2008 cited in Jamali & Neville, 2011; Mezias, 1990). The national level field incorporates the broader (macro level) institutional environment and includes political systems, financial systems, education and labour systems, and cultural systems, which can affect the corporation to adopt particular CSR practice (e.g. implicit or explicit CSR) (Jamali & Neville, 2011; Matten & Moon, 2008). The industry field, also referred to as the organizational field, incorporates all organizations which have similar products and services and also includes other form of organizations such as resource providers, competitors, business partners (DiMaggio & Powell, 1983), industry associations, NGOs, and government bodies who interact more frequently and faithfully with one another in the field than actors outside the field (Powell and DiMaggio, 1991 cited in Bebbington et al., 2009) who can influence firms performance. Apart from the above, the field can also be formed around issues rather than industry (Hoffman, 1999 cited in Bebbington et al., 2009; Wooten and Hoffman 2008 cited in Jamali & Neville, 2011; Mezias, 1990) and nation level field (Matten and Moon, Campell, 2007) because sometimes companies adopt particular

89 practices i.e. philanthropy or staff development and training due to social pressures rather than due to prevailing practices in the industry (Mezias, 1990). Here (in this study) the field is formed around the national (i.e. Pakistani) context and activities practiced/adopted/portrayed by companies are not limited to the industry or the issue level (e.g. environment protection is an international issue). I personally think that the incorporation/adoption/portrayal of a particular activity depends upon a firm’s characteristics and its relevant public. The focus of companies on a particular activity may change with the passage of time as organizations can influence the national (institutional) environment and also be influenced by the environment.

A discussion shall now be presented about why change occurs in practices and procedures of organizations. Institutional theory provided a sophisticated explanation for the change in companies’ social disclosure. According to Tuttle and Dillard (2007) companies disclose information in order to conform with powerful stakeholders and to get legitimacy from members of the organizational field. Further, new organizational activity develops in the field when an organization tries to improve its performance or to survive in an uncertain situation and this activity becomes institutionalized (legitimate practice) when adopted by other members of the same field (cited in Bebbington et al., 2009). New practice also arises, when a new firm enters the field and introduces a practice from other context, which becomes institutionalized if accepted by other members of field (Bebbington et al., 2009). Multinational companies can be considered the best example of this and can be a good source of the introduction of new practice/activity in one country from the other country. Multinational companies face a multitude of institutional pressures which can arise from home country institutions and host country institutions (Jamali and Naville, 2011). Multinational companies face more pressures (across countries) than

90 local companies. This point was complemented by a study conducted in Lebanon which showed a substantial difference between CSR practices of multinational subsidiaries (MNSs) and SMEs (Jamali and Naville, 2011). This might have happened because the two types (MNSs and SMEs) of firms faced different institutional pressures.

To summarise the above discussion, the institutional theoretical perspective focuses on the relationship between an organization and its environment comprises three types of institutions: regulatory, normative, and cognitive that can create three types of isomorphic pressures: coercive, normative, and mimetic for the firm to adopt a particular practice in order to be recognised as legitimate company. Relating this to CSR disclosure practice, companies can disclose CSR information in response to coercive, normative, and mimetic pressures resulting from the regulatory, normative, or cognitive institutions of the country where the firm is operating in order to conform to institutional actors’ demands/expectations. Until this point we have been discussing the explanations of theories and studies using a particular theory. The next section discusses the rationale for choosing a combination of theories: legitimacy, stakeholder, and institutional theory in this research.