Introduction
It is important to note that BP Plc is engaged in both mandatory and voluntary reporting as well as disclosure of information in order to achieve a higher degree of legitimacy. System-oriented theories explain why specific interactions between companies and external parties take place. Legitimacy theory puts a great deal of emphasis on the legitimacy element, which is obtained through legitimation. The purpose of the report is to explain why BP Plc would pay an external entity to prepare a voluntary sustainability report. The scope of the document involves both annual and sustainability reports, which are driven by social contract norms, beliefs, rules, and values. The explanation will begin with system-oriented theory, voluntary reporting, legitimacy theory explanation, and BP Plc and reporting.
Overview of System Orientation Theory
It should be noted that system-oriented theory is a collection of the theoretical framework focused on relationships and disclosures between involved parties. It is stated that “systems oriental theories are concerned with the reason why corporate management chooses to provide certain information to parties outside the organization” (Finance Notes Team, 2021, para. 1). In other words, such theories focus on the importance of disclosure and information sharing between groups, individuals, the State, and organizations (Systems oriented theory: week 19 – activity 19.2, 2021). Therefore, an enterprise not only is influenced by the society in which it operates but also influences it reciprocally as well.
Voluntary Reporting
Although the system-oriented theory is a complex theoretical framework with differential perspectives on the interactions among companies and external parties, the most commonly prevalent aspect is voluntary reporting. It provides a comprehensive explanation of why “an entity might elect to make particular voluntary disclosures” (Systems oriented theory: week 19 – activity 19.2, 2021, p. 1). Thus, it brings convenience and systematic structure to information sharing and disclosure since the system is designed to incentivize such an action.
Legitimacy Theory Explanation
The selected system orientation theory is legitimacy theory, which is based on the notion that companies carry out sustainability reporting and accounting by gaining a license or legitimizing their activities (Deegan, 2019). In other words, there are clearly set beliefs, values, norms, and rules, which comprise boundaries of legitimacy. When it comes to legitimacy theory, it belongs to the bourgeois stream of political economy theory or PET. The key aspect of bourgeois PET is manifested in the fact that there are no explicit considerations for class struggles and structural conflicts. However, the theory is concerned with the pluralistic world’s internal interactions among its groups and entities. It is important to note that norms and bounds are not fixed, which is why a company needs to be highly responsive to such changes and shifts. Social contract plays a major role in ensuring that legitimacy can be achieved since there needs to be a social agreement on accepted norms, beliefs, values, and rules.
Legitimacy and Legitimation
In the case of legitimacy theory, the notion of legitimacy needs to be defined in order to properly understand the framework. It is “the status or condition which exists when an entity’s value system is congruent with that of society” (Systems oriented theory: week 19 – activity 19.2, 2021, p. 6). However, legitimacy is not the same as legitimation since the latter refers to a process where a company strives towards becoming legitimate. Some elements of legitimation and legitimacy can be seen in Figure 1. For example, the mechanism of legitimation includes corporate narrative reporting and financial reporting, which help such an organization to obtain legitimacy status.
BP Plc’s Position
The main reason why the directors at BP Plc would pay an external organization to prepare a voluntary report is rooted in the concept of legitimacy. It is important to distinguish between voluntary information disclosure and mandated information sharing. When it comes to the company, it is engaged in both types of methods of achieving legitimacy. In other words, BP Plc is operating within the social contract as well as its values, norms, beliefs, and rules. The company actively discloses mandated information through annual reports, but it also voluntarily reports on sustainability efforts and achievements undertaken by BP Plc.
Annual Reporting
In the case of annual reporting, one should be aware that it is a form of mandated information disclosure. It is stated that “The U.S. Securities and Exchange Commission (SEC) requires that companies distribute annual reports to their shareholders. Annual Reports are also available freely to the public for most U.S. companies that offer stock” (Cornell University Library, 2022, para. 1). In other words, every public company must provide an annual report to the population in order to ensure its legitimacy. For example, the annual report describes BP Plc’s business model, strategic focus areas, organizational model, key performance indicators, risk factors, and multiple corporate governance elements (BP, 2020a). The commission enforces the social contract in the form of a law or rule, without which a company cannot be perceived as legitimate.
Sustainability Reporting
In the case of sustainability reporting, it should be noted that it is not mandated, which makes it a form of voluntary disclosure. It is stated that “although sustainability reporting in the United States is presently voluntary, corporations have increased their reporting on these issues” (D’Aquila, 2018, para. 9). In other words, despite the fact that no company is obliged to report on their sustainability efforts, they still engage in it voluntarily. It is also stated that “the Governance and Accountability Institute (GAI) reports that approximately 81% of S&P 500 companies issued a sustainability report in 2015, compared to less than 20% in 2011” (D’Aquila, 2018, para. 9). The main reason why BP Plc is interested in such an endeavor is explained by the legitimacy theory, where the company is willing to put an effort to improve its legitimacy. Thus, sustainability reporting is an act of legitimation, where, for example, it seeks to BP Plc wants “to help the world reach net zero and improve people’s lives” (BP, 2020b, p. 4). The company is showing its efforts to increase sustainability without being mandated to do so legally, but it is necessary due to socially expected norms. Therefore, it needs to adhere to the established standards among modern companies to achieve legitimacy.
Conclusion and Recommendations
In conclusion, BP Plc is engaged in voluntary reporting, such as sustainability reporting, because it wants to achieve legitimacy. Therefore, the latter can only be obtained by strictly adhering to the social contract, which is manifested in accepted values, norms, beliefs, and rules. The recommendation for BP Plc is to continue using voluntary disclosure to increase its legitimacy as well as engage in more legitimation activities.
Reference List
‘Systems oriented theory: week 19 – activity 19.2’ (2021) [PowerPoint presentation]. ACFI 2421 Accounting Standards & Theory.
BP. (2020a) Performing while transforming from IOC to IEC: BP annual Report and Form 20-F 2020. Web.
BP. (2020b) Reimagining energy for people and our planet: BP sustainability report 2020. Web.
Cornell University Library. (2022) ‘How do I find corporate annual reports?’, Johnson Cornell SC Johnson College of Business. Web.
D’Aquila, J. M. (2018) ‘The current state of sustainability reporting’, The CPA Journal, Web.
Deegan, C. M. (2019) ‘Legitimacy theory: despite its enduring popularity and contribution, time is right for a necessary makeover’,Accounting, Auditing & Accountability Journal, 32(8), pp. 2307-2329. Web.
Finance Notes Team. (2021) ‘Systems oriented theories’, Finance Notes, Web.
Motivations for the shift to integrated reporting (2021) Web.