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Legitimacy Theory Essay

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Legitimacy theory The legitimacy theory relies upon the notion that there is a “social contract” between an organization and the society in which it operates. Therefore, corporations try to legitimize their corporate actions by engaging in CSR activities to get the approval from society (societal approach) and thus, ensuring their continuing existence. The social contract represents countless expectations that society has about how an organization should conduct its operations. The legitimacy theory stems from the idea that for corporations to continue operating successfully, it must act within the bounds and norms of what society identifies as socially responsible behavior. Legitimacy of a firm is dependent on the maintenance of reciprocal …show more content…

The stakeholder theory is used to analyze those groups to whom a firm should be responsible. Corporations are operated or ought to be operated for the benefit of all those who have a stake in the firm. Hence, like shareholders invest their money in enterprises, employees invest their time and intellectual capital, customers invest their trust and repeated business and communities provide infrastructure and education for future …show more content…

The legitimacy theory is mostly suitable for corporations working in developed countries, while on the other hand, the stakeholder theory seems to be most suitable for multinational corporations working in developing countries. As per social contract theory, CSR exists due to an implicit social contract between business and society and this contract implies some indirect obligations of business towards society. According to the societal approach, firms are responsible to society as a whole, of which they are an integral part. Social contact theory is mostly suitable for organizations working in developed economy/countries. The signaling theory has been used to explain voluntary disclosure in corporate reporting. Firms signal certain information to investors to show that they are better than other firms in the market for the purpose of attracting investments and enhancing a favorable reputation. The signaling theory is better suited to a situation where firms are competing for

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