Legitimacy+theory

toc = An introduction to the legitimacy theory = Legitimacy is a generalized perception of whether a company's actions are correct or appropriate within a social system of norms and values. ​​ Companies require legitimacy to operate. Loss of legitimacy can have serious consequences for an organization, as it may lead to the loss of public support for their activities. In order to create legitimacy, companies may pursue CSR. Thus, when adverse events occur and the organization's legitimacy is threatened, management might react by correcting the company's strategy. Strategies for creating legitimacy include informing the public about corporate actions that correct previous deficiencies, changing the perceptions of external stakeholders, and changing the focus of the public by moving attention from the problem areas.

License to operate
The License to operate -concept can be defined as an approval for a corporation's activities, granted by the local community and other stakeholders. The license to operate is rooted in the beliefs, perceptions and opinions of the local population and other stakeholders. It is intangible, dynamic and non-permanent, because beliefs, opinions and perceptions are subject to change as new information is acquired. The license to operate has to be earned and then maintained.

= Legitimacy theory in the context of tax avoidance = Taxes constitute a cornerstone of modern society, and a precondition for its existence. Capital flight resulting from a loss of tax revenue has devastating consequences for society. Tax evasion directly counteracts the purpose of CSR, which is to contribute to the wellbeing of society. Thus there is an apparent conflict in the actions of firms that engage in CSR while circumventing taxes. Since tax avoidance is not in line with the core values​​ of society, tax avoidance has been proven to induce legitimizing actions. Companies assume a double standard by giving promises of responsible behavior while they engage in tax avoidance and evasion. This organizational hypocricy clearly illustrates the conflict between CSR and tax avoidance.

Findings
The section below presents studies related to the inconsistencies between companies public statements and actions, the link between CSR and tax avoidance, and the validy of the legitimacy theory in the context of tax avoidance and CSR.

Deegan, Rankin, Tobin (2002): An examination of the corporate social and environmental disclosures of BHP from 1983-1997: A test of legitimacy theory
In their study " An examination of the corporate social and environmental disclosures of BHP from 1983-1997: A test of legitimacy theory", Deegan, Rankin, Tobin (2002) examined whether companies give out social and environmental information in response to specific social expectations. The article examines the social and environmental reports of a large Australian corporation, BHP Ltd, to determine whether the content of the reports can be associated with current topics in the media. The analysis covers the period from 1983 to 1997. The article suggests that a higher level of media coverage regarding certain social and environmental commitments will lead to increased information on the subject in the company's reports. Further, the study assumes that unfavorable publicity causes an increase in positive statements about the company's business. To measure the prevalence of certain issues in both the media and the company's social and environmental reports, a content analysis was conducted. There is a significant positive relationship between disclosures about a particular issue in BHP Ltd's annual report and the degree of media attention on the same topic. Further, the study finds evidence that management gives out positive information in response to unfavorable media attention.

The results show that companies adapt their CSR -activities to answer social expectations and unfavorable media attention, indicating that the issues are not embedded in the organization. This in turn suggests that firms establish CSR reports in order to gain legitimacy and strengthen their reputation. The study provides support for the legitimacy theory in corporate social reports.

Lanis, Richardson (2013): Corporate social responsibility and tax aggressiveness- a test of legitimacy theory
By comparing 20 Australian companies accused of aggressive taxation with 20 Australian companies which have not been subject to suspicion, the study examines whether the legitimacy theory applies in the context of taxation. The study covers the years 2001-2006. The analysis was conducted by using paired tests, correlation analysis and regression analysis. The assumption that companies that engage in aggressive taxation procedures publish more CSR -information was supported by all statistical tests. The results show a positive and statistically significant relationship between aggressive tax procedures and CSR reporting. The results thus support the legitimacy theory in association with aggressive taxation. CSR is used to alleviate public concerns, and to show that companies meet the expectations of society.

Preuss (2012): Responsibility in paradise? The adoption of CSR tool s by companies domiciled in tax havens
The article examines the use of CSR tools in multinational companies operating in tax havens. Since establishment in tax havens is socially irresponsible in itself, this constitutes a particularly interesting composition. The study includes 27 large companies located in the Cayman Islands and Bermuda. CSR tools that were analyzed included the codes of conduct for employees, CSR standards, and social and environmental reports. The variables were compared with companies located in the OECD area. The research findings revealed that companies based in tax havens was remarkably active in the establishment of codes of conduct. All but one company had a code of conduct in use, representing 96 percent of the sample. Employee behavior was particularly stressed in the codes, which became even more apparent when compared to companies in the OECD area.The number of commitments were higher in all points, and one can conclude that the codes were very extensive. With regard to other stakeholders, such as suppliers, the community and competitors, the results show a wide coverage area, but a lack of detailed, precise obligations. The article pointed out a pattern where companies almost word for word copy the codes of conduct from one another. The phenomenon however also extends over companies not located in tax havens. T he mimetic behavior raises the question of whether CSR -reports have been subject to real reflection and genuine consideration, or if they are just used as a publicity tool.