Legitimacy Theory and Stakeholder Theory The Difference Between Them

Corporate Social Responsibility (CSR) has gained a significant importance in recent times. This is because businesses are increasingly becoming aware of the impact they have on the society and the environment. Two prominent CSR theories that have emerged over time are the Legitimacy Theory and the Stakeholder Theory. Both theories aim to ensure that organizations behave in a socially responsible way, but there are key differences between the two. This article will explore the differences between Legitimacy Theory and Stakeholder Theory, and how these differences impact the way companies approach CSR.

Legitimacy Theory:

The Legitimacy Theory suggests that a company's long-term success is dependent on its ability to maintain legitimacy with its stakeholders. Legitimacy can be defined as the perception that a company's actions are desirable, proper, and appropriate within the norms, values, and beliefs of its stakeholders. Stakeholders are individuals, groups or organizations that can affect or are affected by a company's actions. Examples of stakeholders include shareholders, employees, customers, suppliers, the community, and the environment.

The Legitimacy Theory argues that companies must act in a socially responsible way in order to maintain legitimacy with their stakeholders. This means that companies must ensure that their actions align with the expectations and values of their stakeholders. The theory suggests that companies that fail to act in a socially responsible way risk losing legitimacy with their stakeholders, which can have serious consequences for their long-term success.

Stakeholder Theory:

The Stakeholder Theory is a broader concept than the Legitimacy Theory. The theory suggests that companies have a responsibility to all their stakeholders, not just those who have a direct financial interest in the company. The Stakeholder Theory argues that companies should consider the interests of all their stakeholders when making decisions, rather than just the interests of their shareholders.

The Stakeholder Theory suggests that companies must act in a socially responsible way in order to meet the expectations of their stakeholders. This means that companies must take into account the interests of their stakeholders when making decisions. The theory suggests that companies that fail to do so risk alienating their stakeholders, which can have serious consequences for their long-term success.

Differences between Legitimacy Theory and Stakeholder Theory:

The Legitimacy Theory and the Stakeholder Theory have some key differences that impact the way companies approach CSR. These differences are outlined below:

1. Scope of responsibility:

The Legitimacy Theory suggests that companies have a responsibility to act in a socially responsible way in order to maintain legitimacy with their stakeholders. However, the scope of this responsibility is limited to those stakeholders who have a direct financial interest in the company, such as shareholders and investors.

In contrast, the Stakeholder Theory suggests that companies have a responsibility to all their stakeholders, not just those who have a direct financial interest in the company. This means that companies must take into account the interests of all their stakeholders when making decisions, including employees, customers, suppliers, the community, and the environment.

2. Nature of responsibility:

The Legitimacy Theory suggests that companies have a responsibility to act in a socially responsible way in order to maintain legitimacy with their stakeholders. This means that companies must ensure that their actions align with the expectations and values of their stakeholders.

In contrast, the Stakeholder Theory suggests that companies have a responsibility to act in a socially responsible way in order to meet the expectations of their stakeholders. This means that companies must take into account the interests of their stakeholders when making decisions, rather than just the expectations and values of their stakeholders.

3. Level of involvement:

The Legitimacy Theory suggests that companies must maintain legitimacy with their stakeholders, but it does not require companies to actively engage with their stakeholders.

In contrast, the Stakeholder Theory suggests that companies must actively engage with their stakeholders in order to understand their interests and incorporate them into decision-making processes. This means that companies must have a two-way dialogue with their stakeholders in order to build relationships and establish trust.

4. Basis of motivation:

The Legitimacy Theory suggests that companies are motivated to act in a socially responsible way in order to maintain legitimacy with their stakeholders. This means that companies may only act in a socially responsible way because they feel that they have to, in order to avoid negative consequences.

In contrast, the Stakeholder Theory suggests that companies are motivated to act in a socially responsible way because it is the right thing to do. This means that companies may act in a socially responsible way because they believe that it is their moral obligation to do so.

5. Focus of decision-making:

The Legitimacy Theory suggests that companies make decisions based on the expectations and values of their stakeholders. This means that companies may prioritize short-term stakeholder interests over long-term sustainability.

In contrast, the Stakeholder Theory suggests that companies must take into account the interests of all their stakeholders when making decisions. This means that companies must balance the interests of different stakeholders and consider the long-term sustainability of their actions.

6. Role of external factors:

The Legitimacy Theory suggests that companies must maintain legitimacy with their stakeholders in order to ensure long-term success. However, the theory does not take into account external factors that may impact a company's ability to maintain legitimacy, such as changes in societal norms or the emergence of new stakeholders.

In contrast, the Stakeholder Theory suggests that companies must be responsive to changes in the external environment and take into account the interests of new stakeholders as they emerge.

Implications for CSR:

The differences between Legitimacy Theory and Stakeholder Theory have important implications for how companies approach CSR. Companies that follow the Legitimacy Theory may focus on meeting the expectations and values of their stakeholders, but may not take into account the interests of all their stakeholders. This may result in a short-term focus on meeting the needs of shareholders and investors, rather than taking a broader view of sustainability.

Companies that follow the Stakeholder Theory, on the other hand, may take a broader view of sustainability and consider the interests of all their stakeholders when making decisions. This may result in a more long-term focus on building relationships and establishing trust with stakeholders, which can lead to greater sustainability and resilience over time.

Conclusion:

The Legitimacy Theory and the Stakeholder Theory are two prominent CSR theories that aim to ensure that companies behave in a socially responsible way. While both theories share some similarities, they also have some key differences that impact the way companies approach CSR. Companies that follow the Legitimacy Theory may focus on meeting the expectations and values of their stakeholders, while companies that follow the Stakeholder Theory may take a broader view of sustainability and consider the interests of all their stakeholders when making decisions. Understanding these differences is important for companies that want to implement effective CSR strategies that are sustainable over the long term.