Stakeholder Theory and the Legitimacy Theory of Accounting - British Petroleum - Essay Example

CASE STUDY By Case Study Introduction This study will rely on the Stakeholder theory and the legitimacy theory of accounting to explore the responses by British Petroleum (BP) following the oil spill crisis of the year 2010 in the Gulf of Mexico. The suitability of the Stakeholder theory derives from the fact that the theory is based on the need to prioritize value for the stakeholders in through an all-inclusive and comprehensive manner. In essence, the stakeholder theory entails a study of the impact of the relationships and connections of the various stakeholders on the actions and reactions of a firm in the event of an issue (Rendtorff, 2009). On the other hand, the legitimacy theory studies the reactions of stakeholders in terms of their social obligations and requirements as imposed by the society and other forces. These two theories will provide insights into the reactions of BP following the oil spill. Theories Overview The stakeholder and legitimacy theories remain some of the most relied upon theories that explain the nature of reaction and approaches that companies, firms, and businesses undertake when faced with various perspectives (Friedman & Miles, 2006). These theories attempt to expose the driving motives and the determining interests that help companies to develop various choices and alternatives as understood together with the policy framework of the companies. The choice of an approach is often determined by the long-term and short-term objectives of the company. These objectives may relate to matters of performance, public image, brand protection, strategic considerations, and the costs involved. The long-term considerations of a company’s interests are largely conditioned by multiple factors that make it necessary for companies to adopt approaches that can safeguard them against the perils of the market and the unpredictable nature of the business environment (Solomon, 2011). The stakeholder theory spells out terms for the survival and the sustainability of any company. According to this theory, firms should seek to create, sustain, and increase value for all its stakeholders for the purposes of performance and survival (Philips, 2011; Philips, 2003). The theory begins from the point that the existence, performance, and progress of a firm is significantly dependent on the harmony that must exist among the stakeholders. Any adverse effect on one or some of the stakeholders will invariably spill over to the other stakeholders. As such, the work of the management is to harmonize, streamline, and regulate the actions, policies, strategies, and processes in a way that shall serve the greatest good towards the community of stakeholders. In order to achieve this aim, it becomes necessary for the organization to create a policy framework that shall control the processes and functions in a manner that creates a meaningful whole. One of the key strengths of this theory is that it promotes a comprehensive pattern of association between the company and the stakeholders. The all-inclusive methods and approaches adopted by the company often tend to reduce the friction between the firm and sections of the stakeholders. In essence, the strategy lessens the possibility of divisions within the ranks of the stakeholders. On this note, the theory promotes the long-term stability of the company by reducing the prevalence of conflicts that pit one section of the stakeholders against the other. Such conflicts often arise whenever the company reacts on a situation in a manner that appears to be biased against a section or sections of the stakeholders. The stakeholder approach is closely associated with the many policies and discourses that seek to promote the welfare of individuals and groups that are not directly associated with the company. For instance, some theorists observe that the adoption and application of the stakeholder approach will eventually yield into Corporate Social Responsibility Practices. However, critics contend that the stakeholder theory of responses often poses challenges of operation. This is because certain forces within the community of the stakeholders display mutual antagonistic relationships and cannot be brought within the same operational framework. For instance, the management of the company may often be in competition with the community or environmentalists due to certain unavoidable policies. On the other hand, legitimacy theory is anchored on the view that the actions of a company are usually determined the requirements of the society. The theory provides that the stakes of the society will often determine direction of policy and responses of the company on multiple issues that concern its performance, stability, and progress. The survival of the company is highly dependent on the goodwill of the society. In all its actions and reactions, matters of policy on, which the interests of the society depend, will always guide the company. One of the strengths of this theory is that it promotes the social good above matters of sheer profitability and other superficial goals that could jeopardize social order and social interests. On the negative side, the legitimacy theory complicates the balance between the company’s core objectives and matters of social justice (Mallin, 2007). Critics who hold onto this position argue that the legitimacy theory fails to consider the company’s primary objective. Companies exist for the primary reason of making profits. Disproportionate concentration on social interest is likely to affect the company’s stability and performance both in the long-term and short-term concerns. It is important to consider some of the issues that relate to the company in terms of the various issues that determine performance, stability, public image (Rendtorff, 2009). An application of this theory requires consistent attention to the relationship between the society and commercial interests of the company. The British Petroleum Oil Spill British Petroleum remains a dominant player on the global petroleum market. Its growing corporate profile is characterized by high annual profits that have sustained for years. However, the 2010 oil spill remains one of the most devastating events in the company’s history. The massive oil spill occurred in the Gulf of Mexico for a three months period, and is considered the worst marine oil spillage in history. By the time the spillage had been contained, nearly 4.9 million barrels of oil had spilled into the sea. It is estimated that the spillage occasioned massive environmental damage that could continue to be felt for a long time. Aquatic life was the worst affected with scientists arguing that the effects are likely to continue affecting marine life for many years. The reaction of BP following the oil spill could be analyzed from the perspective of the stakeholder and legitimacy theories. BP Oil Spill Reactions The management of British Petroleum (BP) issued various responses to the oil spill at various stages of the disaster. The reactions were issues through various media but the most captured reactions were the ones, which were channeled through the press by way of press releases. BP Group Chief Executive, Tony Hayward, in a press release outlined a range of actions that BP had undertaken to mitigate the adverse impacts of the marine disaster (BP, 2010). The release gave a comprehensive line of action that the company had undertaken and some of the planned line of action. In the press release, the Chief Executive promised the dedication of the company to resolve the disaster in a fast way and in a manner that would guarantee safety. This particular press release could be considered in light of both the theory of legitimacy and the stakeholder theory. From the perspective of the stakeholder theory, it is possible to discern a significant concern by the company on the adverse effects of the disaster on their lives. The affected stakeholders, in this sense, could involve the families and friends of the nine people who died on the impact of the explosion, which touched of the spillage. Also affected were the tourists around the Gulf of Mexico, the neighborhood of New Orleans and other areas within the range of zone that was affected by the spillage. Many people were affected directly or indirectly by the disaster. On this score, it might be argued that the reactions of the management, as observed in the press release, were governed by the objective of addressing the interests of the stakeholders. Regarding the theory of legitimacy, it might be appropriate to consider the matter from the perspective of another press release that sought to address the matter of criminality. In November 2012, BP announced that it had reached an agreement with the United States to pay up 4 billion dollars in damages as part of the settlement to the element of criminality at the company. Further, the company announced that it would plead guilty to 11 the charges of neglect and misconduct, and agreed to settle other pending matters. In 2012, BP’s new Chief Executive Bob Dudley said “We apologize for our role in the accident, and as today’s resolution with the U.S. government further reflects, we have accepted responsibility for our actions.” Precisely, this pattern of response is consistent with the theory of legitimacy, which promotes social responsibility on the part of companies. Conclusion British Petroleum (BP) followed up the 2010 massive oil spill in the Gulf of Mexico with a range of responses through various media. However, the most systematic and orderly responses were in the press releases prepared by BP’s management. The dominant themes in the press releases revolved around the expression of regret, and the promise of quick remedial action meant to minimize the impacts of the threat. These reactions fall within the two theories of stakeholder and legitimacy. The stakeholder theory lays emphasis on the need to prioritize the value of stakeholders within any form of reaction. On the other hand, the legitimacy theory concentrates more on the need of aligning companies’ actions on the requirements of the society. In sum the reactions of BP’s management were basically aimed towards serving the purposes of social good and addressing the needs of the stakeholders in a manner that adds value to the entire trade. It is important to consider the different theories in light of their complementary aspect in addressing the key concerns that arose out of the oil spill disaster. Works Cited British Petroleum (BP), 2012, BP Announces Resolution of All Criminal and Securities Claims by US. Government Against Company Relating to Deepwater Horizon Accident, BP, Retrieved 16 November 2012, British Petroleum (BP), 2010, BP Initiates Response to Gulf of Mexico Oil Spill, BP, Retrieved 16 November 2012, Philips, R, A 2011, Stakeholder Theory: Impact and Prospects, Edward Elgar Publishing, New York. Philips, R 2003, Stakeholder Theory and Organizational Ethics, Berrett-Koehler Publishers, New York. Friedman, A, L & Miles, S 2006, Stakeholders : Theory and Practice: Theory and Practice, Oxford University Press, Oxford. Mallin, C, A 2007, Corporate Governance, Oxford University Press, Oxford. Solomon, J 2011, Corporate Governance and Accountability, John Wiley & Sons, New York. Rendtorff, J, D 2009, Responsibility, Ethics and Legitimacy of Corporations, Copenhagen Business School Press DK, Copenhagen. Read More