What do critics contend is a problem inherent in the notion of corporate social responsibility CSR?

Legitimacy and CSR reporting

The legitimacy theory is a widely used framework that is often used to explain disclosures about firms' CSP. Establishing firms as part of a broader social system, the legitimacy theory suggests that firms do not have an inherent right to resources or even to existence. Society assigns legitimacy to firms (Deegan, 2002), and legitimacy is vital to their survival (Dowling and Pfeffer, 1975). In the organizational context, Suchman (1995) defined legitimacy as the perception that a firm's actions are in line with the perceivers' socially constructed system of norms, values, beliefs and definitions. Because stakeholders do not have access to organizational decision-making, they must have transparency to see that organizations are acting in line with their expectations.

One way organizations signal transparency is through CSR reporting (Carroll and Einwiller, 2014). The legitimacy theory sees CSR reporting as a way for organizations to answer claims coming from society. Through the process of legitimation, which substantiates organizational legitimacy (Kaplan and Ruland, 1991), “organizations seek to establish congruence between the social values associated or implied by their activities and the norms of acceptable behavior in the larger system they are a part” (Dowling and Pfeffer, 1975, p. 122). CSR reports provide information to a number of stakeholders who control different resources and pursue various interests and who, thus, demand disclosure from the firm. CSR reports enable firms to legitimize themselves, their behavior and the effects of their behavior (Brown and Deegan, 1998; Neu et al., 1998; O'Donovan, 2002).

Negative CSP disclosure

Corporate behavior with negative ecological or social impact can endanger corporate legitimacy if stakeholders perceive it to not be in line with societal norms and values (Hahn and Lülfs, 2014). In addition, empirical research shows that shareholders benefit from positive CSP, and that negative CSP carries idiosyncratic risk (Mishra and Modi, 2013). This leads firms to tend to not disclose the negative aspects related to their CSP. However, without disclosing some setbacks or failures, firms can encounter increased skepticism regarding the reliability and usefulness of their CSR reports. An excess of positive and whitewashed information holds little value if the report does not foster corporate accountability (Carroll and Olegario, 2019) or provide a fair and authentic picture of a firm's CSP (Hahn and Lülfs, 2014).

Negative CSP disclosures are necessary to attain corporate transparency (Rawlins, 2009), yet regulatory requirements dictating that firms make negative CSP disclosures are limited. This is where projects such as the GRI – the most widely used voluntary framework for CSR reporting (Sethi et al., 2017) – become important. The GRI explicitly requests positive and negative disclosures in CSR reporting, which the GRI refers to as balance. Balance does not mean that firms need to report an equal number of positive and negative aspects, but rather that negative aspects need to be disclosed in addition to highlighting the firm's positive actions and impacts.

Drawing on Hahn and Lülfs's (2014) definition of negative aspects in CSR reporting, we define a negative CSP-related disclosure as any corporate statement referring to factual corporate conduct regarding social, environmental or economic aspects, which had or have a potential or actual negative impact on the realization of sustainability. We note two differences between our definition and the former.

First, Hahn and Lülfs's definition includes potential corporate conduct that had or has a (potentially) negative impact, beyond simply factual corporate conduct, while our focus is on negative disclosures about actual CSP (Liston-Heyes and Ceton, 2009). Because information regarding potential negative conduct does not constitute actual CSP (negative CSP such as setbacks, failures or unmet goals), a negative statement involving speculation, uncertainty or hedging would not count as a negative CSP disclosure in our definition.

Second, Hahn and Lülfs focused on negative environmental and social aspects but not economic aspects, as the latter was assumed to be covered in traditional financial reporting. As our study concerns the quantity of negative CSP disclosures across the full range of CSR reporting, the inclusion of economic aspects is necessary for this study to be comprehensive.

Despite the role of negative CSP disclosures in transparency, firms focus on the disclosure of gains and successes, or “good news,” in their CSR reports (Deegan and Gordon, 1996; Deegan and Rankin, 1996; Holder-Webb et al., 2009; KPMG, 2013). We assume this occurs because they fear that disclosing setbacks, failures or unmet goals puts legitimacy – and, in the case of publicly traded firms, financial performance – at risk (Mishra and Modi, 2013). In fact, research shows that negative information is highly diagnostic because people believe it to be more characteristic of actors who belong in negative categories (Skowronski and Carlston, 1989).

However, research on the effects of two-sided messages has revealed that disclosing negative information in addition to positive information has positive effects on people's judgments of source credibility (Kamins and Assael, 1987; Smith and Hunt, 1978). Wagner et al. (2009) found that firms can reduce perceptions of corporate hypocrite when they use an inoculation strategy, i.e. when firms anticipate negative information will be discovered or released by other parties, they proactively disclose the information and offer refuting counterarguments in advance. Thus, it remains unclear whether firms disclose a lot or a little negative CSP in their CSR reports.

Therefore, our first research question is:

RQ1.

How much negative CSP disclosure exists in firms' CSR reports?

The GRI recommends that firms externally assure their CSR reports. They posit that using external, independent reviews of sustainability management processes and disclosures will increase the robustness, accuracy and trustworthiness of CSP disclosures, as well as build confidence in the areas of governance, management and stakeholder relations (GRI, 2013). Despite some scholars' criticism concerning ambiguity and diversity in the criteria and scope of external assurance, as well as the independence of assurance practitioners (e.g. Deegan et al., 2006; Wilson, 2003), we assume that external assurance has the effect of balancing CSR reports.

H1.

The amount of negative CSP disclosures in CSR reports of firms is higher in reports that are externally assured.

Reporting frameworks like the one issued by the GRI offer a comprehensive list of topics and indicators. The GRI framework versions G3.1 and G4 asks firms to report on the following areas of impact: economic, environmental (subdivided into materials and products and services) and social (subdivided into labor practices, human rights, society and product responsibility). The GRI provides several performance indicators for each aspect. Considering the number of indicators for each of the aspects (economic = 9, environmental = 34, social = 48), a focus on the social and environmental aspects becomes clear. Thus, it is likely that most negative CSP disclosures will involve social and environmental aspects.

Within these two areas, certain disclosures are mandatory. For example, in environmental reporting, various governmental bodies require firms to report their emissions of greenhouse gases (GHG). In social reporting, mandates include aspects of organizational safety and health, such as workplace fatalities and injuries. To show compliance with these norms, firms align their disclosures to the demands of the agencies to which they provide the report, a process that has been called disclosure alignment (Carroll and Einwiller, 2014). Firms need to show that they understand what is asked of them and that they are willing to be accountable.

In support of the argument that regulatory pressures from the state induce greater disclosure, Freedman and Jaggi (2005) showed that firms from the countries that have ratified the Kyoto Protocol report more detailed disclosures on climate change issues. Similarly, Reid and Toffel (2009) found that firms' participation in the Carbon Disclosure Project positively corresponded to greater state-level pressure regarding climate change concerns. Thus, we assume that most negative CSP disclosures will deal with those topics governed by national or transnational regulations.

H2.

Negative CSP disclosures in CSR reports of firms mostly refer to topics on which firms are mandated to report by national or transnational regulations.

The influence of culture on negative CSP disclosures

Research on cultural differences in CSR reporting has mainly focused on similarities and differences in publishing a report and the general topics reported on (e.g. Kolk, 2005, 2008). Our comparison examines large firms headquartered in three economically powerful cultural clusters (Gupta et al., 2002): Anglo countries, Confucian Asia and Germanic/Nordic (G/N) Europe[2]. These clusters come from the ten clusters that were determined based on data from the GLOBE study pertaining to cultural values and beliefs (House et al., 2004). The results of this study showed that cultural cluster effects account for more than two-third of inter-societal differences in values and certain practices, such as institutional collectivism. In particular, differences in individualism-collectivism and the role of face suggest cultural variations in the quantity of negative CSP disclosures.

Individualism-collectivism is likely the most widely studied dimension of cultural variability. Cultures that score high on the individualism end of the continuum emphasize personal goals over group goals and stress values that benefit the individual person (e.g. Triandis, 1995). By contrast, collectivist societies centralize social units with common fate, common goals and common values; the primary value is harmony with others Triandis (1995).

Individualism typifies the Anglo-American culture (Hofstede et al., 2010); Hofstede and colleagues suggest that the USA ranks highest in individualism, followed by the UK and – at some distance – Canada and The Netherlands. While still considered individualistic, Scandinavian and Germanic countries fall more to the middle on this continuum (http://geert-hofstede.com/national-culture.html). Collective values, social relationships and harmony are strongest in cultures influenced by Confucianism such as China, South Korea and Japan (e.g. Zhang et al., 2005), although intercultural differences exist; according to a meta-analysis by Oyserman et al. (2002), China is highest in collectivism, followed by South Korea and Japan.

Considering the value of the collective in collectivist societies, we would expect that firms in these societies are more likely to disclose information that stakeholders and society deem material, including negative CSP. However, other characteristics of collectivist cultures – like preserving social harmony and keeping face – would suggest the opposite.

While people in all cultures try to keep face in most interactions, the importance of face is higher in collectivist societies (Varner and Beamer, 2005). Face is understood as a claimed sense of favorable social self-worth and an estimated other-worth in an interpersonal situation (Ting-Toomey and Kurogi, 1998). Face is kept or lost by complying with or violating the behavior expected of a person. In collectivistic cultures, keeping structural harmony is of importance (Bond and Hwang, 1986). Here, attention is not just paid to preserving one's own face but also the face of superiors and of the group/firm. Because of this greater cost of losing face and of disrupting harmony, firms from Confucian Asian countries might make fewer negative CSP disclosures than firms from individualistic cultures.

H3.

CSR reports for firms from G/N European and Anglo countries contain more negative CSP disclosures than reports for firms from Confucian Asian countries.

When firms disclose negative CSP, they jeopardize face and thus social harmony. To preserve or restore face and legitimacy (Hahn and Lülfs, 2014), firms may apply certain legitimation strategies in their negative CSP disclosures. Drawing on the literature of image restoration, legitimacy, impression management and strategic disclosure, as well as conducting in-depth qualitative content analysis of CSR reports by German and US firms, Hahn and Lülfs (2014) determined various legitimation strategies that firms use when reporting on negative CSP. In addition to the strategy of simply mentioning the negative CSP as a fact, without giving any explanation or justification (which the authors call “indicating facts”), Hahn and Lülfs differentiate the following five strategies of legitimizing shortcoming in CSP disclosures:

1. Corrective action: Ideas, intent or measures are offered for how to tackle or avoid the negative aspect in the future, or information is provided on measures already undertaken to correct the problem.

2. Rationalization: Negative aspects are explained and justified by referring to the utility or function of specific actions or practices. This includes multiple forms of instrumental rationalization (highlighting benefits, functions or purposes) and theoretical rationalization (emphasizing some form of “normal” or “natural” behavior or development).

3. Abstraction: Existence of a negative aspect is generalized as being prevalent throughout a whole industry.

4. Marginalization: Relevance of the negative aspect is downplayed.

5. Authorization: A reference is made to a higher authority to deliver external explanations, validations and judgments of the negative aspect. Here, third parties or authorities provide an apparently more objective justification for the incident.

While Hahn and Lülfs (2014) did not find any notable differences between German and US reports in the use of these legitimation strategies, we can expect differences between western firms and Confucian Asian firms. Because face is more important in collectivist than in individualist societies (Ho, 1976; Varner and Beamer, 2005), it can be expected that firms based in Confucian Asian countries more often apply legitimation strategies to protect face and legitimacy. This means that they offer a justification for a setback or failure (authorization and rationalization), or that they generalize (abstraction) or marginalize (marginalization) the negative aspect. We expect that firms from Confucian Asian cultures will more often communicate a corrective action by which the firm shows the ability to improve and to prevent negative impacts in the future.

H4.

Firms from Confucian Asian countries are more likely to apply the legitimation strategies of (a) corrective action, (b) rationalization, (c) abstraction, (d) marginalization and (e) authorization when disclosing negative CSP than are firms from G/N European or Anglo countries.

Sample

The population from which the sample was drawn was the top 500 firms listed in 2014’s Forbes Global 2000 (Forbes, 2014), with headquarters in the largest economies in the Anglo (Canada, UK, USA), Confucian Asia (China, Japan, South Korea) and G/N Europe (Germany, The Netherlands, Switzerland/Denmark, Finland, Norway, Sweden) clusters. CSR reports were downloaded from the firms' websites. For a CSR report to be considered for the sample, it had to be available as a digital downloadable PDF document. For the sake of comparability, we did not include integrated reports, as these would have disproportionately biased the economic aspects. We selected reports wholly or partially concerning the 2014, with a published English version. In case of a report in multiple languages, all analyses refer only to the English language pages. After downloading all available reports that met the criteria, we drew a random sample of 25 reports per cultural cluster (Ntotal = 75).

Table I gives an overview of the sample. Because of the high representation of firms from the USA, Japan and Germany in the Forbes Top 500, US firms dominated the Anglo cluster, Japanese firms dominated the Confucian Asian cluster and German firms dominated the G/N Europe cluster. Most firms were in the sectors of financial services, automobile and oil and gas/energy/raw materials. The sectors were evenly distributed across cultural clusters. The relationship between industry sector and cultural cluster is not significant, χ2 (2, N = 75) = 1.065, n.s.

In most reports, the firm claimed to have followed either GRI3/GRI3.1 (31 percent) or G4 (51 percent), while 5 percent claimed to have followed GRI without mentioning which version. A total of 13 percent of the firms (nANG = 5, nCA = 4, nGNE = 1) did not mention adhering to any reporting standard.

Procedure and measures

We applied a combination of qualitative and quantitative manual content analysis in two phases. In Phase 1, a group of 20 coders (master's level students majoring in communication science) were extensively trained to identify negative CSP disclosures in the reports; in Phase 2, they coded the manifest and latent content (Potter and Levine-Donnerstein, 1999). In the first phase, a team of two coders (ten teams in total) closely read each report to find passages with negative CSP disclosures per the definition laid out above: any corporate statement referring to factual corporate conduct regarding social, environmental or economic aspects, which had or have a potential or actual negative impact on the realization of sustainability. A negative CSP disclosure was considered complete if it referred to one subtopic within a topic area (Table II), and it usually spanned 2–4 sentences. Any existing supplementary tables or figures on the same topic were coded as part of the same disclosure.

The total number of pages relevant to the analyses was 6,345. (Pages that were excluded included title and back page, table of contents, dividing pages, pages with tables or figures forming more than half of the page and publishing information/flag.) The length of the reports ranged from 17 to 232 relevant pages (M = 85, SD = 47). The focus of the analyses was the narrative, i.e. the text. However, we considered tables and figures when they formed less than 50 percent of a page or when they complemented the narrative, although we excluded tabular overviews included at the end of a report.

Potential content had to meet several criteria. First, the negative impact needed to be manifest content (Potter and Levine-Donnerstein, 1999) within the passage, without any further exploration or speculation. For example, the statement “The total turnover rate was 12.4 percent” alone was not considered negative, but it was if it was accompanied by a statement that this was an increase compared to the previous year(s) and/or that the firm did not reach its goal of a lower turnover rate. Second, coders were instructed to only select content that could be considered negative regardless of the cultural background. For example, the statement “We use polyethylene terephthalate (PET) for water packaging and ready-to-drink products in a number of countries” was not considered negative, even though PET is often regarded as unsustainable in European countries, as in other countries, its light-weight quality actually makes it a sustainable packaging option.

Third, descriptions of negative externalities (e.g. earthquakes, financial crisis) were only considered negative when the firm mentioned being negatively affected by them (e.g. “the tsunami caused production losses”) or having contributed to them (e.g. “We too have a responsibility for the financial crisis”). Fourth and finally, statements in the subjunctive mood (e.g. “Our reputation may be instantly tarnished by corporate scandals, legal infractions or product quality issues”) were not considered negative disclosures.

After reading, the two coders compared their finds and discussed inconsistencies. When the coders could not agree as to whether an aspect qualified as negative, a third coder was called in to break the tie. The authors then double-checked the passages chosen by the coders to see if they fit with the definition of negative CSP disclosure. At the end of this first phase, a total of 783 negative CSP disclosure passages were identified.

In the second phase, we developed a codebook with nine manifest and seven latent categories (see Appendix). For topic area, we adapted the categories from the 2013 GRI guidelines. To code the legitimation strategies, we drew on Hahn and Lülfs' (2014) definitions and examples. Examples for the latent categories represented in the current data are included in the Appendix. Based on the data, the coding of the strategy “corrective action” was enhanced, discerning three levels of corrective action: (1) an imprecise or vague provision of a future corrective action, (2) a precise statement regarding future or partially completed corrective actions and (3) a disclosure that the problem was already corrected. Thus, the content analysis is mainly concept-driven, but is in some parts, also data-driven. Of the negative passages, one-third (n = 250) were double-coded and tested for intercoder reliability. Reliability tests for all categories showed satisfactory results (all variables Holsti ≥ 0.88 and Cohen's Kappa ≥ 0.80).

Amount of negative disclosures

The absolute number of negative CSP disclosures within a CSR report ranged from 0 to 55 (M = 10.5, SD = 9.88); however, more relevant than the absolute number is the proportion of negative content within a report. We determined this by first assessing the proportion a negative CSP disclosure took up in a page, then adding up the proportions in a report and then dividing that sum by the total number of relevant pages. Our results show that, on average, 0.9 percent (M = 0.00884, SD = 0.0071) of the reports' content is negative. This answers RQ1, indicating that the volume of negative CSP disclosures in the CSR reports of large firms is very small.

We conducted an analysis of variance (ANOVA) and planned comparisons tests to investigate the hypothesis that firms from individualistic cultures made more negative CSP disclosures than firms from collectivistic cultures. ANOVA reveals a significant effect of cultural cluster on the volume of negative content (MCA = 0.0061, SD = 0.0048, MANG = 0.0082, SD = 0.0066; MGNE = 0.0122, SD = 0.0084; F[2,72] = 5.31, p < 0.01, η2 = 0.16). Comparisons between the groups show no difference between the Confucian Asian and Anglo cluster (t = 1.32, df = 43.7, p = n.s.), a marginally significant difference between the Anglo and G/N Europe cluster (t = 1.9, df = 45.4, p < 0.07) and a significant difference between the Confucian Asian and G/N Europe (t = 3.2, df = 38, p < 0.01). Thus, H3 – stating that firms from G/N Europe and Anglo countries disclosed more negative CSP than firms from Confucian Asian countries – is only partially confirmed.

The role of external assurance

External assurance by an independent auditor existed for 65 percent (N = 49) of the reports; 28 percent (n = 21) did not experience external assurance. Five of the firms (four of them Japanese) included a third-party opinion by external experts instead of external assurance. Of the 21 not externally assured CSR reports, about half (52 percent) were for firms from Anglo countries (USA or Canada), followed by firms from Asian (29 percent) and G/N European (19 percent) countries.

Analysis of covariance (ANCOVA) was conducted to test the hypothesis that externally assured reports contain more negative CSP disclosures than those that are not externally assured. Two dummy-coded variables for cultural cluster served as covariates to control for culture effects. The data reveal that external assurance significantly influences the proportion of negative CSP disclosures: externally assured reports include more negative CSP disclosures (M = 0.01007, SD = 0.00749) than reports that were not externally assured (M = 0.005999, SD = 0.005123; F[1,66] = 3.17, p = 0.05, η2 = 0.06)[3]. Thus, H1 is confirmed, although the effect barely reaches significance.

Topics of negative CSP disclosures

We found a total of 702 negative topics (new aspects, i.e. repetitive topics were only counted once): 35 percent related to the environment, 29 percent to labor practices, 11 percent to human rights and society issues, 10 percent to economic issues and 8 percent to product responsibility. Other topics – e.g. criticism regarding CSR reporting methods or reputation problems – accounted for 7 percent of the negative volume. Table II gives an overview of the topics and the most frequently occurring subtopics addressed in the negative passages. Confirming H2, the data show that the aspects for which disclosure is regulated by governmental bodies (GHG emissions and workplace fatalities/injuries) were reported most often.

Legitimation strategies

H4 states that firms from Confucian Asian countries are expected to use legitimation strategies more often than firms from the other two cultural clusters. Table III provides an overview of the results on the use of such strategies.

Corrective action was the legitimation strategy applied most often (59 percent). In line with H4a, firms from the Confucian Asian cluster (72 percent) offered ideas, intents or measures for how they had or would tackle or avoid negative CSP in the past and future more often than did firms from the Anglo cluster (58 percent) and the G/N Europe cluster (53 percent). To test whether the differences between these proportions are significant, we applied the z-score test, which is used to test whether two groups differ significantly on some single binary characteristic. The results reveal that firms from Confucian Asian countries mentioned corrective actions significantly more often than firms from the Anglo cluster or the G/N Europe cluster (CA vs Anglo, z = 3.27, p < 0.01; CA vs GN/E, z = 5.57, p < 0.01), while the Anglo and G/N Europe clusters did not differ.

Comparisons of how firms communicated their corrective actions substantiated H4a. Firms from the Confucian Asian cluster were more precise when communicating corrective actions (CA vs Anglo, z = 2.22, p < 0.05; CA vs GN/E, z = 3.14, p < 0.01), and they communicated corrective actions that were already fully completed more frequently than firms from the other two clusters (CA vs Anglo, z = 2.12, p < 0.05; CA vs GN/E, z = 3.12, p < 0.01). We found no meaningful difference in proportionate mentions of imprecise corrective actions. All other legitimation strategies were used less often, with no differences among the cultural clusters. Thus, only H4a – concerning cultural differences in using the corrective action legitimation strategy – is confirmed.

Theoretical and practical implications

Negative CSP carries risks and rewards that require further theoretical clarification. On the one hand, empirical research demonstrates that negative CSP creates idiosyncratic risk for companies (Mishra and Modi, 2013), and negative CSP disclosure may exacerbate these risks and give further ammunition to competitors and critics with ulterior motives (Dubbink et al., 2008). On the other hand, negative CSP provides an opportunity for confession and vulnerability, pulling back the untouchable aura that many firms convey in ways that build organization–public relationships, identification and trust. Then again, it might also provide an opportunity for more cynicism and skepticism. In addition, further attention is warranted for the role played by all of the legitimation strategies identified here in influencing these outcomes.

Further research examining CSP disclosures in relation to third-party verification and authentication gives us the opportunity to explore gaps, discrepancies, consistencies, shortcomings, omissions and over-disclosures, as well as the timing and sequence of negative CSP disclosures in relation to other sources. Each of these has a remarkable power to influence the corporate reputation, trust, legitimacy and source credibility of firms.

Practical implications can be derived for the GRI and other reporting initiatives. Demanding the disclosure of “positive and negative aspects of the organization's performance” (GRI, 2015, p. 17) is useful, yet what counts as negative aspects remains unclear. Thus, we suggest that the GRI offers a clear definition (as is presented in this paper). Hahn and Lülfs (2014) also outlined a scheme for disclosing negative incidents, comprised of an objective description of the negative aspect followed by an explanation providing context. Aside from these two steps (which should be made mandatory), firms can supplement a disclosure with an evaluation of the incident. Finally, consequences should clearly show which concrete corrective action will be or has been taken to resolve the situation, to allow traceability and to foster accountability.

Limitations

Our findings must be understood in the context of the study's limitations. First, our research only focused on negative CSP disclosed in the CSR reports, not actual negative CSP. Evaluating negative CSP across non-governmental organizations’ (NGOs') reports, rating agencies (such as KLD), government agencies, the news media and corporate or industry archives has already begun (Lisbon and Heyes, 2019; Mishra and Modi, 2013; Sethi et al., 2017) and merits further research in the context of negative disclosures.

Second, we only analyzed reports by firms listed within the Forbes Global 2000 – that is, large international firms. Expectations regarding the sustainability of operations of such large firms may be similar (Hahn and Lülfs, 2014); thus, the differences between the clusters may even be larger if a sample of smaller firms was included. Therefore, analyzing reports from smaller firms is a rich area for future research.

Third, we focused on the GRI initiative, as it is the most widely used reporting framework and because the GRI explicitly requests balance as one of their quality principles. However, our contribution should not be limited to reports that adhere to GRI standards, but should apply to any CSR report that aims for transparency.

Fourth, we generated descriptive data; thus, inferences about effects are hypothetical. Despite research on the positive effects of two-sided communication (e.g. Bohner et al., 2003; Kamins and Assael, 1987) and proactive negative information (Wagner et al., 2009), the effect of negative CSP disclosures in CSR reports remains unknown, as does the test for contingent conditions, like culture and type of stakeholder. For example, institutional investors who have other information channels than less-powerful stakeholders may prefer that firms issue negative CSP disclosures to them privately, but not disclose them publicly. At the same time, actively disclosing negative aspects of CSP may be regarded as a positive transparency signal, helping organizations manage risk, develop reputations for accountability and avoid future issues.