D O C U M E N T O D E T R A B A J O W O R K I N G P A P E R S S E R I E S D E P A R T A M E N T O D E G E S T I Ó N D E E M P R E S A S

• • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •

C A N L E G I T I M A C Y T H E O R Y P R O P E R L Y E X P L A I N S O C I A L

P R O B L E M S ? C H A L L E N G I N G T H E B O U R G E O I S

A P P R O A C H

Archel Domench, Pablo

(Universidad Pública de Navarra)

Husillos Carqués, Javier

(Universidad Pública de Navarra)

Larinaga González, Carlos

(Universidad de Burgos)

D T 9 3 / 0 8

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F a x : ( + 3 4 ) 9 4 8 . 1 6 9 . 4 0 4 E - m a i l : w o r k i n g . p a p e r s . d g e @ u n a v a r r a . e s

2

CAN LEGITIMACY THEORY PROPERLY EXPLAIN SOCIAL PROBLEMS?

CHALLENGING THE BOURGEOIS APPROACH

Archel Domench, Pablo

(Universidad Pública de Navarra)

Husillos Carqués, Javier

(Universidad Pública de Navarra)

Larinaga González, Carlos

(Universidad de Burgos)

Abstract: Purpose - The principal objective of the present work is to widen the scope of Legitimacy Theory (LT)

through a detailed analysis of the links that exist between the legitimising strategies of firms and the

characteristics of the business environment in which they are developed.

Designs/methodology/approach - A case study was performed on Social Information Disclosure (SID)

by a multinational in the automotive sector with an established presence in Spain, in the context of the

relational dynamics between the firm/society/state. Different channels of information were compared to

capture both the official discourse and the shadow discourse in the annual reports of the multinational.

Findings - The results of the research show that the firm under study used social information strategically

to legitimise polemical organisational change through the manipulation/distraction of social perceptions,

and at the same time identified telling signs of the alignment of the state with this business strategy.

Research limitations/implications – It appears that, despite a widely-held belief, the study of SID

though LT should not be set in a pluralist view of the world. Were the LT assumption of a pluralist

business environment not to square with reality, LT would be left debilitated and unable to adopt a

satisfactory normative position in the face of the transparency and accountability-related problems that it

has helped to reveal.

Originality and value – In contrast to the dominant approach to LT, the present study analyses the role

played by the state in the implementation of strategies based on manipulation/distraction by the firm. This

approach could well serve to widen the scope of LT by establishing connections between two different

but intertwined legitimising strategies: legitimation of the firm and of the economic system.

Key words: Legitimacy Theory, Social Information Disclosure, Shadow Accounting

Paper type: Case study

3

1. INTRODUCTION

Over the last 10 years, Legitimacy Theory (LT) has contributed to improving our

understanding of the motives and the incentives that move firms (or managers) to make

Social Information Disclosures (SID), and LT has become the referential theoretical

framework when examining this phenomenon (see Patten, 1992, 1995; Deegan and

Ranking, 1996; Deegan and Gordon, 1996; Buhr, 1998; Brown and Deegan, 1998;

Wilmshurst and Frost, 2000; O’Donnovan, 2002; Deegan et al. 2002; Campbell, 2003;

Ahmad and Sulaiman, 2004). Nevertheless, despite its widespread application, LT still

finds itself in an underdeveloped theoretical state (Deegan, 2002; Tilling, 2004), and

needs further refinements (Deegan, 2007). In its current state, LT is unable to take

important problems into account such as, the seriousness of current unsustainable

patterns of development, and the way in which firms, or the present economic system,

could be capturing this complex phenomenon (Milne and Gray, 2007; Bebbington,

O’Dwyer and Unerman, 2007). For Parker (2005:846), LT

“[…] ignores concepts of accountability and transparency and […] it

suffers problems that include apparent conceptual overlap with political

economy accounting theory and institutional theory, lack of specificity,

uncertain ability to anticipate and explain managerial behaviour and a

suspicion that it still privileges financial stakeholders in its analysis.”

One of the main symptoms or indeed motives for the lack of specificity of LT might lie

in the eminently “bourgeois” (see Gray et al. 1995, and Gray et al. 1996) use to which

this conceptual framework has been put by researchers. This has led the majority of

studies to focus their attention on the mere description of business practices ignoring the

analysis of their interrelation with the economic, political, social or ecological

framework in which they develop. Deegan (2007), in explicit reference to this LT

assumption, asserts that “legitimacy theory derives from the bourgeois branch of

political economy theory, and as a result assumes a pluralistic society” (p.132). A

wider vision of the social situation where, for instance, “accounting is not considered to

be put in place to favour specific interests […] where many classes of stakeholders have

the power to influence various decisions by corporations, government and other

4

entities […]” (Unerman and Deegan, 2006:301). In this political and social framework

the state is neutral, and due to its interventionist power its mission would be to: i)

correct imbalanced situations of wealth and power that might arise at certain times

within society, and ii) maintain fundamental levels of freedom in society (Gray et al.

1996). It is perhaps for this reason, in view of the repeated findings in the literature that

point to the untrustworthy nature of the information that is disclosed by firms which

may be used to manipulate public opinion (Deegan and Rankin, 1996; Deegan et. al

2000) that Deegan (2002:298) maintains that one of the main duties of the researcher is

to bring such situations to the attention of the state apparatus.

Nonetheless, according to the results obtained by different researchers, recent state

interventions in the form of legislation enacted on SID do not seem to resolve the

problems that are generally attributed to voluntary disclosures (see Adams et al. 1995;

Larrinaga et al. 2002; Llena et al. 2007 and Criado et al. in press). These findings could

have, at least, two implications: i) they call attention to the need to rework the

assumption that firms develop their activities in a pluralist political and social

framework; and therefore ii) they call for researchers to draw attention to the role of the

state itself in encouraging those legitimation strategies and making them possible.

The work undertaken by Gray, et al. (1995) and Gray, et al. (1996) has exercised very

significant influence over the past decade on the direction taken by social accounting, in

general, and on the study of SID, in particular. Evidence of this is found in the relation

existing between the theoretical approaches used to describe the behaviour of firms

towards disclosures that are qualified as acceptable in these two works, and those

theories that later turned out to be dominant during the last decade1: Stakeholder

Theory, Legitimacy Theory and Political Economic Theory (see Deegan, 2002).

However, Gray et al. (1995) and Gray et al. (1996) did not describe one, but two

variants of LT: one that could be assimilated with that which has been applied en-masse

in recent years, and another arising from a more critical and problematic vision of the

world. A world characterised by inequality and conflict where the state apparatus plays

1 On the other hand, theoretical frames of reference in the area of accounting such as agency theory or the positive accounting theory, qualified by these authors as "virtual rubbish" (Gray et al. 1995:70) have no significant presence in the literature on social information disclosure.

5

a fundamental role in maintaining the situation (Gray et al. 1996:47). Why this critical

approach to LT has fallen into oblivion is a question that is still not sufficiently clear.

The present study, echoing the gaps and the problems identified in the previous

literature, has the principal objective of broadening the scope and explanatory power of

LT. Accordingly, the link between SID business practices seeking to legitimise a firm's

objectives, methods and results (widely identified in the previous literature) and the

economic, political and social context in which they develop is analysed. To that end,

along with the traditional analysis of possible legitimising practices undertaken by

business organisations, the role played by the state apparatus in their resolution or

reproduction is studied and the explanatory power of the two aforementioned variants of

LT is, in some way, compared.

The work is structured in the following way. In the first place, a review of the main

studies will be carried out that have analysed SID made by business organisations in the

more conventional bourgeois framework. Subsequently, in the light of the results

offered by these works as well as the identified shortcomings, a critical/alternative

framework will be described in which to set those studies obtained as a result of a

different, more critical, approach to LT. The case study that is then developed deals

with the coverage that has been given over the past twenty years by a multinational in

the automotive sector in its annual accounts to an important and polemical

organisational change that led to a vigorous response on the part of the workforce. The

case study examines whether this organisation has tried to legitimise its behaviour

through its annual accounts, and simultaneously studies the role that the state apparatus

might have played in curtailing or promoting the legitimation strategies undertaken by

the multinational. In this way, it is hoped to shed light on which is the most appropriate

narrative to understand the phenomenon of SID from a holistic perspective by widening

the scope of LT to include the relations between the firm, society and the state. The

work concludes with a summary of its principal findings and limitations as well as

suggestions for future lines of research.

2. LEGITIMACY THEORY

A bourgeois approach

6

Authors that have recourse to LT to analyse SID maintain that the firm's desire to be

accepted within society is the main incentive or motivation that leads them to disclose

information of this sort. By virtue of what has come to be called “the social contract”

(Shocker and Sethi, 1973) LT argues that if firms behave contrary to the wishes of their

“relevant public” their survival will as a consequence be threatened (Lindblom, 1994).

By going against its dominant values, firms would be in breach of the contractual

clauses that tie them to society by virtue of which society allows them to use its

resources and to continue to operate within it (Deegan 2002). In the face of this threat,

and as legitimacy is imposed beyond the boundaries of the organisation (Dowling and

Pfeffer, 1975), if they see it at risk they are left with no other option than to dialogue

with their surroundings. It is here that the justification is found to include accounting

(and as a consequence SID) within this conceptual framework. SID is seen as a means

of communication with the outside world; as a mechanism that can be used tacitly by

organisations to reach strategic objectives such as how to influence the way in which

their image is envisaged by their relevant public or the way in which society envisages

those firms whose operations it is willing to sanction.

LT predicts that when business managers perceive that society is not in agreement with

the actions or the procedures of the organisations they are running, they will implement

one of the four following strategies (see Lindblom, 1994:13-17): i) correct the

behaviour of their organisation realigning it with the desires of society, ii) change the

perception that society has of their behaviour, explaining it and justifying it but without

modifying it, iii) transform the perception that society has of their behaviour,

manipulating it, deceiving it, or simply distracting its attention, and/or, iv) indoctrinate

or educate society with the aim of modifying its scale of values making it coincide with

that of the organisation's. Setting out from these theoretical assumptions, standard

procedure in the literature to test the explanatory power of LT has been: (1º) to identify

any possible loss of legitimacy by firms; and (2º) subsequently to test whether, through

the implementation of one or more of the four above-mentioned strategies, they react by

producing social information in order to recover a more legitimate status2 .

2 Although at a theoretical level the possibility of undertaking strategic actions is contemplated with a view to restoring, maintaining or gaining legitimacy (Suchman, 1995), the majority of works have centred exclusively on situations in which firms see their legitimacy undermined and disclose social information in an effort to restore it (O’Donnovan, 2002).

7

Conventional research strategies to identify any possible disapproval of company

behaviour by social agents are as follows. In the first place, the literature has assumed

that society wishes the institutions within it to show responsible behaviour towards the

environment (the majority of studies have centred on the environmental behaviour of

firms). This assertion is not usually empirically confirmed, although some authors have

found evidence to uphold it in the proliferation of ecological groups (Deegan and

Gordon, 1996) or the ever-greater concern of governments and regulators for

environmental questions (Patten, 1995). Having assumed this "social sensitivity"

towards environmental matters, standard procedure has consisted of identifying events

or circumstances that mean that organisations are perceived by society as

environmentally damaging. With that end in sight, studies have examined organisations

responding to natural or social disasters (Patten, 1992; Walden and Schwartz, 1997;

Deegan et al. 2000), or those penalised for poor conduct (Deegan and Rankin, 1996;

Jantadej and Kent, 1999), or belonging to sectors that are considered intrinsically

damaging to the environment such as, for example, petrol, electricity, chemical or

paper industries (Deegan and Gordon, 1996; Patten, 1991; Wilmshurst and Frost, 2000;

Campbell, 2003). It is also common to find studies that consider whether press reports

on these events (Brown and Deegan, 1998; Neu et al. 1998; Deegan et al. 2000; Deegan

et al., 2002;), public or private ownership of the firms (Cormier and Gordon, 2001), or

the size of the firms involved in such events (Patten, 1991; Deegan and Gordon, 1996)

could increase the extent of public disapproval towards the behaviour of such

organisations.

Once the legitimacy gap is identified, the second task that the researchers set themselves

consists in testing whether the firms react to it by broadcasting social information. To

do so (resorting on the whole to content analysis methodology), the social information

that is disclosed (mainly environmental and principally in the annual accounts) is

analysed and quantified to confirm whether the occurrence of the aforementioned events

coincides with a variation in the volume of SID. The LT-based hypothesis is said to be

confirmed wherever a significant relation is found between variations in the quantity of

social information disclosed and the fact of belonging to a group of firms whose

legitimacy is affected. Although works can be found that, in addition to measuring the

quantity of information have undertaken an qualitative analysis of SID with a view to

analysing the intentions of the firms in a more precise way (see Deegan and Rankin

8

1996), the choice of which of the four legitimising strategies described above are being

implemented is a question that is usually left to one side (Neu and others, 1998;

Bebbington, 2007). Nevertheless, widespread agreement appears to exist that: i) the

final purpose of SID is to influence the image that society has of the firms, ii) this social

information is strongly biased towards their own interests which might prevent the

emergence of a true and faithful image of the real behaviour of such organisations.

Although LT has shown itself to be a useful tool in highlighting the poor reliability of

the social information disclosed by firms and the way it is used to influence the

perception of society, its eminently bourgeois nature could render it unable to solve the

problems on which it has helped to shed light. As may be seen from the literature

review, the authors that embrace this theoretical approach analyse business practices in

an isolated way, which includes both the direct study of the reasons, principally by

using quantitative methods, (although see O’Dwyer, 2002 and O’Donnovan, 2002), and

the direct study of the socio-political framework in which they develop. Authors seem

to justify this second question by sustaining that LT should be embedded in a pluralist

setting (Deegan, 2007). In other words, LT should be placed in a political, economic

and social setting in which power is not repeatedly concentrated in the hands of certain

groups in a systematic fashion because of (among other reasons) the neutral and aseptic,

mediating role of the state apparatus in the resolution of possible conflicts that could

arise among the different social actors (see Tinker et al. 1991, for a critique on this

usual pluralist vision adopted in the field of Corporate Social Reporting). This

assumption (that is as such untested) allows LT to be applied whilst side-stepping any

analysis of the relation that exists between legitimising strategies and the macro-social-

economic setting. In accordance with this pluralist vision of the world, in a special issue

of the Accounting Auditing and Accountability Journal dedicated entirely to the analysis

of LT, Deegan (2002), adopting a normative posture, and after having performed an

extensive review of the literature from the viewpoint of the theoretical proposals of LT

as well as their empirical contributions, asserted that “what the weight of the literature

on disclosure motivations should do, is provide sufficient evidence to regulators that

leaving it to managers to disclose information cannot be expected to lead to the

provision of unbiased information.”(p. 298)

9

In view of this recommendation it would appear that, under the postulates of LT, the

state would perform the role that the pluralist approach reserves for it, “to act to

maintain freedom and, most importantly, to be neutral with respect to serving particular

group’s interests” (Gray and others, 1996:16). These types of base assumptions mean

that questions such as whether the state might be aligning itself, through its behaviour

(e.g., by not regulating SID), with the dominant social classes (e.g. contributing in such

a way that the firm is successful with its legitimising strategies), are never answered

through a bourgeois approach to LT. Nevertheless, the evidence that points out that

legislation regulating SID is not resolving the problems related to lack of transparency

and accountability of the business organisations that were attributable to voluntary SID

(see for example, Adams et al. 1995; Larrinaga et al. 2002; Llena et al. 2007 and Criado

et al. in press) could be indicating that there is a need to stop assuming that the practices

of business legitimation are developed in a pluralist setting.

A critical/alternative approach

Despite having been adopted by the immense majority of authors, the approach to LT

that we have termed bourgeois that is described in the previous section is not the only

one in existence. Gray et al. (1995) assert, at least conceptually, that a further variant of

LT exists that arises from the premises of what they call classical political economy

theory. The second variant adopts a wider perspective because it “raises questions about

the legitimacy of the system (e.g. capitalism) as a whole” (Gray et al. 1995:47) as

opposed to individual studies of the organisations. Studying SID through the lens of this

second variant of LT, the paradigmatic framework (the theory of political economy) of

which has already been used in the study of SID by several different authors (see for

instant, Tinker and Neimark, 1987; Tinker et. al. 1991 or Neimark, 1992) links the

legitimising strategies identified at an organisational level (described in an earlier

section) with an economic, political and social setting that is diametrically opposed to

the essentially pluralist one assumed by the bourgeois approach.

From the Political Economic Perspective (PEP), the social relations behind capitalism

are characterized by conflict and an unequal distribution of wealth and power with the

state apparatus playing a crucial role in maintaining this situation (Gray et al. 1996). In

this social context, accounting information is considered as a disciplinary and control

measure that helps to replicate power-based relations existing in the setting in which it

10

is delivered (Dillard, 1991). Recognition of this situation implies that accounting is

assumed not to be neutral and that conflict exists both within and outside of

organizations (Tinker, et al. 1991). Accordingly, the research carried out from the PEP

explores and assesses how different actors use accounting information to take part in,

silence or transform social conflict. It is assumed that the annual report is not a passive

element that describes an objective reality, but just the opposite. Either by action

(Neimark, 1992; Adams and Harte, 1998) or by omission (Chwastiak and Young,

2003), or by using carefully worded phrases, the annual report legitimises actions that

are orchestrated from a position of power (Tinker et al, 1982; Tinker and Neimark,

1987; Neimark, 1992; Adams and Harte, 1998; Chwastiak and Young, 2003). Through

the lens of this variant LT grounded in the PEP, not only can SID serve to legitimise

firms’ outputs, methods and goals (as the bourgeois approach shows), but it can also

serve to legitimise the economic, social and political system as a whole (Gray et al.

1995, 1996). Therefore, when authors support the LT argument by analysing the firm’s

behaviour, that is, when they show how firms are trying to inform, educate or

manipulate society using social information, they could be identifying strategies with a

broader impact.

According to PEP, the state plays a crucial role in maintaining the situation of conflict

and social inequality due to its capacity to influence spheres of human activity such as

work, the family, education, tax rates, or, for example, in the regulation of information

disclosed by firms (Tinker, 1984). It therefore seems necessary, if they wish to

incorporate legitimising strategies in the political and social architecture described by

PEP, to analyse, as well as the relation that the firms maintain with society and/or their

relevant public, the role played out by the state in the process of legitimation undertaken

by firms. A close analyse of SID in the context of the relation between the firm, society

and the state could help widen the explanatory power of the traditional LT approach and

pick out lines of research that would enable progress towards a fairer and more

democratic society, which are the principal objectives of the Social Accounting project

(Gray, 2002). Put otherwise, a social critique is proposed that incorporates economic,

political and social questions that “could potentially assist in a rational evaluation of

one’s life and social arrangements and motivate changes in practices and policies

deemed irrational and oppressive” (Dillard, 1991:9).

11

With the aim of verifying and broadening the scope and the explanatory power of the

bourgeois version of LT, a case study was developed which, in addition to examining

the legitimising strategies implemented by firms through SID, also studied the role

played by the state in their curtailment or promotion. This study analyses how

organisational change introduced by a multinational in the automotive sector, which

provoked serious confrontation between the firm and the workforce, was dealt with by

three different parties: the multinational itself in its annual reports; by the workers that

the organisational change affected; and by the state apparatus in its mediatory role in the

conflicts that erupted between workers and the multinational.

3. DESIGN OF THE EMPIRICAL STUDY

3.1. The Volkswagen factory in Navarra

The business organization under study in this research is a factory complex in Spain

operated by the automotive firm, Volkswagen (VW). The presence of VW in Spain

dates back to 1982 when, as a consequence of the financial weakness of the state

automotive company Sociedad Española de Automoviles de Turismo (SEAT), a number

of collaborative agreements were signed between the two companies. Some years later,

in 1986, SEAT was taken over by VW, which ever since has operated two plants in

Spain: one located in Barcelona and the other in the region of Navarra. The company

issued consolidated annual accounts for both plants up until 1993, after which it decided

to manage each plant individually to issue separate accounts. The case presented here

refers to the Navarra plant. This factory is smaller but more versatile than the one in

Barcelona, for which reason as soon as it came under the control of the German group

its installations were adapted to the demands of a new productive model aimed at

increasing the flexibility of its production and supply system. The factory constitutes the

largest firm in the region, providing 4,500 direct jobs and about 15,000 indirect ones

which means that society of Navarra is tremendously sensitive to developments at the

VW factory complex. Together, it all makes for a very suitable landscape in which to

analyse the existing interrelation between the political, economic and social settings of

the organisation and the introduction by the firm of an important change to the way it

organizes its production.

12

3.2. From mass production to lean production and just-in-time supply systems

The organizational phenomenon analysed in the present study is the change that VW

carried out in its factory located in Navarra, from mass production to lean production

and just-in-time supply systems. At the start of the 1970s, western economies began a

severe process of economic adjustment motivated by the rising cost of petroleum

products and derivatives, the most immediate consequences of which led to closures of

firms and a considerable amount of unemployment (Bluestone and Harrison, 1982).

Paradoxically, although its profits were also reduced, the Japanese automotive firm

Toyota Motors managed to maintain its income figures, increasing the difference with

other firms in the same sector (Ohno, 2002). The evident superiority of the Japanese

manufacturers and particularly those in the automotive industry, forced North-American

and European multinationals to propose modifications to their own productive

processes, incorporating lean production and JIT into the industry at the expense of the

Taylor-Ford production model or mass-production system, which up until that time had

constituted the referential model in the automotive industry (Womack et al, 1990;

Kenney and Florida, 1993). The change from a mass-production to a lean production

system and just-in-time supply has radically transformed not only the organisations and

their relations with clients and suppliers (Monden, 1981, 1994), but it has also

introduced important new features in the organisation of work and in labour relations

between firms and trade unions (MacDuffie, 1995). JIT means producing only what is

needed, as near as possible to the time at which it is needed, and delivering it just in

time (Monden, 1994). The necessary counterpart of JIT production is sequential

production ? a system in which all parts of the overall production process are

synchronized with each other (Hampson, 1999). According to its advocates, lean

production is at once supremely efficient, is a superior way for humans to make things,

and provides more challenging and fulfilling work for employees at every level, from

the factory floor to the headquarters (Womack et al, 1990).

However, workers and their unions have often contested these claims and describe a

different reality. For example, some voices have pointed to the negative effects that lean

production has on the workforce because of excessive flexibility, the intensity of work,

the difficulty of bringing family and working lives into line and, in short, by what can

13

be called management by stress or management by fear (Parker and Slaughter, 1988;

Sewell and Wilkinson, 1992). It is argued that the ideology of lean production is

carefully crafted to win support by using words such as “teamwork”, “job rotation”,

“empowerment” or “multi-skilling”, among others, that trigger positive responses, but at

the same time increase management power by applying different methods of controlling

the workforce (Parker and Slaughter, 1995). In addition, to be coherent with its

assumptions, the organisational model based on lean production, JIT and sequential

production implies the existence of core and peripheral workers (Atkinson, 1987),

which greatly increases the precariousness and instability of the workforce; factors

which could suggest a complicated and troubled scenario for labour relations.

3.3. Research method

This present study assumes that language and changes in its use are related with broader

cultural, social and political processes. For that reason, it places great importance on the

analysis of language as a method for the study of social changes (Fairclough, 1992).

Discourse analysis calls for an examination of language, the production of texts and

processes of communication and interaction between actors in organizational and

institutional settings (Grant et al. 2004). However, discourse is never generated in

isolation from its context. Discourse today is connected to yesterday's discourse and to

others that may be generated simultaneously and at a later date. For these reasons, the

concept of context includes “intertextuality as well as sociocultural knowledge"

(Fairclough and Wodak, 1997, p. 277). “Studying discourse is then, a powerful way to

explore processes of organizing and, particularly, the fragility of, and struggles within,

organizational life” (Hardy, et al. 2000, p. 1232). For example, in the case-study

presented below, the firm seeks to use the annual report to legitimise the organisational

change selecting to that end a discourse that highlights the beneficial effects of

flexibility. Simultaneously, however, other discourses appear that resist the effects of

flexibility. The discourse, therefore, does not reflect or represent all of the constituents

within the whole social entity that are involved in its construction. As Fairclough points

out (1992, pp. 3-4), “different discourses constitute key entities in different ways, and

position people in different ways as social subjects”. It is precisely the social effects of

discourse that are at the centre of discourse analysis.

14

Social research covers a wide variety of discourse analysis methods (Fairclough, 2003;

Van Dijk, 1997), which is to say, different ways of investigating a set of texts and

concepts in a structured way. Although discourse analysis is not a uniform

methodological procedure for conducting qualitative social research, it can be said that

the different discourse analysis methods all share two fundamental characteristics. They

are interested in the constructive effects of texts and they are necessarily interpretive

(Hardy and Phillips, 1999). In the present research, the process of interpreting the text in

the annual reports was necessarily a subjective one. As Fairclough (2003:11) says

“interpretation is partly a matter of judgement and evaluation”.

3.4. Data collection

Following the methodology proposed by Fairclough (1992), the entire narrative section

of VW annual reports were analysed in detail. The period of study goes from 1986, the

year when the state automotive company SEAT was taken over by VW, to 2005. The

acquisition of SEAT by VW in 1986 allowed the German company the introduction of

the organizational change analysed in this research having the total control over its

description in the annual report.

Paragraphs relating to the organisational change analysed in this research were extracted

during the reading of the texts with the aim of facilitating the analysis. Those

paragraphs were selected which contained expressions such as flexible working

practices, just-in-time supply, supplier policy, supplier park, client service, collective

negotiation or cost reduction, as the implementation of organizational change was

considered to revolve around those pillars . The extracts were annotated to refer to their

original section, the social context in which they were found and the type of information

that preceded and followed the extracts. Finally, an interpretation was arrived at through

iterative processes that produced a coherent sequence of the events as narrated. It should

be noted the annual reports were only published in Spanish and German and that no

English version existed. The paragraphs that appear in this paper are therefore English

translations from the Spanish.

Alongside these extracts, or more exactly, in opposition to these extracts, the history of

the organizational change that is not told in the annual reports is also analysed in order

15

to capture the shadow accounting. For Dey, (2007:308) “the starting point for silent and

shadow accounting lies in the differences which exist between what is usually promised

by Environmental and Sustainability Reporting and what is generally delivered.” To

capture the silent account, authors must compare the information reported by the

company in different corporate disclosure channels; while to encapsulate the shadow

account researchers must compare the information produced by the company with

external information produced by independent actors that is available in the public

domain.

To implement the shadow accounting strategy research, the official discourse of VW on

organizational change was compared with (i) the work of Castillo and López (2003) on

industrial conflict at the VW plant in Navarra caused by the introduction of this new

productive model, and (ii) the exhaustive coverage by the two most important local

newspapers (Diario de Navarra and Diario Noticias) that reported on the conflicts

arising between firm and workers because of the dispute over flexible working

arrangements (see Gibson, Gray, Laing and Dey, 2001 or Adams, 2004 for a similar

method). The use of these two channels enabled us to gather valuable information

relating to the opinions of the workforce on their experience of lean production, ever-

greater flexibility and more intense working practices as well as the position adopted by

the state in relation to the various conflicts under study between the multinational and

its employees.

In relation to this method, it could be argued that the news appearing in the media

reflects the partisan interests of the media groups themselves. For this reason, an effort

has been made to avoid value judgments made by the media i) by limiting recourse to

the press, in the majority of cases, to gathering the literal expressions of the actors

involved in the conflict, or to information of a quantitative nature; ii) by analysing

different written media sources.

4. FINDINGS

4.1. Lean production, Just-in-Time and annual reports: the official discourse

16

Following the acquisition of the state-owned Spanish firm SEAT by VW, this

multinational in the automotive sector ushered in a very active policy to change the

productive model. To do so, it recruited López de Arriortúa, the engineer responsible for

implementing the same organisational change in the General Motors industrial complex

in Germany at the end of the 1980s (see Arana and Álvarez, 1993 for an exhaustive

biography of López de Arriortúa). With two completely renewed plants, mass

production was abandoned in favour of the lean production system. This meant the

coordination of the daily flow of pieces from the suppliers to the assembly line, sharp

reductions in stock levels, price adjustments and improved monitoring of component

quality to meet more closely specified production requirements. The changes began

with a supplier selection policy that "introduced new supply concepts” (Annual Report,

1988, p. 24) with a view to the “implementation of the just-in-time method for the most

important sets of components” (Annual Report, 1989, p. 23). From that point, the

annual reports dedicate as much as two entire pages to providing information on one of

the fundamental aspects of SEAT new strategy: the just-in-time supply method. The

1988 annual report makes this clear:

“Similarly, for the new factory in Martorell and the one in Pamplona, a programme is

under preparation that will enable the implementation of Just-in-Time supply methods

for the most important sets of components” (Annual Report, 1988, p. 23).

The lean production system, based on JIT supply, implies the need to manage the

supply of pieces and components in a completely different way to the methods that were

formerly used. New concepts appear such as sequential production, which is no less

than the delivery of pieces and components to the final producer's plant just before they

are going to be assembled, thus reducing, or practically eliminating any stocks of raw

materials and intermediate products. It is a short step from this model to the concept of

the supplier park. Collaboration with suppliers becomes more intense and the annual

report inaugurates a new section entitled “Purchasing and Logistics” that is intended to

provide information on supplier policy and related matters.

“Since the integration of Seat into the Volkswagen group, collaboration on product

development with suppliers has become increasingly intense: a significant number of

pieces for the Seat Toledo have not only been devised but also designed by their

suppliers under Seat supervision” (Annual Report, 1991, p. 15).

17

As well as the capability to deliver the component at exactly the right moment, the

process of supplier selection has two fundamental aspects: quality and price. The new

model implies making more and better products for less money, so that suppliers also

compete between each other for supplier contracts. At the end of the eighties, the annual

reports of SEAT-VW already called for this competition between suppliers:

“During 1989, a new policy of supplier selection was implemented based on Seat's need

to offer more competitive products through efficient sales management and high quality

supply. In this context, Seat's suppliers must offer quality, a high potential for

development, business efficiency and industrial capacity, both now and in the future, as

well as maintaining a constant desire to surpass their competitors” (Annual Report,

1989, p. 23).

At the same time, it appears that a specific stakeholder becomes the sole element around

which all of the cost-reduction strategies revolve: the customer. Everything is done for

the customer to whom the highest degree of satisfaction should be assured because “our

competitiveness is only guaranteed by assuring customer satisfaction” (Annual Report,

1996, p. 22). For this reason, “all processes are managed with the aim of achieving full

customer satisfaction” (Annual Report, 1994, p. 11). That is, “every action has the

objective of assuring our competitiveness through the highest degree of customer

satisfaction” (Annual Report, 1995, p. 24). Customer satisfaction is measured in terms

of the quality of the product, its features, the prestige of owning a VW car, etc., but also

in terms of cost. Speaking in his capacity as a board member, when explaining the

pricing policy for the selection of a supplier, Lopez de Arriortua affirmed that:

“The client is in charge, isn't he? Well then, what has to be done is precisely the

contrary to what was done before. You have to start by asking yourself: how much is

the client willing to pay for that product? Or what is the price that the competition sells

a similar product? That is the start of the question. When we have fixed the sale price,

we subtract the profit margin that we want to earn and what remains is the cost. […] So,

when an automobile manufacturer wishes to launch a new model on the market it must

start out by asking: how much is the client prepared to pay for that car?”

(Arana and Álvarez, 1993, p.97).

With reference to the role of workers in the management and consolidation of

organisational change, VW devised specific frameworks for worker participation, such

as workshops, suggestion boxes and quality circles, oriented towards “improvements in

the quality of installations and the development of new work organisation instruments”

18

(Annual Report, 2000, p.27). New organisational instruments that help the organisation

to reach one of the basic objectives of the organisational change: cost reductions.

“Ever-increasing interest in fomenting worker participation in cost rationalization still

forms part of Seat policy. The quality circles instituted in 1990 are evidence of this.”

(Annual Report, 1990. p.22)

For the change of organisational model to develop successfully a suitable framework for

labour relations is needed that guarantees a high dose of flexibility at the same time as

reducing any uncertainty over the willingness of the workforce to accept it. This trade

off between the firm and the workforce of secure employment in return for increased

flexibility was set out in the collective bargaining agreement of 1996 and was reflected

in the annual report of that same year.

“The agreement that was signed includes important measures that allow flexibility in

the programming of production and moreover, they significantly reduce the level of

temporary employment contracts by converting practically all of the temporary

contracts into permanent positions” (Annual Report, 1996, p. 25).

In short, the treatment given to organisational change by VW in its annual accounts

presents a discourse that is constructed on flexibility, efficiency and competitiveness.

Increased flexibility brings with it cost reductions as a consequence and improved

product quality. This in turn contributes to increasing client satisfaction, improving the

competitive position of the firm and, lastly, increasing benefits for society at large, or in

the terms chosen by VW “the contribution of value to society in Navarra” (Annual

Report, 2005, p.13). However, with the new productive model, the organisation of work

is radically transformed as are labour relations and the way of dealing with collective

bargaining. Although some workers have benefited from permanent jobs in return for

increased flexibility, working conditions are no longer uniform, dual salary scales are

generalised3, outsourcing and subcontracting of tasks are more common which implies

worse working conditions for some workers, at the same time as it increases the

responsibility of the worker on the job. All of which is a source of conflict, tension and

a hidden story that is left untold in the annual reports.

3 For example, art. 68 of the III Volkswagen-Navarra Collective Bargaining Agreement fixed the salary of a newly incorporated specialist at 85%, for a period of 24 months.

19

4.2. Lean production, Just-in-Time and annual reports: the untold story

Greater efficiency and productivity achieved thanks to changes in the productive

system, which are related and defended by the firm in its annual reports, appear to be

seen in a different way by the workforce. Increased flexibility brings with it more

intense work routines, as well as the recognition of core workers, essential for the firm,

and peripheral workers, contracted through temporary employment agencies or whose

employment is outsourced to subcontractors offering worse working conditions than in

the latter case (Parker and Slaughter, 1995). Once the VW supplier park was

constructed in 1999, the establishment of suppliers began that adjusted their production

to the demands and the work rhythm of the assembly plant. Tasks that were previously

completed in the assembly plant by VW workers were passed on to workers belonging

to suppliers with different employment conditions to those in the assembly plants (see

Castillo and López, 2003). The different ways of organising production and greater

flexibility required from the workforce created tension over the collective bargaining

agreement for 2000. The active resistance of the workforce against these flexible

measures proposed by the firm extended the negotiations over six months, a period in

which various strike calls were backed by practically all of the workers at the plant4.

Firms and trade unions waged an ongoing battle at the negotiating table, but also

through the communications media that reported it in the following terms:

“The negotiating table for the IV collective bargaining agreement at Volkswagen met

yesterday, but no progress was achieved. The firm asked for replies on a number of

points concerning flexibility set out at previous meetings, whereas the unions referred

to the need to move on to the discussion and debate of the points that make up their

demands.” (Diario de Navarra, 26th of January, 2001, p. 37).

During the negotiations, the workers had to face media pressure announcing relocations

of production to other plants in the group5 (Bratislava in the Slovak republic) and

declarations by the VW President calling for “trade union responsibility” given that

“there must be unity between the firm and the workers for the factory to continue on the

right course.” (Diario de Navarra, 23rd of March, 2001, p. 36). After six months of tense

4 A report on the strikes that took place throughout the negotiating period may be found in the "Diario de Noticias", 6th of June, 2001, p. 31 and the "Diario de Noticias", 7th June 2001, p. 36. also in the Diario de Navarra, 15 June 2001, p. 36. 5 There has been a constant threat to move part of the production to other plants in the group, principally Bratislava and Brussels, in the history of collective bargaining at the Volkswagen plant in Navarra. See the Diario de Navarra, 4th of July 2001, p. 22. Also, Diario de Noticias, 4th of April, 2006, p. 36.

20

negotiations, 87% of the trade union representatives finally accepted the measures on

greater flexibility (Saturday work and leaving the Christmas holidays out of the

agreement) in exchange for better salaries and a commitment to contract temporary

workers over the summer months. The sole matter to be reflected in the annual report of

2001 (p. 29) was precisely the one that concerned cover over the summer holidays, and

no reference was made to the conflictive negotiating process, the increase in flexibility

introduced or worker discontent expressed through strike action and demonstrations.

The negotiation of the fifth VW collective bargaining agreement, four years later, once

again revived the tensions of the previous one due to the opposition of the workforce to

an extension of the measures on flexibility signed four years ago. The principal

obstruction once again lay in the consideration of Saturday as a working day and in the

16-hour period of notice to respond to production needs. In the middle of the

negotiating process, the President of the Business Confederation of Navarra stated that

“the time of social conquests has finished” (Diario de Noticias, 9th of June, 2005, p. 46),

at the same time as the workers of the plant called various demonstrations on the city

streets to demonstrate their rejection of measures involving even greater flexibility than

those signed in previous agreements. After one of the many protest demonstrations led

by the workforce throughout the month of May, 2005, the president of the company's

works committee demanded:

“[…] the withdrawal of the abusive proposal on flexibility and that management inform

us of the real needs in order to determine, in view of the latter, whether or not it is

necessary to adopt flexible working arrangements in the new [collective bargaining]

agreement.” (Diario de Navarra, 14th of May, 2005, p. 27).

Once again, the annual accounts remained silent over the conflictive atmosphere that

had impregnated the economic activity of VW during 2005. The paragraph below was

the sole reference that VW devoted to the negotiation of the fifth VW collective

bargaining agreement in its annual report

"2005 was marked by negotiations brought to a head between the organisation and the

committee of the organisation in order to formulate the new collective agreement.

Those negotiations did not formalise a definitive or agreed text before the end of 2005,

although the negotiations had reached a very advanced staged and a definitive accord

was expected in the early weeks of 2006. One of the principle themes of the

negotiations was the inclusion of the collective agreement over flexible working, a

21

necessary concept to adjust the production cycle to different phases of the product's life

and to variability in demand" (Annual Report, 2005, p. 27)..

In addition to the resistance of the workforce to accepting ever-greater doses of

flexibility, another significant source of conflict between workers and management

(which was not quoted in the annual reports) was caused by VW introducing new types

of employment contracts. As from 1999, outsourcing of jobs to other firms that resorted

to temporary employment agencies to recruit workers was generalised, to the point

where even the most routine, easily substituted and least specialised jobs were

outsourced, of least added value to the self-employed workers that used their home as a

work centre; workers that, for example, do not have the possibility of organising

themselves in unions (Castillo and López, 2003). The worse working conditions (lower

salaries and greater insecurity) that sub-contractors usually offer, were opposed by the

workers that were affected in various ways. One of the reactions that had the greatest

impact, in view of the social concern that it generated and the economic consequences

that ensued for VW, was triggered within the largest firm subcontracted by VW to carry

out logistics. It was a strike initiated by a group of workers that, although having

worked at the same assembly plant and carried out similar tasks to those undertaken by

workers contracted by the assembly firm, had to put up with worse working conditions

(see Castillo and López, 2003). Throughout March 2000, the workers initiated a strike

that had an immense media impact and some very significant economic effects, which

managed to completely paralyse the production of vehicles, as the local press was at

pains to point out:

“[…] The strike of 320 people paralysed the activity of over 6,000 workers.

Volkswagen manufactured only 235 cars of the 1,116 that are programmed on a daily

basis ” (Diario de Navarra, 8th March, 2000, p.26)

Another example of this same problem is found in the strike backed on June 2003 by

the workers of two firms that supplied VW under the JIT system. The impact of the

strike was such that it led to the request by VW for the temporary suspension of the

contracts for the workers in the Navarra plant (Diario de Noticias, 19th June, 2003). The

paralysation of production at VW due to the strikes seconded by subcontracted workers,

in addition to highlighting once again the existence of serious conflicts between the firm

22

and the workers that were systematically silenced in the company's annual reports, also

shed light on the economic vulnerability of VW as a consequence of new methods of

organising production and work. This second question is especially relevant, as it is

precisely the economic benefits of the new organisational change that VW uses to

construct its discourse by which it justifies the modifications to the method of

organising production and work in the annual reports .

The possible contradiction existing between the description of organisational change

advanced by the firm and the rejection of its effects by the workers constitutes a source

of conflict. A conflict in which there is a third actor that is to play an active role in its

management: the government of the autonomous region.

4.3. The role of the state

The autonomous region of Navarra, unlike other regions of Spain, has historically held

on to full powers over industrial policy enjoying wide regulatory and tax powers in

fiscal matters. These specific powers at regional level allowed the early establishment,

in 1966, of a plant for the manufacture of automobiles registered in the name of British

Leyland, thanks to the tax incentives made available by the government of Navarra to

firms setting up in the region. In 1974, coinciding with the start of the petrol crisis, the

British firm sold off its investments in Spain, selling the installations to the state

automotive company SEAT that, years later, as explained in the earlier section, likewise

sold them on to the multinational VW.

Since the arrival of the German multinational in Navarra, the autonomous government

of the region has implemented an industry policy aimed at consolidating the presence of

VW in the region. To do so, it authorised and stimulated the construction of a VW

supplier park by conducting an active industrial policy which led to the establishment of

30 firms over the first two years of its operation. Once the construction of the VW

supplier park was completed, VW switched over to just-in-time supply for the majority

of its components, inaugurating an era in which the flexibility demanded by the firm

was to saturate the collective negotiations between the firm and the workers, in which

the regional government was to participate not only as a spectator, but as an actor with a

prominent role.

23

As mentioned in the previous section, the rejection demonstrated by the workers

towards increased flexibility as proposed by the firm in negotiations for the fourth

Collective Bargaining Agreement led to significant delays in its signing. Faced with this

situation, the President of the regional government in a statement made to the Diario de

Navarra called for “rational behaviour” urging “a quick signature” of the agreement

due to the importance that this multinational had for the economic development of the

region.

“The Government is concerned about the situation that has arisen. The conflict might

put the launch of the new Polo in danger and, might even endanger the economic

growth of Navarra because Volkswagen is a key, strategic firm to the industrial

landscape of Navarra” (Diario de Navarra, 5th of July, 2001, p. 26).

The threat of delocalisation, wielded once again by the VW management, if an

agreement was not rapidly reached (Diario de Navarra, 30th June, 2001, p. 23), was used

by the Regional Minister of Industry (Consejera de Industria) to express her concern, at

the same time as she urged both parties to analyse the situation “from a global

perspective”. The Minister recalled that the Polo model:

“[…] is not exclusive to Navarra as a model, but is also constructed in another five

locations, for which reason we would have to analyse the problem from a global

perspective” (Diario de Navarra, 30th of June, 2001, p. 23).

With the negotiating process in full flight and faced with the aforementioned delay in

signing the agreement, VW announced it was to cut back production by 20,000 vehicles

and abandoned the recruitment of one thousand students over the summer holidays

(Diario de Navarra, 5th July, 2001, p. 26). The announcement of cut backs in production

made by the company prompted a shower of statements by prominent members of the

government, alarmed at the “loss of income” from taxes, estimated to be around 12

million euros (Diario de Navarra, 5th of July 2001, p.26). The workers at the assembly

plant were even accused of “lacking solidarity” whose employment-related demands

and claims were endangering the recruitment foreseen by the firm over the summer. The

Minister of Industry made it clear that:

“The failure to recruit students at the University to cover temporary vacancies during

the summer holidays is putting thousands of jobs at risk, which, to my mind seems to

show a lack of solidarity towards those workers” (Diario de Navarra, 30th of June, 2001,

p. 23).

24

Three years after the conflicts described above, in the midst of growing confrontation

caused once again by the resistance of workers towards ever-greater doses of

flexibility6, the local press recalled the award of the Gold Medal of the Community to

VW (Diario de Noticias, 9th of November, 2004, p. 6). The government argued that this

prize “the highest distinction of the Community” was in recognition of a firm that was

an "example at an international level for its production, its installations, its level of

quality and its productivity7”. The following year, in the course of the negotiations of

the fifth collective bargaining agreement, the Minister of Industry supported the

discourse employed by VW in its annual accounts when he related flexibility with

competitiveness and urged the workers to sign an agreement that would maintain

productivity at the plant in Navarra so as to attract new investment to the region. The

press reported his statement in the following terms.

“It is very important to sign an agreement that covers a satisfactory degree of flexibility

and working conditions that allow the plant to remain competitive. If VW loses

competitiveness, there will be no arguments to justify new investments” (Diario de

Navarra, 25th of October, 2005, p. 25).

As mentioned in an earlier section, just as for the fourth collective bargaining

agreement, the negotiation of the fifth one turned out to be very conflictive. After 15

months since the start of the negotiating process of the fifth agreement, the regional

government intervened in the negotiations between the firm and the workers by

assuming a unilateral role as the mediator between both parties. The President of the

Government justified this intrusion by highlighting once again the economic importance

of VW for the growth of GDP in the region that “calls for continual and permanent

effort from us all” (Diario de Noticias 7th of March, 2006 p.37). The intervention of the

government was flatly rejected by the president of the company's works committee who

criticized “external pressure on the committee” (Diario de Noticias 7th of March, 2006

p.37) at the same time as one of the managers of the majority unions affirmed that:

6 The first quarter of 2005 saw a series of strikes in the Volkswagen plant as means of pressure to "call for the firm negotiate” (Diario de Navarra, 25th of February, 2005, p. 23). 7 A decree of the Regional Government of Navarra (Decreto Foral 346/2004 of 8th of November), by which the Gold Medal of Navarra was awarded to Volkswagen Navarra, S.A. Official Gazette of Navarra, 19 of November 2004, nº 139.

25

“What Sanz [the President of the regional government] should do is to get management

to sit down at the table after having unilaterally broken off the process […] the only

valid framework is the negotiating table” (Diario de Noticias 7th of March, 2006 p.37)

When the President of General Motors, subsequently the US Secretary of Defence to

President Eisenhower pronounced the well-known phrase to the effect that what is good

for General Motors is good for America, he was affirming the common interests of the

state and a strategic industry for the North American economy (Neimark, 1992). Putting

aside the differences that exist between the USA and small region of Navarra and

between GM and the VW plant, it could well be said from the information disclosed in

this research that, for the Government of Navarra, whatever is good for VW is good for

the region as a whole8.

5. COMMENTS

5.1. Legitimising strategies: distraction and/or manipulation.

Bearing in mind the premises of LT, if the image of the organisation held by society is

altered because of a modification in its objectives, methods or results, and this new

image does not fit in with the desires of its principal stakeholders, the firm could face

serious problems continuing to carry out its activities (Lindblom, 1994). During the

period running between 1986 and 2006, VW introduced important changes to its

procedures. It moved from the en-masse, standardised manufacturing of uniform

products, to the manufacture of diversified products, oriented towards client tastes,

through a lean production system based on flexible working practices. These changes in

procedures also brought with them significant adjustments in the operating results of

this multinational in the automotive sector. On the one hand, VW seems to have

reduced its costs, improved customer satisfaction and increased its productivity thanks

to the new methods of organising production and working practices. Workers, on the

other hand, appear to have experienced a deterioration in their working conditions as the

8 In fact, the industry minister of the regional government of Navarra in 1996 was D. Ramón Bultó, who up until 1994 had occupied various managerial posts in SEAT, as the SEAT director of production and the Director of the Volkswagen plant in Navarra.

26

organisational changes were put in place that, as a result, increased their deep sense of

unease. The conflicts between VW and its workforce spilt out beyond the boundaries of

VW, making themselves visible in society due to the numerous strike calls backed by

the workers, principally (although not exclusively) because of the negotiations in recent

years over the collective bargaining agreements. Strikes that on each occasion were

reported through the principal channels of the media and that were able to affect the

image that society has of VW.

According to the premises of LT, were VW to see that its social image had been

significantly affected by the socially adverse consequences of the organisational

changes in question, it would be forced to implement one or more of the following

strategies: undo some of the changes undertaken, justify their adverse consequences on

the workers without modifying those changes, manipulate/distract the perception held

by society of those adverse effects on the workforce, or modify the related social

expectations (Dowling and Pfeffer, 1975; Lindblom, 1994; Deegan, 2002). Both the

information that is disclosed and the information withheld might be important to the

successful implementation of these strategies (Chwastiak and Young, 2003). In order to

manipulate or distract the social perception, it would not be necessary to lie or to falsify

information that is disclosed, it would be enough to make visible those changes in

procedures and results that are aligned with the wishes and needs of society, while

hiding others that went against them and that might therefore compromise the success of

the changes underway in the firm (Neu et al. 1998).

As repeatedly stated above, VW used their annual report to transmit the message that

the new work model had been introduced in the organization because of improvements

to efficiency, cost savings and/or greater productivity thereby enhancing customer

satisfaction and the competitive position of the organization. Those users that trusted in

the objectivity and neutrality of the information revealed by VW, could arrive at the

conclusion that organizational change would be desirable for everybody in the

organization. This is possible, among other reasons, because all of the conflictive labour

relations would have gone unnoticed by social agents that use the annual reports, which

are prepared exclusively by the company, as their sole source of information. VW

omitted any allusion to its numerous conflicts with workers due to increased flexibility

in working practices, which was the main feature of its organisational change. Under the

ideal circumstances described by VW in its annual reports, the user of the accounting

27

information would obtain a biased view of the economic and social reality of VW in

which it could be concluded that what is good for the organization is good for every

constituency and for society in general. It might be that these findings not only show

that annual report is hardly a neutral tool that reflects the reality of VW in an objective

way, free of value-laden judgments (Burchell, et al, 1980; Tinker et al, 1982; Morgan,

1988; Dillard, 1991), but that VW might be using it to legitimise its behaviour through

the manipulation/distraction of the perceptions of society (Deegan and Rankin, 1996;

Deegan et al. 2000).

However, if you wish to understand the true scope of these strategic manoeuvres, their

analysis should not be limited to the relation that the firm maintains with society, in

general, or with its stakeholders, in particular. After analysing the possible use that VW

makes of its annual accounts to legitimise its behaviour, an analysis will be made in the

following section of the role played by the state in this process. The study of the way in

which the regional government has positioned itself in the conflicts between VW and its

workers, which is to say, on those occasions when the legitimacy of the organisational

change has been questioned, could help to connect up legitimising strategies undertaken

by VW, within the political framework in which they take place.

5.2. Connection with the macro-environment: the role of the state in the conflict

The possibility that the state is contributing to the successful implementation of

legitimising strategies in business in general, and in particular, to those aiming to

manipulate social perceptions, is a question that is not dealt with by the traditional

approach to LT. This could be due, at least in part, to the assumption made by authors

(more often than not in an implicit way, although see Deegan, 2007:132) that business

strategies are embedded in a pluralist political and social setting. The state appears to be

contemplated as a neutral entity that strives to balance situations of inequality through

the sharing of wealth or power that on certain occasions arise within society. This

premise might be preventing authors that have applied this conceptual framework from

even suggesting theses types of "synergies" between the interests of the firm and the

state.

However from the analysis of the case study conducted in the course of this research

there seems to be an underlying confluence of interests between VW and the state

28

apparatus that is centred around the implementation of lean production and JIT. The

logical process underlies the arguments employed by the government to justify the

changes introduced by VW coincides with the basis of the discourse that the

transnational company might be using to legitimise the changes to the organisation of

work: what is good for the firm is good for all of its constituents (in this case the

workers) and also for society in general (in this case, the society in Navarra). A

discourse that highlights positive impact on costs, efficiency, productivity and customer

satisfaction, but also seems silence the deterioration in the working conditions that the

new scenario might be causing, and the adverse effects of the organizational changes on

VW's economic risk. Therefore the discourse of the State due to its bias towards the

positive aspects of change might be helping (voluntarily or not) VW to

manipulate/distract perceptions held by society.

The analysis of the legitimising strategies undertaken by VW under a more

critical/alternative approach in this study, as well as serving to shed light on legitimising

strategies circumscribed by the relationship between firm/stakeholders, widely studied

under the bourgeois approach (see Deegan and Ranking, 1996; Deegan and Gordon,

1996; Buhr, 1998; Brown and Deegan, 1998; Deegan et al. 2000; Wilmshurst and Frost,

2000; O’Donnovan, 2002; Deegan et al. 2002; Campbell, 2003; Ahmad and Sulaiman,

2004), allows us to analyse the role played by the state in the implementation of these

types of strategies, thus increasing the scope and application of LT to the relations

between firm, society and state. This broadening of the scope of LT is no trivial

question. In keeping with the supposition of a pluralist setting, on numerous occasions

researchers using LT have, either implicitly or explicitly, placed their trust in the state

apparatus in order to deal with the manipulative strategies of the firm.

6. SUMMARY AND IMPLICATIONS

This work has sought to highlight that the theoretical approach to LT, which has

dominated the study of SID by academies for many years, has not attempted

contextualise the business practices that it has helped to reveal sufficiently well. The

greater part of the research undertaken within this conceptual framework has taken it as

given, either explicitly or implicitly, that the political and social setting of organisations

is a pluralist one. Faced with a non-problematic setting, the identified shortcomings in

transparency and accountability are limited to the relation that the firms maintain with

29

their stakeholders and not to the main attributes of their business environments. Thus, it

is usual to trust in the role played by the state when considering solutions to problems

that refer to the veracity of SID made by organisations to their stakeholders (see for

example, Deegan et al. 2000). The results obtained in this research, in line with those

arising from previous studies (see Adams et al. 1995; Larrinaga et al. 2002; Llena et al.

2007 or Criado et al. in press), might well serve to call these suppositions into question.

In this sense, the contribution of the present study is twofold. On the one hand, the

simultaneous and qualitative analysis of information that is made available through

different channels allows us to capture the shadow side of the VW annual report and, at

the same time, to specify the main aim of the legitimation strategy of VW:

manipulation/distraction. On the other hand, by introducing the role played by the state

in the implementation of this strategy into the analysis, we also extend the scope of LT

by linking the strategies at firm-stakeholder level to the political environment. The

behaviour displayed, at certain points in time, by the government of Navarra in relation

to the organisational change introduced by VW, could call into question the

presumption that we live in a pluralist world. In our opinion, it points to the need to

adopt a more critical position towards present-day political and social structures. If this

were the case, if the world in which firms operate were not essentially pluralist, the

bourgeois approach might only explain in an incomplete way the reasons for the

legitimising strategies of business and their implications. It would therefore be unable to

prescribe actions aimed at resolving the problems of transparency and accountability

that it has helped to uncover.

The aim of this work is not to propose a specific theory on the state in the LT

framework (see Tinker, 1984 to a review in this sense), but to highlight the view that

there is an evident need to widen the scope and explanatory power of LT, and thereby

extend the framework of the study of SID and the relations that exist between the firm,

its stakeholders and the socio-political setting. For this reason, when carrying out future

studies under the postulates of LT, it researchers should perhaps stop taking the main

attributes of the business environment for granted, should move away from the starting

premises and ground their work instead in questions that are empirically studied.

30

Acknowledgements

The authors wish to acknowledge the insightful comments provided by Crawford

Spence, Jesse Dillard and participants at the 30th Annual Congress of the European

Accounting Association (Lisbon, 2007). We are also thankful to Antony Price for

having edited the English language version of this paper. The Spanish Ministry of

Education and Science (Ministerio de Educación y Ciencia) (project SEC2006-03959)

provided financial assistance for this research.

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