Legitimising corporate reputation in times of employee distress through disclosure: Media exposure in the electronic manufacturing services industry in China

Zhongtian Li (The Business School, Queensland University of Technology, Brisbane, Australia)
Shamima Haque (The Business School, Queensland University of Technology, Brisbane, Australia)
Ellie (Larelle) Chapple (The Business School, Queensland University of Technology, Brisbane, Australia)

Accounting Research Journal

ISSN: 1030-9616

Publication date: 8 May 2018

Abstract

Purpose

This paper aims to examine changes of non-financial voluntary reporting practices over time in response to episodes of employee-related distress. It investigates employee-related disclosures by the four largest electronic manufacturing services firms in China between 2008 and 2013 during a series of employment-related incidents, to investigate how the firms re-legitimate their reputation in response to the media coverage on those incidents.

Design/methodology/approach

A series of employee-related incidents that occurred in 2010-2012 is selected as the focus of this study, with total coverage of employee-related disclosures between 2008 and 2013. These incidents are directly linked to three of the four sample companies: Foxconn, Pegatron and Compal Electronics. Employee-related disclosures in corporate social responsibility (CSR) stand-alone reports are coded by a set of specifically designed instructions, and newspaper articles about employee-related incidents are coded for sentiment. Results are interpreted through two theoretical lenses: the media agenda setting theory and the legitimacy theory.

Findings

Newspapers reported the employee-related incidents in a way detrimental to the legitimacy of firms that directly involved in the selected industry. In the process of legitimation, firms switch between disclosing more employee-related information and reducing disclosures. The self-expectation on organizational legitimacy also affects how CSR reporting is used in legitimation. The employee-related disclosure analysed is closer to symbolic legitimation than substantive legitimation.

Originality/value

This study contributes to reporting practice by showing that employee-related disclosure is largely vacuous and to a greater extent is used as symbolic legitimation. The quality of disclosure requires significant improvement. This study contributes to the literature by using the legitimacy theory to interpret employee-related disclosure in China, addressing inadequate research efforts in the context of social and human rights dimensions of CSR reporting.

Keywords

Citation

Li, Z., Haque, S. and Chapple, E. (2018), "Legitimising corporate reputation in times of employee distress through disclosure", Accounting Research Journal, Vol. 31 No. 1, pp. 22-45. https://doi.org/10.1108/ARJ-12-2016-0158

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Publisher

:

Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited


1. Introduction

This study investigates the voluntary employee-related disclosure made by four major electronic manufacturing services (EMS) firms. Three out of four EMS firms, Foxconn, Compal Electronics and Pegatron, were involved with employee-related incidents between 2010 and 2012 relating to their operations in China, and the fourth EMS firm Quanta Computer was not. A comparison between the first three technology hardware manufacturers with the last provides the opportunity to observe the similarities and differences in how news media reported the incidents and the firms involved, and how the firms responded through voluntary disclosure to the challenges to their reputation. The objective of this study is to examine, using the media agenda setting theory (Brown and Deegan, 1998; Aerts and Cormier, 2009; Dickson and Eckman, 2008), whether and how the four EMS firms attempted to re-legitimate their reputation through employee-related disclosure in response to the media coverage on those employee-related incidents.

The years 2010-2012 represent a period of time where several traumatic events occurred affecting workers in the EMS industry. The employee-related incidents, affecting worker safety and well-being, include the following: Regarding Foxconn, 17 workers from Foxconn committed or attempted to commit suicide in 2010 (SACOM, 2010); in 2011, a Foxconn assembly plant exploded, causing three deaths and 15 injuries[1] (Apple, 2011); and labour disputes due to wages were raised in Foxconn in 2012[2]. Regarding Pegatron, a factory exploded in 2011, causing 61 injuries and 23 hospitalisations[3] (Apple, 2011). Regarding Compal Electronics, it became subject to labour disputes in 2012[4]. This litany of events forms the basis of this study.

This study is important for two reasons: first, a research focus on employee-related disclosure contributes to the research on business and human rights (Marens, 2010). Human rights are “associated with human beings basic in achieving a minimum level of human dignity, health and wellbeing” (Dillard et al., 2012, p. 198). In the workplace, human rights are transformed into labour rights. Second, a research focus on corporate social responsibility (CSR) reporting of EMS firms has significant economic and social influences, due to the operational scale of the industry and the pervasiveness of the end consumer product (Zhai et al., 2007). Thus, a focus on employee-related disclosure made by the four EMS firms provides a convergence of academic and practical consequences within the scope of CSR reporting research.

The employee-related incidents that occurred between 2010 and 2012 were intensively reported by news media. This study uses two theories – the media agenda setting theory and the legitimacy theory. This study uses newspaper articles collected between 2007 and 2013 as primary data, analysed according to the media agenda setting theory. Next, informed by the legitimacy theory, the employee-related disclosure between 2008 and 2013 is collected and analysed to examine whether and how the four EMS firms re-legitimated their reputations in response to media coverage on those incidents.

This study finds that news media reported employee-related incidents in a way detrimental to corporate legitimacy. In terms of volume/amount of disclosure, the four EMS firms responded to the media coverage on employee-related incidents in different ways, and the divergent responses are viewed according to legitimacy theory. Examining CSR reporting practice at not only the organizational level but also the industry level, this study covers disclosures from four top EMS firms. Empirical evidence shows that the motivations for voluntary reporting differ between the four firms. In particular, Foxconn’s reporting appears consistent with the legitimacy theory, whereas this result is not consistent for the remaining three competitor firms. Overall, our findings suggest that the quality of employee-related disclosures can be improved.

The rest of paper unfolds as follows. Section 2 discusses the background at four levels: global, national, industrial and organizational. Section 3 reviews the literature, particularly focusing on CSR in China and employee-related disclosure. Section 4 explains theories used in the study. Section 5 explains the data sources and analysis conducted. Section 6 presents results and discussion. Section 7 focuses on conclusion and implications.

2. Background

2.1 Outsourcing – global level

The rise of outsourcing is linked with globalization[5] with several features relevant to this study. First, business activities pertaining to outsourcing, such as production and logistics, usually happen in low-cost countries[6], where the enforcement of labour law is weak, and workers are vulnerable to exploitation and suppression from employers (Chan et al., 2015a). Second, outsourcing transforms internally organized production to externally coordinated contracts. This transformation allows a procuring firm to shift its risks to manufacturing firms, fostering ignorance on such matters as labour rights. The chance to (at minimum) shift blame or to (even) deny accusations worsens workers’ conditions (Knight, 2007). Third, outsourcing to some extent clouds public attention on violations of labour rights. Media outlets in different countries have divergent interests in reporting news events. For example, the series of worker suicides sparked strong public outcry directed at Foxconn, following which, the local media reported a significant amount of news pertaining to labour malpractice in the EMS industry. In contrast, the US media focused on procurers of Foxconn (such as the brand Apple), rather than the EMS industry. In summary, outsourcing as a business decision may obfuscate violations of labour rights.

2.2 The electronic manufacturing service industry – industrial level

The EMS industry “comprises the process of design, development, fabrication, assembly and testing of electronics parts, technology, components and systems” (Mason et al., 2002, p. 612). The mainstay of the EMS industry is contract manufacturing for major brands, such as Apple, Microsoft and Dell (called “original equipment manufacturers” OEMs) (Barnes et al., 2000). Relevant production facilities are located in more than 45 countries, and the EMS industry (in the upper stream of supply chain) provides products to sectors in the downstream, such as communications, computing, medical, commercial aviation and automotive (Sherman, 2014). Lüthje (2002, p. 4) reviewed the history of the EMS industry, concluding that the shift to China is related to lower labour costs. The EMS firms discussed in this study deployed (almost) all production capacity to China, whereas their headquarters are located in Taiwan.

2.3 Sample electronic manufacturing service firms – organizational level

Top five EMS firms ranked by Wang (2014) are Flextronics, Foxconn, Compal Electronics, Quanta Computer and Pegatron. The literature, including Patten (1991, 1992, 2002) and Kent and Zunker (2013), has reported that firm size, industry affiliation and country of origin are related to voluntary reporting. Thus, considering firm size, business connection with Apple and country of origin, the study selected the four Taiwanese firms, Foxconn, Compal Electronics, Quanta Computer and Pegatron. Table I summarizes background about the four EMS firms. Information is collected from Onesource, Financial Times, Fortune 2015 Global 500 and the Apple website. The four EMS firms provided 13 final manufacturing facilities to Apple. In terms of size, Foxconn is the dominant player – the sum of total revenues generated by the other three firms in 2015 was still less than the total revenue earned by Foxconn in the same year.

The major employee-related incidents occurred between 2010 and 2012 and are presented in Figure 1. The employee-related incidents marked in the timeline have been reported by both English and local media.

3. Literature review

This section discusses relevant prior research, including CSR in China and CSR reporting pertaining to employee issues. At the broader level, previous studies, including those of Thomson (2007) and Fifka (2012, 2013), argued that CSR research may be progressed by examining reporting practices in Asia; hence, this study responds to that call by focussing on reporting practices in China. Previous studies on CSR in China have explored two perspectives, the relationship between reporting practice and corporate characteristics and the discovery of different CSR themes among stakeholders. Regarding the first aspect, Xiao and Yuan (2007), Liu and Anbumozhi (2009), Chu et al. (2012) and Marquis and Qian (2014) found that CSR reporting in China is affected by firm size, industry affiliation, corporate governance and pressure from external stakeholders. The above findings largely clarify the sample selection criteria used in this study – firms in the same industry, in the same country and of similar size are chosen. Regarding the second aspect, Rowe and Guthrie (2007), Hofman and Newman (2014), Tang et al. (2014), Yin (2015) and Yu (2015) found stakeholder interest and perceptions regarding several CSR topics, including labour rights. Thus, it is reasonable as researchers to have prior expectations about stakeholders’ interest in labour practices of firms in China.

Arguably, CSR reporting on social issues has a more powerful agenda than on environmental issues pertaining to the current interest in business and human rights (McPhail and Adams, 2016). Prior research on employee-related disclosure focuses on developed countries. For example, Adams and Harte (1998), Day and Woodward (2004), Vuontisjärvi (2006), Archel et al. (2009), Williams and Adams (2013), Koskela (2014), Kent and Zunker (2013, 2015) and Searcy et al. (2016) found that the quality of employee-related disclosure in developed countries was problematic, representing a failure in accountability. In another stream of research, Islam and Deegan (2010a), Islam and McPhail (2011) and Islam and Jain (2013) examined the relationship between employee-related disclosure and influences exerted by stakeholders. Sikka (2008) argued that workers in developed countries also face structural injustice. The labour-rights circumstances in developing countries may render workers more vulnerable (see discussion in Section 2). This study contributes to the CSR literature by investigating the employee-related disclosure pertaining to production operations in China.

Finally, Seuring and Müller (2008) argued that CSR reporting pertaining to supply chains is largely ignored in the literature. Very few studies, Islam and Deegan (2010a), Islam and McPhail (2011) and Islam and Jain (2013), explored CSR reporting practices pertaining to the supply chain. As explained in Section 2, EMS manufacturers such as the firms in this sample are in the upper stream of supply chain, this study also contributes to examining the reporting practices of firms participating in supply chain. Accordingly, this study fulfils three research opportunities: one, in terms of geo-political situation; two, in terms of analysing social employee-related CSR disclosure given the insufficient attention on social issues (Parker, 2005, 2011); and three, in terms of investigating the impact of disclosure in the supply chain.

4. The media agenda setting theory and the legitimacy theory

This study examines CSR disclosure in terms of the media agenda setting theory, which explains how exposure of employee-related incidents affects legitimacy of the affected firms; and the legitimacy theory, which interprets how employee-related disclosure by firms manages their organizational legitimacy. The two theories together explain the relationship between media coverage and CSR disclosure

4.1 The media agenda setting theory

Media shapes public opinion on events that the public lacks first-hand experience. Changes in how the media portray a firm affect the level of the firm’s social acceptance (Brown and Deegan, 1998; Aerts and Cormier, 2009; Dickson and Eckman, 2008). Thus, the firm determines on whether, and in what ways, to use CSR communication to re-legitimate itself, according to changes in its organizational image portrayed by media: Deegan et al. (2000) and Islam and Deegan (2010a).

The media agenda setting theory justifies our expectation that the relationship between media coverage on certain issues/events and public awareness of those issues/events is related – “the media play an influential role in developing the image and perceptions created in people’s mind” (Yekini et al., 2016, p. 4). Previous studies discussed the media agenda setting theory in different scenarios: Brown and Deegan (1998), Deegan, Rankin, and Voght (2000) and Aerts and Cormier (2009) used the theory in context of environmental issues; Islam and Deegan (2010a) discussed it in context of social issues; and Tilling and Tilt (2010) and Clarkson et al. (2011) considered it the theoretical basis for measuring legitimacy. In summary, the CSR literature seems to agree that the public awareness of and expectation on certain CSR issues/events are to a greater extent determined by the media coverage on those issues/events, which informs our RQ1 as to the effect on CSR reporting decisions. The first research question is presented below:

RQ1.

To what extent and in which sentiment, mass media reported the EMS industry and the EMS firm that directly involved with the employee-related incidents?

4.2 Legitimacy theory

The literature suggests that the demand of organizational legitimacy is one of the main motivations behind CSR reporting (Gray et al., 2009). Suchman (1995, p. 574) defined legitimacy as “a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions”. Public acceptance toward an organization (reflected in mass media) can signal whether the organization needs to (re-) gain a certain level of legitimacy. To maintain a desired level of social acceptance (i.e. legitimacy), an organization can use multiple legitimation strategies, such as CSR disclosure (Deegan, 2002).

In the case of a legitimacy crisis, the literature suggests that firms tend to disclose more CSR information to repair their damaged organisational legitimacy. The argument for more information is intuitive – extra information may convince stakeholders to believe previous socially irresponsible actions have been corrected so that they may re-confer legitimacy (Patten, 1991, 1992, 2002; Brown and Deegan, 1998; Deegan et al., 2000; Deegan et al., 2002; Cho and Patten, 2007; Islam and Deegan, 2010a and Deegan and Islam, 2014).

But, there is a contra possibility: firms facing a legitimacy crisis may cut down communication or conceal bad news to reduce damage to its organisational legitimacy. Although the less-information legitimation may be unwise at first glance, the choice of silence can actually prove to be a calculated move (Adams et al., 1995; Deegan and Rankin, 1996, 1999; Rahman Belal, 2001; Adams (2004; De Villiers and Van Staden, 2006). These studies found that offering less information was used by firms to manage their legitimacy threats. Except for the findings from empirical studies, interviews by O’Donovan (2002) recorded that managers intentionally reduce CSR information to keep a desired level of legitimacy. Thus, the EMS firms in this study are expected to adjust the amount of employee-related disclosure either upwardly or downwardly. The second research question is presented below:

RQ2.

To what extent the volume/amount of employee-related disclosure offered by the EMS firms changed pre- and post-occurrence of employee-related incidents between 2008 and 2013?

Dowling and Pfeffer (1975, p. 127) classified legitimation into three types:

  1. It may alter its own behaviours to follow social expectations.

  2. It may adjust expectations of the general public so that new expectations match its current behaviours.

  3. It may try to become identified with “symbols, values, or institutions which have a strong base of social legitimacy”.

Thus, given difficulties in (re-) shaping social expectations, a firm may either change its behaviours (i.e. substantive legitimation) or attach legitimacy symbols to itself (i.e. symbolic legitimation).

Ashforth and Gibbs’s (1990, pp. 178-180) dichotomous classification of substantive or symbolic legitimation reflects the above argument. Substantive is “real, material change in organizational goals, structures, and processes or socially institutionalized practices”; whereas symbolic is defined as “rather than actually change its ways, the organization might simply portray – or symbolically manage – them so as to appear consistent with social values and expectations”. Among symbolic strategies, rendering explanations or “offering accounts” (Ashforth and Gibbs 1990, p. 181) is frequently used, as either justification or denial. In the area of CSR reporting, explanations may be offered through different mediums, including CSR stand-alone report, annual report or brochure. This study posits that if CSR disclosure is used as symbolic legitimation, the comprehensiveness of disclosure will be undermined. Hooks and van Staden (2011, p. 202) argued that comprehensiveness provides “the reader with a sense that no important aspect has been left undisclosed”. It has two dimensions, content and information types (Bouten et al., 2011). The first dimension content is linked with extent or completeness of CSR disclosure, and the second dimension information types reflects a higher degree of analysis than volume of CSR disclosure. The third question is presented below:

RQ3.

To what extent the employee-related disclosure offered by the EMS firms was used as symbolic or substantive legitimation between 2008 and 2013?

5. Methodology

The objective of the study is to examine the extent of media coverage of employee-related incidents and whether and how the four EMS firms attempted to re-legitimate their reputation through employee-related disclosure in response to the media coverage on those incidents. The study qualitatively analyses two sources of data, CSR stand-alone reports as a sample of corporate reports and newspaper articles as a sample of media reports, with a quantitative content analysis. Quantitative content analysis is common in CSR disclosure studies, such as those of Deegan and Rankin (1996), Gamble et al. (1996), Brown and Deegan (1998), Williams (1999), Williams and Pei (1999), Purushothaman et al. (2000), Newsona and Deegan (2002) and Guthrie et al. (2008). Regarding coding instrument reliability, the study followed suggestions made by Milne and Adler (1999), Unerman (2000) and Krippendorff (2013) as to five different coders[7].

5.1 Media exposure

To answer the first research question, the study collected newspaper articles[8] through Factiva and a digital portal[9] in the National Library of China. English and Chinese newspapers are reviewed, such as Los Angeles Times, Wall Street Journal, Southern Metropolitan Daily and China Daily. The time period of sample is between 2007 and 2013 so that changes in media reports before and after the employee-related incidents during 2010-2012 can be captured. Coding unit is the whole article, and the set of coding criteria used is consistent with that of Brown and Deegan (1998):

  • Negative/bad/unfavourable – an article contains information about corporate activities, which implies them detrimental to labour rights.

  • Positive/good/favourable – an article has information about corporate activities, which implies them beneficial to labour rights.

  • Neutral – an article contains non-directional information.

Media sentiment toward a firm in each year is measured by deducting the number of negative news items from the number of positive news[10]. Thus, if this figure is above zero, it indicates that media sentiment toward a firm is overall favourable in a year. Otherwise, media sentiment toward the firm is either neutral or unfavourable. Table II shows the number of newspaper articles reporting corporate activities relevant to labour rights.

5.2 Corporate reports

To answer the second and third research questions, the study downloaded corporate reports (in PDF format) from corporate websites during 2008 and 2013, so that the changes in employee-related disclosure before and after the incidents in 2010-2012 are covered. The scope of analysis is narrowed down to CSR stand-alone report primarily because Foxconn, Compal Electronics and Quanta Computer provided their annual reports only in Chinese; whereas all CSR stand-alone reports are available in English. Other communication mediums may contain employee-related information (Zeghal and Ahmed, 1990), but consistent availability in English language is a major constraint.

The employee-related disclosure is analysed at three steps, creating a complex coding structure. First, to assess change on volume, the employee-related disclosure is coded by sentence[11]. Second, the content of disclosure is coded with a set of coding themes that contain prevalent labour-rights issues. The set of coding themes used in the study comes from the fourth version of Sustainability Reporting Guidelines (Global Reporting Initiative, 2013) and the updated publication on International Labour Standards (International Labour Organization, 2014). Third, the information types of disclosure are analysed at five levels – expression, tone/sentiment, location, time orientation and managerial orientation. How information is presented (i.e. expression) is considered – it is divided into three sub-categories: monetary, quantitative and qualitative (Newsona and Deegan, 2002). Sentiment/tone of information is analysed – it is classified into neutral, bad and good[12] (Gray et al., 1995a, 1995b). Where information is located in report (i.e. location) is a focus, paragraph, footnote/endnote or caption (Gray et al., 1995a, 1995b). Whether a sentence refers to the past, present or future (i.e. time orientation) is analysed (Beretta and Bozzolan, 2008). In other words, the relationship between a piece of information and time is taken into account. Operational meanings behind each sentence are included in the content analysis (i.e. managerial orientation) (Beretta and Bozzolan (2004). Similar approaches can also be found in the studies of Hooks and van Staden (2011) and Bouten et al. (2011). Following Michelon et al. (2014), the study classified managerial orientation into a goal, an action or an outcome. The coding structure is presented in Table III.

The coding structure used in the study has several advantages. First, it takes into account the latest version of Sustainability Reporting Guidelines, the main guideline for CSR reporting. Second, International Labour Organization (2014) ensures all prevalent labour-rights topics are included. Third, information types of employee-related disclosure are analysed at five different perspectives, providing a reasonably well assessment on the comprehensiveness of information (Beattie et al., 2004). Thus, this coding structure better reflects the richness of employee-related disclosure at three levels, volume, content and information types, and contributes to future research on employee-related disclosure: the updated list of labour-rights themes covers salient labour-rights topics, including topics (e.g. maternity protection) that were not categorised in prior studies.

6. Outcomes and discussion

6.1 Media exposure (RQ1)

RQ1 investigates the volume and sentiment of news reporting. Table IV shows the level of coverage on the four EMS firms and the entire industry. The coverage on Quanta Computer can be deemed as an ad hoc benchmark – in terms of labour rights issues, it was largely overlooked by news media, and recalled that Quanta Computer was not related to any employee-related incidents as discussed in Section 2 (Panel D, Table IV). Panel A in Table IV shows that the series of worker suicides focusses media attention on Foxconn (the number of newspaper articles surged to a peak in 2010), and the fatal factory explosion kept Foxconn as the focus of both Chinese and English media (the number of newspaper articles in the last three years dropped but has not reverted to the lower level in the first three years). Panel B shows that the explosion in Pegatron attracted media attention (the number of newspaper articles in 2011 rose sharply in both Chinese and English media). The relatively intensive coverage in the first three years is due to litigation with customers[13], rather than employee-related incidents. Panel C shows that media attention on Compal Electronics peaked in 2012, and reveals a discrepancy between English and Chinese media. The English media published a number of articles about labour disputes in Compal Electronics’ assembly plants; however, no articles were located in the Chinese media. The difference between English and Chinese media can also be found in general EMS industry reportage between 2007 and 2013; in the Chinese newspapers, the coverage on the EMS industry peaked in 2010 and 2011, and was largely ignored in other years by the English newspapers (Panel E).

Table V presents changes in media sentiment towards the four sample EMS firms and the whole EMS industry between 2007 and 2013. Panel A in Table V shows that in the first three years, the media sentiment towards Foxconn was favourable (figures in 2007, 2008 and 2009 were positive), but the incidents shifted media sentiment from favourable to unfavourable (figures in 2010 and 2011 were negative), and in the last two years the media appeared to be less unfavourable. Panel B in Table V reports that media sentiment towards Pegatron moved from neutral to favourable (figures in 2007, 2008, 2009 and 2010 were positive), but the explosion in 2011 coincides with a change from favourable to unfavourable (figure dropped to below zero in 2011), reverting to neutral. Panel C in Table V illustrates that media sentiment towards Compal Electronics was unfavourable (figure in 2012 was negative) and media sentiment towards this firm post-2012 was largely neutral. In contrast, Panel D in Table V shows that the media sentiment towards Quanta Computer was largely neutral between 2007 and 2013. Ultimately, Panel E in Table V reveals that the attitudes toward the whole industry was favourable in 2008 and 2009, but it was unfavourable in 2010, 2011 and 2012 and returned to favourable in 2013.

In summary, Tables IV and V show that the employee-related incidents put the EMS firms directly involved with the incidents under the media spotlight. Compared with Compal Electronics and Pegatron, Foxconn received most of media attention; reasons for the difference in media coverage can be many, but incidents involving Foxconn are more dramatic and shocking than those in Pegatron or Compal Electronics. The media agenda setting theory suggests that the social acceptance/legitimacy of Foxconn, Pegatron and Compal Electronics was undermined at different levels.

6.2 Corporate reports

6.2.1 Volume/amount of employee-related disclosure (RQ2).

RQ2 asks to what extent the volume/amount of employee-related disclosure offered by the EMS firms changed pre- and post-occurrence of employee-related incidents. Table VI presents changes in the volume of employee-related disclosure across six years. The volume of disclosure by Foxconn via CSR stand-alone report rose sharply in 2011, dipped in 2012, and in 2013 returned to a level similar to that in the first three years. The volume provided by Pegatron climbed to a peak in 2009 and in the following four years dropped to a level lower than that observed in 2008. The volume of the disclosure by Compal Electronics remained largely stable during this period. The volume of information reported by Quanta Computer reached a plateau in 2010, 2011 and 2012 and reduced to a lower level comparable to 2009 by the end of sample period.

Two conclusions are drawn from Table VI. First, the series of worker suicides, which abruptly changed the media favourable coverage, arguably challenged the legitimacy of Foxconn so that the firm reactively reported more employee-related information in 2011. In other words, “offering accounts” seems to be used as legitimation. However, the deadly explosion in 2011 arguably caused the firm to reduce the volume of disclosure in 2012. “Remaining silent” in CSR stand-alone report seems to support the other mode of reaction found in the literature (de Villiers and van Staden, 2006).

Second, Compal Electronics and Pegatron maintained a largely stable amount of information reported between 2008 and 2017 (i.e. the stable mode), although Foxconn actively adjusted the volume of disclosure to manage the legitimacy challenge. The stable mode may be due to either the relatively lower level of media coverage or different levels of managerial self-expectation on legitimacy. Compared with the incidents in Foxconn that received quite intensive coverage, neither labour disputes in Compal Electronics nor explosion in Pegatron drew a similar level of media attention. O’Donovan (2002) articulated the level of media coverage as a key factor to decide whether and how a firm responds to a legitimacy challenge. Thus, it is possible that neither Pegatron nor Compal Electronics treated its own incident(s) as a challenge urgent enough for adjustment through CSR disclosure. However, the reporting practice of Quanta Computer to some extent offered a counter-argument: it disclosed more employee-related information in 2010, 2011 and 2012, but it received much less media attention than Pegatron or Compal Electronics[14]. Thus, another interpretation can be that management in Quanta Computer held a relatively higher self-expectation on legitimacy. In other words, the desired level of legitimacy was higher for Quanta Computer than for Compal Electronics and Pegatron. Employee-related incident at certain scale may be not perceived by management in Compal Electronics or Pegatron as serious enough for legitimation, but the same incident (although they are not directly related to Quanta Computer) may be deemed by management in Quanta Computer as urgent enough.

6.2.2 Comprehensiveness of employee-related disclosure (RQ3).

RQ3 examines the extent to which employee-related disclosure offered by the EMS firms can be seen as symbolic or substantive legitimisation strategies. The multiple coding categories used in the study, theme, expression, sentiment, location, time orientation and managerial orientation, can be linked with some but not all criteria which assess the comprehensiveness of CSR reporting (Wensen et al., 2011). The linkages are presented in Figure 2. Four criteria linking with six coding categories are discussed below.

6.2.2.1 Completeness.

Completeness of the employee-related disclosure is analysed from three perspectives: the presence of key labour-rights topics (i.e. themes), temporal meanings of information (i.e. time orientation) and operational meanings of information (i.e. managerial orientation). Results shown in Table VII directly reflect the extent of completeness. It is clear that the employee-related information rendered by the four EMS firms is incomplete and selective as to employee-rights issues.

Results on time orientation in Table VIII and managerial orientation in Table IX collectively provide circumstantial evidence on disclosure (in)completeness. The employee-related disclosure over the six-year period lacks forward-looking information and messages pertaining to vision, goals and objectives. In summary, the information reported between 2008 and 2013 is incomplete at two levels. At the first level (i.e. content), it does not cover all prevalent labour-rights issues. At the second level (i.e. information types), it does not contain forward-looking information that describes vision, goals and objectives pertaining to better practice.

6.2.2.2 Balance.

Tone of the employee-related disclosure is shown in Table X. The disclosure between 2008 and 2013 is out of balance: no bad news was reported during this period, except for one firm in a single year – Foxconn disclosed some bad news about its labour practice in 2011. This “abnormal” behaviour may be due to the high level of scepticism fostered by multiple employee-related incidents. In this circumstance, it is unlikely that stakeholders would accept good or even neutral news. In summary, the information rendered by the EMS firms was overly positive, given the multiple employee-related incidents in the same period.

6.2.2.3 Comparability.

Results concerning expression (Table XI) provide circumstantial evidence on comparability – quantitative or monetary information is easier to use in cross-sectional comparison. Most of employee-related disclosure is descriptive, and quantitative and monetary information is not evident, limiting comparability across time and among peers.

6.2.2.4 Clarity.

Where information is disclosed in CSR stand-alone report can be linked with another criterion, clarity. The format and structure of disclosure published by the EMS firms are clear and well organized, and neither endnote nor footnote is used. Thus, the relevant information can be easily found in paragraphs.

6.2.2.5 Summary.

The findings with respect to the comprehensiveness of disclosure are as follows: the employee-related disclosure by the EMS firms is incomplete, unbalanced in tone and not capable of comparison, whereas the information is well structured and can be easily found in report. According to the prior expectation on the relationship between comprehensiveness of disclosure and legitimation (Section 4.2), the study argues that the employee-related disclosure represents symbolic legitimation. It is interesting to note that most of those CSR stand-alone reports analysed claim to follow the Sustainability Reporting Guideline and are assured by external third party (in untabulated results). Therefore, an interesting future research question is to what extent the Sustainability Reporting Guideline and/or the use of assurance services improve the reporting practice in China.

6.3 Discussion

Findings presented in Section 6.2 both (re-) confirm and challenge the literature. In terms of the legitimacy theory, two new findings are presented by the study. First, an organization may switch between “offering accounts” and keeping quiet in its legitimation strategy. Previous studies do not explicitly consider “offering accounts” and keeping quiet as two convertible strategies. Second, corporate self-expectation on legitimacy (or the desired level of legitimacy) is a key factor to interpret changes in volume of CSR disclosure. Prior studies that explored explanation power of legitimacy theory, for example Guthrie and Parker (1989), do not explicitly take into account that managers in different firms can hold different desired levels of legitimacy. In the study, managers in Compal Electronics and Pegatron may hold lower desired levels of legitimacy than Quanta Computer management. The differences in desired level of legitimacy may be the reason for adjustments in the volume of disclosure. In summary, the relationship between damage on organizational legitimacy and volume of CSR disclosure is intriguing. First, it can be a concave curve. Second, it can be shifted by different desired levels of corporate legitimacy. Figure 3 shows the two speculations based on limited evidence presented in the study.

Our findings also confirm the literature. For example, labour-rights themes disclosed by the four EMS firms are largely in line with those found by Searcy et al. (2016): the employee-related disclosure published by Canadian firms also focused on health and safety, occupational training, compensation and benefits and employment diversity, however other labour-rights topics, including suppliers, collective bargaining and unions, were (selectively) overlooked. Another example is: the tone and expression of employee-related disclosure are positive and descriptive. This finding also confirms the literature, such as that of Deegan and Rankin (1996), Adams and Harte (1998) and Williams and Adams (2013). In terms of comprehensiveness of reporting, the employee-related disclosure rendered by the four EMS firms is particularly problematic in completeness (i.e. some key information is missing) and balance (i.e. almost no bad news is provided, although improper labour practices are exposed). Thus, the employee-related disclosure is closer to a type of public relations exercise, although the information preparers claimed to follow the Sustainability Reporting Guideline and employed assurance services to check the information.

7. Conclusion

The objective of the study is to examine whether and how employee-related disclosure was used by the EMS firms to manage legitimacy challenges consequent to media coverage on employee-related incidents in the industry. The study found that media reported those incidents detrimental to legitimacy of the four EMS firms and to the EMS industry. Regarding volume/amount of the disclosure, the EMS firms responded to the media exposure in different ways, and the study argues that different desired levels of legitimacy explain changes in volume. Regarding comprehensiveness of the disclosure, the study found that the media coverage on employee-related incidents seemed to not improve the comprehensiveness of disclosure, and the comprehensiveness can be improved significantly.

The study contributes to the literature in two ways, the social dimension of CSR reporting and CSR communication in China. First, it focuses on employee-related information (i.e. a social dimension of CSR reporting). The disclosure is coded with a set of specialized coding categories, which can be used to analyse employee-related disclosure from different industries or areas. Second, employee-related information to some extent represents CSR communication in China, a geo-political context that requires further attention in the CSR reporting literature. From a broader prospective, this study contributes to the corporate voluntary reporting literature, given that employee-related disclosure is a type of non-financial voluntary disclosure.

There are several limitations and scope for future research to note for example. the findings presented in the study are based on four firms in one industry based on content analysis of archival documents. Future research into legitimacy strategies will benefit from stakeholder interviews. As mentioned, future research may examine the role(s) and effectiveness of GRI disclosure and assurance services in employee-related disclosure.

Regarding theoretical implications, the study (re-) examines the legitimacy theory in the context of business operations in China (a developing market in Asia) and clarifies two conditions overlooked in previous studies. First, if CSR communication is used in legitimation, an organization can switch between “more talk” and “less talk”. Second, in the case of legitimacy challenge, the use of legitimation strategies is affected by not only how news media reported the challenge(s) but also the level of self-expectation on legitimacy.

Figures

Timeline of incorporation of four Taiwanese EMS firms and employee-related incidents

Figure 1.

Timeline of incorporation of four Taiwanese EMS firms and employee-related incidents

Linkages between coding categories and comprehensiveness criteria

Figure 2.

Linkages between coding categories and comprehensiveness criteria

The relationship between legitimacy challenge and volume/amount of disclosure

Figure 3.

The relationship between legitimacy challenge and volume/amount of disclosure

Background of the four EMS firms

Firms Headquarters location Total revenue in 2015 ($US mil) Proportion of production capacity assigned in China (2015) No. of employees in 2015 Rank in the Fortune 2015 Global 500[15] Products manufactured No. of final assembly facilities owned
Compal Electronics Taiwan 26,695 Over 99% of employees in China 72,796 423rd iPad One
Foxconn Taiwan 141,213 Over 99% of employees in China 1,060,000 31st All products offered by Apple Inc. Seven
Pegatron Taiwan 38,239 3 manufacturing facilities out of 6 196,251 355th iPhone and iPad Two
Quanta Computer Taiwan 31,734 3 manufacturing facilities out of 3 90,167 389th Mac and iPod Three

Number of relevant newspaper articles between 2007 and 2013

Foxconn Pegatron Compal Electronics Quanta Computer The EMS Industry
Factiva National Library of China Factiva National Library of China Factiva National Library of China Factiva National Library of China Factiva National Library of China
Number of relevant articles 3,418 473 28 25 34 1 4 2 10 131

Coding categories on corporate reports

Dimension 1: Content Dimension 2: Information types
Theme Expression Sentiment/tone Location Time orientation Managerial orientation
Freedom of association
Collective bargaining
Forced labour
Child labour
Equality of opportunity and treatment
Employment policy
Employment promotion
Vocational guidance and training
Employment security
Wages
Working time
Occupational safety and health
Maternity protection
Supplier assessment for labour practices
Monetary
Quantitative
Qualitative
Neutral
Good
Bad
Paragraph
Footnote/Endnote
Caption
Past/Historical
Present
Future/Forward
Non-time specific
Vision, goals and objectives
Management approach
Results of actions
Other

Media coverage of the four EMS firms and the entire EMS industry

2007 2008 2009 2010 2011 2012 2013
Panel A – Media coverage on Foxconn
Number of relevant articles from Factiva 74 185 155 1,333 340 911 420
Number of relevant articles from National Library of China 31 23 14 222 55 66 62
Panel B – Media coverage on Pegatron
Number of relevant articles from Factiva 0 2 0 5 14 7 0
Number of relevant articles from National Library of China 0 7 4 1 11 1 1
Panel C – Media coverage on Compal Electronics
Number of relevant articles from Factiva 1 0 1 12 1 19 0
Number of relevant articles from National Library of China 0 0 0 1 0 0 0
Panel D – Media coverage on Quanta Computer
Number of relevant articles from Factiva 1 0 0 1 0 0 2
Number of relevant articles from National Library of China 0 0 0 1 0 0 1
Panel E – Media coverage on the EMS Industry
Number of relevant articles from Factiva 0 0 0 0 0 10 0
Number of relevant articles from National Library of China 0 21 19 33 31 0 27

Media sentiment towards the four EMS firms and the entire EMS industry

2007 2008 2009 2010 2011 2012 2013
Panel A
Changes in media sentiment toward Foxconn 25 21 8 −184 −62 8 7
Panel B
Changes in media sentiment toward Pegatron 0 3 4 3 −12 0 1
Panel C
Changes in media sentiment toward Compal Electronics 1 0 1 0 1 −12 0
Panel D
Changes in media sentiment toward Quanta Computer 1 0 0 1 0 0 2
Panel E
Changes in media sentiment toward the EMS Industry 0 18 17 −14 −7 −5 19

Changes in amount of employee-related information disclosed in CSR stand-alone reports (measured in sentence)

2008 2009 2010 2011 2012 2013
Foxconn 111 113 117 142 94 106
Pegatron 97 135 68 70 74 74
Compal Electronics 0 91 94 87 84 81
Quanta Computer 0 156 207 170 191 169

Percentage of employee-related disclosures by themes in CSR stand-alone reports

2008 2009 2010 2011 2012 2013
Panel A – Foxconn
T1 – Freedom of association 2.02 1.56 0.84 4.49 7.00 0.93
T2 – Collective bargaining 2.34 1.28
T3 – Forced labour 4.03 0.78 5.13 1.00 0.93
T4 – Child labour 4.03 1.56 1.92 1.00 0.93
T5 – Equality of opportunity and treatment 17.74 10.16 9.24 12.18 2.00 8.33
T6 – Employment policy 16.94 15.63 9.24 1.28 3.00 5.56
T7 – Employment promotion 1.56 1.68 1.28 1.00 1.85
T8 – Vocational guidance and training 12.10 19.53 12.61 17.95 16.00 9.26
T9 – Employment security 3.23 5.47 2.52 2.56 1.00 0.93
T10 – Wages 0.40 2.34 2.52 5.13 6.00 19.44
T11 – Working time 0.78 3.21 4.00
T12 – Occupational safety and health 28.23 35.16 41.18 35.26 51.00 41.67
T13 – Maternity protection 0.40 1.56 0.64 2.78
T14 – Supplier assessment for labour practices 5.65 1.56 1.68 1.28
T15 – Others 5.24 18.49 6.41 7.00 7.41
Panel B – Compal Electronics
T1 – Freedom of association 2.01 1.06 1.56 1.19 1.29
T2 – Collective bargaining 4.33 1.06 2.38 5.16
T3 – Forced labour 5.11 2.13 4.69 3.57 0.65
T4 – Child labour 1.23 4.26 3.13 1.19 0.65
T5 – Equality of opportunity and treatment 14.91 15.96 12.50 9.52 8.39
T6 – Employment policy 1.06 1.94
T7 – Employment promotion 1.06
T8 – Vocational guidance and training 27.03 11.70 25.00 20.24 31.61
T9 – Employment security
T10 – Wages 5.58 6.38 9.38 4.76 18.71
T11 – Working time 2.12 3.19 9.38 4.76 2.58
T12 – Occupational safety and health 10.49 23.40 9.38 24.52
T13 – Maternity protection 1.56 7.14
T14 – Supplier assessment for labour practices
T15 – Others 27.19 28.72 23.44 45.24 4.52
Panel C – Quanta Computer
T1 – Freedom of association
T2 – Collective bargaining 2.14
T3 – Forced labour 1.00 1.37 6.42
T4 – Child labour 0.64 0.42 4.48 3.20
T5 – Equality of opportunity and treatment 6.41 5.42 4.98 3.65 8.02
T6 – Employment policy 5.13 1.25 0.50 0.46 3.21
T7 – Employment promotion 5.13 7.08 1.49 2.28 1.07
T8 – Vocational guidance and training 43.59 42.50 35.32 32.42 16.04
T9 – Employment security 1.49 2.28
T10 – Wages 7.05 8.33 5.47 11.42 1.60
T11 – Working time 0.83 6.97 0.46
T12 – Occupational safety and health 12.18 10.00 17.41 14.16 51.87
T13 – Maternity protection 0.83 1.49 1.37 0.53
T14 – Supplier assessment for labour practices 1.00 2.14
T15 – Others 19.87 23.33 18.41 26.94 6.95
Panel D – Pegatron
T1 – Freedom of association 0.74
T2 – Collective bargaining 0.00
T3 – Forced labour 1.00 0.00
T4 – Child labour 3.00 1.48
T5 – Equality of opportunity and treatment 6.00 5.19 5.97 9.43 5.41 9.34
T6 – Employment policy 6.00 23.70 8.96 16.98 35.14 34.22
T7 – Employment promotion 2.00 1.48 1.49 5.66 1.35 3.13
T8 – Vocational guidance and training 23.00 19.26 41.79 13.21 21.62 20.19
T9 – Employment security 3.70 14.93 1.89
T10 – Wages 8.00 2.22 1.49 1.89 1.35 1.01
T11 – Working time
T12 – Occupational safety and health 34.00 29.63 17.91 39.62 33.78 30.11
T13 – Maternity protection
T14 – Supplier assessment for labour practices 1.00 0.74
T15 – Others 16.00 11.85 7.46 11.32 1.35 2.00

Note: The calculation formula used=The Number of Units in One CategoryTotal Number of Units

Percentage of employee-related disclosures by time orientation in CSR stand-alone reports

2008 2009 2010 2011 2012 2013
Foxconn
Past/historical 35.14 20.35 47.41 44.37 56.38 57.55
Present 46.85 29.20 31.03 23.94 26.60 18.87
Future/forward 8.11 2.65 3.45 1.41 1.06
Non-time specific 9.91 47.79 18.10 30.28 15.96 23.58
Compal Electronics
Past/historical 6.32 8.51 10.34 5.95 11.61
Present 80.33 87.23 88.51 94.05 81.29
Future/forward 13.35 4.26 1.15 7.10
Non-time specific
Quanta Computer
Past/historical 19.87 25.12 17.65 22.51 7.10
Present 71.15 72.46 79.41 73.30 89.94
Future/forward 8.97 2.42 2.35 2.62 2.96
Non-time specific 0.59 1.57
Pegatron
Past/historical 11.32 17.78 1.47 5.45 5.41 4.31
Present 59.43 2.96 23.64 39.19 32.55
Future/forward 8.49 3.64
Non-time specific 20.75 79.26 98.53 67.27 55.41 63.14

Note: The calculation formula used=The Number of Units in One CategoryTotal Number of Units

Percentage of employee-related disclosures by managerial orientation in CSR stand-alone reports

2008 2009 2010 2011 2012 2013
Foxconn
Vision, goals and objectives 4.50 7.96 11.97 5.63 9.57 4.72
Management approach 64.86 41.59 30.77 26.76 25.53 37.74
Results and outcomes 30.63 50.44 57.26 67.61 64.89 57.55
Compal Electronics
Vision, goals and objectives 5.01 1.06 4.60 8.33
Management approach 88.66 90.43 79.31 72.62 94.19
Results and outcomes 6.33 8.51 16.09 19.05 5.81
Quanta Computer
Vision, goals and objectives 9.62 2.90 2.35 18.06 2.96
Management approach 68.59 71.50 80.00 59.91 89.94
Results and outcomes 21.79 25.60 17.65 22.03 7.10
Pegatron
Vision, goals and objectives 3.09 19.26 26.87 24.53 8.11 6.01
Management approach 47.42 49.63 50.75 58.49 60.81 55.12
Results and outcomes 49.48 31.11 22.39 16.98 31.08 38.87

Note: The calculation formula used=The Number of Units in One CategoryTotal Number of Units

Percentage of employee-related disclosures by sentiment in CSR stand-alone reports

2008 2009 2010 2011 2012 2013
Foxconn
Good 32.43 65.49 70.09 72.54 60.64 96.23
Neutral 67.57 34.51 29.91 39.36 3.77
Bad 27.46
Compal Electronics
Good 87.11 90.43 88.51 85.71 72.26
Neutral 12.89 9.57 11.49 14.29 27.74
Bad
Quanta Computer
Good 86.54 81.16 73.53 78.53 90.53
Neutral 13.46 18.84 26.47 21.47 9.47
Bad
Pegatron
Good 51.55 22.22 36.76 56.36 44.59 44.59
Neutral 48.45 77.78 63.24 43.64 55.41 55.41
Bad

Note: The calculation formula used=The Number of Units in One CategoryTotal Number of Units

Percentage of employee-related disclosures by expression in CSR stand-alone reports

2008 2009 2010 2011 2012 2013
Foxconn
Monetary
Quantitative 21.24 22.22 24.65 31.91 27.36
Qualitative 100.00 78.76 77.78 75.35 68.09 72.64
Compal Electronics
Monetary
Quantitative 20.15 23.40 13.79 7.14 50.32
Qualitative 79.85 76.60 86.21 92.86 49.68
Quanta Computer
Monetary
Quantitative 16.67 18.84 29.41 24.61 5.92
Qualitative 83.33 81.16 70.59 75.39 94.08
Pegatron
Monetary
Quantitative 1.47 3.64
Qualitative 100.00 100.00 98.53 96.36 100.00 100.00

Note: The calculation formula used=The Number of Units in One CategoryTotal Number of Units

Notes

1.

The official investigation (in simplified Chinese) on the explosion can be found at: www.gov.cn/zwgk/2011-06/07/content_1878906.htm

5.

Globalization is defined as “the process of intensification of cross-area and cross-border social relations between actors from very distant locations, and of growing transitional interdependence of economic and social activities” (Scherer and Palazzo, 2008, p. 415).

6.

Low-cost countries are “less-developed countries, emerging countries and developing countries” (Ruamsook et al., 2007, p. 16). China offers the lowest labour costs compared with other surveyed low-cost countries, including India, Thailand, Malaysia, Mexico, Brazil and the Philippines (Ruamsook et al., 2007).

7.

Five university students were recruited as coders and were trained with employee-related information extracted from CSR stand-alone reports with the coding instrument refined after three rounds of coding exercise. The entire analysis, including training and coding sessions, took over two months. The Fleiss’s Kappa reliability test on set of coding categories for corporate reports is 0.88, p < 0.001, indicating an almost perfect match among different coders. Details of Fleiss’s Kappa can be found in Fleiss et al.’s study (1979).

8.

The scope of collection is narrowed to newspaper articles. This limited scope of collection is consistent with Clarkson et al. (2008) and Clarkson et al. (2011).

9.

The online access is www.cnki.net/, and the access date is 9 July 2015.

10.

The study considered the use of Janis–Fadner coefficient (J–F coefficient) to standardize changes in media sentiment, as per prior work of Clarkson et al. (2008) and Chu et al. (2012). However, in certain years for some firms, relevant articles are not found so the J-F coefficients across years are not available. Thus, the J–F coefficient was dropped.

11.

Sentence is defined as “strings of words that begin with a capital letter and end with a period” (Krippendorff, 2013, p. 105).

12.

Neutral – CSR information that credits/discredits the firm is not obvious; Good/positive/favourable – “any statements which reflect credit on the company”; Bad/negative/unfavourable – “any statement which reflects/might reflect discredit on the company” (Gray et al., 1995a, p. 99).

13.

More information about this legal case is available at http://chinadigitaltimes.net/2008/11/huang-jing-vs-asus-updated/, and access date is 6 September 2016.

14.

Not to mention that there was no (publicly reported) employee-related incident happening in Quanta Computer between 2008 and 2013.

15.

The full list is available at http://fortune.com/global500/2015/. The access date is 10 June 2016.

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Further reading

Guthrie, J., Petty, R., Yongvanich, K. and Ricceri, F. (2004), “Using content analysis as a research method to inquire into intellectual capital reporting”, Journal of Intellectual Capital, Vol. 5 No. 2, pp. 282-293.

Hofman, P.S., Moon, J. and Wu, B. (2015), “Corporate social responsibility under authoritarian capitalism dynamics and prospects of state-led and society-driven CSR”, Business & Society, Vol. 14 No. 5, pp. 349 -382.

Islam, M.A. and Deegan, C. (2010b), Social Responsibility Disclosure Practices: Evidence from Bangladesh, The Association of Chartered Certified Accountants, Dhaka.

Tan-Mullins, M. (2015), “Successes and failures of corporate social responsibility mechanisms in Chinese extractive industries”, Journal of Current Chinese Affairs, Vol. 43 No. 4, pp. 19-39.

Tan-Mullins, M. and Hofman, P.S. (2014), “The shaping of Chinese corporate social responsibility”, Journal of Current Chinese Affairs-China Aktuell, Vol. 43 No. 4, pp. 3-18.

Acknowledgements

The authors acknowledge comments from participants at the Asia Pacific Interdisciplinary Research in Accounting Conference, Melbourne, July 2016.

Corresponding author

Ellie (Larelle) Chapple can be contacted at: larelle.chapple@qut.edu.au