legitimising corporate reputation in times of employee ... · electronic manufacturing services...

19/09/2017 2:35:23 PM Manuscript ID ARJ-12-2016-0158.R2

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Legitimising Corporate Reputation in Times of Employee Distress through Disclosure:

Media Exposure in the Electronic Manufacturing Services Industry in China

Abstract

Purpose

This research examines changes over time of non-financial voluntary reporting practices in

response to episodes of employee-related distress. It investigates employee-related disclosures

by the four largest electronic manufacturing services (EMS) 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 2010 - 2012 are 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 were coded by a set of specifically designed instructions, and newspaper

articles about employee-related incidents were coded for sentiment. Results are interpreted

through two theoretical lenses: the media agenda setting theory and 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.

Value

The 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

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.


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Key words: corporate social responsibility, human rights, employee-related disclosure, China.

R2 Submitted 11/07/2017

R1 Submitted 26/04/2017

Original Submitted 16/12/2016


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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 the study is to examine, using 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 to 2012 represent a period of time where several traumatic events occurred

affecting workers in the EMS industry. The employee-related incidents, impacting on worker

safety and wellbeing, 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 injuries1 (Apple, 2011); and labour

disputes due to wages were raised in Foxconn in 20122. 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 20124. This litany of events form the basis

of this study.

The 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

1 The official investigation (in simplified Chinese) on the explosion can be found at: http://www.gov.cn/zwgk/2011-06/07/content_1878906.htm. 2 Further information can be found at: http://www.news.com.au/technology/foxconn-denies-apple-factory-strike/news-story/39e4d0cca0bbbe9cb7924c9749c53b50. 3 News about this explosion can be found at: https://www.macx.cn/thread-2030929-1-1.html and http://www.bbc.com/zhongwen/simp/chinese_news/2011/12/111220_ipad_shanghai_explosion.shtml. 4 Discussion can be found at: http://www.4-traders.com/COMPAL-ELECTRONICS-INC-6492315/news/Compal-Electronics-Chengdu-Factory-Operations-Back-to-Normal-15440054/ and http://www.4-traders.com/COMPAL-ELECTRONICS-INC-6492315/news/Compal-Electronics-Shift-Wages-Dispute-With-Workers-Halts-Work-at-Chengdu-Plant-15422161/


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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 utilises two theories – media agenda setting theory and 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 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 legitimacy

theory while 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.


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2. Background

2.1 Outsourcing – Global Level

The rise of outsourcing is linked with globalization5 with several features relevant to this study.

First, business activities pertaining to outsourcing, such as production and logistics, usually

happen in low-cost countries6, 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 EMS 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, while their headquarters are located in Taiwan.

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).


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2.4 Sample EMS 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 1 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.

TABLE I ABOUT HERE

Figure 1 Timeline of Incorporation of Four Taiwanese EMS Firms and Employee-related

Incidents


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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 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 & 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


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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 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).

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 research question 1 as to the effect on CSR reporting decisions. The first

research question is presented below.


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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 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), and 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 in 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.


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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, 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 were

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


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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: 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 articles8 through Factiva

and a digital portal9 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 Brown

and Deegan (1998): (1) negative/bad/unfavourable – an article contains information about

corporate activities which implies them detrimental to labour rights; (2)

positive/good/favourable – an article has information about corporate activities which implies

them beneficial to labour rights; (3) 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 news10. 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.

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 .88, p < .001, indicating an almost perfect match among different coders. Details of Fleiss’s Kappa can be found in Fleiss, Nee, and Landis (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 http://www.cnki.net/, and the access date is 09/10/2015. 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 Cho et al., (2012). However, in certain years for some firms, relevant articles are not found so that J-F coefficients across years are not available. Thus, the J-F coefficient was dropped.


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TABLE II ABOUT HERE

5.2 Corporate Reports

To answer the second and third research questions, the study downloaded corporate reports (in

PDF format) from corporate websites during the period 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

sentence11 .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 come 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 good12 (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 Hooks and van Staden (2011) and

11 Sentence is defined as “strings of words that begin with a capital letter and end with a period” (Krippendorff 2013, p. 105). 12 (1) Neutral – CSR information that credits/discredits the firm is not obvious; (2) Good/positive/favourable – “any statements which reflect credit on the company”; (3) Bad/negative/unfavourable – “any statement which reflects/might reflect discredit on the company” (Gray et al., 1995a, p. 99).


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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.

TABLE III ABOUT HERE

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)

Research question 1 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 recall that Quanta Computer was not related to any

employee-related incidents discussed in Section 2 (see Panel D, Table 4). 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 customers13, rather than employee-related incidents.

13 More information about this legal case can be found at http://chinadigitaltimes.net/2008/11/huang-jing-vs-asus-updated/, and access date is 06/09/2016.


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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 (see Panel E).

TABLE IV ABOUT HERE

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.

TABLE V ABOUT HERE

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


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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)

Research question 2 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.

TABLE VI ABOUT HERE

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


16

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 Electronics14. 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)

Research question 3 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.

Figure 2 Linkages between Coding Categories and Comprehensiveness Criteria

Content adapted from Wensen, et al. (2011) and Global Reporting Initiative (2013)

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


17

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.

TABLE VII ABOUT HERE

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 lacks 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.

TABLE VIII ABOUT HERE

TABLE IX ABOUT HERE

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.

TABLE X ABOUT HERE


18

6.2.2.3 Comparability

Results concerning expression (shown in 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.

TABLE XI ABOUT HERE

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: the employee-related

disclosure by the EMS firms is incomplete, unbalanced in tone and not capable of comparison,

while 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 (see 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: 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


19

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.

Figure 3 The Relationship between Legitimacy Challenge and Volume/Amount of

Disclosure

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 Deegan and Rankin (1996),


20

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.


21

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.

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