Legitimacy is a condition or status which exists when a corporate value system is congruent with the value system of the larger social system of which the company is a part. When a disparity, actual or potential, exists between the two value systems, there is a threat to corporate legitimacy (Lindblom 1994). Legitimacy theory proposes a relationship between corporate social disclosure and community concerns so that management must react to community expectations and changes (Deegan 2001, 2002).
Because a corporation is part of a broader social system, it must seek to operate within the bounds and norms of its respective society and so attempts to ensure that its activities are perceived as legitimate by outside parties. (Deegan 2002). When there is a change in social expectations or stakeholders’ concerns, corporations seek to ensure that their activities in terms of human, environmental, and other social consequences respond to those changes to meet those social expectations (Deegan 2001). If companies do not operate in a manner consisted with community expectations, they will be penalised. As a result, corporations will adapt their activities to meet community expectations, if they want to be successful