Accounting Theory and Practice Individual Assignment

3101AFE ACCOUNTING THEORY AND PRACTICE

Article 2. National Australia Bank stops all lending for new thermal coal projects

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Article 2. National Australia Bank stops all lending for new thermal coal projects

The Guardian, Gabrielle Jackson 14 Dec 2017

Article 2. National Australia Bank stops all lending for new thermal coal projects

The National Australia Bank (NAB) has announced to stop all lending for new thermal coal mining

projects, but not affect the existing customers. This policy means that NAB has join dozens of banks

and insurers around the world, who are pulling out of the most polluted industry. Therefore, the

Commonwealth Bank, ING, ANZ and Westpac all have similar policies that limit lending to new coal

projects. Australia’s financial regulator warned financial institutions to take more measures to reduce

the risk associated with climate change, otherwise they may take "regulatory action".

Words: 90

Institutional Theory

Institutional theory provides explanations for why organizations within a field tend to adopt similar

characteristics and forms (DiMaggio & Powell, 2000, P.145-146). Scott (1987, P.498) claims that

organizations copy to each other because they can be rewarded for increasing legitimacy, resources,

and survival capabilities. Organizational structures tend to become homogeneous, they are taken for

granted as legitimate and because of the ‘taken-for-granted’ status they tend to perpetuate. The process

of isomorphic change can be coercive, mimetic and normative (DiMaggio & Powell, 2000, P.147-154).

Tolbert & Zucker (1983, P.23-24) found that when coercive pressures are high, organizations quickly

adopt new structures. The institutional environments can strongly influence the development of formal

structures in organizations, often more than market pressures. Organisations will adopt the structural

form even if the form doesn’t improve efficiency (DiMaggio & Powell, 2000, P.144). To reduce this

negative effect, organisations regularly will decouple their activities from these legitimizing structures

(Meyer & Rowan, 1977, P.357).

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Analysis

Institutional theory is based on the organizations within an organization field, which means those

organizations that have same group of consumers and produce similar services or products (DiMaggio

& Powell, 2000, P.145-146). In the article, it mentions that NAB joins the ranks of dozens of banks in

the world to withdraw from thermal coal mining industries, which makes them in the same

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organizational field. And once the organizations are united as well as established in an area powerful

forces will emerge. Organizations can be rewarded for increasing legitimacy, resources, and survival

capabilities by copying to each other (Scott, 1987, P.498). After another four big banks change their

policy to limit the lending for coal industries, NAB has lifted the bar above its competitors to become

a market-leading position for an Australian bank, which was welcome and supported by environmental

groups.

The company will adopt a similar structure, and the result is three mechanisms of isomorphism in the

organization: coercive, mimetic, and normative isomorphism. The coercive isomorphism comes from

the authority of the law or from the influence of the organization they depend on. In the highly

uncertain situation, the imitation of the successful form of mimetic isomorphism will appear. Finally,

the normative isomorphism on homogeneity comes from the similar attitudes and methods brought by

professional groups and associations through employment practices (DiMaggio & Powell, 2000,

P.147-154).

According to the article, Australia’ financial regulator as a powerful constituent, who add pressures to

banks, lenders and insurers to do more to reduce the risk relating to the climate change, which increase

the homogeneity of organizational structures in an institutional environment. When coercive pressures

are high, organizations will adopt new structures quickly to maintain legitimacy. NAB makes

announcement one month after financial regulator’s warning (Tolbert & Zucker, 1983, P.23-24).

Institutional environment can strongly influence the development of formal structure in organizations,

which is often more than market pressure. These formal structures may reduce the efficiency of the

organization and hinder the organization's competitive position in the industry (DiMaggio & Powell,

2000, P.144). To reduce this negative impact, organizations may show much diversity in actual

practice. Therefore, the organization minimizes the implementation of the evaluation and neglect plans

to maintain external and internal confidence in the formal structure while reducing their efficiency

impact (Meyer & Rowan, 1977, P.357).

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Conclusion

As shown above, the theory that relates to this news article’s assumptions is the institutional theory.

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Reference list

DiMaggio, P. J., & Powell, W. W. (2000). The iron cage revisited institutional isomorphism and

collective rationality in organizational fields. In Economics Meets Sociology in Strategic

Management (pp. 143-166). Emerald Group Publishing Limited.

Meyer, J. W., & Rowan, B. (1977). Institutionalized organizations: Formal structure as myth and

ceremony. American journal of sociology, 83(2), 340-363.

Scott, W. R. (1987). The adolescence of institutional theory. Administrative science quarterly, 493-

511.

Tolbert, P. S., & Zucker, L. G. (1983). Institutional sources of change in the formal structure of

organizations: The diffusion of civil service reform, 1880-1935. Administrative science

quarterly, 22-39.