Institutional Theory views institutions as comprising of regulatory, normative, and cultural-cognitive elements that provide stability and meaning to social life. It understands that institutions must interact with surrounding social systems. There are two dimensions of institutional change - isomorphism, where an institution changes to resemble others facing similar conditions; and decoupling, where formal practices separate from actual operations. Isomorphism can occur through coercive, mimetic, or normative pressures on institutions to conform to social expectations.

1. LO 2+3_3 Institutional Theory
1 Created by Dr G. L. Ilott, CQUniversity Australia

2. Institutional Theory
Institutional Theory has a long history and has been popular in the
disciplines of economics, social theory and political theory.
It shares much in common with Legitimacy Theory in that it
understands that institutions must interact with its surrounding social
systems.
However, it is much more interested in what this means for the
structure and conduct of the institution than it is in what it means for
society.
2 Created by Dr G. L. Ilott, CQUniversity Australia

3. A definition of an institution
Obviously the "institution" is the core of Institutional Theory.
Scott, cited in Deegan (2014, p. 382) stated that an institution was:
…comprised of regulative, normative and cultural-cognitive elements
that, together with associated activities and resources, provide
stability and meaning to social life.
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4. The elements of an institution
The previous definition is useful for showing the essential elements of an institution. An
institution does not have to be a business, but all businesses are institutions.
1. Regulative pillar: Rules, laws and their associated sanctions. Society expects that institutions
will live by the "rules", or else!
2. Normative pillar: These are the norms and values that permeate through the institution and
give it its ethics, its individuality, its "personality". Expectations of the "proper" way to behave
& perform are maintained through systems of education, accreditation and professional
development.
3. Cultural-Cognitive pillar: These are the "taken for granted" ways of getting things done. An
institution sits easily in a society when it has absorbed the society's culture and ways of doing
things done.
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5. The dimensions of Institutional Theory
There are two dimensions that indicate the dynamics of institutional
change relative to social interaction:
1. Isomorphism: A constraining process whereby an institution
changes to resemble other institutions facing the same
environmental conditions.
2. Decoupling: Where there is a separation from the formal
institutional (the one that reflects society's expectations) and the
actual practices of the organisation.
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6. Isomorphism
An institution can change to meet social expectations in a number of ways:
1. Coercive isomorphism: The institution changes its practices because of pressure from
dominant stakeholders (for example, corporate regulators and tax offices).
2. Mimetic isomorphism: Institutions will adopt the practices of successful institutions
and therefore come to resemble them if it leads to greater access to resources and
even some strategic advantage.
3. Normative isomorphism: Norm groups (aka pressure groups) will pressure institutions
to adopt what they see as "normal" behaviour. Consider the number of banks and
social institutions who no longer invest in mining companies, because of the pressure
from activist groups and media.
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7. Decoupling
Sometimes an institution seeks all the benefits of appearing to comply
with social expectations, while in reality they are "doing their own
thing".
Enron was the classic example of this. Outwardly a leading, innovative
company. In reality they engaged in predatory and the most unethical
behaviour imaginable.
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8. A wrap-up
Institutional Theory has a more macro viewpoint of the three theories
presented here. Accounting theorists consider Institutional Theory
because of its ability to track accounting decisions in relation to the
institutions need for social acceptance. Conformity and institutional
change are large aspects of accounting decision-making under this
theory.
However, it needs to be appreciated that there are large overlaps with
Legitimacy and Stakeholder theories.
8 Created by Dr G. L. Ilott, CQUniversity Australia