How is legitimacy incorporated into the social context of third-party certifying firms?

(1)

How is legitimacy incorporated into the social

context of third-party certifying firms?

Author: Marten Dekker

Student number: 10475362

Date: 31 January 2015

Education: Master of Science in Business Administration – Strategy track Faculty: Faculty of Economics and Business, University of Amsterdam First supervisor: Dr. ir. Jeroen Kraaijenbrink

(2)

2

Preface

In front of you lies my master’s thesis on “how legitimacy is incorporated into the social context of third-party certifying firms.” The journey of writing this thesis is part of the Master of Science in Business Administration at the Universiteit van Amsterdam. The first time I started thinking about this master’s thesis was just under a year ago. From June 2014 until January 2015, I devoted a major part of my time and energy to researching and, finally, writing this thesis.

As an employee of a third-party certifying firm, I have always been interested in why customers pursue certification. Therefore, I wanted to investigate this matter in my thesis. First, I made a proposal more closely related to marketing, but in discussion with a professor from the university I was advised to look into the field of organizational legitimacy. While reading on this topic, I formed a network perspective on legitimacy, based on experience in the third-party certifying industry. After further brainstorming with Jeroen Kraaijenbrink, this was developed into my research design.

I personally view this thesis as the major accomplishment of my educational career. Without a doubt, this thesis has been the most challenging and rewarding part of my studies. To complete it successfully, I built on the professional, critical, and thought-provoking guidance of Jeroen Kraaijenbrink, who deserves my sincere acknowledgement. Because of his accurate review of the process of researching and writing, I have developed a thesis of which I am proud.

I want to thank all respondents who replied enthusiastically to my invitation for an interview. A special thanks goes to DNV GL for giving me the opportunity to complete this study. I am also thankful for my colleagues, who took over additional work so I could study and work on my thesis. Additionally, I want to thank my friends and family who helped me in several ways. Finally, I want to thank my wife, Tanja. You helped me through the tough moments and have been my motivation the entire time.

I hope you enjoy reading!

(3)

3

Abstract

Scholars currently describe legitimacy as a highly abstract construct that identifies why firms have a right to exist. Applying a new perspective on third-party certifying firms in the energy industry resulted in new and practical insights into legitimacy. These insights identify what determines legitimacy of a third-party certifying firm. Current theoretical knowledge is used as the start for applying this new network perspective on legitimacy. Pragmatic, cognitive, moral, industrial, and regulative legitimacy are the forms of legitimacy most prominently utilized in the existing literature. These forms of legitimacy are a part of the determinants of legitimacy; however this research also reveals new determinants. Starting from the social context in which third-party firms operate, interviews and documents are used to investigate the existence of legitimacy for these types of firms. Data is analysed using the grounded theory method. It was found that legitimacy is built for a third-party firm on four determinants: (1) a contribution to the industry objectives for the industry in which the organization operates. And inside the industry the acknowledgement that it is part of a network of organizations, trying to fulfil society’s demands. (2) The position it holds in the industry, relative to stakeholders. Independence is a special – legitimacy providing - position for a third party. (3) The relationships it needs, for resource exchange and to be able to obtain and confirm legitimacy towards other organizations. And (4) the regulations it must follow, which gives it formal acceptance. For scholars, the implications of this research are primarily that legitimacy requires multiple forms in order to even exist. This research also provides more concrete knowledge regarding where certain types of legitimacy are generally located. Managers for example can influence moral legitimacy by changing the firms’ position relative to other stakeholders. Conversely, managers could attempt to positively affect identified lacking forms of legitimacy. The identification of these lacking forms is easier as result from this research, because observable items are related to abstract forms of legitimacy. Thus by changing observable items (industry, position, relations, regulations) the perceived legitimacy of their organization is affected.

(4)

4

List of tables and figures

Figure 1 – Social context of third-party firms and legitimacy relationships ... 19

Figure 2 - Legitimacy creation for a third party ... 21

Figure 3 - Example of first cycle coding... 36

Figure 4 - Second cycle coding example ... 37

Figure 5 - Case study overview ... 40

Figure 6 - Findings overview ... 42

(6)

6

1. Introduction

Stakeholders must perceive a firm as legitimate before they are inclined to engage in a resource exchange with it. Legitimate organizations meet and conform to societal expectations. As a result, they are accepted, valued, and evaluated as right, fitting, and good (Aldrich & Fiol, 1994). Stakeholders – such as customers, suppliers, investors, and potential employees — observe and evaluate firms. They do this in order to judge firms’ credibility, as well as the likelihood that their operations will continue (Aldrich, 1999; Suchman, 1995). Stakeholders’ perceptions are shaped by the normative, cognitive, and moral forces that construct organizations. A small example is charity, they rely on moral forces to shape individuals’ perceptions – and in turn, raise money. It shows how organizations can depend on the perception which rests with the audience. The perception forces involved can vary for different actors in a social environment. Furthermore, these forces change over time. For example, sustainable energy, reflects changes over time in how it is perceived by society. These changing perceptions are due to dynamics in moral concerns. Only in the last ten to twenty years have moral concerns about energy production been great enough to create demand for “greener” solutions from energy providers. Knowledge of these forces, and the time and variation dynamics involved, will enable managers to build, defend, maintain, or extend their organizations’ legitimacy.

Similar to Aldrich and Fiol (1994), multiple scholars have defined “organizational legitimacy” as congruence between societal expectations and the actions of an organization. During this research, I expect that in the case of third-party firms, this “congruence obtainment” might be a more complex process than described in by scholars so far. Third party firms make independent assessments to verify that specific requirements for a product, person, process, or management system have been met. When these requirements are satisfied, an official declaration is given in the form of a certificate (ANSI, 2013). As third parties assess requirements for two exchanging firms, their involvement makes legitimacy a more intricate combination of relationships than merely a bilateral relationship between the exchanging firms. Further complexity is added by the expectation

(7)

7 that third parties themselves must also be legitimate. The third party must be evaluated as legitimate by both exchanging firms. In other words, third parties must obtain legitimacy from their audiences in order to confirm the legitimacy of other exchanging organizations. The complex process of gaining legitimacy for a third-party firm is in need of further investigation, to know how third-party firms can build, defend, maintain of extend their legitimacy. This research attempts to find what determines the perceived legitimacy of a third party certifying firm.

As this research attempts to find the determinants for legitimacy of a third-party firm, third parties operating inside a network of actors can provide additional insight into the concept of legitimacy. The network of organizations and institutions surrounding these types of firms – which all make their own contributions to the process of obtaining and confirming legitimacy – is a subject that has not yet been explored in detail. I expect that investigating this subject will lead to a refinement of current literature and will increase the understanding that legitimacy is obtained within a network of actors. This network perspective would be a contribution to existing theoretical knowledge about legitimacy, as it unravels how legitimacy is existing in the network of a firm. Also, it would partially explain why third-party firms are emergent in certain industries. I define this as the network perspective on legitimacy: look at legitimacy in terms of the existing relationships in a network and actors surrounding a firm. Inside this network and these relationships, I expect to find the forces of legitimacy defined by Suchman (1995) and Zimmerman & Zeitz (2002). Additionally it is expected that other legitimization forces are present that determine if a third-party is perceived as legitimate. I expect that a network perspective on legitimacy will provide an answer to the question of how legitimacy is incorporated into the social context of third-party firms. Here, the social context is the network of actors surrounding the firm, the industry in which it operates, and societal expectations (which can differ regionally). This research focuses on third-party firms, as their networks and relationships are clearly visible. I hope this research will lead to practical insights on legitimacy for both managers and scholars.

(8)

8 1.1 Existing theoretical knowledge

Legitimacy is a perception from two value systems. On one side is the organization, with its activities. These activities are associated with social values – for example, moral values in the case of charities. On the other side is the organization’s social context, which includes norms of acceptable behaviour. Dowling & Pfeffer (1975) explain that, insofar as these two value systems are congruent, we can speak of organizational legitimacy. Like many other scholars, Dowling & Pfeffer (1975) view legitimacy as a bilateral relationship between two systems (Zimmerman & Zeitz, 2002; Suchman, 1995). In this manner, a rather complex system is simplified to two sides searching for conformity.

Suchman recognizes that firms can gain legitimacy from conforming to formal requirements. However, like Zimmerman & Zeitz (2002), Suchman only describes regulative legitimacy as a form of legitimacy obtainable from third parties. Both scholars do not fully address that confirmation of legitimacy requires obtainment of legitimacy at the same time. This study addresses this void, by stating that regulative legitimacy can be obtained, given a circumstance in which the third-party firm is perceived as legitimate by the network surrounding it. Therefore, the third-party firm should not only perform confirmation activities between an organization and its client, but it should also obtain legitimacy itself. When the third-party firm is legitimate within the network of actors, a spill-over effect can occur, in which legitimacy moves from this third-party towards the exchanging organizations. A selling organization values this spill-over effect, because it allows it to expend less effort convincing its clients that its products or services are desirable. So certification from a third-party firm builds trust and confidence for an exchange relationship between an organization and its client. Furthermore, certification confirms that the activities of the focal organization are appropriate and desirable to the client. This confirmation and required obtainment of legitimacy is the main enhancement I propose adding to Suchman’s (1995) legitimacy theory.

(9)

9 1.2 Research objectives

The purpose of this research is to investigate the determinants of legitimacy for a third party firm. When it is known how legitimacy of a third-party firm is established, it is known how third parties can confirm legitimacy for other organizations. Thus the complexity of the legitimization process of a third party certifying firm is investigated. To shed light on this issue, the study explores how a third party’s network is constructed. Because it is expected that through the network of a third-party firm it can be known how its legitimacy is determined. The network is investigated taking into account that the firm and its network are part of the social context. So the complexity of the social context is explored, instead of simplified as do other researchers (Zimmerman & Zeitz, 2002; Suchman, 1995). This is done in order to understand which legitimacy forces are present. In essence, I look at legitimacy as starting at the firm and the network within which it operates, whereas previously scholars looked at legitimacy as starting from its definition of the term itself. By exploring in tandem the relationships and the types of legitimacy, I aim for a better grasp of how the social context partially explains how third parties are perceived as legitimate.

The network is explored by the ties of organizations, as these cause the complex legitimization process. It is expected that a third-party firm’s existing ties lead to “web of ties" in which each tie contributes to some extent to the third party’s total perceived legitimacy. Every tie has a specific piece to contribute to the third party’s total perceived legitimacy. Therefore, I will investigate all ties individually. Others scholars identify these pieces of legitimacy as “legitimacy types” (Suchman, 1995; Zimmerman & Zeitz, 2002), and each has its specific effect on perceived legitimacy of a third-party firm. Suchman (1995) specifically explains that he expects that legitimacy types are co-existing in the real world. Derived from this, this research investigates the network because, in a network, all legitimacy types require co-existing forms of legitimacy to be of any value. Thus, legitimacy can only be created in a network of ties. By exploring these ties and clarifying their effects, the network perspective on legitimacy can explain how a third party becomes legitimate in its audience’s perception. Becoming legitimate – which I will refer to as obtaining legitimacy as

(10)

10 defined by Suchman (1995) – is a condition required for third parties’ conformational activities. The conformational activities which I define as confirmation of legitimacy. Summed up this lead to the sub-questions that will guide the research:

- Which ties does a third-party firm need in its network to be legitimate? - Which types of legitimacy can be distinguished in these ties?

- What results from different legitimacy types for third-party firms?

The answers to these questions should show the configuration of a third-party firm’s network, the third-party firm’s legitimization process and how a third party firm can confirm legitimacy for other organizations. Together it aims to identify how firms could influence their networks and, thus, their perceived legitimacy.

This research’s goal is to provide rich empirical data to aid in understanding the rationale underlying relationships of third-party firms within a network of organizations and institutions. The study should lead to results that provide new insights in the field of legitimacy. This field is relatively new and highly abstract (Zimmerman & Zeitz, 2002). New insights are necessary, because, as explained earlier, knowledge regarding the social context is currently limited. Due to this limitation, legitimacy is not fully understood.

Exploration of a third-party firm’s network is undertaken. Furthermore, investigation into how each tie contributes to the firm’s legitimacy will allow scholars to see which ties or relationships are most beneficial to certain types of legitimacy. Such research will further develop knowledge in this field. More importantly, legitimacy will become a more tangible field of study when it is known how networks influence its perception. So at the very bottom, this thesis and previous research look at the same subject but from different angles. From this perspective it might bring new insights into legitimacy. However, I also expect this work to partially overlap with existing research, as the object in question is the same.

(11)

11 1.3 Research contributions

This study will deepen knowledge of the social context. Actors that are a part of the social context include the users of products/services, as well as competitors of firms, suppliers, shareholders, and other stakeholders. The organization’s social context is about the norms of acceptable behaviour, which is an abstract definition given by several scholars (Suchman, 1995; Zimmerman & Zeitz, 2002; Dowling & Pfeffer, 1975; Aldrich & Fiol, 1994). This study emphasizes that the social context of a firm can be explored through the network of actors surrounding the firm. Legitimacy is much more of a network-related issue than an issue of firms and social contexts. The network can help strategic and institutional scholars understand which actions firms can take and which parts of legitimacy are network-determined. Where scholars currently describe organizations and social contexts as two sides searching for congruence, this study emphasizes that organizations are embedded in their social context. Therefore the searching of congruence is more applicable to the network of a firm. Understanding that their organizations are part of a network will give managers opportunities to shape organizational ties and through that actions improve legitimacy. Third-party firms provide the following enhancement to current understandings of legitimacy: The confirmation of legitimacy is just as an important a process as that of obtaining legitimacy. Independent certifying firms and scholars in this field will be interested to see how legitimacy can be confirmed for other firms and value associated with this. Knowledge about conditions for the conformation of legitimacy can help independent certifying firms improve their understanding of how they add value. Organizations seeking increased legitimacy via certification can select firms that most increase their legitimacy in the eyes of their observers.

1.4 Research approach

This research begins with a literature review, to which the network perspective on legitimacy is applied afterwards. Other scholars’ major contributions and findings are used to distinguish among processes that appear in these networks. Through use of the new perspective and its relationship to the existing literature, I make an estimation of how legitimacy is incorporated in the social context.

(12)

12 The network perspective is applied through interviews. In interviews with stakeholders from the network of a third-party certifying firm, I examine how its network is constructed. Inside this network, ties are investigated based on their contribution to the third-party firm’s perceived legitimacy. A documentary analysis is used to find additional data. This source will help develop further knowledge. As I use qualitative research in an inductive manner, I try to be as open as possible to new insights that might explain legitimacy as part of a network.

This research continues with a chapter on theory that thoroughly explains the concept of legitimacy and how the network perspective is applied in this study. The research method will be described, in order to be as open as possible about how the study is conducted and in which ways findings are gathered. The results section shows the major findings, which are discussed in the subsequent chapter. Conclusions regarding this research are drawn in the final chapter.

(13)

13

2. Theory

To understand how legitimacy is incorporated in the social context of third-party firms, legitimacy theory is used as starting point. The key for answering the research question, are the main items: legitimacy, third-party firms, and social context. In this chapter, a network perspective on legitimacy is proposed as a tool for obtaining an accurate portrayal of a third-party firm’s social context. The existing literature is reviewed in light of this network perspective. The value of this network perspective is to provide answers to the following questions: Which ties does a third-party firm need to be legitimate? Which types of legitimacy are present in the network? And what is the effect of each type? Through careful analysis of the literature, I expect to find additional legitimation forces that account for the legitimacy of a third-party firm and that can only be explained by a network perspective on legitimacy. Finally, this chapter concludes with a section on how legitimacy theory is applied in this research.

2.1 Defining legitimacy

I started the introduction stating that, stakeholders must perceive a firm as legitimate before they are inclined to engage in a resource exchange with it. Therefore, firms are forced to find (and maintain) legitimacy to stay in business. Several scholars discuss how this is accomplished (Suchman, 1995; Zimmerman & Zeitz, 2002; Dowling & Pfeffer, 1975), and they all reach approximately equivalent definitions of legitimacy. These definitions have four key points: the organization, its social context, social values, and congruence between the organization and society.

“Legitimacy is 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.” (Suchman, 1995)

It is important to note that legitimacy is socially constructed between the legitimated entity and the social group. Legitimacy is dependent on a collective audience and is independent of individual observers (Dowling & Pfeffer, 1975; Suchman, 1995). The organization is at all times searching for legitimacy in its social context. An organization’s actions, communications, and the

(14)

14 implications of these are perceived within the social context that values the organization on a social level. A firm’s social context is the complete world in which it operates. This consists of the network surrounding the firm, the industry, the region, and society. Social context is thus a broad term for defining which audiences and norms should be taken into account when seeking legitimacy. As an example, to the military, the weapons industry is legitimate, but society disapproves of at least a part of the weapons industry’s actions. Social values provide general guidelines for social conduct. Values such as fundamental rights, patriotism, respect for human dignity, rationality, sacrifice, individuality, equality, democracy, guide our behaviour in many ways (Mondal, 2015). For organizations, social values are important, as people reflect upon organizational behaviour from their personal perspectives. Legitimacy exists when the social values associated with an organization’s activities are in line with the social values of the social context to which the organization belongs. (Dowling & Pfeffer, 1975).

Scholars distinguish two views of legitimacy: a strategic view and an institutional view. In the strategic view, legitimacy is a resource that firms can use to their advantage and that can be proactively shaped by the firm. The contrasting view, held by institutional scholars, is that legitimacy comes out of society; it is a set of constitutive beliefs.“Organizations do not simply extract legitimacy from the environment in a feat of cultural strip mining; rather, external institutions construct and interpenetrate the organization in every respect. Cultural definitions determine how the organization is built, how it is run, and, simultaneously, how it is understood and evaluated” (Suchman, 1995). Both views are important for understanding legitimacy. For example, two kinds of changes can influence perceived legitimacy: firms can change themselves, or firms can change the social environment (strategic view) (Suchman, 1995; Zimmerman & Zeitz, 2002). The institutional view, however, provides an important reminder that these options for change are limited. Institutional scholars use isomorphism to explain that firms will eventually be similar due to the presence of rational actors. These and other legitimation forces shape different organizations in similar ways (DiMaggio & Powell, 1983; DiMaggio & Powell, 1991). Both views – the strategic and the institutional

(15)

15 – claim that legitimacy is a prerequisite for a resource exchange to occur between organizations. Therefore, legitimacy can be viewed as a resource in itself. Legitimacy justifies an organization's role in the social system, and it helps attract resources and the continued support of constituents (Ashford & Gibbs, 1990).

Legitimacy is dynamic in nature and as result there is an active process of legitimacy for all existing organizations. The process of legitimacy consists of gaining, maintaining, and repairing legitimacy. In the beginning, legitimacy should be gained. After it is gained, maintaining legitimacy is a challenge. Furthermore, occasionally legitimacy should be repaired (Suchman, 1995). Legitimacy must first be gained when a new activity is started by an organization. Winning the audience’s acceptance of a new activity or as new practitioner of an existing activity is challenging. The challenge of this process is known from overcoming problems of “liability of newness” (Zimmerman & Zeitz, 2002; Suchman, 1995). The challenge of building legitimacy applies to new industries as well as to new entrants into mature industries. Maintaining legitimacy might seem an easier task, once legitimacy is established. However the difficulty rests in an heterogeneous audience, which has changing norms of acceptable behaviour. It requires dynamic behaviour of an organization, which is often more difficult when organizations mature. Changing norms of behaviour might result from events in the social context of an organization. Repairing legitimacy is mostly going through the process of gaining legitimacy again, however this time the task is more difficult as repairing legitimacy is a response on a crisis in perceived legitimacy (Suchman, 1995; Zimmerman & Zeitz, 2002). To create a better understanding of this process an illustrative example is briefly discussed. Commercial nuclear power in the 1950’s required much effort to gain social acceptance. Industrial effort, governmental support and subsidies are examples of major efforts to gain this acceptance. After establishment, in the 70’s and 80’s the discussion on nuclear power rose again, guided by environmental activist. This discussion continued varying in intensity during the years, but for the industry it meant that maintaining legitimacy was an active process. In 2010 the discussion rose again after the events in Fukushima. In Germany this event resulted in closing down the nuclear power

(16)

16 plants, an example where legitimacy is damaged and the process of regaining must start. This example shows that legitimacy in the field of commercial nuclear energy is highly dynamic. Institutional scholars and strategic scholars acknowledge that these legitimization dynamics are applicable for organizations. The strategic action that can be taken to influence this illustrates their different viewpoints; this is discussed in the previous paragraph. The process of legitimization is important for this study, to understand in which phase the organizations are. This will have an effect on the observed phenomena.

Concluding this section, for this research, I accept the definition of legitimacy described at the beginning of this section, and put forth by Suchman (1995), as it covers the most important items that construct legitimacy. The next section aims to explore its meaning in a concrete manner. So, this definition provides the starting point from which this research begins.

2.2 A third-party firm’s network

To understand a third-party firm’s social context, some background information on these types of firms is required. Afterwards the social context of third parties is discussed. As mentioned by other scholars and this thesis, the social context consists of the complete environment in which the firm operates. A third-party firm’s network only includes the organizations that are interacting directly with the third-party. The interacting firms are ones that force concrete requirements on the third-party. For example manufacturers to provide a good service or standards that require tests to be performed according to their description. The social context is discussed to highlight the

importance of obtaining legitimacy and confirmation of legitimacy, as proposed in this research.

2.2.1 Third parties

Third-party certifiers are external institutions that assess, evaluate, and certify organizations’ quality claims (Deaton, 2004). This assessment is carried out in the network surrounding the third party. The network of third-party firms includes other organizations, of which I define a number of them in accordance with the classification laid out by Tanner (2000):

(17)

17

First party: Company

Second party: The company’s consultants.

Third party: External institutions that assess, evaluate, and certify quality claims made by the company/first party.

Fourth party: Regulatory and standardizing bodies

As stated in the description above, third parties are external institutions that assess and evaluate claims made by the first party. External indicates that the assessing third-party is not involved in the main monetary exchange between the first party and its customers. Third parties do not produce any physical goods or sell directly to a customer. The “product” they produce is a paper that includes a judgement regarding, for example, some apparatus, service, process, or firm. Often their assessment is based on the standards, which are controlled by fourth parties. Standardization is important in an technical industry, because as early as the end of the 19th century, it had already been recognized that the lack of standardized electrical equipment was a worldwide problem. With the development of economically viable electrical equipment, local authorities and distributors could choose for the first time among the merits of different designs. However, in the absence of agreed-upon ratings and recognized performance criteria, these authorities and distributors were often obliged to follow the advice of experienced consultants. Manufacturers, on the other hand, wanted to facilitate repetitive production and the simplification of designs. They viewed these steps as essential for reducing consumer costs, successfully competing with foreign producers, and providing recognized guarantees (Paul Tunbridge, 2014). So standardization is beneficial to the industry, however compliance to standards requires that certain claims made by manufacturers must be assessed – and this is what third-party certifiers do.

2.2.2 Confirmation of legitimacy in the network

As do all other existent firms, the four parties – discussed in the previous section – need legitimacy. As the first party sells products to its customers, its legitimacy is the most visible and is highly pragmatic in nature. Second parties are consultants, assumed to be experts in the field, selling their

(18)

18 knowledge to the first party. Third parties assess and evaluate claims made by the first party. I consider this to be a first indication that their legitimacy rests on aspects other than purely pragmatic concerns. Fourth parties find their legitimacy in rules and regulations, which provide efficiency to all other parties. Standardization is providing efficiency, and by complying with those requirements, all participating firms acquire a form of legitimacy. That form of legitimacy is recognized by Suchman (1995), who states that a way to achieve legitimacy is through compliance with rules laid down by official institutions. Thus, legitimacy can be obtained by complying with rules. Suchman (1995) states this as obvious fact for acquiring legitimacy, however, compliance requires that certain claims made by manufacturers must be assessed and confirmed. The assessment and confirmation of legitimacy is provided by third parties for the benefit of first parties.

The relationship among the four parties creates a complex network. This complexity can be seen in the necessity of receiving certification from third-party certifiers. The number of organizations participating in this certification process results in a more complex legitimacy process than as between an organization and its audience. Its intricacy lies in the verification and confirmation activities delivered by third-party firms. Confirmation is valuable to an audience when that audience views the third-party firm as credible. However, this confirmation process also requires the audience to assess both the organization and the third-party firm. Hence, legitimization becomes more complex. While it might seem undesirable for the audience to assess multiple organizations, the value of its judgement is apparently higher than the costs involved. This can be seen in the fact that demand exists for such organizations. Otherwise, third-party firms would not be legitimate.

Figure 1 exemplifies this intricacy, providing a basic example of a third-party certifier’s social context. It includes all parties, as well as a competitor of the first party. In Figure 1, black arrows indicate standardization bodies’ relationships. Figure 1 explains the value added by the third-party firm. Beginning with the first party (manufacturer), a legitimacy relationship with its customer (the utility) is a prerequisite for an exchange relationship. Exchange relationships are indicated by blue

(19)

19 arrows with two tips. As every firm has competitors, the first party’s competitor is also trying to establish a similar relationship (also indicated by a blue arrow) with the utility. The third party’s value is equal to the difference in legitimacy relationships between the first party and its competitor. The third party confirms to the utility that the first party’s actions are desirable, as indicated by the red arrows. It does not change the product or add legitimacy; it only confirms assumptions made by the customer. The competitor, which does not have this confirmation from an independent party, will need more/different efforts to explain that its actions/products are appropriate. Although the independent party does not have an exchange relationship with the third party, its judgement is valued by both the first party and the utility. In this triangular relationship, the end user should assess the third party’s legitimacy to appreciate confirmation to the manufacturer, as indicated by the yellow arrow. The green arrow indicates the relationship between the third party and the manufacturer. This relationship is important to both of those parties and results from the other relationships in the network. Though this might seem to be an exchange relationship, the third party’s endorsement powers (indicated by red arrows) also heavily affect this relationship.

(20)

20 The FIRM3-K laboratories provide an example of the figure described above. Long ago, the utilities developed a laboratory for testing future equipment, as they required a verification of performance. However, in the short term, the manufacturers requested that this laboratory be authorized to act on behalf of the utilities (FIRM-D, 2014). As standardized procedures were known and accepted by all parties, this provided the network with efficiency and effectiveness. This is an example of how both manufacturers and customers search for ways to determine that their own and others’ behaviour are legitimate and appropriate. The literature on information economics provides a similar theoretical structure for understanding the emergence of third-party certification bodies. The economic framework explains how third-party firms decrease information asymmetry and uncertainty for transacting parties. This “signalling” of independent firms increases trust. Consequently, the transaction relationship improves, rendering third-party certifiers desirable (Deaton, 2004). Both parties should judge the independent party as objective, and this often is accomplished through standardizing bodies (Deaton, 2004). This economic model partially explains the emergence of certifying firms. However, consumer benefits are secondary and indirect (Taylor, 1958). Based on the network displayed above, I expect that the confirmation of appropriate behaviour has more direct benefits for manufacturers, as well as for their customers.

2.2.3 Obtaining legitimacy as a third party in a network

Now that the confirmation activities of the third-party firm and their value have been established, the next topic is how this third party gains its own legitimacy. As there are multiple third parties in the world, what makes a particular third party more desirable in a network than another? The environment of the third-party firm consists of two main players: manufacturers and utilities. Both manufacturers and utilities assess the third-party firm’s legitimacy. As explained, in this new network perspective, the utility needs to assess two organizations rather than only one. Therefore, the third-party firm’s legitimacy should be easily assessable. Third-party firms gain legitimacy from other organizations, and they have their basis in international and national standardizing bodies.

(21)

21 Examples of these standards are ISO1, IEC2, and ANSI3 standards. Based on these standards, third-party firms provide efficiency advantages for manufacturers, as well as for utilities (Deaton, 2004). In Figure 1, the manufacturer must confirm its legitimacy to each and every utility through the third party. Likewise, each utility must assess the claims made by the manufacturer. However, if the third party follows standards accepted by utilities and manufacturers, the assessment becomes generalizable. This provides efficiency, thereby forming a part of the third party’s legitimacy.

Just as the third party assesses the manufacturer’s legitimacy, an accreditation agency verifies the third party’s appropriate application of rules and regulations. This is a formal type of legitimacy that can be – or must be – obtained by third-party certifiers. Similar to a third party, the accreditation agency offers assurance that the third party will provide an objective and independent assessment (Deaton, 2004). The accreditation agency and the standardizing bodies extend the network beyond the independent party. This extension is needed to provide legitimacy for the third party. Figure 2 illustrates this line of reasoning.

Figure 2 - Legitimacy creation for a third party

1

International Organization for Standardization

2_{International Electrotechnical Commission} 3

(22)

22 Figure 2 is an extension of Figure 1, focusing on the third-party firm. In Figure 1, the red line indicates a third party confirming a manufacturer’s legitimacy based on accepted standards. This confirmation is eventually used to inform and confirm appropriate behaviour to customers. Figure 2 shows a similar relationship confirming a third-party firm’s desirable behaviour to both the manufacturer and utility. The accreditation agency is the institute through which legitimacy is confirmed. Therefore, Figure 2 shows that organizations search for legitimacy and confirmation of that legitimacy for their audience. In this search, firms demand external organizations that are able to assess their legitimacy. These external organizations are the so-called third parties. These third-party firms also need to be perceived as legitimate in their own right. Consequently, they build on certain external organizations to gain legitimacy (in this example, the accreditation agency). Together these organizations form a network of legitimacy. Inside this network, firms can spill over legitimacy from one firm to another. This spill-over effect is similar to the endorsement effect described by Zimmerman & Zeitz (2002), which is further discussed in section 2.4.

2.3 Emerging independent parties

Despite the fact that the conformational activities of third parties and their effect on the network have been explained, one might still question why a network of legitimacy is required and why firms cannot confirm legitimacy without independent and external organizations. Explanations are given in the economics literature. Tanner argues that independence is the key: “An independent assessment by an expert, experienced and fully accredited organisation provides true additional value to the industry it serves as well as supporting, and complementing the role regulating and enforcement agencies” (Tanner, 2000). The complementary role is primarily present in circumstances where third-party certifiers are truly independent. In these cases, the costs of obtaining third-party certification are inversely related to the quality of a firm and/or its product (e.g. high quality firms pay less for certification, since their products more closely adhere to quality requirements). If this were not the case, third-party certification would not allow for discrimination on the basis of quality.

(23)

23 It means that without independence, high- and low-quality firms could obtain certification for the same price, which would damage the certification’s credibility (Deaton, 2004).

Though a relatively small amount of literature has been devoted to independent third-party firms and their certification marks, Taylor (1958) concludes that, “Although the objectives underlying the use of certification marks appear logical and desirable, it is apparent that, except in those programs conducted by governmental agencies; there is little desire to aid the consumer directly in the buying process. In most instances, any benefit to the consumer is secondary and indirect.” The conclusion he draws seems a bit premature. He uses exactly some key items of the legitimacy definition put forwards by Suchman (1995) “logical and desirable.” Doing so creates a definite purpose for certification marks – namely, legitimacy. After all, according to Suchman, legitimacy is a condition needed for any firm in the marketplace. Taylor’s conclusion also indicates that a direct connection might not be in an exchange relationship, but in a legitimacy relationship through a network of actors. Therefore, in this research, I aim to answer the question of why third-party firms are emergent in certain industries.

2.4 Legitimacy types

Now that the social context of third-party firms has been discussed, including the basic network that will be the foundation of this research, the different forms of legitimacy existing in the literature will be investigated. These forms of legitimacy are expected to be present inside the third-party firm’s social context. Scholars have discussed the different forces that shape the audience’s perceptions of legitimacy. Each type reflects a different force of legitimacy and reflects the amount of strategic action that can be taken to influence this perception. Thus, some types of legitimacy are less malleable by managers but are seen as most powerful by the audience. Pragmatic legitimacy, moral legitimacy, cognitive legitimacy, industry legitimacy, and regulative legitimacy are all types of legitimacy described by scholars (Zimmerman & Zeitz, 2002; Suchman, 1995; Dowling & Pfeffer, 1975). The types discussed by Suchman (1995) and by Zimmerman & Zeitz (2002) will be used as the

(24)

24 basis for this study. As they partially complement and overlap each other, I use the terms according to the following typology.

2.4.1 Pragmatic legitimacy

Pragmatic legitimacy rests on the self-interested calculations of an organization's most immediate audiences (Suchman, 1995). Basically, this means that pragmatic legitimacy is an exchange legitimacy relationship. Thus, there is a direct relationship between the organization and the stakeholder in question. The higher the benefits to the audience, the higher the organization’s perceived legitimacy will be. An organization is legitimate simply because it fulfils the audience’s desires. Pragmatic legitimacy can consequently be purchased. Therefore, this type of legitimacy is the easiest form to manipulate (Suchman, 1995).

A related variant of pragmatic legitimacy is influence legitimacy, which is slightly more socially constructed. This type is not determined by a favourable exchange relationship but looks more at society’s larger interests. Another variant is dispositional legitimacy, which is characterized by organizations perceived as individuals. Organizations are legitimate when they “are honest,” “have the best interests of the client in mind,” “share the same values,” “are trustworthy,” and etc.

2.4.2 Moral legitimacy

Like an individual’s morals, a firm’s moral legitimacy is a judgement as to whether the activity performed by the firm is “the right thing to do.” This judgement is made by society or the firm’s audience (Suchman, 1995). For example, current discussions on sustainability and firm activities are influenced by moral legitimacy. Though it is not fully disinterested for many firms, since society desires sustainable firms, the audience makes a moral judgement based on the firm’s activities. This moral form of legitimacy is derived from society’s norms and values. Society’s norms and values are the reference point for the audience’s perceptions. Organizations demonstrate that they are appropriate and desirable by addressing norms and values. These norms and values include profitability, fair treatment, and human rights. Here, endorsement is an important source for

(25)

25 demonstrating this form of legitimacy. Endorsement is a favourable opinion about an organization given by another organization. “The endorsing organization’s legitimacy spills over into the recipient organization” (Zimmerman & Zeitz, 2002, p. 419). On a more personal level, this is similar to references on a resume when applying for a job. When a reference says positive things about a candidate, the candidate is more credible and is thus provided with a form of legitimacy.

Four variants of moral legitimacy are: consequential legitimacy, procedural legitimacy, structural legitimacy, and personal legitimacy (Suchman, 1995). Consequential legitimacy proclaims that organizations should be judged by what they accomplish. The technical properties of outputs are socially defined and do not exist in some concrete sense. Examples are test scores and car emission rates. Procedural legitimacy means that, in addition to producing socially valued consequences, organizations can also gain moral legitimacy by embracing socially accepted techniques and procedures. For example, a hospital will not lose legitimacy if some patients die. However, if it performs involuntary executions, it will lose legitimacy. A structurally legitimate organization gains public confidence, because it is "the right organization for the job." This sense of rightness has more to do with emblems of organizational identity than with demonstrations of organizational competence. For educational organizations, this means having modern facilities and educational methods. Finally, personal legitimacy rests on the charisma of individual organizational leaders (Suchman, 1995). It is important to distinguish between these variants of legitimacy, and between the relationships which are based on them. Aspects of these forms are utilized later in this research.

2.4.3 Cognitive legitimacy

Cognitive legitimacy can be derived by addressing, "widely held beliefs and taken-for-granted assumptions that provide a framework for everyday routines, as well as the more specialized, explicit and codified knowledge and belief systems promulgated by various professional and scientific bodies" (Scott, 1994). Whereas the other forms of legitimacy are based on an evaluation, cognitive legitimacy takes a certain taken-for-granted stance. The organization is considered inevitable and

(26)

26 necessary; this is typical for this type of legitimacy (Suchman, 1995). Theorists describe two variants: legitimacy based on comprehensibility and taken-for-grandness legitimacy. Comprehensibility legitimacy stems from the belief that the social world is a chaotic cognitive environment. Organizations in this world must arrange their activities and experiences into understandable schemas. Taken-for-grandness legitimacy is almost impossible for an organization to attain, since the audience will accept the organization without questioning its actions.

2.4.4 Regulative legitimacy

An organization attains this form of legitimacy when it can acquire legitimacy by visibly conforming to regulations, rules, standards, and expectations created by governments, credentialing associations, professional bodies, and even powerful organizations. (Zimmerman & Zeitz, 2002). Usually there needs to be a sanctioning system, in order to ensure that organizations address the rules and regulations of the governing bodies. This type of legitimacy is considered to be the most objective measure of legitimacy, since there are formalized procedures and objective evaluation processes to measure it.

2.4.5 Industry legitimacy

Industries have varying degrees of legitimacy, based on a variety of actions and consequences stemming from the collective actions of industry members (Zimmerman & Zeitz, 2002). In times of recession, the banking industry’s legitimacy was heavily questioned. Similarly, in the past, the oil and chemical industries have been under attack. Individual firms are not evaluated by the audience. Rather, doubt is cast over the entire industry. This dynamic can also function in the opposite direction. Throughout history, several industries have been called “the industry of the future.” IT is an example. An organization associated with this industry is automatically judged as worthy for a resource exchange. General audience perceptions of an industry reflect this form of legitimacy.

(27)

27 2.5 From theory to research question

Various types of legitimacy are present in the network in different places as shown in Figure 1. Legitimacy between a manufacturer and a customer is based on different factors than legitimacy between a customer and a third party. This is simply due to the absence of an exchange relationship between the latter two parties. The relationship between the third party and the customer, as compared to that between the third party and the manufacturer, is influenced by other legitimacy forces. This is because desires and expectation are different. These varying forces are described by several scholars and primarily show how to obtain legitimacy (Suchman, 1995; Zimmerman & Zeitz, 2002). Research has focused around obtaining legitimacy, as an organization versus social context paradigm. That the forces of legitimacy have not been used in a network form might result from a lack of detailed understanding about the social environment, as described by Zimmerman & Zeitz (2002):

“To be sure, the concept of "social system" is quite broad. For us, the key point is that such a system constitutes the environment in which the organization operates and with which it needs to demonstrate consistency.” (Zimmerman & Zeitz, 2002)

Suchman (1995) expresses the same shortcomings in current research, “Pragmatic, moral, and cognitive legitimacy co-exist in most real-world settings...Future research must explore both the conflicts and the synergies among various legitimation dynamics…Theorists currently know little about how legitimacy differs from one industry to another, from public organizations to private organizations, from new sectors to old sectors, or from the beginning of the organizational life cycle to the end. One could, nonetheless, imagine constructing indicators of different types of legitimacy (based, perhaps, on audience/constituent surveys) and then employing those indicators to ascertain the legitimacy profiles of specific organizations, professions, industries, or sectors” (Suchman, 1995). To investigate in greater detail how legitimacy is embedded in a firm’s social context, it is important to investigate its legitimization ties and the effect of these ties. To do this from a network perspective on legitimacy is new and promising, since a firm’s network is recognized as important by Zimmerman

(28)

28 & Zeitz (2002). They recognize some forms of legitimacy are typical network forms – for example, normative legitimacy. If this form of legitimacy is heavily influenced through networks, those network dynamics might work in other forms of legitimacy as well. Such normative networks consist of ties between organizations and associations outside the firm (Zimmerman & Zeitz, 2002). In this form of legitimacy, it is important for the first-party firm to assess the legitimacy of the other firms in the network. If the other firm’s legitimacy cannot be spilled over to the first party, the tie lacks value, and this possibly diminishes the firm’s legitimacy. A field where this spill-over effect has already been explored is the literature of social capital. “Social capital is the contextual complement to human capital. The social capital metaphor is that the people, who do better, are somehow better connected. Certain people or certain groups are connected to certain others, trusting certain others, obligated to support certain others, dependent on exchange with certain others. Holding a certain position in the structure of these exchanges can be an asset in its own right. That asset is social capital, in essence, a concept of location effects in differentiated markets” (Burt, 2000). In this complement to human capital, I expect to find grounds for my network complement to organizational legitimacy. Firms can improve their perceived legitimacy by improving their positions in the network as compared to that of their stakeholders and competitors. Although one organization cannot influence the entire network surrounding the focal organization, it can influence the ties and the number of ties surrounding the firm. The theory discussed is reflected in the research questions: “Which ties does a third-party firm need in its network to be legitimate?” Is about the network perspective explained. “Which types of legitimacy can be distinguished in these ties?” Focusses on the forms of legitimacy which can be found in these types and which have already been discussed by scholars. And “What results from different legitimacy types for third-party firms?” Will discuss the effects of every type of relationship. As other scholars research the main focus in this research is on relationship. However, the social capital metaphor is an indication that other legitimization forces might be present. The research is explicitly open in approach to identify new determinants of legitimacy.

(29)

29 2.6 Summary

The theory discussed in this chapter will be applied inside a network of legitimacy. Starting from the organization and the network surrounding the third-party firm, I will investigate the existence of legitimacy. Where previously scholars have discussed legitimacy as an audience’s perception of a firm, I discuss legitimacy inside a network. Here, relationships are more complex. As major addition, I expect to find certain confirmation activities that will be important in several places in the network. The conformational activities are valuable through endorsement effects. Endorsement is important in this network theory.

(30)

30

3. Research methodology

“Sometimes we simply have to keep our eyes open and look carefully at individual cases –

not in the hope of proving anything, but rather in the hope of learning something” (Eysenck, 1976). 3.1 Introduction

This chapter presents the research method in order to show a close connection between the research objective s and methods. I explain the research design and data collections methods in order to address the validity and reliability of this research. Finally, I describe the data analysis process

3.2 Research approach

To come to a deep understanding of third-party firms’ social contexts, a qualitative research study has been conducted. Qualitative research has a humanistic focus, whereas quantitative research is grounded in mathematical and statistical knowledge (Gephart, 2004). Because of its humanistic focus, qualitative research is very suitable for finding, for example, the social values people apply to organizations. Qualitative studies stress the socially constructed nature of reality, the intimate relationship between the researcher and what is studied, and the situational constraints that shape inquiry (Denzin & Lincoln, 2000). In the field of legitimacy, other researchers have followed similar qualitative methods because, “legitimacy which is an abstract, unobservable concept that has proven difficult to measure, will require extensive and qualitative information” (Zimmerman & Zeitz, 2002). Different strategies for performing qualitative research are: archival research, ethnography, action research, grounded theory, narrative inquiry, clinical research, and case studies. (Denzin & Lincoln, 2000).

A case study is used for finding underlying aspects of legitimacy, because it has the potential to provide a fresh perspective on an already researched topic (Eisenhardt, 1989). Equally important, it is an investigation on a topic within its real-life context. It uses multiple sources of evidence, which contribute to filling the empirical findings gap that currently exists in the field of legitimacy (Saunders

(31)

31 & Lewis, 2012; Suchman, 1995; Zimmerman & Zeitz, 2002). The case study, which I use for theory-building, will combine data collection methods. I use interviews and documentary analysis. Through these collection methods, triangulation is made possible, which provides stronger proof for certain constructs (Eisenhardt, 1989; Silverman, 2010). My case study is built around the third-party certifier, FIRM3-K. FIRM3-K is chosen because of the characteristics of its industry. I identify this industry as mature and small. In the industry, relationships are important due to absence of a controlling agency. Furthermore, I have a good understanding of the industry, which is beneficial during interviews and documentary research.

Given the early stage of empirical research in the field of legitimacy, an inductive approach is chosen for this research. An inductive approach supports the case study in finding new insights and is suitable for developing new theories. The qualitative inductive approach is chosen primarily since statistical data on legitimacy will not provide an understanding of the effects of relationships around the third-party firm and how they lead to perceptions of its legitimacy. Understanding these effects is critical for gaining new insights. Furthermore, according to Zimmerman & Zeits (2000), statistical data is hard to attain. An accurate statistical measurement of legitimacy has not yet been created. Therefore, a statistical approach would require extensive verification and justification of its validity, which, due to resource limitations, is not possible.

3.3 Research design

Now that the research approach has been explained, the location and sampling method is described. Theoretical sampling needs to be used for this research, since its purpose is to refine theory. Theoretical sampling means that I select cases, because they are particularly suitable for illuminating and extending relationships and logic among constructs (Eisenhardt, 1989). Since the research question is about an independent third party, this is the first criterion for selecting a firm. The next important item of importance is that certification is not mandatory to access to the market.

(32)

32 For example, a CE-mark4 is a mandatory conformity mark stating that a product has been assessed before being placed on the market and that it meets European Union safety, health, and environmental protection requirements. The CE-mark, therefore, has a highly regulative legitimization influence. This has a different effect on legitimacy than does voluntary certification. By looking at the voluntary aspect, I expect to find rich information on why organizations pursue such confirmations of performance. A certification body fulfilling these requirements is FIRM3-K laboratories, which issues FIRM3-K type test certificates.

To select the sample, I use two non-probability sampling methods. The first method is purposive sampling, which is utilized inside the third-party firm. The criteria for selecting interviewees are individuals who: have an overview of the market, have more than five years of experience in the industry, and have a detailed understanding of the needs of different stakeholders. In general, these individuals are perceived as experts in the field and hold the position of manager. In the third-party firm, I collect data until I reach theoretical saturation (Eisenhardt, 1989). The theoretical saturation point is important. This is important because, based on the input of the first respondents, the following respondents are selected, using a snowball sampling method (Saunders & Lewis, 2012). This method is applied by asking respondents to identify persons in the organization they have mentioned during the interviews, who are considered to fulfil the selection criteria.

3.4 Data collection

As a primary data source, interviews are used. Interviews can be held utilizing different methods: unstructured interviews, semi-structured interview, and structured interviews. For this research, I use semi-structured interviews, as these allow the contrasting of different groups and are also suitable for uncovering information that might have been considered as unimportant (Della Porta & Keating, 2008). These semi-structured interviews are conducted with a clear framework of themes to explore, bearing in mind that rich data is the goal for learning about legitimacy in relation to the main

4

(33)

33 and sub-questions of this research. The interview starts with questions about the interviewee, including the organization which he represents. In the second step all organizational ties in the network are drawn on a blank sheet of paper. The result is an overview of the network from which the organization is a part of, according to the interviewee. These drawn networks provide input for step three which is discussing the ties drawn. Here the purposes of the ties and their effects are discussed. In the fourth step some specific questions, including the word “legitimacy” will be asked. These question aim to find out – if and how – organizations address their legitimization process. Finally the interview is closed giving the interviewee the opportunity to bring up any other items that could be interesting for this research. To make sure that the interviews are conducted properly, I first perform two interviews to improve the guidelines and to ensure that the topics are addressed properly. These two interviews are then excluded from the data. The questions are open-ended and partially based on existing literature about legitimacy. For details, see Appendix A.

To achieve triangulation including different sources of information, documentary analysis is performed. This also brings more rigidity to the research. Documentary analysis is not used to confirm my interviews but to investigate if the network perspective on legitimacy can be found in documents provided by the organizations. Documentary analysis should be regarded as data in its own right. However, it is important to understand that organizations in contemporary society are the major producer of documents (Silverman, 2010), and therefore I must pay proper attention to these documents. Documentary analysis in my research involves: reports, brochures, year reports, official publications, and websites. Although it is necessary to proceed with caution in the examination of these documents, I am looking for relationships and if firms are working on their relationships. With proper consideration, documents are a valuable source as I attempt to research relationships and their importance for legitimacy. If relationships are not important, documents will not reveal much about them. The documents should reveal if organizations really want to be in a network of organizations and institutes for the sake of their legitimacy. I expect that, in the documents, certain terms should reoccur when confirmation of legitimacy inside the social context is important.

(34)

34 Table 1 gives an overview of all resources used during the research. The organizations and brands are selected based on the networks drawn by the interviewees in the third-party firm FIRM3-K. These three managers are responsible for the customers of the third party, as well as for operations. The managers of FIRM3-K all have more than fifteen years of experience in the industry. Therefore they have an excellent overview of the services of the third party and its value to the network of actors surrounding the third-party firm. The snowball sampling methods used identified the other “experts in the field” in the other organizations.

Table 1 - Overview of data sources

Documents were selected based on their intent. Annual reports and brochures are written to convince shareholders or stakeholders. When legitimacy is truly important for an organization, evidence for it must be available in these kinds of documents. In the case of FIRM3-P, these documents were not available; therefore information from their website is used.

(35)

35 The interviews are all performed face-to-face. Each interview is recorded and transcribed afterwards. Documentary analysis is performed via coding. For details, please see Appendix B.

3.5 Analysis

I use a grounded theory approach to develop theory. Though this research approach is often used to develop new theory, I deviate here, as I only use this approach to shine new light on an existing theory. Therefore, the current knowledge base, which was discussed in the theory chapter, is an important input during the analysis. The coding process is explained by the cycles that were used to develop the final core themes of legitimacy.

3.5.1 First cycle coding

I start the data analysis after the first couple of interviews. During the first cycle, I assign codes to chunks of data from the interviews. As there is no pre-developed coding, I use the transcripts to develop empirically driven labels. In this process, I examine data without limitations regarding scope and without the application of any filters. Thus, all data were accepted, and none were excluded. The same is done for the documents. However, here I filter based on industry. While many documents go beyond the scope of the energy industry, I select only sections of these documents that discuss this industry. During the first cycle coding useful concepts are being identified and key phrases are being marked. It results in the complete dataset being divided in conceptual components. The purpose of doing so is to have a first indication which components are important. Altogether, this analysis forms 148 codes. A short example is provided in Figure 3.

How is legitimacy incorporated into the social context of third-party certifying firms?