Organizational Legitimacy as Key Component in Getting
the Support of the Dominant Coalition
Master thesis Organizational & Management Control
Aimaybel Christiena Wolfrat Student number: 2797569
University of Groningen
Supervisor: Martijn van der Steen Co-assessor: Nicolas Mangin
Date: 20-06-2017 Word count: 11412
Table of Contents
Abstract ... 3
1. Introduction ... 3
2. Literature review ... 6
2.1 Dominant coalition ... 6
2.2 Members of the Cooperative ... 8
2.3 Organizational legitimation process ... 10
2.4 Conceptual model ... 12
3. Methodology ... 13
3.1 Cooperatives in the Netherlands ... 14
Abstract
The dominant coalition has a large influence on the mission and goals of the organization because of their powerful position and legitimate relationship with focal organization’s management. It is expected that the members of the dominant coalition will keep changes contrary to their interest from implementation. The management of the Cooperative Rabobank has a long history with their local member-banks, who for years form the dominant coalition at the Cooperative. These member-banks have a formal mechanism in place, the Corporate Governance Structure (CGS), which guarantees their powerful position in the organization and legitimate relationship with Rabobank’s management. However, in 2016, Rabobank’s management achieved to change its CGS with full support of their local member-banks. Their support is remarkable since the change had a significant negative impact on the power and legitimacy of the member-banks. This research investigates organizational legitimacy as a key component in getting the support of the dominant coalition. Furthermore, aims to answer the question how organizational changes occur that are contrary to the interest of the most powerful party in the organization, the dominant coalition. Therefore, this research investigates the communications and annual reports from the start of the Cooperative discussing regarding the CGS in 1994 until the change in CGS in 2016. The results of this research show that in this period, Rabobank’s management, mostly made use of moral-, cognitive- and regulatory legitimacy. Therefore, this research concludes that in particular these forms of legitimacy play an important role in the gaining the support of the dominant coalition, even if it’s not in their own best interest.
Keywords: dominant coalition, stakeholder power, stakeholder legitimacy, organizational legitimacy, organizational change.
1. Introduction
legitimacy. Power provides the dominant coalition the ability to shape the gains and losses of the organization either by threatening or using coercion to deter undesired behavior or by promising rewards to promote desired behavior (Tyler, 2006). 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). Without a legitimate relationship with focal organization’s management it is more difficult for the dominant coalition to influence the organization (Mitchell, et al, 1997; Tyler, 2006). Moreover, attributes power and legitimacy are transitory, not a steady state, thus membership in the dominant coalition can be acquired as well as lost (Mitchell et al, 1997).
Although membership in the dominant coalition can shift, members of the dominant coalition desire to remain in the dominant coalition and also maintain influence over the organization in order to represent their interest (Bowler, 2006; Greenwood & Hinings, 1996). Therefore, they will use their power and legitimacy to influence decisions to their benefit in pursuit of their own interest (Bowler, 2006; Cook, 1995; Greenwood & Hinings, 1996). Moreover, also have a formal mechanism in place that acknowledges the importance of their legitimate relationship with the Cooperatives management (Mitchell et al, 1997). The members at the Cooperative have such a formal mechanism in place, namely the Corporate Governance Structure (CGS). The CGS acknowledges their legitimate relationship with management. The members of the Cooperative are since its foundation owners, managers, co-controllers, co-users and co-beneficiaries and also co-liable for any debt (Alexandra Mamouni Limnios, Watson, Mazzarol, & Soutar, 2016) and therefore form the dominant coalition. Moreover, the members of the Cooperative democratically elect member representatives for the board of directors; management is only hired to carry out the policies adopted by the board. However, over the years, the CGS of the Cooperative became more exposed to free-market capitalism. In response, some governments have allowed deviations to the traditional cooperative model. This has taken a variety of forms, including the acceptance of non-member owners, the appreciation and transferability of equity and the use of proportional member control structures.
purpose of this research is to investigate the legitimacy relationship between the most powerful party in the organization, the dominant coalition, and organization’s focal management at the Cooperative Rabobank. The main question in this research is:
‘How do changes occur in an organization that are contrary to the interest of the most powerful party in the organization, the dominant coalition?’ This phenomenon can be explained through organizational legitimacy theory. When interests of dominant coalition members match those set by the formal leadership, this will result in support and resources. However, when the interests of the dominant coalition contradict those of formal leadership, a legitimation process arises (Bowler, 2006). Legitimation can be explained as a retrospective process, whereas the organization interprets its past actions in light of the current social values (Ashforth & Gibbs, 1990). Moreover, through communications organizations legitimize their present output, values, and methods of operations with institutions, values, or outputs which are strongly believed to be legitimate (Dowling & Pfeffer, 1975). Many studies show that organizations use communications as tools to ensure legitimacy in the eyes of their stakeholders (Aerts & Cormier, 2009; Beddewela & Fairbrass, 2016; Cho & Patten, 2007; Castelló, Etter, & Arup Nielsen, 2015; Kent & Zunker, 2013; Monfardini, Barretta & Ruggiero, 2013; O’Donovan, 2002). However, these studies often do not clarify in the eye of which stakeholders the organization aims to gain legitimacy nor explain based on stakeholder theory why they address a certain stakeholder instead of another.
To answer the research question and investigate if this expectation is true, communications between the Rabobank’s management and their local-member-banks and annual reports are analyzed in this research. Hereby this research makes three contributions. First, this research contributes to legitimacy- and stakeholder literature because it investigates the legitimacy relationship between focal organization’s management and the dominant coalition (Aerts & Cormier, 2009; Beddewela & Fairbrass, 2016; Cho & Patten, 2007; Castelló, et al, 2015; Kent & Zunker, 2013; Mitchell et al, 1997 Monfardini et al, 2013; O’Donovan, 2002). Second, a contribution is made to literature regarding organizational change explained by legitimacy theory (Greenwood, Suddaby & Hinings, 2002; Gilley, 2008; Suddaby & Greenwood, 2005). Last this research contributes to literature regarding Cooperatives and their relationship with their stakeholders (Alexandra Mamouni Limnios et al, 2016; Kimberley et al, 2004; Teixeira et al, 2016). This chapter introduced the research topic, organizational legitimacy as a key component in getting the support of the dominant coalition. Chapter two discusses the relevant literature mostly built on stakeholder- and organizational legitimacy theory. Thereafter, the method used in this study is discussed as well as data-analysis plan in chapter three. The results of this research are showed in tables and figures and explained in chapter four. Finally, these results are discussed in chapter five resulting in six propositions. Chapter six discusses the conclusions, main limitations of this research and recommendation for further research
2. Literature review
This literature review disucsses the two main bodies of academic literature that are the most important to this research: the dominant coalition as part of stakeholder theory and legitimation processes as part of organizational legitimacy theory. These two bodies combined form the foundation for this research.
2.1 Dominant coalition
outcomes (Morgan, 2006). Those in positions of authority in an organization’s structure or hierarchy are commonly members of the dominant coalition (Bowen, 2009). However, this position does not necessarily follow organizational hierarchy (Hatch, 1997). Membership in the dominant coalition can be based on other factors than authority, organizational structure and rank (Bowen, 2009).
The work of Mitchell et al (1997) identifies seven types of stakeholders, who are illustrated in figure 1. The stakeholders of an organization can posses one, two, or all three of the following relationship attributes: the stakeholder's power to influence the firm; the legitimacy of the stakeholder's relationship with the firm; the urgency of the stakeholder's claim on the organization. These attributes explain explain how managers prioritize stakeholder relationships. As ilustrated in figure 1, the dominant coaliton posses besides power also legitimacy, which is defined by Suchman (1995) 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. According to Mitchell et al (1997) stakeholders are characterized as dominant with respect to the legitimate claims they have upon the organization and their ability to act on these claims. However, Santana (2012) argues that stakeholder’s legitimacy is not only based on the legitimacy of the stakeholders claim. The author defines stakeholder legitimacy as a composite perception by the focal organization’s management of: legitimacy of the stakeholder as an entity, legitimacy of the stakeholder's claim, and legitimacy of the stakeholder's behavior at a certain point in time (Santana, 2012).
Figure 1: Stakeholder Salience, attributes of the dominant coalition (Mitchel, et al, 1997)
coalition is not a steady state it can shift (Mitchell et al). The members of the dominant coalition desire to remain in the dominant coalition and also maintain influence over the organization in order to represent their interest (Bowler, 2006; Greenwood & Hinings, 1996). Therefore, they will use their power and legitimacy to influence decisions to their benefit in pursuit of their own interest (Bowler, 2006; Cook, 1995; Greenwood & Hinings, 1996). Moreover, also have a formal mechanism in place that acknowledges the importance of their legitimate relationship with the Cooperatives management (Mitchell et al, 1997). The Cooperative is an organizational form that has such a formal mechanism in place and a long history with their dominant coalition. The Cooperative is a democratic organization, controlled and financed by its members. If the Cooperative enters into agreements with others organizations and/ or with governments, or as attracting external capital, they do that in such a way that democratic control of the members and the autonomy of the Cooperative are guaranteed (NCR, 2012). Moreover, to prevent many democratic misunderstandings, the democratic governance of the Cooperative is founded on a principle of 1-member-1-vote many co-operations follow the ‘one man one vote’ (Alexandra Mamouni Limnios et al, 2016). At the Cooperative, it seems clear that the members are part of the dominant coalition. The members hold power or authority and legitimacy because of their position (member and shareholder) and their long history with the organization.
2.2 Members of the Cooperative
Currently, there are more than one million Cooperatives worldwide. France (26,106,829), Germany (22,200,000), Netherlands (16,912,900), UK (14,919,093) and Italy (12,620,000) are the countries with most cooperative members in Europe. These Cooperatives are active in the following sectors: agriculture and food industry, insurance, wholesale & retail, industry and utilities, banks and financial services, health and social care, miscellaneous services and other (NCR, 2014). The main difference with other organizational forms is that in Cooperative the importance of member users is central and not the return on capital inflows (NCR, 2012). The founders of the first Cooperative, the Rochdale Cooperative in England, formulated Principles or Rules (The Rochdale Principles of Co-operation 1937). The International Cooperative Alliance (ICA) presented in 1995 an updated formulation of the values and principles of the Cooperative. These values and principles respected by Cooperatives worldwide are displayed in the attachments of this thesis. Furthermore, the ICA (2006) defines a Cooperative as an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly owned and democratically controlled enterprise.
participate in policy matters and decision making. Members control the cooperative by democratically electing member representatives to a board of directors. The board of directors has an important role and takes the main decisions in a co-operation. Management is responsible for hiring and supervising staff, and carrying out board policies (Kimberly, Cropp, & Cropp, 2004). The managers of a Cooperative have a supporting role instead of a leading role in the organization. Cooperatives are characterized by a two-way Corporate Governance Structure (CGS), on one side the board of directors and on the other the CEO. Over the years, the CGS became more exposed to free-market capitalism. In response, some governments have allowed deviations to the traditional cooperative model. This has taken a variety of forms, including the acceptance of non-member owners, the appreciation and transferability of equity and the use of proportional member control structures (i.e. one-share-one-vote rather than one-member-one-vote). As a result, a variety of cooperative business models have emerged (Alexandra Mamouni Limnios et al, 2016). As the members of the Cooperative form the dominant coalition, it is expected that they will attempt to influence the decisions to their benefit in pursuit of their own interest (Bowler, 2006; Cook, 1995; Greenwood & Hinings, 1996). As part of the dominant coalition, the members have a strong position in the organization and desire to remain in this position. Furthermore, maintain influence over the organization in order to represent their interest (Bowler, 2006; Greenwood & Hinings, 1996). Changes in CGS are not in the interest of the dominant coalition as it threatens their position in the organization. Still, many Cooperatives have achieved to change their governance structure. This raises the question central in this study:
certain stakeholder instead of another. Therefore, this research contributes to the literature as it investigates the legitimacy relationship between focal organization’s management and the dominant coalition.
2.3 Organizational legitimation process
Organizational legitimacy is defined by Dowling & Pfeffer (1975) as the congruence between two value systems. According to the authors, organizations seek to establish congruence between the social values associated with or implied by their activities and the norms of acceptable behavior in the larger social system of which they are a part. This definition of organization legitimacy corresponds with strategic legitimacy theory, which argues that legitimacy is controllable by organizations (Aerts & Cormier, 2009; Ashforth & Gibbs, 1990; Dowling & Pfeffer, 1975; Oliver, 1991). Central to this perspective is the legitimation concept, which can be explained as a retrospective process, the organization interprets its past actions in light of the current social values (Ashforth & Gibbs, 1990). In this way, organizations can bring the ‘unaccepted’ into accord with accepted norms, values, beliefs, practices, and procedures (Zelditch, 2001). Moreover, Suchman (1995) identifies three main forms of legitimacy, which the focal-organizations management can address in their communication with the dominant coalition: pragmatic, based on audience self-interest; moral, based on normative approval; cognitive, based on comprehensibility and taken-for-grandness.
organizations that have our best interests at heart, share our values or that are honest, trustworthy, decent, and wise (Suchman, 1995).
Second, moral legitimacy reflects a positive normative evaluation of the organization and its activities. Unlike pragmatic legitimacy, moral legitimacy does not rest on judgments about whether a given activity benefits the evaluator, but rather on judgments about whether the activity is the right thing to do (Suchman, 1995). In other words, pragmatic legitimacy could be paraphrased as “if we get anything out of this, then we consider it legitimate.” The moral legitimacy perspective frames social enterprise not merely as something that earns revenues or achieves outcomes but as something that is a preferred model of organization (Dart, 2004). This form includes: consequences, procedures, persons, and structures (Deephouse & Suchman, 2008). According to Palazzo & Scherer (2006), moral legitimacy is socially constructed by giving and considering reasons to justify certain actions, practices, or institutions. Moreover, the management of moral legitimacy must be conceived of as deliberative communication. Rather than manipulating and persuading stakeholders, the challenge is to convince them by reasonable arguments (Palazzo & Scherer, 2006). Thus, moral legitimacy justifies focal management’s role in the organization, which assures support from its stakeholders (Parson, 1960; Ashforth & Gibbs, 1990). Subcategories of moral legitimacy are consequential legitimacy, procedural legitimacy, structural legitimacy and personal legitimacy. Consequential legitimacy explains that organizations should be judged by what they accomplish. Procedural legitimacy explains that organizations can garner moral legitimacy by embracing socially accepted techniques and procedures. In the case of structural legitimacy, the audiences see the organization as valuable and worthy of support be-cause its structural characteristics locate it within a morally favored taxonomic category. The fourth subcategory, personal legitimacy rests on the charisma of individual organizational leaders (Suchman, 1995).
experiences into coherent, understandable accounts (Suchman, 1995). To provide legitimacy, an account must mesh both with larger belief systems and with the experienced reality of the audience's daily life (DiMaggio & Powell, 1991; Geertz, 1973; Suchman, 1995). Taken-for-granted legitimacy describes a calmer scene of cognitive coherence and glacial, integrative change. According to this view, institutions not only render disorder manageable, they actually transform it into a set of intersubjective principles that submerge the possibility of dissent (Suchman, 1995). Besides these three main forms of legitimacy, current literature also distinguishes a fourth type, regulatory legitimacy. According to Zimmerman & Zeits (2002) regulatory legitimacy is a more recent type and refers to the consistency of venture behaviors with relevant laws, regulations, rules, standards, and expectations set out by the governments and non-governmental organizations (NGO’s) like the IFRS. Addressing these rules, regulations, standards, and expectations provides legitimacy for the organizations among a wide variety of stakeholders. An organization operating according to these rules and regulations can be recognized as a ‘good citizen’ (Zimmerman & Zeitz, 2002). The next paragraph summarizes the discussed literature in a conceptual model.
2.4 Conceptual model
This research interprets organizational legitimacy as (Aerts & Cormier, 2009; Dart, 2004; Zimmerman & Zeits, 2002; Human & Provan, 2000):
‘The perceptions of stakeholders that the actions of the organization are consistent with their beliefs, standards, values and expectations, resulting in support and resources’
Central in this research are the perceptions of the dominant coalition. This research argues that organizations that are perceived as legitimate by the dominant coalition will gain a reservoir of support, which shapes reactions to organizational changes (Weatherford 1992; Tyler, 2006). This support can be congruent to the interest of the dominant coalition, however also contrary to the interest of the dominant coalition. The lateral implies that the dominant coalition feels obligated to focal organization’s management (Tyler, 2006). This study predicts that pragmatic and cognitive legitimacy only contributes to changes congruent to the interest of the dominant coalition. Furthermore, that moral and regulatory legitimacy contribute to change contrary to the interest of the dominant coalition. Figure 2, shows the conceptual model based on these assumptions.
moral legitimacy as it does rest on the evaluation by the dominant coalition, therefore creates the opportunity for focal organizations’ management to bring the ‘unaccepted’ into accord with accepted norms, values, beliefs, practices, and procedures (Zelditch, 2001).
Figure 2 Conceptual model: changes contrary and congruent to the interest of the dominant coalition Fourth and last, regulatory legitimacy goes beyond the mere response to sanctions. Addressing rules and regulations provides legitimacy for the organization among a wide variety of stakeholders. So, it does not only provide the focal organization management legitimacy, but the organizations as a whole, which the dominant coalition are part of. Thus, this research argues that moral- and regulatory legitimacy can make the dominant coalition feel obligated to the ‘necessary changes’.
3. Methodology
3.1 Cooperatives in the Netherlands
The Netherlands has many co-operations with an interesting history, in particular in banking. Banking in the Netherlands is an important economic sector because of its large size compared to the country’s GDP and its high degree of internationalization. In the 1950s the boundaries between the different types of banks were well defined, the commercial banks, the Cooperative banks and the savings banks each provided their own services for their own market segment. However, in response to the increasing demand for investment and export credit of Dutch enterprises, a transformation started of the Dutch banks from a highly-segmented market to a market in which all banks were direct competitors. Around 1990 all of banks had converged in terms of the banking services they supplied and the wide range of customers (Arnoldus & Dankers, 2005). Rabobank Group is currently the largest cooperative bank in the Netherlands. The local-member-banks at the Cooperative Rabobank the representation of a dominant coalition. Moreover, in 2016 the Rabobank was able to change its CGS with full support of their local member-banks. Therefore, the Rabobank is the organization researched in this study.
The Rabobank Group originated from the Boerenleenbanken and Raiffeisenbanken, which were set up to provide farmers with cheap credit. The first local banks set up two centers in 1898. The increasing demand for financial services and competition lead both central organizations to a merger in 1972, from which Rabobank Netherlands originated. The Cooperative discussion regarding CGS started in 1994 and the change was achieved in 2016 (Sluyterman et al, 1998). From 1 January 2016, all 106-local member-banks and the Cooperative central institution Rabobank Nederland will form one Cooperative, with one banking license, and one financial statement (Groeneveld, 2016). After the change the Rabobank became a more centralized organization, which means less power for the local-member-banks. Moreover, the local-member-banks lost their banking license and therewith their independence.
3.2 Research questions
The question central in this research is: ‘How do changes occur that are contrary to the interest of the most powerful party in the organization, the dominant coalition?’ Sub-questions are formulated to simplify the research question:
Who are members of the dominant coalition in an organization?
How aware is focal-organization’s management of the dominant coalition in their organization? What are the interest of the dominant coalition?
Which changes are contrary to the interest of the dominant coalition?
In this research, the local-members of the Cooperative Rabobank are the dominant coalition. Furthermore, this research argues that from 1994 till 2016, Rabobank’s management made attempts through communications to legitimize the change in CGS. Therefore, the communications between management and the local member-banks are analyzed based on the legitimacy types by Suchman (1995) and Zimmerman & Zeits (2002). Because this research has access to communications until 2007, also annual reports are added to the data. It is plausible that these annual reports, also report the legitimation process at the Rabobank regarding the CGS. The next paragraph discusses the analysis of the communications and annual reports.
3.3 Analysis plan
This research has access to the communications between the focal organizations management and their local-member-banks from 1994 till 2007. These communications are: Bank en Bestuurder, 1994-2006; Rabomagazine, 1996 and 1997; Bank in Beweging, 2007. Because the change took place in 2016, the parts of Rabobank’s annual reports regarding the CGS topic from 2008 up till 2015 were also analyzed in this research. The communications and annual reports are part of a qualitative research. Inductive content analysis is used to analyze the data. This process includes open coding, creating coding categories and interpretation. Open coding means that notes and headings are written in the text while reading it (Hsieh & Shannon, 2005). This research is part of a research group of the University of Groningen, consisting of seven researches. Communications of Rabobank’s management with its local-member-banks from 1972 up till 2007 were coded by this research group.
The researchers first coded three pilot communications of the Rabobank before coding the whole set regarding this period. These pilots were beneficial because after every pilot the codes were discussed in the presence of the supervisor. Agreements were written down and before the coding of the whole set started an auditor was assignment. Of each researcher, the auditor coded two documents. After the auditor and the other students coded these similar communications, these communications were compared and a match of 85 percent is found, which is high. For qualitative content analysis, a high intercoder reliability (ICR) is required. The high ICR assures the quality when more than one coder is involved in data analysis (Burla, Knierim, Barth, Liewald, Deutz & Abel, 2008; Lombard, Snyder-Duch & Bracken, 2002).The annual reports from the period 2008 up till 2015 were solely coded for this research.
process, the hierarchy in codes was established, which concerns questions like (Hsieh & Shannon, 2005; Krippendorff, 2004): which forms of legitimacy are most commonly used? which ones are less commonly used? Finally, relationships and patterns are determined, which concerns question like are there noteworthy combinations of legitimacy present; how can these combinations be explained through theory? These patterns and relationships form the foundation for the results of this research.
Table 1 Coding agreements research group
Agreements
Code: Agenda of meetings; tables; editorial;
summary is counted as one page; an introduction to a summary is a separate paragraph, just as the conclusion after the summary; intermediate headings that belong to the paragraph, if the text says the same as the table, then one paragraph, if the text says something different than two paragraphs; one form of legitimacy per paragraph.
Do not code: Photos; front page; index; colophon, pure
discussion of person (in CV style); headers and titles; short text boxes (i.e. from practice; name writer); footnotes and asterisk; death reports; pages with employees leaving the company; awards; jubilee; appointment of CKV; CKV leaves; advertising.
Table 2 Analysis plan according to the agreements
Four forms of legitimacy
Short description Agreements
No legitimacy None of the four types are recognized
If there is no additional message in the text about a person and its only his story; person’s CV; references and corrections of things said in previous newsletters
Pragmatic legitimacy audience self-interest
discussed. Hereby the bank discusses for example: growth, profitability, costs, income, efficiency, etc.
Moral legitimacy normative
approval/evaluation
The norms and values of the Cooperative, which the local-member-banks most relate to, are discussed. Hereby the bank discusses for example: the unique characteristics of the co-operation, the history of the Cooperative form, the desirability of the Cooperative form, the local-member-banks and their position in the organization, etc.
Cognitive legitimacy Comprehensibility and taken-for-grandness
Credible explanation of activities of the organization, which are based on mental models of the local member-banks. Hereby the banks discusses: standards common to banking, extensive explanations of actions, connecting to the mental model of the local-member-banks, daily practices of the local member-banks, etc.
Regulatory legitimacy Rules and regulations set out by the governments and
non-governmental organizations (NGO’s)
Addressing the importance of applying to rules and regulations. Herby the bank discusses: increasing banking regulations, the gain of some regulatory states, approval from the Central bank, struggles to maintain the current governance structure of the Cooperative in light of this regulation etc.
4. Results
however the use regulatory legitimacy is more frequent. These annual reports are from after the start of the financial bank crisis. Thus, a plausible explanation could be that Rabobank’s management became aware of the power of regulatory legitimacy after the financial crisis, which explains the increase in use of this form.
4.1 The Local member-banks
The local member-banks form the dominant coalition at the Cooperative Rabobank. These member-banks are also the shareholders of the Cooperative. Moreover, the member-banks are represented in the board of directors, called the Centrale Kringvergadering (CKV), which sets the policies for the organization. Rabobanks management, often referred to as Rabobank Nederland is hired to carry out these policies. Beside the CKV, the local Rabobanks also take a place in the general meeting, the governing body in the governance of the Cooperative that appoints the supervisory board of the bank. Multiple times the local member-banks are named the core of the organization, which corresponds with the Stakeholder Salience illustrated in figure 1 of chapter two. In Bank and Bestuur from 1996, it is stated:
‘It is duly noted that the Cooperative discussion directly hit the core of the local member-banks. A core that until recently, because it’s taken-for grandness in the organization, was never openly discussed. Apparently, in the previous period it was realized that at local level things should change. Many are working on a contemporary legitimation of the autonomous cooperative bank.’
In this statement management addresses the taken-for granted status of the local-member-banks. Moreover, argue that the local member-banks are trying to restore their legitimacy in the Cooperative. Remarkably, is that it seems that the legitimacy of the local-member-banks is weakened, creating the opportunity for Rabobank’s management to strengthen their legitimacy. As mentioned in the literature review the attributes power and legitimacy are transitory. Thus, the position in the dominant coalition can be weakened or lost.
‘The Centrale Kringvergadering (CKV) forms the heart of the Cooperative Rabobank’s. The elected and nominated local directors discusses organizational policy in the CKV, bottom-up. The renewal of the central governance is in their hands. If the CKV does not If the CKV does do not support, it will not happen.’
As mentioned before the CKV is the board of directors in the Rabobank organization. Members control the cooperative by democratically electing member representatives to a board of directors. The CKV and the general meeting and are parts of the formal mechanism that the local-member-banks have in place to ensure their legitimate relationship with Rabobank’s management. Moreover, this formal mechanism gives them authority as the CKV sets policies and the general meeting appoints positions. According to literature the dominant coalition desires to remain their position to ensure their influence in the organization. The interest of the local Rabobanks is to keep their powerful and independent position in the CGS of the Rabobank. Moreover, keep a legitimate relationship with Rabobanks management, because without this relationship it is harder to influence Rabobank’s management. In the communications and annual reports management often explicitly guarantees the influence and control of the member-banks. It can be concluded that Rabobank’s management is completely aware of the interests of their dominant coalition.
In the eighties, Rabobank emphasis was on entrepreneurs and their funding, however the bank also wanted to provide in the needs of individuals. In the nineties, Rabobank developed into a broad financial service provider as result of the merger with Interpolis (insurance) and Robeco (fund investment). This commercial turn was accompanied by a reorientation of the essence and the structure of the Cooperative, which eventual led to Cooperative discussion in 1994, also the starting point of this research (Sluyterman et al, 1998). Until the change in 2016, the power and legitimacy of the dominant coalition was secured in the CGS of the Cooperative. After the change the Cooperative Rabobank became a more centralized organization (top-bottom). Moreover, the local Rabobanks lost their banking license and therewith their independence from Rabobank’s management. Thus, the bank now has one banking license, one annual report and is more centrally organized. It can be concluded that these changes were contrary to the interest of the dominant coalition, still they fully supported the change. The next paragraph gives an explanation for this support.
4.2 Legitimation process
was to create the perception that their actions are consistent with the local banks their beliefs, standards, values and expectations, resulting in support and resources. To achieve this goal, four forms of legitimacy are addressed: pragmatic-, moral-, and cognitive-, and regulatory legitimacy. The hierarchy in use of legitimacy per year from 1994 up till 2015 can be seen in table 3, communications and 4, annual reports. Figure 3, communications and 4, annual reports summarizes the use of legitimacy by Rabobank’s management.
Table 3 Hierarchy in use of legitimacy from 1994-2007
1994 1995 1996 1996 1997 1997 Bank en Bestuurder Bank en Bestuurder Bank en Bestuurder Rabomagazine Bank en Bestuurder Rabomagazine
Moral Moral Moral Cognitive Moral Cognitive
Cognitive Cognitive Cognitive Pragmatic Cognitive Moral
Non Pragmatic Pragmatic Moral Non Non
Non Non Non Pragmatic Pragmatic
Regulatory Regulatory Regulatory
1998 1999 2000 2001 2002 Bank en Bestuurder Bank en Bestuurder Bank en Bestuurder Bank en Bestuurder Bank en Bestuurder
Moral Moral Moral Cognitive Moral
Cognitive Pragmatic Cognitive Pragmatic Cognitive
Pragmatic Cognitive Pragmatic Moral Pragmatic
Non Non Non Non Regulatory
Regulatory Non 2003 2004 2005 2006 2007 Bank en Bestuurder Bank en Bestuurder Bank en Bestuurder Bank en Bestuurder Bank in Beweging
Cognitive Moral Cognitive Moral Moral
Moral Cognitive Moral Cognitive Cognitive
Pragmatic Pragmatic Pragmatic Pragmatic Pragmatic
Non Non Non Non Non
Regulatory Regulatory Regulatory Regulatory
Table 4 Annual reports: forms of legitimacy recognized 2008-2015
2008 2009 2010 2011 2012 2013 2014 2015
Moral Moral Moral Moral Moral Moral Moral Moral
Regulatory Regulatory Regulatory Regulatory Regulatory Regulatory Regulatory Cognitive
Cognitive Cognitive Cognitive Cognitive Cognitive Regulatory
Non
Figure 3: Moral- and Cognitive Legitimacy stand out
Figure 4 Mora-l and Regulatory Legitimacy stand out
Moral legitimacy
The communication, Bank en Bestuur, of 1994, discusses the Cooperative discussion extensively. According to the communication the main question discussed were: what is the visible interest of the member partnership for the individual member and for the community? Which rights (benefits) and obligations can you connect to the membership? Who can be the members of the Rabobank? Do we know the needs of our members and do we have a particular image of their expectations of the Cooperative
0 100 200 300 400 500 600 700
Non Pragmatic Moral Cognitive Regulatory
Rabobank's Management use of legitimacy 1994-2007
0 50 100 150 200 250 300
Non Pragmatic Moral Cognitive Regulatory
Rabobank? How can the involvement back and forth increase? Is there reason to change the role distribution at the Cooperative and which task and functions should be granted? Does the distance between management increase due to the mergers and if so should measures be taken? Moreover, in the communication (1994) it is stated:
‘We invited the directors of the local member-banks to collaborate about the Cooperative, and the invitation was honored. We were able to determine the importance of such a discussion is shared widespread in the organization and that our banks find that the Cooperative must be maintained and cherished as a valuable tool to achieve our goals…. The structure itself is obviously not debatable because it is experienced within the organization as the most important expression of the cooperative identity.’
In this statement, Rabobank’s management justifies the Cooperative discussion. Furthermore, aims the discussion to be conceived as deliberative communication. This indicates the use of moral legitimacy, which is strongly represented in the communications between Rabobank’s management and their local member-banks. The aim of moral legitimacy is a positive normative evaluation of the organization’s focal management and its actions, practices or goals. Most of the communications show an extensive use of moral legitimacy, followed by cognitive legitimacy. As with the communications, moral legitimacy also stands out in the annual reports. First, because every annual report regarding the CGS started with an explanation of the Cooperative and its unique structure and relationship with their local-member-banks. For example, they explain that the local Rabobank’s are members of the Cooperative Rabobank Netherlands and with every subject the bank refers back to the unique Cooperative and its relationship with its members. By embracing these structural characteristics of the Cooperative, Rabobank’s management aims to gain legitimacy in the eyes of the local-member-banks. This also includes the socially accepted procedures by the local-member-banks, which again indicates moral legitimacy. As mentioned before the aim of moral legitimacy is a positive evaluation of management actions and goals.
Cognitive legitimacy
Therefore, Rabobank aims to indirectly influence the perceptions of their banks, by addressing some taken-for-granted cultural account. This taken-for granted cultural account of the Rabobank is related to its history. The bank was established to provide farmers with cheap credit, in later years’ entrepreneurs were an important client for the Rabobank. The developments around the customers, also members (different from the local-member-banks) are therefore important to the bank. For instance, in the communication of 1998 it is stated:
‘The cooperative bank is not founded on the idea that someone had money to invest or wanted more value for its capital, it is a unique invention of people who wanted to be employed under the circumstances of mutual support. Historically, this demands from us the obligation to look very closely at the actual needs of our clients and to respond to them as accurate as possible. That is the reason for our existence.’
Cognitive legitimacy is violated when actions of the focal-management do not feel right in the eyes of the dominant coalition. When the management engages in activities that are the complete opposite of why the Cooperative is founded, they will lose cognitive legitimacy. For example, change its focus from its members (local banks and clientele) to profit and state this in the communication.
Regulatory legitimacy
Regulatory legitimacy refers to the consistency of venture behaviors with relevant laws, regulations, rules, standards, and expectations set out by the governments and non-governmental organizations (NGO’s). Regulative legitimacy is mostly addressed by the bank through the Code Banks. In the annual report of 2010 it is stated:
‘In response to the financial crisis that emerged in mid-2007, an in depth social debate started about the functioning of financial entities. In the Netherlands, the advisory committee future Banking took the lead by issuing the report Restore of Trust. Within banking several decisions were held, in which Rabobank actively participated. These discussions have led to the Code Banking. This code was adopted on the 9st of September, 2009 by the Dutch Association of Banks (NVB) and entered into force on January 1st, 2010. The Code banking is legally anchored.’
operates and the introduction of the European Banking supervision. Furthermore, it is state that the bank does not meet all requirement of the Code banking, but deviations on a few points. This is odd because before they stated that all requirements were met. In the annual report of 2015 the change of CGS is stated and mostly moral and cognitive legitimacy are used in the communication to justify the change. Regulatory legitimacy played a powerful role in the road towards the Cooperative structure, however moral and cognitive legitimacy were again a predominant pair in the annual report of 2015
Pragmatic legitimacy
Result show that little use is made of pragmatic legitimacy in the communications. The aim of pragmatic legitimacy is to address the interests of the member-banks. In other words, address that the local-member-banks will benefit from organizational decisions. Therefore, mostly economic exchanges are recognized as pragmatic legitimacy. According to literature member involvement could also be categorized as pragmatic legitimacy. However, to the Cooperative member involvement is part of their structure and procedures and is therefore not recognized as an exchange but as moral legitimacy. An example of pragmatic legitimacy is the following statement from Bank in Beweging, 2007:
‘An increase in net profit of 14 percent, increasing lending at home and abroad and an unprecedented growth in savings. Rabobank's position is stronger than ever, CEO Bert Heemskerk concludes with the presentation of the half-yearly figures.’
This statement includes economic exchanges. As the member-banks are stakeholder they will benefit from these exchanges. Moreover, as part of the organization they benefit from financial growth of the organization. This legitimacy form is not categorized often, which is difficult to explain since the (non-economic) interest of the dominant coalition are addressed. However, in another organizational form, not comparable to the Cooperative, involvement and other non-economic exchanges would be categorized as pragmatic legitimacy. Examples as involvement and influence with regard to the local-member-banks are part of the norms and values of the Cooperative, and therefore not an exchange.
5. Discussion
dominant stakeholders may expect and receive much of managers' attention, but they are by no means the full set of stakeholders to whom managers should or do relate. This research investigates the dominant coalition because of their large influence in the organization. Moreover, found the local-member-banks at the Cooperative as a great representation of the dominant coalition. However, this research does not imply that dominant stakeholders are the only relevant stakeholder of the Cooperative.
Proposition 1: The members of the Cooperative are the representation of the dominant coalition in an organization and as these stakeholders form the core of the Cooperative their support is most valuable to the Cooperatives management.
The change in CGS was contrary to the interest of the dominant coalition. Literature regarding dominant stakeholder argue that the dominant coalition desires to remain their strong position in the organization. Moreover, will use their power and legitimacy to influence decisions to represent their interest. The change in CGS can be explained by strategic legitimacy theory, which argues that legitimacy is controllable by organizations. However, organizational legitimacy theory also knows an institutional perspective. Institutional legitimacy theory argues that organizations who become isomorphic with the institutional environment, characterized by the elaboration of rules and requirements, will receive support and legitimacy (Powell & DiMaggio, 1991). Based on this perspective the Cooperative should confirm to the requirements demanded by the dominant coalition in order to gain legitimacy. In this case, the Cooperative would never achieve changes contrary to the interest of the dominant coalition. The change in CGS at the Rabobank proves otherwise. Thus, the strategic perspective is more likely to explain the change.
Proposition 2: Strategic legitimacy theory is more likely to explain changes contrary to the interest of the dominant coalition, this perspective argues that legitimacy is controllable by the organization as focal-organizations management can bring the unaccepted into accord with the accepted norms, values, beliefs, practices, and procedures.
According to Bansal & Clelland (2004) stakeholders evaluate the organization’s legitimacy according to their own norms, values, beliefs and definitions. Organizations make use of moral legitimacy to justify their actions (Palazzo & Scherer, 2006).
Proposition 3: Moral legitimacy is associated with changes contrary to the interest of the dominant coalition as it is based on the evaluation of the organization based on own norms, values, beliefs, practices, and procedures, which is controllable by organizations.
Remarkably is the frequent use of cognitive legitimacy in the communications between Rabobank’s management and their local-member-banks, this was not expected. From the cognitive perspective, organizations are legitimate when they are understandable (Stepherd & Zacharakis, 2003). Cognitive legitimacy operates mainly at the subconscious level, making it difficult for management to directly influence and manipulate perceptions of the dominant coalition (Oliver, 1991; Palazzo & Scherer, 2006; Suchman, 1995). However, when management engages in activities that are that are not understandable, they will lose cognitive legitimacy. This can be activities that complete deviate of the mission, goals, norms and values of the organization. Thus, cognitive legitimacy is violated simply when a stimulus or situation doesn’t feel right (Dart, 2004).
Proposition 4: Cognitive legitimacy is the necessary condition in getting the support of the dominant coalition when the organization neglect this form of legitimacy, the organization is no longer understood or recognizable, resulting in illegitimacy in the eyes of the dominant coalition.
The annual reports (after 2008) show a frequent use of regulatory legitimacy, which was expected. However, this was also the period of the financial banking crisis and regulatory pressures were high. Therefore, a plausible explanation is that the organization realized that this form of legitimacy became more powerful and therefore useful after the crisis.
Proposition 5: Regulatory legitimacy becomes a powerful tool for the organization, when dealing with crisis and regulatory pressures and therefore can help the organization achieve changes contrary to the interest of the dominant coalition.
Proposition 6: Pragmatic legitimacy rest of the self-interest and (economic) exchanges and is therefore association with change congruent to the interest of the dominant coalition.
Often it was difficult to make a choice between moral and pragmatic legitimacy. For example, when member involvement was mentioned this was coded as moral legitimacy in accordance to the agreements between researchers. The reason for this agreement was that member involvement was a typical characteristic of the Cooperative and therefore coded as moral legitimacy. Thus, in other organizations the results regarding pragmatic legitimacy can be different.
6. Conclusion
The main question in this research was: ‘How do changes occur that are contrary to the interest of the most powerful party in the organization, the dominant coalition?’ Conclusions have been drawn from the results of this research regarding the dominant coalition at the Cooperative Rabobank. Based on the communications and annual reports of the Cooperative Rabobank it can be concluded that the local member-banks are indeed the dominant coalition in this organization. Moreover, that the Rabobank’s management is completely aware of the influence of this powerful party in their organization. The interests of the member- banks is to remain their powerful position in the organization and their legitimate relationship with Rabobank’s management. Since the foundation of the Cooperative, the member-banks secured these interest in the CGS, where they are represented in two important governance bodies, CKV and general meeting. Changes in this formal mechanism are contrary to the interest of the dominant coalition. Rabobank’s management achieve the change in CGS by actively engaging in a legitimation process whereas the use of moral- and cognitive legitimacy were common from 1994 until 2007. After the financial banking crisis, regulatory legitimacy became a powerful tool for Rabobank’s management and in combination with the moral legitimacy the annual reports show that these two forms of legitimacy led to the change in CGS in 2016. Thus, the answer to research question: changes contrary to the interest of the dominant coalition can occur when focal-organization’s management engage in a legitimation processes whereas especially moral legitimacy plays a key role and cognitive legitimacy is the required condition. In times of crisis or regulatory pressures, the results show that regulatory legitimacy becomes a powerful tool to get the support of the dominant coalition.
coalition of the legitimation process of focal-organization management. However, this is a difficult one, since the research cannot address the dominant coalition directly about their perceptions regarding the legitimation process by management. Thus, an indirect way to examine the perceptions must be found. Second, this research recommends to investigate how a (former) dominant coalition engage in a legitimation processes themselves to restore their position. In other words, a legitimation battle between focal-organizations management and the (former) dominant coalition. As mentioned in the literature review, stakeholder legitimacy is based on three elements: legitimacy of the stakeholder as an entity, legitimacy of the stakeholder's claim, and legitimacy of the stakeholder's behavior at a certain point in time. Thus, investing the legitimation process of the dominant coalitions, in which the perceptions of focal-organizations management are central. In addition, this research recommends examining the similarities and differences between the legitimation processes by focal-organization management, whereas the perceptions of the dominant coalition are central and the legitimation process by the dominant coalition, whereas the perceptions of focal-organizations management are central.
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Attachments
International Co-operative Alliance (ICA) principles
The co-operative principles are guidelines by which co-operatives put their values into practice.
1. Voluntary and Open Membership Co-operatives are voluntary organizations, open to all persons able to use their services and willing to accept the responsibilities of membership, without gender, social, racial, political or religious discrimination. 2. Democratic Member Control Co-operatives are democratic organizations controlled by their members, who actively participate in setting their policies and making decisions. Men and women serving as elected representatives are accountable to the membership. In primary co-operatives members have equal voting rights (one member, one vote) and co-operatives at other levels are also organized in a democratic manner. 3. Member Economic Participation Members contribute equitably to, and democratically control, the capital of their co-operative. At least part of that capital is usually the common property of the co-operative. Members usually receive limited compensation, if any, on capital subscribed as a condition of membership. Members allocate surpluses for any or all of the following purposes: developing their co-operative, possibly by setting up reserves, part of which at least would be indivisible; benefiting members in proportion to their transactions with the co-operative; and supporting other activities approved by the membership. 4. Autonomy and Independence Co-operatives are autonomous, self-help organizations controlled by their members. If they enter into agreements with other organizations, including governments, or raise capital from external sources, they do so on terms that ensure democratic control by their members and maintain their co-operative autonomy. 5. Education, Training and
Information
Co-operatives provide education and training for their members, elected representatives, managers, and employees so they can contribute effectively to the development of their co-operatives. They inform the general public - particularly young people and opinion leaders - about the nature and benefits of
