An explorative study on the effect of organizational crises in a co- operative on the adopted legitimation strategy towards its members

An explorative study on the effect of organizational crises in a

co-operative on the adopted legitimation strategy towards its members

by

Yannick Akkerman

S2392852

MSc Business Administration - Organizational and Management Control

Supervisor: Dr. M.P van der Steen

Co-Assessor: N.J.B. Mangin

20 June 2017

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ABSTRACT

Every organization needs legitimacy in order to attract resources and even gain the right to exist. In organizational crises, the legitimacy of an organization is often under attack. While various scholars have examined how organizational crises affect how organizations seek to gain legitimacy, no research is performed on the case of a co-operative. Since legitimacy and authority are highly related and co-operatives have a very different governance structure, theory and empirical evidence on the effect of organizational crises on the legitimation strategy of an organization, may not be generalizable to the specific case of a co-operative. This research examines the effect of organizational crises on the adopted legitimation strategy of a co-operative towards its members. Based on analyses of variances (ANOVAs) we found that during a financial crisis, the co-operative adopts a more pragmatic legitimation strategy towards its members, while during an identity crisis moral legitimation efforts were increased. Furthermore, the co-operative decreased their efforts to cognitively legitimize during the identity crisis. We argue that the different responses to different crises are due to the dual nature of the co-operative: on the one hand it serves an economic mission, while on the other hand the co-operative serves a social mission.

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1. INTRODUCTION

Academics have frequently studied the concept of legitimacy. The seminal work of Weber (1978) serves as a foundational work on which much legitimacy literature is built. Weber relates legitimacy to authority. Authority in this sense can be regarded as power. When in a relationship between multiple actors, the commands of one actor are treated as binding by the other actor(s), the commanding actor has authority. Weber then asserts that there are different bases on which authority is legitimized: authority will be perceived as legitimate when authority is either charismatic (for example a “special” person or institute), traditional (when it is as it always has been) or legal (based on law).

Literature on legitimacy argues that an audience is most likely to supply resources to an organization when it is considered legitimate (Parson, 1960; Tyler, 1990; Ashforth and Gibbs, 1990; Zimmerman and Zeitz, 2002). Zimmerman and Zeitz (2002) add that the resource flow to the organization, in turn, contributes to the legitimacy of this organization. Legitimate organizations are more likely to receive engagement from its members (Tyler and Lind, 1992; Mueller et. al., 1994). Furthermore, many authors (e.g. Brown, 1998; Meyer and Rowan, 1977; Zucker, 1987) suggest that legitimacy is of critical importance for the survival of organizations. Without legitimacy, the organization is likely to fail since the necessary inflow of resources into the organization is hampered and the desired output can therefore not be produced.

The notion of organizations having or building legitimacy received much attention from institutional theorists, who assert that much behavior, i.e. what actually happens, in an organization is not due to technological or material needs, but to cultural norms, beliefs, and rituals (DiMaggio and Powell, 1991). Legitimacy fits in institutional theory since it disagrees with the rational-man approach which is primarily interested in increasing profit by means of technological, material change. So, while legitimacy can be seen as a resource needed to do business, it is a social construct which is derived from a social setting.

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develop certain socially embraced procedures by which production processes are performed, the organization gains a more continual type of legitimacy (Berger et al., 1973). So, in choosing a legitimation strategy it is not “one size fits all.” Some strategies are less effective or appropriate than others. Furthermore, external pressure can influence the choice of the legitimation strategy. The need to increase legitimacy is not always equally strong. When an organization is considered legitimate and is performing well, there may be a lesser focus on legitimacy (Dutton, 1986).

Stakeholders start to doubt the legitimacy of an organization when it is in crisis (Massey, 2001). It is therefore interesting how organizations choose a certain legitimation strategy when there is an organizational crisis since this is the moment when legitimacy is under attack (Caillouet, 1991; Elsbach and Sutton, 1992). Organizations are then likely to communicate more strategically to stakeholders to retain legitimacy (Massey, 2001).

Some research is done on legitimation strategies of organizations in crisis. For example, Massey (2001) found that consistency in crisis responses enhances legitimacy, in contrast to inconsistency in crisis responses. Wang (2010) studied how restructuring could repair the legitimate position of firms caught in the act of fraud. When fraudulent financial reporting was discovered, separation from illegitimate business and the design of profitable business operations are amongst the most effective legitimation strategy. When embezzlement or stock market manipulation are found, the best strategy to repair legitimacy is to set up controls and alienate from illegitimate organizational structures.

However, two remarks should be made. First, these studies focused on traditional organizations with a hierarchical structure. Second, these studies focused on legitimacy towards the public outside the organization. However, not all organizations function similarly since some organizations have a non-hierarchical organizational structure, which means that authority and power structures are not comparable. Weber (1978) asserts that authority can be perceived legitimate if it meets certain conditions. In a traditional organization, authority increases with the level of management. This is different in organization that have a non-hierarchical structure, like the co-operative.. A co-operative is an organization which is owned and run jointly by its members. In a co-operative the members are the owners and authority is thus differently divided. Co-operatives have a special role because they are not primarily being focused on shareholder wealth, but on the well-being of the individual stakeholders.

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the legitimacy will be under pressure, hence we expect that the co-operative will attempt to gain legitimacy from its members.

Research on this matter is important since co-operatives have a major role in many market economies (Novkovic, 2008) and are not excluded from encountering organizational crises. Even in well-governed organizations, crises arise from time to time. However, a co-operative might react differently from a ‘traditional’ organization because of the non-hierarchical structure. It has not yet been studied how organizational crises affect the legitimation strategy adopted by a co-operative and our research aims to fill that gap.

Therefore, this research will contribute to and link the field of legitimacy, crisis management and communication and co-operatives by answering the following research question:

RQ. Which legitimation strategy do co-operatives employ to increase legitimacy towards its

members during an organizational crisis?

While there are various processes to increase legitimacy, we will focus on communication since communication is the most important means to increase legitimacy (Elsbach, 1994) and a key to managing an organizational crisis (Seeger et al., 2003).

Our research is performed on the largest co-operative of the Netherlands: the Rabobank. We aim to find which type of legitimacy this organization tries to enhance when suffering an organizational crisis.

This study finds Rabobank to increase its efforts to pragmatically legitimize their actions towards its members during a financial crisis, while an increase of efforts to morally legitimize was found during an ‘identity crisis.’ Furthermore, a decrease in cognitively legitimizing efforts was found during this identity crisis.

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2. LITERATURE REVIEW

This section of the paper reviews the literature. The first part of this section will contextualize and define legitimacy. In the second part we will discuss four different forms of legitimacy. The third part will review the literature on organizational crises and the management thereof. In the fourth part we will review the co-operative organization and how it differs from other organizations. In the fifth part, a literature gap will be presented. The sixth part will develop several hypotheses based on theory and literature. Finally, in the seventh part, a conceptual model will be demonstrated.

In mainstream research, academics have viewed organizations as rational. The goal of an organization was simply to achieve preset goals by producing material outputs from material inputs (Scott, 1987). Organizations were portrayed as just an entity on itself, with strong borders and not connected with their surroundings (Scott, 1987). However, this was questioned by “open system” theorists who claimed that organization’s boundaries did include the surroundings and organizations were not a system separated from other entities or its social environment. They built on the work of Barnard and Simon (1947) who explained that people are not fully rational but base their decisions sometimes on irrational feelings or thoughts and since organizations consist of individuals an organization is not fully rational. This means that a firm is not merely producing outputs from inputs at the most efficient way, but there are more forces at work which affect the production of organizations. Additionally, institutional theorists, (DiMaggio and Powell, 1991; Selznick, 1957) argue that organizations are not run only by material means, but are also influenced by the social culture, norms, values, beliefs, and traditions. Hence, an organization is not only concerned about efficient production, but it should be done in accordance with the norms, values, beliefs and the traditions of the social system it operates in.

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influence organizations to ‘behave’ in certain manners. The organizations have no choice but to align themselves with these cultural pressures in order to be considered legitimate.

So, In the strategic legitimacy view legitimacy is determined by the organization itself rather than the social network it is operating in or with. Simply put, in the strategic view of legitimacy, legitimacy is a competitive resource, whereas in the institutional view it is a necessary resource to survive and can only be gained by conforming to societal norms, values, and beliefs.

Defining legitimacy

According to Terreberry (1968), legitimacy is often described in organization theory, but not often defined. Since then, several social scientists have defined the concept of legitimacy. For example, Maurer (1971, p. 361) argued that legitimacy is obtained when ”an organization justifies to a peer or superordinate system its right to exist.” This is a hierarchical explanation, with the organization being the authoritative figure. Dowling and Pfeffer (1975) assert that legitimacy is obtained when the organizational activities and its implied social values fit within the norms of acceptable behavior of the social system. In their definition, the values of the social system play a greater role. Meyer and Scott (1983) describe legitimacy as the measure in which the cultural environment can explain an organization’s existence.

Suchman (1995) synthesizes the literature on legitimacy and defines legitimacy as follows: “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” (p.574).

Particularly, one does not decide himself that one is legitimate, but other people do. Legitimacy is based on the perception or assumptions of others. Suchman’s definition fits in the category of strategic legitimacy since the entity can take actions that are desirable and proper or not desirable and improper. Yet, his definition also fits within institutional legitimacy, since the social system decides whether the actions are appropriate and the organization should adapt to this pressure.

Forms of legitimacy

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bank we add a fourth type of legitimacy, namely regulatory legitimacy. It is not explicitly categorized by Suchman, but mentioned by various other scholars. We first discuss these four distinct types of legitimacy.

Pragmatic legitimacy

According to Wood (1991), people constantly assess the practical consequences of an organization’s activities or policies. Pragmatic legitimacy is based on the self-interested assessment of direct stakeholders (Suchman 1995). An organization is considered legitimate if these other parties benefit from its existence, when audiences are expecting positive value for themselves through the actions of this organization (Dowling and Pfeffer, 1975). Hence, pragmatic legitimacy can be obtained by conforming to demands of the other party.

When this positive value is a direct benefit we speak of exchange legitimacy (Suchman, 1995), which is a more generalized form of materialistic power-dependence relations (Emerson, 1962). An example of exchange legitimacy is a service provided to certain parties. Some organizations are legitimate because they serve some need. When this need would disappear, the organization would lose its legitimacy.

When an audience indirectly benefits from an organization because it acts in their broader interests we speak of influence legitimacy (Suchman, 1995). The organization has a positive influence on stakeholders without directly providing them a wanted service or product. According to Suchman (1995), influence legitimacy can be obtained by listening to the audiences and giving them some power to influence, as Selznick (1949) mentions. Another form of pragmatic legitimacy is dispositional legitimacy (Suchman, 1995). This is built on the notion that organizations are personified (Zucker, 1983) and people respond to organizations as if they are persons (Tuzzolini and Armandi, 1981). One tends to be around people with the same values, preferences and interests. Individuals then grant legitimacy to organizations when they are considered to share the same values, preferences or interests (Suchman, 1995).

Moral legitimacy

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legitimate. However, different audiences may have different moral values. Furthermore, moral values may shift over time. What was considered immoral in the past may be considered moral now.

Moral legitimacy can be distinguished in four categories. First of all, one can evaluate the outputs of an organization, i.e. what they produce or provide and possible externalities (Meyer and Rowan, 1991). This is called consequential legitimacy (Suchman, 1995). An example is corporate social responsibility reporting. Secondly, organizations can obtain procedural legitimacy by using techniques and procedures that are socially accepted (Berger et al., 1973; Scott, 1977). Especially when consequences are hard to measure, the procedures to produce will be evaluated on their morality (Scott, 1992). Thirdly, an organization can obtain structural legitimacy when the organizational structure is favored by the audience because this structure demonstrates an organization’s capacity to perform certain positively evaluated work (Scott, 1977). Lastly, personal legitimacy can be obtained by the charisma of the individuals of an organization, especially leaders (Suchman, 1995). For example, if the CEO is suspected of certain crimes in his private life, the organization loses moral legitimacy. Firing him would then enhance the moral legitimacy of the organization again.

Cognitive legitimacy

Cognitive legitimacy is not based on self-interest or evaluation but on cognition (Aldrich and Fiol, 1994). Comprehensibility and taken-for grantedness lead to cognitive legitimacy (Suchman, 1995). Comprehensibility regards whether it is clear what an organization is doing. Legitimacy, in this case, is obtained when the organization and its activities are meaningful and understandable (Scott, 1991). It is clear what the organization is seeking to achieve and there is little uncertainty. Legitimacy by means of taken-for-grantedness is obtained when an organization’s expectations and judgments are so similar to that of the audience that the organization becomes ‘natural’ and unquestioned (Hannan and Freeman, 1986). The organization becomes so normal that an alternative becomes unthinkable (Zucker, 1983).

Regulatory legitimacy

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they are operating in. According to Scott (1995) and Hunt and Aldrich (1996), regulatory legitimacy is derived from voluntarily conforming to rules, laws, and regulations imposed on the organization by official entities like the government, or non-state organizations with the credentials to set standards for specific markets.

Regulatory legitimacy might be more prevalent in sectors with strict regulations and high standards. One can think, for example, of the banking sector, the healthcare sector, schools, and child care. An organization can, in this case, legitimize actions by pointing towards law and regulations.

Crisis management

All organizations are vulnerable to organizational crises (Pearson and Clair, 1998). According to Pearson and Clair’s summary of crisis management theory literature, an organizational crisis is “a low-probability, high-impact event that threatens the viability of the organization and is characterized by ambiguity of cause, effect, and means of resolution, as well as by a belief that decisions must be made swiftly.” (p.60). Organizational crises have the following characteristics: Organizational crises occur not often but have a large negative impact on both the organization (Dutton and Jackson, 1987) and its stakeholders. There are much ambiguity and uncertainty (Dutton, 1986). Organizational crises often surprise organizations and its members or stakeholders (Hermann, 1963) and a response should be quick (Quarantelli, 1998).This necessary but difficult decision or judgment will either positively or negatively influence the situation (Aguilera, 1994; Slaikeu, 1990). Furthermore, social-political matters are one of the key issues in both the creation and the management of organizational crises (Pauchant and Douville, 1993).

While an organizational crisis can start internally or externally, we focus on crises within the organization. This may include crises which start from within the organization (for example fraud) or from outside the organization (for example the loss of buildings because of a natural disaster).

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information should be shared. When an organization attempts to recover from a crisis, the goal of the organization is often regaining a positive public perception (Horsley and Barker, 2002). Our research aims to gain more understanding about the communication after the crisis has hit, the crisis response phase. Specifically, we want to research how a co-operative attempts to gain legitimacy when it is in an organizational crisis.

This is important since an organizational crisis influences the support of stakeholders (Dowling, 2000). Freeman (1984) defines stakeholders as “any group or individual who can affect, or is affected by the achievement of an organization’s objectives”. The list of potential stakeholders of a given organization can be large. However, not all stakeholders are equally influential. Since different stakeholders have different levels of influence on the organization, it is important to distinguish which stakeholders are most important. Mitchell et al. (1997) propose in their theory towards stakeholder identification three criteria on which the importance of a stakeholder can be assessed (p. 854): “(1) the stakeholder's power to influence the firm, (2) the legitimacy of the stakeholder's relationship with the firm, and (3) the urgency of the stakeholder's claim on the firm”. Mitchell et al. then propose that managers should focus their attention on stakeholders which are the most important according to these criteria.

In the case of a co-operative, the most important stakeholders are the members. First, they have much power to influence the organization (they are the owners). Second, their relationship with the organization is very strong, since there are contractual agreements between the head and the (local) members. Third, the members have a large claim on the organization because they are the owners. Co-operatives, therefore, should prioritize their members over other stakeholders and attempt to obtain legitimacy from its members. Also, Allen and Caillouet (1994) suggest that communication to enhance legitimacy should be addressed to the most important and powerful stakeholders since they provide the most legitimacy to the organization.

Co-operatives

To fully understand how legitimacy might be gained during an organizational crisis in a operative, it is important to first understand the specific structure and uniqueness of the co-operative.

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operative, i.e. dependent on a co-operative in terms of income. Nevertheless, despite their significance, co-operatives have been mostly ignored in management science (Puusa et al., 2013). Mazzarol et al. (2011) indicate that more research is needed to better grasp the uniqueness of co-operative businesses. Co-co-operatives are concerned with creating or maintaining competitiveness by having an entrepreneurial spirit, but simultaneously they are owned by the members who are concerned with the well-being of the members of the co-operative. (Puusa et al., 2016). Nilsson (2001) describes the distinguishing characteristics of co-operatives by explaining that members are both a patron, i.e. a supplier or customer, and an owner, i.e. a shareholder, at the same time. Some scholars argue that co-operatives have a social mission with economic returns (Neck et al., 2009), while other scholars suggest that co-operatives have an economic mission with social returns (Mazzarol et al., 2011). Nevertheless, a co-operative loses its identity when either the social aspect or the economic aspect is sacrificed for the other (Zamagni and Zamagni, 2010). This does not mean that co-operatives are static, they constantly change to adapt to a changing environment (Mazzarol et al., 2011). Mooney and Gray (2002) indicate that more research on co-operatives should be performed to link theory with practice to provide a real picture of co-operatives.

Co-operatives differ substantially from other organizations. Traditional organizations usually have a top-down management structure. The higher management has authority over lower management. In co-operatives, the members are the owners and have therefore authority. Weber (1978) argues that legitimacy and authority are related and therefore the legitimation process may differ in a co-operative compared to traditional organizations.

Literature gap

Bringing the literature on legitimacy, crisis communication and co-operatives together, a literature gap of interest is found. Our research will fill this gap by examining what legitimation strategies co-operatives use in their communication towards members when they are in an organizational crisis. Since co-operatives have a distinct hierarchical structure from ‘traditional’ organizations it is not clear whether previous research and practical recommendations on legitimacy are applicable to co-operatives. Hence, we need to explore how co-operatives seek to gain legitimacy from its members during an organizational crisis.

Hypothesis development

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Literature suggests that communication is the most important means to gain legitimacy during a crisis (Elsbach, 1994). Horsley and Barker (2002) state that after a crisis has hit, the goal of organizations is often to regain a positive public perception.

Crises damage the reputation of an organization and affect the support of stakeholders for the organization (Dowling, 2000). When an organization has experienced a crisis, communication is crucial to prevent reputational damage and to restore an organization’s reputation (Coombs and Holladay, 2005). Situational crisis communication theory (SCCT) provides a framework on how reputation can be protected by means of crisis communication (Coombs, 2007). SCCT is built on experimental methods rather than case studies.

While reputation and legitimacy are distinguished in literature, there is much overlap (Deephouse and Carter, 2005). Both are formed through a social construction process whereby various stakeholders assess an organization (Fombrun and Shanley, 1990). Furthermore, legitimacy and reputation have often the same determinants (Oliver, 1990). Lastly, both legitimacy and reputation are positively linked to the capability of an organization to earn resources (Hall, 1992; Suchman, 1995). Deephouse and Carter (2005) argue that the main difference between the concepts of legitimacy and reputation is that legitimacy is more related to adherence to social norms, while reputation can likewise be acquired by performing better than competitors. Legitimacy compares with social norms, while reputation compares also with other organizations in the field. However, by performing better than competitors an organization might gain a better reputation, but also pragmatic legitimacy from its shareholders, since they benefit from the organization. We conclude that the difference between reputation and legitimacy is rather vague or even artificial. Therefore, we find SCCT applicable in our research. It deals with communication during a crisis to regain legitimacy.

Moral legitimacy

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organization (Coombs, 2007). The inflow of necessary resources will tamper when the organization is seen as responsible.

Furthermore, moral legitimacy is especially important for a co-operative. Dart (2004) explains that moral legitimacy is the core of the evolution of social enterprises, it is the backbone of social enterprises. Similarly, Mason et al. (2007) argue that the moral foundation of a stakeholder-oriented organization (e.g. a co-operative) is critical for the existence of this organization. Since in an organizational crisis the legitimacy is under attack (Elsbach and Sutton, 1992), we expect the co-operative aiming to gain moral legitimacy by (implicitly) arguing that the organization is morally right, does the right thing, and by adhering to social norms and values positively influences society.

We, therefore hypothesize:

H.1 Co-operatives will increase their efforts to morally legitimize their actions towards members during an organizational crisis.

Pragmatic legitimacy

Literature links pragmatic legitimacy to crises. For example, He and Baruch (2010) found that when facing a recession the two building societies they researched both increased their efforts to pragmatically legitimize actions, by focusing on cost control and consolidation of the financial strength of the organization. Morgan (2010) suggests that during a financial crisis pragmatic legitimacy should be rebuild. That is the only way to attract again the resources of various stakeholders. We argue that this may be similar for co-operatives as for alternative organizations, since co-operatives are also, and perhaps even more, dependent on the resources of their stakeholders. We think that in any crisis, the resource flow to the co-operative should be protected by adopting a pragmatic legitimation strategy which convinces the stakeholders to continue to provide their resources and not leave the co-operative.

We therefore hypothesize:

H.2 Co-operatives will increase their efforts to pragmatically legitimize their actions towards members during an organizational crisis.

Cognitive legitimacy

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informed about the events that are occurring. So, during and after a crisis, organizations should explain what happened and why it happened so that the organization may reduce uncertainty and ambiguity in the eyes of stakeholders (Coombs, 2007)

Seeger (2006), in his synthesis of the best practices in crisis communication as a grounded theoretical approach, similarly argues that organizations should inform stakeholders during a crisis. This is one of the best practices of crisis communication.

We assert that in a co-operative the need of informed stakeholders is at least as important as in an alternative organization since the stakeholders have much power over the firm. However, we expect that the members are already well-informed since they are insiders in the co-operative and not outsiders. We expect the co-operative to focus more on moral and pragmatic legitimacy towards its members and since legitimacy is not an unending source, we expect that the co-operative will decrease their efforts to cognitively legitimize towards its members during an organizational crisis.

We therefore hypothesize:

H.3 Co-operatives will decrease their efforts to cognitively legitimize their actions towards members during an organizational crisis.

Regulatory legitimacy

Morgan (2010) argues that in a financial crisis regulatory legitimacy should be rebuild. regulatory legitimacy can be enhanced by conforming to (newly formed) rules and regulations from a governing body. However, we expect that co-operatives are not aiming to enhance regulatory legitimacy since co-operatives are built on certain social values and norms, which are of a higher standard and more important to a co-operative than regulations.

We therefore hypothesize:

H.4 Co-operatives will not change their efforts to regulatory legitimize their actions towards members during an organizational crisis.

Conceptual model

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Figure 1: Conceptual model

3. METHODOLOGY

Our research will take both a quantitative and qualitative approach to test the significance of the hypothesized relationships developed. The quantitative approach is performed through an analysis of variance (ANOVA) on our dependent and independent variables. Since no database was available on legitimacy, we created data by coding internal documents on the types of legitimacy, giving this research a qualitative aspect as well.

This methodology section will discuss the sample chosen, how our dependent and independent variables were found and which analysis we performed to test our hypotheses.

Research setting

Our research is performed on the legitimation strategy of the Rabobank. The Rabobank was chosen as research object because it is both the largest cooperative in the Netherlands and has sizeable international allure as a cooperative. Lotti et. al (2006) present Rabobank as the massively successful example of businesses with a cooperative structure.

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Sample

The sample consists of more than 100 years of documents, starting in 1906 and ending in 2007. These newsletters were used to communicate from the head (Centrale Bank) to the local members. We expect the head to use these reports to send a certain message to legitimize since this is the most important instrument of communication from the Centrale Bank to all the local banks and communication is the most useful means to manage legitimacy (Elsbach, 1994). Furthermore, the local members are the most important stakeholders and we expect the organization to derive most of their legitimacy from these stakeholders.

While monthly reports were available, we only assessed one document a year, due to the heavy time intensive coding of these documents. The month of October was chosen, as we decided that this was a fairly neutral month, where most banks are fully in business. We chose to have the same month every year to reduce possible biases related to the period of the year. If October was not available, November was taken. September was chosen if November was also not available.

Documents available for coding started in 1906 for the Boerenleenbank and in 1911 for the Raifeissenbank. In the year of 1910, the Boerenleenbank did not send a newsletter due to the outbreak of the first World War. In the years 1942 and 1943 no newsletter was sent out by the Raifeissenbank due to the second World War.

Dependent variables

To create a database with our dependent variables, the reports were manually coded according to the legitimation strategy used. This manual coding is the best option in the case of complex categorization (Linderman, 2001), which computers are not able to do. Every paragraph of the document (except for advertisements, memorials, and the table of content) was coded. Coding was performed along the four measures of legitimation strategy, namely pragmatic, moral, cognitive and regulatory legitimacy. A fifth code was created for paragraphs that did not legitimize.

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years. The seventh student acted as our internal auditor and coded two of the years of every period coded by students. This was performed to examine our intercoder reliability, which was at a satisfying level of 86%.

This coding was performed to create a database which computes the percentage of the type of legitimacy used in every report. To illustrate this, the legitimation strategy of a report can be 10% pragmatic, 20% moral, 30% cognitive, 10% regulatory, while the remaining 30% of the paragraphs did not legitimize at all.

We have data on both co-operative banks from before the merger. For the purpose of our research, it fitted to average the data on the two banks before the merger. After the merger, there was only one bank and we coded the newsletter that was now sent to the whole Rabobank.

Because the Raiffeisenbank did not send newsletters to the local banks in 1942 and 1943 we deleted the data of the Boerenleenbank for these years, since we could not average the Raiffeisenbank and the Boerenleenbank in these years.

In the appendices, a summary of the descriptives of the combined data of the dependent variables is included by means of a table (Table 1) and a graph (Figure 2).

Independent variable

Because there may be divergent definitions and versions of organizational crises, it is important to create certain criteria so that we can identify crises and label certain years as a crisis years. Based on our type of research and inspired by crisis management literature we developed three criteria to identify a crisis year. A crisis year was identified when the following criteria were satisfied: 1. There are uncertainty and ambiguity. 2. This crisis should have a negative influence on the Rabobank. 3. The crisis should have a vast impact.

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(1992) who suggest that organizational crises are the time where legitimacy is under attack, we expect that the legitimation strategy is more affected by an organizational crisis than by a single little negative event. We, therefore, code only years with major crises as crisis years.

To identify crisis years we performed an extensive search on the internet, we examined a newspaper database and read various books about the Rabobank. The Rabobank has suffered a few substantial crises. Interestingly enough these were not per se during broader national crises, like the financial crisis in the 1930s and the two World Wars.

The first major crisis we identified, which fitted our criteria, was from 1967 until 1972. This crisis was of financial nature. Sluyterman et al. (1998) describe these years. From the 1960s the local banks under the Coöperatieve Centrale Raiffeisen-Bank and the local banks of the Coöperatieve Centrale Boerenleenbank were heavily competing for customers. Both banks started to open banks in the work area of the other. Also at this time, the co-operative banks started to feel the competitive pressures of the commercial banks, who increased their interest rates on savings until the level of the co-operative banks. All this competition led to a massive reduction in profitability. At this time the question arose whether it was still useful for the co-operative Raifeissen- and Boerenleenbank to exist as two separate organizations with the same vision and goals. The heads of the banks answered this with a no, their solution was to merge the banks. When in 1967 a possible merger between the two banks was mentioned many local members disagreed and protested against this idea. The heads took the time to explain why this was for both parties a beneficial decision. Eventually, after a long period of debating all local banks agreed to the merger. In December 1972, the banks finally merged into one bank: the Rabobank. After this, the competing pressure was over, the local members finished their resistance against the merger and the bank could recover by merging local banks and decreasing costs.

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To demonstrate its co-operative ideals, the head of the bank declared in 1993 that Rabobank had to take a stand in ethical and social issues and in 1994 the bank created a code of conduct for all its employees in which the co-operative ideals of the organization were leading. The bank wanted to be more integer and respectful towards customers, as should be expected from a co-operative. In 1994 a discussion broke out about the co-operative goals of the organization. It was questioned who the bank was serving: itself or its customers and members? The co-operative was in an identity crisis as was mentioned during several meetings. The Rabobank started to organize co-operative conferences in which the co-operative structure of the organization was discussed. It was decided in November 1997, after much discussion that the structure of the organization would change. A partnership model would be implemented whereby the power of the director of the local bank was weakened since he became more accountable to the members of the local bank. The director became part of the board and could not make major decisions on its own. With this model, the democracy in the local banks became stronger. After this change, the discussion of the co-operative structure of the Rabobank was ended and the identity crisis was over.

Analysis

We want to assess the impact of an organizational crisis on the legitimation strategy used and have therefore identified certain years in which there was an organizational crisis. Since we identified certain years as a crisis and other years not, we perform an analysis which compares the legitimation strategy of the years before and after the crisis to the years of the crisis. We choose to test our hypotheses with an analysis of variance (ANOVA). An ANOVA is designed to compare the means of distinct groups. The ANOVA is the ideal option because we want to compare whether the legitimation strategy of an organization differs during an organizational crisis. Since we use only one independent variable the one-way ANOVA is chosen and not the two-way ANOVA. ANOVA is suitable since our independent variable (organizational crisis) is categorical (yes or no) and the dependent variables (the legitimation strategies) are interval.

4. RESULTS

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We first statistically analyzed the period from 1967 until 1972 where there was a pre-merger crisis. We compared this period with the 6 years before and after the crisis. Table 2 introduces the descriptive statistics of this period.

Table 2: Descriptives 1967-1972

Legitimation strategy Crisis year N Mean Std. Dev. Minimum Maximum pragmatic No 12 11,8% 6,6% 0,6% 21,4% Yes 6 18,8% 6,6% 8,2% 25,8% Total 18 14,1% 7,2% 0,6% 25,8% moral No 12 17,1% 7,9% 7,1% 32,2% Yes 6 18,7% 4,9% 11,5% 25,4% Total 18 17,6% 6,9% 7,1% 32,2% cognitive No 12 56,3% 11,7% 40,5% 88,1% Yes 6 48,6% 12,4% 36,6% 64,6% Total 18 53,7% 12,1% 36,6% 88,1% regulatory No 12 0,5% 1,4% 0,0% 5,0% Yes 6 0,1% 0,1% 0,0% 0,4% Total 18 0,4% 1,2% 0,0% 5,0%

An ANOVA was executed to test whether the reported differences in means between crisis years and non-crisis years were significant. Our ANOVA of the period 1967 until 1972 is presented in Table 3.

Table 3: ANOVA 1967-1972

Legitimation strategy Source Sum of squares df Mean square F P pragmatic Between groups 196,391 1 196,391 4,559 0,049

Within groups 689,206 16 43,075 Total 885,597 17 moral Between groups 10,848 1 10,848 0,217 0,647

Within groups 798,334 16 49,896 Total 809,182 17 cognitive Between groups 234,412 1 234,412 1,649 0,217

Within groups 2274,699 16 142,169 Total 2509,111 17 regulatory Between groups 0,766 1 0,766 0,553 0,468

22

From our ANOVA we can infer that the increase in the pragmatic legitimation strategy is significant at a 5% level. The hypothesized decrease in cognitive legitimation efforts was found, but not statistically significant. Furthermore, no significant changes were found regarding the moral and regulatory legitimation efforts.

The second statistical analysis was performed on the identity crisis from 1992 until 1997. Since the identity crisis broke out in the end of 1991, our first coded document in this period is from October 1992. We compared this period with the 6 years before and after the crisis. The descriptives of this period are introduced in Table 4.

Table 4: Descriptives 1992-1997

Legitimation strategy Crisis year N Mean Std. Dev. Minimum Maximum pragmatic no 12 16,7% 12,5% 3,4% 38,4% yes 6 9,8% 6,5% 0,0% 19,7% Total 18 14,4% 11,2% 0,0% 38,4% moral no 12 26,6% 23,5% 1,6% 63,9% yes 6 61,8% 9,2% 50,7% 78,7% Total 18 38,3% 26,0% 1,6% 78,7% cognitive no 12 52,0% 27,4% 14,9% 92,6% yes 6 20,5% 5,4% 14,1% 27,5% Total 18 41,5% 27,0% 14,1% 92,6% regulatory no 12 1,9% 3,7% 0,0% 12,7% yes 6 0,3% 0,7% 0,0% 1,7% Total 18 1,4% 3,1% 0,0% 12,7%

Again an ANOVA was executed to test whether the reported differences were significant. Table 5 presents the results of this ANOVA.

Table 5: ANOVA 1992-1997

Legitimation strategy Source Sum of squares df Mean square F P pragmatic Between groups 186,671 1 186,671 1,543 0,232

Within groups 1935,380 16 120,961 Total 2122,051 17

moral Between groups 4952,896 1 4952,896 12,178 0,003 Within groups 6507,317 16 406,707

Total 11460,212 17

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Total 12357,208 17

regulatory Between groups 10,686 1 10,686 1,116 0,306 Within groups 153,152 16 9,572

Total 163,838 17

According to our ANOVA, the Rabobank increased their moral legitimation strategy. The P-value is below 1%. Furthermore, the cognitive legitimation strategy decreased, it is significant at a 5% level. Differences in regulatory and pragmatic were not reported to be significant.

However, before we draw any conclusions based on our results, we first perform a supplementary analysis to assess the robustness of our results.

Supplementary analysis

Hair et. al (2010) indicate that ANOVAs are valid when the following assumptions are met: 1. Dependent variables are normally distributed. 2.The different groups are independent in response to the dependent variable. 3. The variances are equal for all treatment groups. While some scholars (Myers, 1979 and Winer et. al., 1991) suggest that the ANOVA is quite robust to these assumptions except for extreme cases, we want to examine the robustness of our results and perform therefore a supplementary analysis.

First, assumption 2 is met since years identified as crisis years cannot be non-crisis years too. The crisis- and non-crisis years are therefore clearly independent from each other in response to the dependent variables. Our supplementary analysis will therefore focus on assumption 1 and 3.

Crisis 1967-1972

We first tested the dependent variables in our first crisis period on the normality assumption. Many researchers (e.g Thode, 2002; Razali and Wah, 2011) recommend the Shapiro-Wilk test as the best statistical test to examine normality. We, therefore, performed a Shapiro-Wilk test, the results are displayed in Table 6.

Table 6: Normality test 1967-1972

Legitimation strategy Crisis year Shapiro-Wilk Statistic df Sig. pragmatic no 0,964 12 0,833

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cognitive no 0,803 12 0,010 yes 0,850 6 0,157 regulatory no 0,409 12 0,000 yes 0,496 6 0,000

According to the Shapiro-Wilk test, efforts to cognitively legitimize were not normally distributed in the non-crisis years. We, therefore, run the non-parametric Kruskall-Wallis H test which does not have the assumption of normality (Montgomery, 2001). Furthermore, the regulatory legitimation efforts were not normally distributed, but since these efforts were very small and no sign of significance was found, we did not execute the non-parametric test on this dependent variable. In Table 7 the results of the Kruskall-Wallis H test are presented.

Table 7: Kruskall Wallis H test 1967-1972

Legitimation strategy Crisis year N Mean Rank Chi-Square df Asymp. Sig. cognitive no 12 10,50

yes 6 7,50

total 18 1,263 1 0,261

The non-parametric Kruskall-Wallis H test reports, like the ANOVA, no significant change in the cognitively legitimizing efforts from the head towards the local banks.

Levene (1960) designed a test to examine whether variances are equal for different groups. So, to test the assumption of equal variances for all treatment groups the Levene statistic was computed. In Table 8 the results are displayed.

Table 8: Homogeneity of variances test 1967-1972

Legitimation strategy Levene Statistic df1 df2 Sig. pragmatic 0,206 1 16 0,656 moral 1,799 1 16 0,199 cognitive 0,592 1 16 0,453 regulatory 1,782 1 16 0,201

25 Crisis 1992-1997

We first performed a Shapiro-Wilk test on our second crisis to test the normality assumption of the dependent variables. The results are presented in Table 9.

Table 9: Normality test 1992-1997

Legitimation strategy Crisis year Shapiro-Wilk Statistic df Sig. pragmatic no 0,868 12 0,062 yes 0,972 6 0,903 moral no 0,863 12 0,053 yes 0,834 6 0,116 cognitive no 0,922 12 0,303 yes 0,920 6 0,507 regulatory no 0,596 12 0,000 yes 0,496 6 0,000

The Shapiro-Wilk test reports no significant violations of the normality assumption (at a 5% significant level) of the dependent variables, except for regulatory legitimizing efforts. However, since these efforts were very small and no sign points to possible significance, we do not execute a non-parametric test on this dependent variable.

To test the assumption of homogeneity of variances, the Levene statistic was calculated on our dependent variables. The results are found in Table 10.

Table 10: Homogeneity of variance test 1992-1997

Legitimation strategy Levene Statistic df1 df2 Sig. pragmatic 4,021 1 16 0,062 moral 10,647 1 16 0,005 cognitive 6,527 1 16 0,021 regulatory 2,924 1 16 0,107

The Levene statistic is significant at the 1% level for moral legitimacy and at the 5% level for cognitive legitimacy. This means that for these dependent variables no homogeneity of variances is found and thus assumption 3 is not met for these dependent variables.

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Table 11: Robust equality of means test 1992-1997

Legitimation strategy Welch Statistic df1 df2 Sig. pragmatic 2,326 1 15,904 0,147 moral 20,580 1 15,551 0,000 cognitive 14,726 1 12,626 0,002 regulatory 2,186 1 12,457 0,164

According to the Welch-test, the efforts to morally and cognitively legitimize are still significant. To conclude, our supplementary analysis tested the robustness of our results and it was found that our results are robust. The different tests performed to correct for violations of the normality assumption and the homogeneity assumption did not change the results significantly for either the financial crisis or the identity crisis. Therefore, we can confidently assess our hypotheses and examine whether they should be rejected or accepted.

Hypotheses testing

Our first hypothesis stated that during an organizational crisis, a co-operative will increase its efforts to morally legitimize towards its members. This effect was statistically significant in the identity crisis from 1992 until 1997, but in the financial crisis from 1967 until 1972 no significant increase was found. We, therefore, reject our first hypothesis and cannot conclude that co-operatives increase their efforts to morally legitimize towards their members during an organizational crisis.

Hypothesis 2

27 Hypothesis 3

Our third hypothesis asserted that during an organizational crisis, a co-operative will decrease its efforts to pragmatically legitimize towards its members. This effect was statistically significant in the identity crisis from 1992 until 1997, but in the financial crisis from 1967 until 1972 no significant decrease was found. We, therefore, reject our second hypothesis and cannot conclude that co-operatives raise their efforts to pragmatically legitimize during an organizational crisis.

Hypothesis 4

Our fourth hypothesis expressed that during an organizational crisis, a co-operative will neither increase nor decrease its efforts to regulatory legitimize towards its members. In both the financial crisis from 1967 until 1972 and the identity crisis from 1992 until 1997, no statistically significant increase or decrease was found and we can therefore not reject our fourth hypothesis.

5. DISCUSSION AND CONCLUSION

In this section, we first briefly summarize the results of our research and we answer our research question. Then we discuss the limitations of our research and we close this section with recommendations and implications for future research.

Discussion of results

While we had to reject our first three hypotheses, some remarks can still be made when we distinguish between the different organizational crises.

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In the identity crisis in the 1990s however, the Rabobank tried to morally legitimize when the co-operative identity of the bank was questioned. The Rabobank adopted in this situation a morally legitimizing strategy. This happened, next to certain communication, through the implementation of a more co-operative partnership model, the creation of a code of conduct, the activities to take a stand in ethical and social issues and the creation of so-called co-operative conferences in which the co-operative goals of the organization were discussed. This is in agreement with Novkovic and Power (2005) who suggest that a co-operative has to establish both its governance and management on its social foundation of co-operative principles and values. The increase in morally legitimizing efforts also follows Dart (2004), who explains that social enterprises have a moral foundation. When this foundation is questioned, efforts should be made to restore the moral legitimacy.

This is in line with the literature on co-operatives which stresses the dualistic nature of the co-operative business. At the one hand a co-operative is competitive, and on the other hand it fulfills a social purpose (Puusa et. al, 2016). The specific circumstances of the organizational crisis, therefore, influence the adopted legitimation strategy of the co-operative.

While theory suggests that organizations should make situations understandable and clear and thus enhance cognitive legitimacy, we argued that the members of the Rabobank are already well-informed and the bank will focus its legitimizing efforts on other types of legitimacy. We suggested, therefore, that the cognitive legitimation efforts would decrease during an organizational crisis. This suggested effect was found for the identity crisis, but not in the financial crisis. Although the ANOVA reported an increase in cognitive legitimation, the effect was not statistically significant.

So, we can answer our research question by stating that the co-operative increase its efforts to pragmatically legitimize during a financial crisis, while the co-operative increased its efforts to morally legitimize during an identity crisis. The specific type of crisis, therefore, affects which legitimation strategy is adopted.

Limitations of our research

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Future research can address this issue by not merely looking at the percentage of legitimation strategies used, but also by looking at the size of the reports and other channels co-operatives use to communicate and legitimize her actions.

Another limitation of our research is that only one report per year was coded due to time constraints. When more documents are coded every year, more observations are gathered, which increases the power of the statistical tests. Furthermore, more observations per year make it possible to study smaller crises, since we can study smaller time periods without having too few observations. This increases the potential number of crises that can be examined.

Recommendations and implications for future research

Next to addressing the abovementioned research limitations of our research, future research might angle more issues.

For example, future research can assess the applicability of Situational Crisis Communication Theory in different situations since we did not find empirical evidence for an increase in cognitive and moral legitimation in every situation. We therefore suggest that SCCT should be tested for distinct kinds of organizational crisis. One can think of a financial crisis or identity crisis, as we studied., crises due to natural disasters or political instability or any other kind of organizational crisis. Different kind of crises might influence the adopted legitimation strategy.

Furthermore, our research showed the dual nature of the co-operative by pragmatically legitimizing their actions in the financial crisis and morally legitimizing behavior in the identity crisis. Future research can look how the environment (market) the co-operative operates in influences the adopted legitimation strategy. Does a co-operative select a different legitimation strategy when the co-operative is a monopolist compared to a situation in which it has many competitors.

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APPENDICES

Table 1: Descriptives 1911-2007

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Figure 2: Legitimation strategies 1911-2017