The Creation of Legitimacy for
Internationalization in a Cooperative Bank
Master Thesis, MSc BA Organizational and Management Control University of Groningen, Faculty of Economics & Business
Thesis supervisor: M. P. van der Steen Co-assessor: E. van de Mortel
Word count: 12.828 (including references and appendix)
Eline A. M. Bulsink Student number: S3218376 e.a.m.bulsink@student.rug.nl
ABSTRACT
This research examines the way in which the central department of a cooperative can use pragmatic, moral, cognitive and regulatory legitimacy in order to gain support for an internationalization strategy and thereby overcome conflict between institutional pressures. Cooperatives have a power distribution in which the lower levels of the organization have more power than the higher levels. Since the lower-level members of a cooperative are often located at a local or regional lower-level, an internationalization strategy aspired by the central department of the cooperative would be conflicting with the
institutional pressures felt by the members. The cooperative of interest in this thesis is the Rabobank, a major Dutch cooperative bank with a focus on the food and agricultural sector. Content analysis was applied on documents that were sent from the central department to the local members of the
Rabobank and quantitative tests were conducted on the data over a period around the
internationalization of the Rabobank. The findings show that the central department of the Rabobank was able to gain legitimacy for its internationalization strategy by increasing its use of pragmatic and cognitive legitimacy and decreasing its use of moral legitimacy.
Keywords: cooperative, legitimacy, institutional theory, conflicting institutions, and internationalization.
ACKNOWLEDGEMENTS
Writing this thesis would not have been possible without the support of several people. First, I would like to thank my supervisor dr. M. P. van der Steen for his professional and valuable feedback and support during the entire process. I would also like to thank dr. A. Moreno (Universidad de Jaén) for guiding my fellow master students and me through the content analysis process. Furthermore I would like to thank my fellow master students Y. Akkerman, J. de Beij, J. de Boer, R. de Vries, T.
TABLE OF CONTENTS
1. INTRODUCTION ... 4 2. LITERATURE REVIEW ... 8 2.1 COOPERATIVES ... 8 2.1.1 RABOBANK ... 9 2.2 INSTITUTIONAL THEORY ... 10 2.3 LEGITIMACY ... 11 2.3.1 PRAGMATIC LEGITIMACY ... 13 2.3.2 MORAL LEGITIMACY ... 13 2.3.3 COGNITIVE LEGITIMACY ... 14 2.3.4 REGULATORY LEGITIMACY ... 15 2.4 CONCEPTUAL FRAMEWORK ... 17 3. METHODOLOGY ... 18 3.1 RESEARCH SETTING ... 18 3.2 SAMPLE ... 18 3.3 DEPENDENT VARIABLES ... 19 3.4 INDEPENDENT VARIABLE ... 21 3.5 ANALYSIS ... 21 4. RESULTS ... 23 4.1 DESCRIPTIVE STATISTICS ... 23 4.2 TEST RESULTS ... 244.2.1 HYPOTHESIS 1: PRAGMATIC LEGITIMACY ... 25
4.2.2 HYPOTHESIS 2: MORAL LEGITIMACY ... 25
4.2.3 HYPOTHESIS 3: COGNITIVE LEGITIMACY ... 25
4.2.4 HYPOTHESIS 4: REGULATORY LEGITIMACY ... 25
4.3 ROBUSTNESS TESTS ... 26
5. DISCUSSION AND CONCLUSION ... 28
5.1 DISCUSSION AND CONCLUSION ... 28
5.2 MANAGERIAL AND THEORETICAL IMPLICATIONS ... 29
5.3 LIMITATIONS ... 30
5.4 RECOMMENDATIONS FOR FUTURE RESEARCH ... 31
6. REFERENCES ... 32
7. APPENDIX ... 37
7.1 APPENDIX A ... 37
1. INTRODUCTION
Over the last decades, research which draws on institutional theory has been extended to include powerful explanations for both individual and organizational action (Zucker, 1987; Deephouse, 1996; Hoffman, 1999; Dacin, Goodstein & Scott, 2002). According to institutional theory, institutions exert a form of pressure on organizations (Hoffman, 1999). These institutions can be norms, beliefs and rules that dictate what an organization can or cannot do (Hoffman, 1999). In social life, institutions are often considered as facts that must be taken into account by the actors (DiMaggio & Powell, 1983). Therefore, institutions are maintained over a long period of time and they are resistant to change. However, when a process of change occurs in an institution, it may lead to organizational change as well (Zucker, 1987; O’Donovan, 2002). Organizations are likely to change in this situation, since they strive for society’s and stakeholders’ support and approval for their activities (O’Donovan, 2002).
According to institutional theory, the actions of organizations are a consequence of the
competition for legitimacy among competitors and resource-providing stakeholders (Bloodgood & Morrow, 2000; DiMaggio & Powell, 1983). By conforming to the institutional environment and embedding the institutionalized rules of the environment to their own structures, organizations attempt to attract resources and gain support from stakeholders (Ashforth & Gibbs,1990; Bloodgood &
Morrow, 2000). A transformation of or change in organizations, initiated by institutions, requires some degree of legitimacy in order to be successful. Legitimacy and change are therefore linked (Dacin et al., 2002). Over the years, many researchers have attempted to define the concept of legitimacy. An example of an early definition is given by Dowling and Pfeffer (1975) who define legitimacy as a “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.” (p.122). Another, more recent, definition was used by Dacin et al. (2002) who described legitimacy as “a condition whereby other alternatives are seen as less appropriate, desirable, or viable.” (p. 47). A more inclusive and broad-based definition of legitimacy is given by Suchman (1995). According to Suchman (1995) “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). This definition will be used in this thesis, since it recognizes the evaluative, cognitive and socially constructed nature of legitimacy (Suchman, 1995; Mitchell, Agle & Wood, 1997).
specific standard that is perceived as the proper thing to do (Suchman, 1995; Dart, 2004; Ruef & Scott, 1998). The last form of legitimacy is cognitive legitimacy, the more complex form of legitimacy (Suchman, 1995). Rather than on interest or evaluation, cognitive legitimacy refers to basic, taken-for-granted assumptions of the organization based on some cultural account (Suchman, 1995; Dart, 2004). Next to these three types of legitimacy, Hunt and Aldrich (1996) found an additional fourth type of legitimacy, namely regulatory legitimacy. Regulatory legitimacy is derived from regulations, rules, standards and expectations of governments, professional bodies and credentialing associations (Zimmerman & Zeitz, 2002). Change can be reached and legitimated by organizations through influencing legitimacy by adhering to institutional preferences of the environment.
The issue of legitimacy has been widely investigated and discussed (Kostova & Zaheer, 1999). Most theoretical research on legitimacy has focused on organizations in their most general and abstract form. This form implies a hierarchical structure with a group of power at the top and subsequent levels of power beneath them (Dowling & Pfeffer, 1975; Meyer & Rowan, 1977; Suchman, 1995;
Zimmerman & Zeitz, 2002). Empirical research has also been conducted in organizations with alternative organizational forms, although the power in these organizational forms is still at the top and the structure is hierarchical (Hoffman, 1999; Kostova & Zaheer, 1999; O’Donovan, 2002). Examples of this kind of empirical research are the research of Dart (2004), who studied legitimacy of the social enterprise, which operates in the non-profit sector but nevertheless consists of a traditional hierarchical structure and the research of Kostova and Zaheer (1999) who extend research on
legitimacy by conducting research in multinational enterprises, which are less conventional and more complex organizational forms, however they still comply with a hierarchical organizational structure. Dacin et al. (2002) point out that most research focuses on the most dominant forms of organizations. He warns for the risk that focusing on the dominant organizational forms may overlook important differences in other organizational forms (Dacin et al., 2002). This suggests that it cannot be assumed that the research on legitimacy in conventional organizational forms can also be applied to
organizations with a divergent organizational structure and power distribution.
One of these organizational forms is the cooperative, which seems to have been ignored in academic literature for the most part (Nelson, Nelson, Huybrechts, Dufays, O’Shea & Trasciani, 2016). According to the International Cooperative Alliance a cooperative “is an autonomous
business and government institutions and business schools, which are mostly hierarchy-oriented. Therefore, studies on the legitimacy of more conventional organizational forms cannot be readily extended to cooperative forms.
The cooperative of interest in this thesis is the Rabobank, a major Dutch cooperative bank with a focus on the food and agricultural sector (Rabobank, 2016). In 2016, the Rabobank had a net profit of 2,024 million euros and approximately 45500 employees in FTEs (Rabobank, 2016). The Rabobank was constituted of the former umbrella organizations “Coöperatieve Centrale Raiffeisen-Bank” and “Coöperatieve Centrale Boerenleenbank, which merged in 1972 to the Rabobank (Rabobank, 2017). Within the cooperative structure of the Rabobank, there are 103 autonomous local banks and a central bank, which is the decision-making body, while the autonomous local banks are members of the cooperative (Rabobank, 2016). This means that the local member banks are the formal owners of the cooperative and can formally vote against decisions of the central bank. The member banks of the Rabobank have in their turn members, or stakeholders, as well; these members are mostly private persons living near to the local banks (Rabobank, 2016). In organizations, managers have to gain legitimacy from their stakeholders. For the Rabobank it means that managers from the central bank have to gain legitimacy from the local banks for initiatives to be accepted, since the local banks can stop the introduction of these changes.
the importance of legitimacy and ways in which to gain or maintain legitimacy (Suchman, 1995). This leads to the following research question:
“In what way can a cooperative use different types of legitimacy to gain support from its local members for its internationalization strategy?”
The remainder of this thesis is organized as follows. First, a literature review on institutional theory, legitimacy and the types of legitimacy that may be used to achieve legitimacy of
2. LITERATURE REVIEW
This section explains the most important concepts within the literature that are relevant for this research and forms the theoretical basis for this study. First, literature on cooperatives is reviewed, followed by an explanation of institutional theory. After that, the topic legitimacy in organizations is explored further. Several hypotheses are developed in this literature review, which will be tested in this study.
2.1 Cooperatives
Since cooperatives cannot be assumed to behave in the same manner as conventional organizational forms (Nelson et al., 2016), it is important to see what has been said about cooperatives and their structure in the literature up until now. To be able to understand the behaviour of the cooperative, it is important to provide some information on the history and underlying values of the cooperative, which might explain their way of operating to some extent.
The concept of the cooperative originates from the Rochdale Society of Equitable Pioneers, which was established by laborers who suffered from the social dislocations of the Industrial Revolution in England (Fairbairn, 1994). They decided to engage in mutual self-help, which means that by helping each other, they could help themselves (Fairbairn, 1994). Nowadays, this concept is still the basis of the cooperative identity defined by the International Cooperative Alliance (ICA). According to the ICA (2017), the characteristic values of cooperatives are help,
than the conventional organizational forms where the interest of shareholders is maximized as opposed to the wider group of stakeholder interests that cooperatives focus on (Ayadi et al., 2010).
2.1.1 Rabobank
Since the subject of interest in this thesis is the Rabobank, it is important to have some additional knowledge about the history and structure of the Rabobank in order to be able to understand their cooperative processes and operations.
Due to misery and lack of affordable loans among farmers, the first local cooperative banks were set up in the Netherlands in 1895 (Groeneveld, 2016; Rabobank, 2017). These local cooperative banks were based on the principles of the German Raifeissenbanks (Groeneveld, 2016; Sluytyerman, Dankers, van der Linden, van Zanden, 1998). The Raiffeisen model consists of several features; first and foremost, the credit cooperative should limit its activities and the recruitment of membership to a very narrow local district; second, the cooperative should be open to anyone, even the poorest members of society; third, there is no entrance fee and no or only low business shares and dividend payments; fourth, there should be unlimited liability of the members in case of bankruptcy, so that members would have an incentive to monitor both the management and borrowers; fifth, a committee should supervise a smaller committee that is responsible for the day-to-day business; sixth, loans can be long-term, but this is combined with short periods of notice; seventh, the cooperative should carry out as many services as possible for their members; finally, profits should not be divided over the members, but instead put in an “undividable fund” with the purpose of giving it to charity (Guinnane, 1994; Prinz, 2002).
By the end of the nineteenth century two umbrella organizations were launched, namely the Coöperatieve Centrale Raiffeisen-Bank and the Coöperatieve Centrale Boerenleenbank, which became the central banks for the local banks (Rabobank, 2017). In 1972 these banks merged to become the Coöperatieve Centrale Raiffeisen-Boerenleenbank, or Rabobank (Groeneveld, 2016; Rabobank, 2017). Already in the course of 1970, Rabobank formulated aspirations to go international
(Groeneveld, 2016). According to Groeneveld (2016), the aim for the Rabobank was to support the expansion of partners’ international operations, which they started to pursue in the beginning of the 1980s. In 1996 all foreign business of the Rabobank was grouped into an entity called “Rabobank International” (Groeneveld, 2016). In 2013, Rabobank International was integrated with Rabobank Nederland again. Up to today the international activities of the Rabobank are driven by following local customers, linking up with existing activities and core competences (Groeneveld, 2016). In 2016, Rabobank had 103 local banks that fully own the Rabobank and was operating in 40 countries (Rabobank, 2016).
integral part of their field of operation (Rabobank, 2017a). The local banks own the Rabobank and are owned by local members, so both the Rabobank as well as its local member banks are fully
cooperative in nature (Ayadi et al., 2010). Second, there is a member council that consists of a
delegation that represents all the members of the Rabobank (Rabobank, 2017a). Their main function is to help the Board of Directors in improving its services and selecting social projects that are supported by the bank (Rabobank, 2017a). The highest body in the Rabobank is the General Members Council, in which the chairmen of the local supervisory bodies represent local members. In their semiannual meetings, the General Members Council adopts the strategy, approves the most important points of the annual budget, advises on large acquisitions and alliances and appoints the Supervisory Board
members (Rabobank, 2017a). Furthermore, the Executive Board is responsible for reaching the business objectives, the strategy and the profit performance as well as guaranteeing compliance with laws and regulations and controlling risks (Rabobank, 2017b). This implies that the Executive Board is the most powerful body in the Rabobank, since they have oversight on the overall state of the central Rabobank and its local members. Nevertheless, the General Members Council can formally reject the strategy set out by the Executive Board. The Supervisory Board is appointed by the General Members Council and supervises the Executive Board’s policy and compliance with relevant laws and regulations (Rabobank, 2017c).
2.2 Institutional Theory
Institutional theory has been researched since 1919, when Hamilton was the first to introduce the concept of institutions (Hodgson, 2004). Since then, much research has been dedicated to institutional theory and its effects in organizations and society (Hodgson, 2004; Zucker, 1987; Hoffman, 1999). The concept of institutions and institutional theory has been defined in various ways, which led to multiple variants of institutional theory (Scott, 1987). This thesis will follow the New Institutional Sociology, since the thesis is concerned with the institutions in an organizational environment that shape its structure and that force organizations to seek legitimacy (Scapens, 2006; Deephouse & Suchman, 2008).
these institutions create powerful pressures on organizations for them to seek legitimacy and conform to these pressures. This conformance is in New Institutional Sociology explained as isomorphism, which is a process of external institutions that force one actor in the organizational field to resemble the other actors who have the same set of environmental conditions (DiMaggio & Powell, 1983). Three mechanisms through which isomorphic adaptions occur can be distinguished – coercive, mimetic and normative (Scapens, 2006; DiMaggio & Powell, 1983). Coercive isomorphism occurs due to political and regulative influences; mimetic isomorphism is the result of an organization copying the practices of other successful organizations; normative isomorphism occurs when the norms of society and professional bodies influence the practices of organizations (Scapens, 2006; DiMaggio & Powell, 1983). According to Deephouse (1996), the fundamental consequence of isomorphism in institutional theory is legitimacy, the acceptance of an organization by its external environment. Organizations that conform to their institutions appear rational to the social system that they are in, and will therefore be considered as acceptable or legitimated (Deephouse & Carter, 2005). 2.3 Legitimacy
As mentioned before, the definition of legitimacy that will be used in this thesis is one by Suchman (1995): “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). This definition consists of the several elements that explain legitimacy. First, the word generalized addresses the aspect of legitimacy being dependent on a history of events and that it is therefore, to some extent, resilient to conflicting departures from social norms (Suchman, 1995). Furthermore, perception or assumption refers to the view of internal and external audiences of the actions of the organization (Suchman, 1995; Elsbach & Sutton, 1992). Lastly, legitimacy is socially constructed, since congruence between the social values associated with an organization’s activities and the norms, values and beliefs of the larger social system of which they are a part
(Suchman, 1995; Dowling & Pfeffer, 1975). According to Ashforth and Gibbs (1990), an organization is legitimate when it is “pursuing socially acceptable goals in a socially acceptable manner”(p. 177). The larger social system that sets the standards for what is socially accepted or not are the institutions in the organizational field of an organization (Dacin, Oliver & Roy, 2006). Legitimacy is essential for an organization’s existence and survival (Ashforth & Gibbs, 1990; Zimmerman & Zeitz, 2002; Dacin et al., 2002). The internal and external audiences of the actions of the organization are viewing a legitimate organization as more trustworthy, meaningful, and more predictable (Elsbach & Sutton, 1992; Suchman, 1995). Without legitimacy, an organization may face difficulties in attracting resources, entering the processes of social exchange and getting the support of the social system (Ashforth & Gibbs, 1990; Palazzo & Scherer, 2006).
challenge in gaining acceptance is winning acceptance and trust for a new activity (Suchman, 1995; Aldrich & Fiol, 1994). This can be done via three strategies (Suchman, 1995). First, researchers in institutional theory literature have often discussed that a simple way to achieve legitimacy is through conformity to the prescriptions of the formal structure and institutional rules of the organization, also described as coercive isomorphism (Meyer & Rowan, 1977; DiMaggio & Powell, 1983; Ashforth & Gibbs, 1990). Second, a more proactive strategy that Suchman (1995) identified in the process of achieving legitimacy is selecting an environment in which the otherwise questioned activities seem proper and desirable, without many changes. And third, although most organizations gain legitimacy through conforming to or the selection of an environment, it is also possible to manipulate the environment (Suchman, 1995).
In the cooperative that is researched, legitimacy for the new activity of internationalization had to be gained and its existing legitimacy had to be extended. According to institutional theory,
internationalization is not only aspired because of the economic consideration of profit maximization, but also because of isomorphic pressures derived from the institutional environment (Li & Ding, 2013). Moreover, the research of Li and Ding (2013) showed that firms choose to internationalize not only for the reason of pursuing economic benefits, but also with the purpose to gain legitimacy by conforming to its institutional environment. The institutional pressures experienced by the central Rabobank could come from competitors who internationalize, but also from partners who are expanding their operations internationally and will otherwise be lost (Groeneveld, 2016). However, the members and formal owners of the central Rabobank may not recognize these institutional
2.3.1 Pragmatic legitimacy
Suchman (1995) discerned some broad types of legitimacy within the existing literature. The first type of legitimacy discussed is pragmatic legitimacy. Pragmatic legitimacy is based on sort of
self-interested calculations of the stakeholders (Suchman, 1995). The stakeholders will consider an action legitimate when they can benefit from the practical consequences that follow from the calculations (Suchman, 1995; Dart, 2004). These practical consequences are benefits from the corporation’s activities such as payment or cost reduction (Palazzo & Scherer, 2006). Pragmatic legitimacy is the least abstract form of legitimacy distinguished by Suchman (Dart, 2004). Stakeholder groups will perceive an activity as socially acceptable when it provides them with anything of value (Dart, 2004). Therefore, it is a key challenge for organizations to persuade their stakeholder groups of the usefulness of their outputs, procedures and structures (Palazzo & Scherer, 2006). Ways in which organizations can gain pragmatic legitimacy are lobbyism, branding and strategic public relation (Palazzo & Scherer, 2006).
Many authors discuss that motives of organizations to expand their business abroad are economics-driven (Cuervo-Cazurra, Narula & Un, 2015; Buckley, Clegg, Cross, Liu, & Zheng, 2007). Motives to internationalize are for example to increase its competitiveness, increase revenues, and improving the efficiency of its operations (Cuervo-Cazurra et al., 2015). These kinds of motives are all focused on reaching a competitive advantage and profit maximization for the organization. In a cooperative with the intentions to internationalize, the members will take the consequences of this decision into consideration. Members of the cooperative are the main source of profit for the
Rabobank and they would also have to bear the costs of an internationalization strategy. As long as the local members do not know what they can gain from an internationalization strategy, it can lead to resistance against the internationalization strategy pursued by the central department of the Rabobank. Pragmatic legitimation efforts by the central department of the cooperative can change the attitude of the local members by explaining the practical benefits such as higher profit and growth that can be reached through internationalizing. In the documentation between the central department and the members, the cooperative could use techniques such as lobbyism and branding, but it is also likely to emphasize all the positive consequences that can benefit the members (Palazzo & Scherer, 2006). This leads to the first hypothesis:
H1: The cooperative will increase the use of pragmatic legitimacy to gain support for their
internationalization strategy. 2.3.2 Moral legitimacy
The second form of legitimacy is moral legitimacy, also referred to as normative legitimacy
and its conformity to a specific standard that is perceived as appropriate (Suchman, 1995; Dart, 2004; Ruef & Scott, 1998). This specific standard is a reflection of the norms, values and beliefs of the stakeholder group (Suchman, 1995). In other words, the institutions of the stakeholders determine whether a new activity of an organization will be seen as legitimate or not. Moral legitimacy is socially constructed, through giving and considering reasons to justify the actions of the organization (Palazzo & Scherer, 2006). An organization can gain moral legitimacy only through participation in “explicit public discussion” (Suchman, 1995, p. 858). By deliberate communication with reasonable arguments, an organization will be able to gain moral legitimacy (Palazzo & Scherer, 2006).
Cooperatives operate in accordance with certain cooperative principles and values (ICA, 2017). The members of the cooperative consider these principles and values as standards for the organizations. The Rabobank based its standards on the principles of the German Raiffeisenbanks. One of the most important principles of the Raiffeisen model is that the cooperative should operate in a very narrow local district (Prinz, 2002). This is undeniable woven into the identity of the Rabobank and the local member banks. Since the members of the cooperative will accept an internationalization strategy when they perceive it as the right thing to do, the central department of the cooperative needs them to morally legitimate the decision to internationalize to a certain level. In order to achieve this, they might discuss the values and beliefs of the cooperative to persuade the members that it is an appropriate decision, also because institution have been exerting pressure to internationalize (Suchman, 1995).
Here, conflicting institutions can be identified. On the one hand there is the importance of the cooperative principles and values on which the cooperative is based, and on the other hand there is the institutional pressure to internationalize for the central department. Some degree of the use moral legitimacy is necessary for the cooperative to make sure that the local member banks support the central department in their daily decision-making. But since an internationalization strategy
contradicts the important principle of operating in a narrow local district and since it is probable that it will be more beneficial to the central bank than to the local member banks, it is also likely that the central bank will put less emphasis on the use of moral legitimacy (Dart, 2004). In that way, they move the importance of the cooperative and its principles more to the background by using less moral legitimation efforts. This leads to the second hypothesis:
H2: the cooperative will decrease the use of moral legitimacy to gain support for their
internationalization strategy 2.3.3 Cognitive legitimacy
According to Aldrich and Fiol (1994), an activity can become so familiar that it is taken for granted, attempts at copies of this activity happen regularly and are very successful. When a new activity is taken for granted, the highest form of cognitive legitimacy is gained (Aldrich & Fiol, 1994). Whereas moral legitimacy is about conscious moral judgments and pragmatic legitimacy about self-interested calculations, cognitive legitimacy functions mainly on the subconscious level (Palazzo & Scherer, 2006). This poses a big challenge for organizations to influence the stakeholder groups’ perceptions (Palazzo & Scherer, 2006). Managers of cognitive legitimacy have to be careful in gaining it, since disclosure of the attempts may collapse the cognitive legitimacy build (Palazzo & Scherer, 2006; Ashforth & Gibbs, 1990). Explicit evaluation and opposition then replace the subconscious approval because people are generally predisposed to perceive influence attempts as socially unacceptable (Ashforth & Gibbs, 1990; Palazzo & Scherer, 2006). Therefore, it is often only possible to manage cognitive legitimacy indirectly, which then results in a simple adaptation to the social expectations (Palazzo & Scherer, 2006).
As discussed by Suchman (1995) amongst other authors, cognitive legitimacy is the subtlest, but also the most powerful form of legitimacy. When members of a cooperative take an innovation for granted or accept it on a subconscious level, the cognitive legitimacy efforts of the central department have been successful (Suchman, 1995; Palazzo & Scherer, 2006). However, when members recognize the attempts to influence them, the new activity will be rejected (Ashforth & Gibbs, 1990). This indicates that the central department of the cooperative has to be careful in delivering the indirect legitimation efforts. Internationalization is such a new activity that the central department wants to be accepted by its members. Cognitive legitimacy can be gained by internalizing a belief system so that it will later be taken for granted (Díez-Martín, Prado-Roman & González, 2013). By indirectly
influencing the subconscious of the local member banks, the central bank could internalize a new belief system in which internationalization feels right and is socially accepted (Díez-Martín et al, 2013; Aldrich & Fiol, 1994). In order to make the internationalization strategy considered acceptable on not only the pragmatic level, but also on the subconscious level, the cooperative has to increase its cognitive legitimacy efforts.
H3: The cooperative will increase the use of cognitive legitimacy to gain support for their
internationalization strategy. 2.3.4. Regulatory legitimacy
sense that organizations have to conform to expectations. Disclosure of the organization’s attempt to legitimize it will raise questions about the organization (Tost, 2011). However, regulatory legitimacy differs from cognitive legitimacy because these expectations are not about culture, but about law and other regulations (Zimmerman & Zeitz, 2002; Tost, 2011). Moreover, regulatory legitimacy involves active external validation by e.g. a government agency (Zimmerman & Zeitz, 2002; Tost, 2011). Validation is the extent to which there appears to be a collective-level consensus of the
appropriateness of an entity, so individual-level judgments may differ (Tost, 2011). Regulatory legitimacy indicates to the stakeholder groups that the organization is accepted by agencies such as governments, professional bodies and credentialing associations (Zimmerman & Zeitz, 2002). According to Zimmerman and Zeitz (2002), regulatory legitimacy can be gained by obeying the law, filing articles of incorporation and obtaining personal certification.
Members of the cooperative need to have a sense that the central department is operating in accordance with the law and regulations in order to the central department to be regulatory legitimated (Zimmerman & Zeitz, 2002). The central department can show their conformance to laws and
regulations by communicating and explaining these to the members of the cooperative. Also for a new activity it is important to show that it is acceptable to the regulatory agencies, since a failure in gaining regulatory legitimacy may prevent the activity from being launched (Zimmerman & Zeitz, 2002). For the internationalization strategy it means that the cooperative will use regulatory legitimacy to explain the laws and regulations that are relevant for the strategy. Since the cooperative has to continuously maintain the regulatory legitimacy of its local members, they already need some level of regulatory legitimation efforts in their documentation. Those regulatory legitimation efforts can be used to gain legitimacy for internationalization as well, thereby replacing the need for maintaining regulatory legitimacy. Thus, in order to get support for their internationalization strategy they will probably use the same level of regulatory legitimacy but with a different goal. This leads to the fourth hypothesis:
H4: the cooperative will stay constant in using regulatory legitimacy to gain support for their
3. METHODOLOGY
This section elaborates on the methodology used in this research. First the applied research setting is explained, followed by a description of the sample used. Furthermore the dependent and independent variables are discussed as well as the analysis that will be performed on the data.
3.1 Research setting
The organizational form of interest in this thesis is the cooperative and especially a cooperative that pursues or has pursued an internationalization strategy. Therefore, the data of an internationally active cooperative was needed to test the hypotheses and answer the research question: “In what way can a cooperative use different types of legitimacy to gain support from its local members for its
internationalization strategy?”
The Rabobank is based on cooperative principles and is an international provider of financial services (Rabobank, 2017d). The Rabobank originates from a group of farmers that founded
agricultural cooperative banks and even today the Rabobank is by far the largest financial service provider in the food and agriculture industry in the Netherlands (Rabobank, 2017d). With almost two million members, and 103 local member banks, the Rabobank is also one of the largest cooperatives in the Netherlands (Rabobank, 2017d). Moreover, the Rabobank was in 2016 active in 40 countries (Rabobank, 2016). This shows the internationalization strategy that the Rabobank has followed. The Rabobank is considered as an appropriate research subject not only because of its size and impact in the Netherlands, but for the visibility of their legitimacy processes as well. The cooperative nature of the Rabobank, in which the customer and openness are central, makes it possible that the documents including attempts to gain legitimacy are available for the outside world.
3.2 Sample
The data collected are documents sent from the cooperative central to the local member banks. This one-way communication is in the form of monthly magazines, instruction sheets and journals and covers the period between 1915 and 2007. The central Rabobank uses these documents to affect their legitimacy to their members and to claim the different forms of legitimacy. Of each year, only the document of October is chosen to code. When this document was not available, the document of November is coded and otherwise the documents of September. Every paragraph of the documents is coded, since the paragraph was chosen as recording unit. Therefore, coding one month per year gives a substantial amount of data available for analysis.
the cooperative does not have to gain legitimacy for this strategy anymore. The establishment of Rabobank International in 1996 is considered as the official moment of internationalization because Rabobank International is established in July 1996 (Rabobank, 1997). This means that the document of October 1995 is the last document coded before the establishment of Rabobank International, and the document of October 1996 the first one coded after what is considered as internationalization. A sample period of five years before the establishment of Rabobank International is chosen as a benchmark for the amount of paragraphs used before and after internationalization. This leads to a sample size of 696 paragraphs in total. The five-year period is chosen because it is long enough to deal with short-term irregularities (Gomez-Mejia, 1992; Gankema, Snuif & Zwart, 2000). Furthermore, on the other side, since it is also short enough to capture only the phases before and after the
establishment of Rabobank International in 1996. Only documents with the title “Bank & Bestuurder” are used to form the sample.
3.3 Dependent variables
The documents were analyzed through thematic content analysis. Six master students were responsible for coding the documents of a period of fifteen years in five categories of legitimacy. In Table 1 an overview is given of the codes used to identify the different forms of legitimacy and in Appendix A the guidelines underlying these classifications are explained. One master student was appointed as auditor to ensure the intercoder reliability. Intercoder reliability, or intercoder agreement, is “the extent to which independent coders evaluate a characteristic of a message or artifact and reach the same conclusion” (Lombard, Snyder-Duch & Bracken, 2002, pp. 589). Intercoder agreement is an important component of content analysis. According to Lombard et al. (2002), content analysis without a
measure of intercoder reliability, the data and interpretation cannot be considered valid. TABLE 1
Category of Legitimacy Code Pragmatic legitimacy 1
Moral legitimacy 2
Cognitive legitimacy 3 Regulatory legitimacy 4
No legitimacy 0
sufficient to start the actual coding process. During this period, the students communicated with the auditor and with each other via WhatsApp and e-mail to clarify some difficulties and to create some extra guidelines. This led to an intercoder reliability of 86%, calculated with Holsti’s method. This method was appropriate since it accounts for situations in which coders evaluate different units, in this case the different years and documents that the students coded (Lombard et al., 2002). The “rules of thumb” that are set out by several methodologists, according to Lombard et al. (2002), indicate that above 80% intercoder agreement is acceptable in most situations, whereas 90% would be acceptable in all situations. However, content analysis is seldom performed by seven coders, since it is harder to reach an appropriate intercoder agreement. This means that the intercoder reliability of 86% is a very good score for this study.
The coding procedure generated data on five categories of legitimacy, namely pragmatic legitimacy, moral legitimacy, cognitive legitimacy, regulatory legitimacy and no legitimacy. Since the hypotheses that are tested all assume a form of legitimacy, only the first four categories are taken into consideration.
The first hypothesis predicts that the use of pragmatic legitimacy increases to receive support for the internationalization strategy. Pragmatic legitimacy was measured when paragraphs used terms that indicated economical elements important for the cooperative, such as cost reduction or revenue streams, or economic exchanges that are beneficial, but also pragmatic instructions for employees. To capture the changes in the use of legitimacy caused by the internationalization strategy of the
Rabobank, a separate dummy variable is created. The pragmatic legitimacy that occurred in the sample was coded with a 1 and the other categories were coded 0.
Secondly, it is hypothesized that the use of moral legitimacy would decrease when the central Rabobank attempted to gain legitimacy for internationalization. Moral legitimacy was identified when terms such as “Rabobank”, “coöperatie”, and “lokale banken” were used in combination with
mentioning cooperative principles and emphasizing the identity of the Rabobank. Procedures mentioned that are used specifically within the Rabobank were categorized as moral legitimacy as well. Furthermore, differences between the Rabobank and other banks and the social value to communities and the Dutch society in general were seen as moral legitimacy. To be able to measure the changes in moral legitimacy before and after the establishment of Rabobank International, a separate dummy variable was created in which the moral legitimacy codes were coded 1 and the other categories were coded 0.
internationalization, so to be able to see only the use of cognitive legitimacy, the codes of cognitive legitimacy were translated into a separate dummy variable where cognitive legitimacy was coded 1 and the codes of other categories were coded 0.
Finally, it is hypothesized that the use of regulatory legitimacy would stay constant during the period of seeking support for the internationalization strategy of the Rabobank. Regulatory legitimacy was identified when a paragraph explained external laws and legislation or referred to the Dutch central bank, Basel, the Dutch government or the EU with regard to compliance or regulation. Internal procedures or legislation was not considered as regulatory legitimacy, since the criteria was that the laws and legislation should also hold for other banks. To capture the differences in the use of regulatory legitimacy and to show only the use of regulatory legitimacy in the sample set, a separate dummy variable was created. The use of regulatory legitimacy was coded with a 1 and the other categories were coded 0.
3.4 Independent Variable
The Rabobank already aspired to internationalize in the 1970’s (Groeneveld, 2016). In 1982 the first offices of the Rabobank were opened abroad and in 1996 Rabobank International was established. With Rabobank International all the foreign activities were concentrated in one entity with a managing board and a large degree of autonomy (Groeneveld, 2016). Since this was such an important step for the Rabobank and a clear benchmark of the internationalization of the Rabobank, the establishment of Rabobank International will in this thesis be considered as the official moment of internationalization of the Rabobank. The period before 1996 is the period in which the central Rabobank had to gain legitimacy for the internationalization strategy. After the launch of Rabobank International in July 1996 they did not need to gain legitimacy for their internationalization strategy anymore (Rabobank, 1997).
A dummy variable is created to measure the effect of internationalization on the legitimacy efforts. The period before 1996 is coded as a 0 and the period after the establishment of Rabobank International is coded with a 1.
3.5 Analysis
The first step in the data analysis is to create tables and histograms with the frequencies of the different forms of legitimacy used in the period between 1991-2000, 1991-1995 and 1996-2000.
4. RESULTS
In this section, the results of the proposed analysis are presented. First the overall frequencies of the different codes are discussed. After that, the test results are reported and explained.
4.1 Descriptive Statistics
In this research the frequencies of the different forms of legitimacy are of interest. Descriptive statistics such as the mean are providing little information about the whole sample. For example, a mean of 2.5 may be constituted by a large amount of codes of 2s and 3s, but also 1s and 4s may lead to a mean of 2.5. Only the frequencies of the dependent variables are of interest, since the proposed independent variable consists of two equally distributed values.
Table 2 shows the frequencies of the different forms of legitimacy before and after the establishment of Rabobank International. It can be seen that the central Rabobank mostly used moral legitimacy to influence the local member banks both before and after the establishment of Rabobank International. Also, regulatory legitimacy is rarely used in the documents written by the central Rabobank. Figure 1 in Appendix B shows a histogram with the distribution of the different forms of legitimacy and the normal distribution graph. Figure 2 and 3 in Appendix B respectively show the use of the different forms of legitimacy in the sample period before and after internationalization.
4.2 Test Results
To test whether internationalization has an influence on the use of pragmatic, moral, cognitive and regulatory legitimacy, a one-way ANOVA test is conducted for each hypothesis. The dependent variables are transformed in dummy variables in order to be able to compare the means before and after internationalization. The results of the one-way ANOVA are also shown in Table 4.
TABLE 2
Frequencies Subsamples 1991-1995 and 1996-2000 Subsample 1991-1995 Subsample 1996-2000 Category of Legitimacy
Frequency Valid Percent Frequency Valid Percent
.
4.2.1. Hypothesis 1: Pragmatic legitimacy
The results of the first test confirm the first hypothesis. The level of pragmatic legitimacy is higher before the establishment of Rabobank International than thereafter. The one-way ANOVA test is significant, with F (1, 694) = 3,938 and p=0,048.
4.2.2. Hypothesis 2: Moral legitimacy
The results of the second one-way ANOVA support the second hypothesis. After realizing the internationalization strategy, the Rabobank increased its efforts to gain moral legitimacy. The results of the one-way ANOVA are significant, with F (1, 694)= 9,337 and p=0,002.
4.2.3. Hypothesis 3: Cognitive legitimacy
The third hypothesis is supported by the results of the third one-way ANOVA. Before the
establishment of Rabobank International more cognitive legitimacy efforts were used than afterwards. The third test is significant with F (1, 694)= 6,139 and p=0,013.
4.2.4. Hypothesis 4: Regulatory legitimacy
The fourth hypothesis is not supported. There is no significant difference between the use of pragmatic legitimacy before and after realizing the internationalization strategy. The results from the one-way ANOVA test are not significant, F (1, 694)= 1,000 and p= 0,318.
TABLE 4
Results of One-Way Analysis of Variance
Source df SS MS F p
Pragmatic legitimacy Between groups 1 0,519 0,519 3,938 0,048*
Within groups 694 91,411 0,132
Total 695 91,930
Moral legitimacy Between groups 1 2,299 2,299 9,337 0,002**
Within groups 694 170,874 0,246
Total 695 173,172
Cognitive legitimacy Between groups 1 1,126 1,126 6,139 0,013*
Within groups 694 127,351 0,184
Total 695 128,477
Regulatory legitimacy Between groups 1 0,001 0,001 1,000 0,318
Within groups 694 0,997 0,001
Total 695 0,998
4.3 Robustness tests
The Kolmogorov-Smirnov test was used to see whether the data had a normal curve about the mean (Bontis, 1998). This test confirmed that the variables are distributed non-normally, which can also be seen in table 5. However, according to Fields (2009) the ANOVA is a robust test, which can handle a violation of the normality assumption. Next to that, a limitation of the Kolmogorov-Smirnov test is that large samples easily get significant results from to small deviations from normality (Fields, 2009).
To check the assumption of homogeneity of variances, the Levene’s test was used. For the dependent variables, the variances were significantly different in the groups before and after internationalization, as can be seen in Table 6. This means that the assumption of homogeneity has been violated (Fields, 2009).
TABLE 5
Kolmogorov-Smirnov Test of Normality
Internationalization D df p Pragmatic legitimacy 1991-1995 1996-2000 0,498 0,521 348 348 0,000** 0,000** Moral legitimacy 1991-1995 1996-2000 0,353 0,388 348 348 0,000** 0,000** Cognitive legitimacy 1991-1995 1996-2000 0,451 0,489 348 348 0,000** 0,000** Regulatory legitimacy 1991-1995 1996-2000 0,519 - 348 - 0,000** **p<0,01
- Regulatory legitimacy is constant during 1996-2000, so it has been omitted
TABLE 6
Test of Homogeneity of Variances
Since the homogeneity of variances assumption is broken, a Welch test has to be conducted. The results of this Welch test can be seen in Table 7. The Welch test could not be performed on the regulatory legitimacy variable, since the group after internationalization had a variance of 0.
Furthermore, it can be seen that the results of the Welch test are similar to the results of the one-way ANOVA. This indicates that the performed one-way ANOVA already was robust.
TABLE 7
Welch Robust Test of Equality of Means
5. DISCUSSION AND CONCLUSION
This research studies the use of legitimacy by a cooperative in order to gain support for its
internationalization strategy. To be able to gain insight into the effect of internationalization on the use of pragmatic, moral, cognitive and regulatory legitimacy, multiple one-way ANOVA tests were conducted. This chapter first discusses the results and answers to the hypotheses. After that, the main research question is answered and the managerial and theoretical implications are explained. Then, the most important limitations are addressed. Finally, recommendations for future research are given. 5.1 Discussion and Conclusion
The results of the one-way ANOVA have revealed that Hypothesis 1 is supported. The use of
pragmatic legitimacy in the documents from the central Rabobank to the local member banks is higher before the establishment of Rabobank International than after it. This indicates that the cooperative changes its use of legitimation efforts in order to gain legitimacy for internationalization. Motives for internationalization are mainly strategic and based on opportunities for competitive advantage (Fernández & Nieto, 2005; Cuervo-Cazurra et al., 2015). This finding shows that by strategic communication, such as emphasizing the positive consequences and outcomes for the stakeholders, pragmatic legitimacy can be gained (Palazzo & Scherer, 2006; Suchman, 1995). Furthermore, it shows that pragmatic legitimacy plays a bigger role in an organizational change with motives based on competitive advantage than when such a change as been realized.
The results show that there was a significant difference between the use of moral legitimacy before and after the establishment of Rabobank International. After the establishment of Rabobank International more use of moral legitimacy was identified. Interesting about the use of moral legitimacy is that it is the most used form of legitimacy by the central Rabobank, even before the establishment of Rabobank International. This indicates that the overall standards and principles of the cooperative are important to the bank, as well as the value that doing the right thing brings along (Dart, 2004). The finding that the central bank used less moral legitimation efforts before internationalization than after confirms the idea that the central bank did not want to place much emphasis on the standards and principles of the cooperative, since they are contradictive. Also, the use of less moral legitimacy may be explained by the fact that moral legitimacy is not about self-interest, whereas the establishment of Rabobank International was more beneficial for the competitive strategy of the central Rabobank than for the local member banks (Dart, 2004).
internationalization strategy is realized, they apparently succeeded in doing this deliberately and subtle so that the local member banks did not recognize the efforts to gain cognitive legitimacy for
internationalization.
The results of the one-way ANOVA test regarding regulatory legitimacy were insignificant. This means that there was no significant difference in the means of the use of regulatory legitimacy before and after internationalization. Thus, Hypothesis 4 cannot be supported. It cannot be said that the use of regulatory legitimacy remained the same before and after the establishment of the Rabobank. Remarkable in the data of this finding was that only a very little percentage of the
legitimacy efforts was used to gain regulatory legitimacy, this may have led to the insignificant results of the ANOVA. This is not in accordance with Zimmerman and Zeitz (2000) who discussed that an organization has to continuously maintain a certain level of regulatory legitimacy. It seems that regulatory legitimacy was of least importance to the central Rabobank.
To answer the research question “in what way can a cooperative use different types of legitimacy to gain support from its local members for its internationalization strategy?” multiple quantitative tests have been conducted after a thematic content analysis of documents provided by the central Rabobank to the local member banks. By doing so, this research provides insight into the usage of different forms of legitimacy in order to gain support for an organizational change such as
internationalization. The tests show that by strategically using pragmatic, moral, cognitive and regulatory legitimacy, support can be gained for internationalization by a cooperative. This research confirms Suchman (1995) who stated that organizations that aspire to change often have to intervene preventively in their internal and external audiences in order to gain support for their ideas.
Furthermore, this research shows the dynamics in which the central department deals with the non-traditional power distribution of the cooperative. To gain support for a new strategy that may be conflicting to the institutions of the members with the highest power, the central department uses different forms of legitimacy. Also, the central department found a balance between the different forms of legitimacy that turned out to be effective. By using more pragmatic and cognitive legitimacy, less moral legitimacy and the same level of regulatory legitimacy, the central Rabobank gained overall legitimacy for internationalization.
5.2 Managerial and Theoretical Implications
support for new activities in an organization. Up until now, research to gaining legitimacy has rarely distinguished the use of these different forms of legitimacy and rather focused on overall legitimacy. Furthermore, this research shows how a cooperative can reach an organizational change that is conflicting with the institutions of the members of that cooperative. So, a link is established between the influence of legitimacy and conflicting institutions, which shows that thoughtful use of legitimacy can bridge the gap between conflicting institutions experienced between the central department and members of a cooperative.
This research might also provide some insights to managers and especially managers in cooperatives. First, it shows that managers could influence others by using different forms of
legitimacy. Especially firms that aspire to internationalize and have to gain support in order to realize an internationalization strategy will find this research useful. Furthermore, this research is useful for managers of cooperatives since it provided insights in the background of cooperatives, follows the line of thinking of members of cooperatives and shows how to influence these members effectively in order to start a new activity or change an existing one.
5.3 Limitations
This research is bound by several limitations as well. It is important to explain and acknowledge these limitations so that other research can build on this study to create a more complete overview of the subject.
The first limitation is regarding the content analysis. The process of content analysis is inevitably subjective and the results are biased by the position of the researchers (Moreno & Cámara, 2014; Laine, 2009). However, through the auditor and by measuring the intercoder reliability a minimization of the effect of this subjectivity is attempted.
A second limitation of this study concerns the literature review. First, cooperatives have not yet been studied as much as conventional organizational forms (Dacin et al., 2002; Nelson et al., 2016). Second, research to the separate forms of legitimacy is scarce, most literature regards overall legitimacy. Third, the research field of conflicting institutions has only opened recently, which causes the literature to be not very extensive yet (Provan et al, 2004; Delmestri & Walgenbach, 2009; Pache & Santos, 2010). The combination of these three factors made it difficult to create theoretically well-supported hypotheses regarding the use of pragmatic, moral, cognitive and regulatory legitimacy in a cooperative with conflicting institutions between the central department and the local members.
5.4 Recommendations for future research
The findings and limitations of this study lead to some recommendations for future research. First, an interesting finding was that moral legitimacy was the most used type of legitimacy in the documents of the Rabobank. It was not subject of interest in this study to find an explanation for the use of the types of legitimacy; only changes in the use of legitimacy were studied. So, it could be interesting for future research to study why moral legitimacy is so important to the Rabobank. Second, future researchers could study the use of the different forms of legitimacy in other cooperative banks to increase the generalizability of this research. It would be interesting to study the difference in the use of legitimacy in cooperative banks and regular banks as well. Third, also to increase the
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7. APPENDIX
7.1 Appendix A
Instructions for coders
Thematic content analysis (Rabobank and predecessors)
As a coder, you must code every paragraph of the documents, according to the categories of the coding scheme (see the coding scheme for more details). Please, use the excel file to code. Every paragraph, whether relevant to the coding scheme or not, should be coded from 0 to 4:
- 0: no legitimacy related in any part of the paragraph - 1: pragmatic legitimacy related
- 2: moral legitimacy related - 3: cognitive legitimacy related - 4: regulatory legitimacy related
Non-editorial items like advertisements are excluded from analysis. They should not be coded.
Niet coderen: Wel coderen:
- Foto’s (ook al staan er quotes bij) - Voorpagina
- Inhoudsopgave - Colofon
- Pure bespreking van persoon (in CV-stijl)
- Kopjes en titels niet apart coderen -> horen bij paragraaf
- Korte blokjes tekst (zoals, Uit de Praktijk, naam schrijver etc.) - Voetnoten en sterretjes - Overlijdensberichten - Pagina met afscheid,
onderscheidingen, jubilea, CKV-benoemingen, CKV-afscheid (behalve als er meer uitleg dan nodig is bij een persoon) - Reclame
- Agenda van vergaderingen - Tabellen
- Redactioneel (vaak na/bij inhoudsopgave)
- Opsomming is 1 paragraaf. Een inleiding op een opsomming is een aparte paragraaf, net als een conclusie na een opsomming. - Tussenkopjes horen bij de
paragraaf
- Bij een tabel en tekst: als de tekst hetzelfde zegt als de tabel, 1 paragraaf. Als de tekst iets anders zegt dan de tabel: 2 paragrafen - Er is 1 soort legitimiteit in een
paragraaf
- Als er geen extra boodschap zit in de tekst over een persoon en het alleen zijn historie is, dan is het een 0
