Legitimacy Perspective in Business Developmentus-jpri.org/wp/wp-content/uploads/2013/03/ray_20130320.pdfLegitimacy Perspective in Business Development 1 GAUTAM RAY GRADUATE SCHOOL

Legitimacy Perspective in Business Development Business Development

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G A U T A M R A YG R A D U A T E S C H O O L O F M A N A G E M E N T

O OK Y O T O U N I V E R S I T Y

U S J I W o r k s h o pM a r c h 2 0 2 0 1 3M a r c h 2 0 , 2 0 1 3

20-03-2013Gautam Ray, Graduate School of Management, Kyoto University

The Notion of Legitimacyg y

Legitimacy results from conformity with both general norms and

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Legitimacy results from conformity with both general norms and formal laws ( Max Weber, 1978)

Legitimacy is “ a generalized perception or assumption that actions of an entity is desirable, proper and appropriate within some of an entity is desirable, proper and appropriate within some socially constructed system of norms, values, beliefs and definitions.” (Suchman 1995: 574)

An organization is said to be legitimate to the extent that its means An organization is said to be legitimate to the extent that its means and ends appear to conform with social norms, values and expectations (Dowling and Pfeffer, 1975)

Legitimacy justifies the organization’s role in the social system and g y j g yhelps attract resources and continued support of the constituents of social system (Parsons, 1960).

Since legitimacy is required to draw constituents’ support and g y q ppattract resources, it is a resource by itself.” (Ashforth and Gibbs, 1990)


Key Points of This Presentationy3

Businesses survive within a social system as they are perceived to Businesses survive within a social system as they are perceived to accrue a minimum or threshold level of overall legitimacy by other constituents of the social system

Perception of legitimacy comes from a socially constructed Perception of legitimacy comes from a socially constructed resource- shared standards/notions of norms, values, beliefs and definitions (NVBD)- in a process called legitimation

Shared standards of NVBD drive the development of the broader Shared standards of NVBD drive the development of the broader social system including development of its business subsystem.

How? Through their effects on peoples’ needs and aspirations and Through their effects on peoples needs and aspirations and

institutional development that impact the development of market resources and business activities

In a dynamic social system the notions of NBVD undergo In a dynamic social system the notions of NBVD undergo ‘structuration’, a process that internalizes the unintended external effects of businesses.


SharedSt d d Standards of NVBD

People’sNeeds and A i ti

Sociopolitical

InstitutionAspirations Institution

State

Legitimacy Evaluation ; L iti ti

Human d

StateMarket

LegitimationProcess

and Material

Resources

Technology

Business output and

20-03-2013 Gautam Ray, Graduate School of Management, Kyoto University

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output and Externalities

Link between the Social Resource of NVBD and Business Development Through Legitimation Business Development Through Legitimation

Legitimation means evaluation of legitimacy of business activities

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Legitimation means evaluation of legitimacy of business activities and outputs as regards their relevance, desirability and propriety

This evaluation is done with reference to the shared standards of NVBD NVBD

These shared standards constitute a social resource that influences peoples’ needs and aspirations and development of socio-political institutionsinstitutions

Peoples’ needs and aspirations and socio-political institutions directly influence development of marketable business resources

This is how NVBD impacts the development of business sub-system This is how NVBD impacts the development of business sub system Shared standards of NVBD are re-constructed as an unintended

effect of legitimation process in a manner similar to Anthony Giddens’ theory of ‘structuration’ Giddens theory of structuration

NVBD trigger the self-reinforcing development dynamics of cultural –institutional subsystem mechanics of the entire social system including business developmentg p


Business Developmentp

Business development means development of

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Business development means development of business sub-system as part of the overall development dynamics of a broader social system development dynamics of a broader social system within which businesses constitute one sub-system

Other two constituent sub-systems are i) market and Ot e t o co st tue t sub syste s a e ) a et a d macro-economic subsystem; and ii) cultural-institutional subsystem

Development dynamics within the broader social system consist of separate but interdependent d l h i h i f development mechanics among the constituents of its three social subsystems


Peoples’ Historical &C lt l

BROADER SOCIAL SYSTEMPeoplesNeeds &

Aspirations

Historical & Institutional

Contexts

Cultural-InstitutionalSubsystem Aspirations Contexts

Market Resources State Policy and

Subsystem

M7Market Resources

and SizeState Policy and

Regulations Macro-EconomicSubsystem

Business strategy,

Subsystem

Business strategy, Resources, and

PracticesBusinessS b t

Value Added

Subsystem

Output and Externalities 20-03-2013Gautam Ray, Graduate School of Management, Kyoto University

Business Development Dynamics as a Part of Development of Social Systemeve op e t o Soc a Syste

D l t f b i t t d

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Development of business strategy, resources and practices is recursively interlinked with the development of market and institutional resourcesdevelopment of market and institutional resources

Development of market resources (human capital, h i l it l d t h l ) d i tit ti l physical capital and technology) and institutional

resources is also recursively interlinked with the ds d s i ti s f l d th i needs and aspirations of people and their

educational/cultural development through self reinforcing feedback loops reinforcing feedback loops


Link between Legitimacy and Business Developmente e op e t

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Business development is sustained and nurtured within the social system through feedback dynamics generated across the three sub-systemssystems

Whether the feedback of business subsystems is positive or not depends upon whether business activities and output are congruent with the shared standards of NVBD with the shared standards of NVBD

The degree of legitimacy depends on the degree of congruency or alignment with NVBD

We posit that businesses can sustain their activities if legitimacy We posit that businesses can sustain their activities if legitimacy grantors perceive that businesses have accumulated a minimum level of overall legitimacy, threshold legitimacy

Businesses at threshold level of legitimacy are neither positively Businesses at threshold level of legitimacy are neither positively legitimate nor illegitimate


Different Typologies of Legitimacy yp g g y

Pragmatic legitimacy: a business gains pragmatic legitimacy when it

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Pragmatic legitimacy: a business gains pragmatic legitimacy when it achieves its business goals through favorable exchanges such as facilitating payments, speed money and bribes to the powers that be in the social systemy

Moral or normative legitimacy: a business gains moral/normative legitimacy by achieving its goals through morally acceptable means.

Sociopolitical legitimacy: a business gains sociopolitical legitimacy Sociopolitical legitimacy: a business gains sociopolitical legitimacy by conforming to informal institutions and addressing the urgent needs and expectations of the community and the common public

Cognitive legitimacy: a business gains cognitive legitimacy in two g g y g g g yways: i) by conforming to well established business practices and formal institutions(taken-for-granted legitimacy); and ii) by making their activities and output comprehensible and rational in a given

t t ( ti l iti l iti )context (rational cognitive legitimacy).


Perfect Legitimacy and Threshold Legitimacy e ect eg t acy a d es o d eg t acy11

Generalized perception or assumption of overall legitimacy of Generalized perception or assumption of overall legitimacy of a business is formed from an overall assessment of the desirability, propriety and relevance of the entire spectrum of its activities that are evaluated with regard to the four types of its activities that are evaluated with regard to the four types of legitimacy

A business is said to be perfectly legitimate if no question or doubt regarding legitimacy of its strategies and activities can doubt regarding legitimacy of its strategies and activities can be raised

A business acquires threshold/minimum level of legitimacy f it i l if it t d t th necessary for its survival if its management responds to the

doubts, questions and instructions so that a minimum level of satisfaction of its key stakeholders and legitimacy grantors is

hi d f i i th b i t ill iti tachieved for perceiving the business as not illegitimate If overall legitimacy exceeds the threshold level over a period

of time businesses begin to accumulate legitimacy capital


Measuring Overall Legitimacy: Benchmarks g g y

A f ll l iti th b i d t

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A score of overall legitimacy the can be assigned to prevailing business strategies and practices as well as organizational behavior on the basis of weighted average organizational behavior on the basis of weighted average legitimacy score of four different types of legitimacies

Each type of legitimacy is scored in a scale ranging from Each type of legitimacy is scored in a scale ranging from zero to 100

No question asked means 100 score; many questions No question asked means 100 score; many questions asked and none could be answered within a reasonable period of time means zero scorep

Threshold legitimacy is at the middle point in the scale, 50, above which businesses start to develop legitimacy


Weights of each Legitimacy Type in the Overall Legitimacy: Determinantseg t acy ete a ts

The weights of each legitimacy type depend on many factors:

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The weights of each legitimacy type depend on many factors: Perspective of external legitimacy grantors such as judiciary,

regulators, suppliers, auditors, accountants, lawyers, media, community and common people who are actual or potential community, and common people who are actual or potential consumers of business output/externalities

They tend to give higher weights to socio-political legitimacy d ti l itiand normative legitimacy

Perspective of internal legitimacy grantors such as shareholders and senior management acting as agent to g g gshareholders . They give higher weight to pragmatic and cognitive legitimacy

Specific context such as stage of institutional development, Specific context such as stage of institutional development, broader development dynamics and the forces driving these dynamics


Contextual Weights of Legitimacy Types g g y yp14

Contextual weights of different types of legitimacy Contextual weights of different types of legitimacy depend on their relative importance in different contexts

In countries such as India where institutions and shared In countries such as India where institutions and shared values are changing because of the ongoing inclusive development dynamics, sociopolitical legitimacy and

i l i i hi h i hnormative legitimacy carry higher weights Cognitive and pragmatic legitimacy carry higher weights

where capitalist institutions and values and norms are where capitalist institutions and values and norms are not undergoing any significant change (SE Asia)

For foreign enterprises entering a new market, For foreign enterprises entering a new market, sociopolitical legitimacy and cognitive legitimacy carry higher weight


Measuring Overall Legitimacy: A Hypothetical Case Illustration Case ust at o

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Why sovereign debt bonds in BRICS countries with high growth outlook should have lower credit rating than sovereign debt bonds in countries such as Greece, Portugal, Spain, Ireland ?in countries such as Greece, Portugal, Spain, Ireland ?

From the perspectives of those who give high priority to the stability of EU, pragmatic and taken-for-granted legitimacy get higher weights weights

Therefore the practice of higher sovereign debt ratings for peripheral countries in Europe gets positive legitimacy evaluation feedback from these stakeholders.

However credit rating agencies could not answer the question whether debt funds would have generate higher return if invested in faster growing economies such as BRICS rather than in peripheral g g p pEuropean countries.

Higher credit rating for Greece gets low score of normative and rational cognitive legitimacy


Computing Score of Each Legitimacy Type and Weighted Average Score of Overall Legitimacy We g ted ve age Sco e o Ove a eg t acy

Pragmatic legitimacy score:100;

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Pragmatic legitimacy score:100; Taken for granted legitimacy score: 100 Normative/ moral legitimacy score: 0 Rational cognitive legitimacy score: 0 Socio-political legitimacy: Not Applicable in this context If more legitimacy grantors believed that debt funds would If more legitimacy grantors believed that debt funds would

have performed better if invested in high growth countries, the weights of normative and rational-cognitive legitimacy become higher become higher

Consequently overall legitimacy score for such credit rating practice is less than 50, which is below the threshold or

t l l l f l itineutral level of legitimacy This means zero or negative accumulation of legitimacy

capital


Legitimacy of Business St t /P ti

Strategy/ P ti

Cognitive L iti

Pragmatic L iti

Moral/ N ti

SociopoliticalL iti

Overall L iti

Strategy/Practices

Practices Legitimacy Legitimacy Normative Legitimacy

Legitimacy Legitimacy

Payment of Legitimate/ille Legitimate/ill Not Not legitimate Less than yfacilitating payments or bribe

ggitimate depending on contexts

gegitimatedepending on contexts

legitimateg

threshold level

bribe contexts on contextsTax Avoidance

Legitimate/illegitimated di

Legitimate/illegitimated di

Not legitimate

Not Legitimate Less than threshold l ldepending on

contextsdepending on contexts

level

Transfer Legitimate/ille Legitimate/ill Not Not legitimate Less than Pricing in inter-firm trade

gitimatedepending on contexts

egitimatedepending on contexts

legitimate threshold level

trade contexts on contexts


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Strategy/ Practices

Cognitive Legitimacy

Pragmatic Legitimacy

Moral/ Normative Legitimacy

Sociopolitical Legitimacy

Overall Legitimacy

LegitimacyHiring Casual L b

Legitimate Legitimate Legitimate/illegitimate d di

Legitimate/illegitimate d di

Above threshold l lLabor depending

on contextsdepending on context

level

Reinvesting Rational- Illegitimate Legitimate Legitimate in AboveReinvesting Profit for capacity

i

Rational-cognitive legitimate in

th

Illegitimate from sharehoder

l ki f

LegitimateIn growth market

Legitimate in economies facing high

l t

Above threshold level in

th k texpansion growth market

s looking for dividends

unemployment/under employment

growth market

Downsizing for profit

Legitimate/illegitimate depending


Not Legitimate

Not Legitimate Below threshold level unlessdepending

on contexts depending on contexts

level unless insolvent


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Strategy/ Cognitive Pragmatic Moral/ Sociopolitical OverallStrategy/ Practices



Moral/ Normative Legitimacy

SociopoliticalLegitimacy

OverallLegitimacy

Forcible Land Acquisition



Not Legitimate

Legitimate/illegitimate depending on contexts

Less than threshold level if weight q

for public purpose

p gon contexts

p gon contexts

gof moral/normative legitimacyve legitimacy is high

Acquisition f

Legitimate/ill iti t



Legitimate/illegitimt d di

Legitimate/illeiti tof

Agricultural land for

legitimate depending on contexts



ate depending on contexts

gitimate depending on contexts

industrial purpose


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Strategy/ Practices



Moral/ Normative

Sociopolitical Legitimacy

OverallLegitimacyPractices Legitimacy Legitimacy Normative

LegitimacyLegitimacy Legitimacy

Mining and Legitimate/il Legitimate/il Legitimate/il Legitimate/illegitim Legitimate/illforest clearance in Tribal




ate depending on contexts

egitimate depending on contextsin Tribal

areason contexts on contexts on contexts on contexts


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The Notion of Legitimacy Capitalg y p

Legitimacy capital of a business is the nucleus of trust 21

Legitimacy capital of a business is the nucleus of trust and credibility and goodwill that it accrues over a period of time by maintaining or gaining legitimacy above the threshold or neutral levelthreshold or neutral level

It draws support and confidence from stakeholders including state and regulatory agencies which buffers g g y gbusinesses against the risks, uncertainties and adverse circumstances

By accruing legitimacy capital corporations attract By accruing legitimacy capital corporations attract complementary resources and alliance partners

They draw good quality human resources who take pride y g q y pto work in corporations having high legitimacy status and reputation


Legitimate Businessin social, cultural, andInstitutional context

Growth in Legitimacy Capital &

BusinessCultural‐InstitutionalContexts

Legitimacy Capitalg y p

Sustainable Business

Business Strategy and Practices

Contexts

TIME

Societal needs

TIME

and aspirations

Legitimacy Capital and Sustainable Growth of Legitimate BusinessBusiness


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Concluding Remarks: Impact of Social and Cultural Resources on Business Development Cu tu a esou ces o us ess eve op e t

Business development requires accrual of legitimacy 23

Business development requires accrual of legitimacy capital without which no business can survive and thrive in dynamic social environments

i i i l i d i d f l i l Legitimacy capital is derived from a structural social resource: socially constructed norms, values, beliefs and definitions, NVBD which evolves through ‘structuration’ , g( a la Giddens) in dynamic societies

Standards of NVBD, a structural social resource, sustains business development through legitimation processbusiness development through legitimation process

Changing social reality pertaining to businesses changes NVBD standards

Businesses must adapt to the ongoing social dynamics in order to survive and thrive within the social system


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Legitimacy Perspective in Business Developmentus-jpri.org/wp/wp-content/uploads/2013/03/ray_20130320.pdfLegitimacy Perspective in Business Development 1 GAUTAM RAY GRADUATE SCHOOL