Organisational Legitimacy: SG 405

Within legitimacy theory, legitimacy itself is seen as resource on which an organization

depends for survival. It is something that is conferred on the organisation by society, and
it is something that is desired or sought by the organisation. It is a resource that the
organisation is thought to be able to influence or manipulate through various disclosurerelated strategies.
Breach Real Life Example: No disclosure to stakeholders
AWB did not disclose to the UN its arrangements with the Iraqi government, instead
saying it paid discharge costs to unnamed 'maritime agents' of up to $12 per metric tonne
(pmt). The initial cost of these transportation contracts in 1999 was $10 to $12 pmt.
These rates rose by up to 50% the following year, then increased from 2001 until the just
before the invasion to between $45 and $56 pmt.
These increases were offered with no explanation, and were far beyond what could be
considered a reasonable transportation fee in Iraq. When the UN Inquiry interviewed the
former Iraqi Minister of Trade, he said that these fees were then added onto the original
contract through after-sales service fees, making them revenue-neutral for AWB. Only a
small part of the fees remained in the hands of the drivers and Alia, the majority being
funnelled back to the Iraqi Government.
The Social contract SG 405
Legitimacy theory is based on the notion that there is a social contract between the
organization and the society in which it operates. The social contract is not easy to
define, but the concept is used to represent the multitude of implicit and explicit
expectations that society has about how the organization should conduct its operations.
Breach of Social contract:
The United Nations initiated the Oil-for-Food Humanitarian Program in 1995 (UN Security
Council Resolution 986: of allowing Iraq to sell oil on the world market in exchange for
food, medicine and other humanitarian needs for ordinary Iraqi citizens without allowing
Iraq to gain military capabilities.
The Cole Inquiry found AWB's bribes were transferred to Baghdad through a Jordanian
front company, Alia, disguised as trucking fees and were paid out of inflated prices
claimed for the wheat from UN-held accounts. It heard these payments and commissions
were in contravention of UN Security Council sanctions against Iraq, imposed after its
1991 invasion of Kuwait.
(Society does not want to fund war. Here AWB breached the societal contract through
kickbacks to Iraq Government)
Legitimacy Theory: SG 406

The main premise to legitimacy theory is that an organization will take action to manage
community perceptions in order to survive. Corporations need to at least appear to be
operating within the established rules of society, that is, within the bounds of social
contract, When there is disparity between what the organisation appears to be doing and
the terms of its social contract, there will be a threat to its legitimacy, and therefore to its
future survival and success.
Real life scenario:
The scale ($290 million) of the kickbacks allegedly demanded by the Iraqi regime to
secure wheat contracts in late 1999 should have been viewed as highly risky by those
within AWB, particularly given that these kickbacks were in direct contravention of UN
sanctions.
It appears the short-term prospect of winning Iraqi wheat sales totally overshadowed the
risk to a lucrative monopoly asset - the "single desk". AWB derives about half of its
market value from the single-desk arrangement. The prospect that AWB may now lose its
monopoly on Australian wheat exports due to the reputation damage it has suffered
shows disregard for the potential consequences. To have continued kickback payments in
the face of concerns raised by the UN and competing wheat interests smacks of terminal
naivety.
Lindblom 1994 Example of real life scenario Change and Inform:
AWB Chairman Brendan Stewart said the company-accepted responsibility:
"The board deeply regrets the damage done to the company. The board accepts
accountability for the actions of management, and the culture at AWB during the Oil-forFood program," Mr Stewart said at the time. "At the end of the day, the board ultimately
accepts responsibility for what happened, and is committed to making significant changes
to ensure it never happens again."