Power, legitimacy, urgency make potent shareholders

Who were those people demonstrating at the G7, World Bank and WTO meetings in Prague, Washington and Seattle? After the triumph of capitalism, why is it now under attack? Perhaps, capitalism is under attack, precisely because it has triumphed. Should business take them seriously?

These demonstrations against big business highlight the centrality of business in all our lives. Essentially, business creates the world we live in. It creates the wealth and has a huge impact on the way that wealth gets distributed. Moreover, today the actions of companies are highly visible. What they are doing gets known very quickly around the world.

If people don't like it, the company may find itself in a PR nightmare. Look at Monsanto, Coca-Cola and Nike. So, the centrality and visibility of business places an onus on management to act responsibly toward all its stakeholders - those who are affected by and those who affect the corporation in achieving its objectives. As good corporate citizens, this is the right thing to do - those who have power should exercise it responsibly. But it is also a matter of self-preservation.

But first, managers must have some in-depth way of understanding their stakeholders both to create some fair and just balance among their potentially conflicting interests, and for competitive strategic reasons - to win influence in the right places.

Scholars in the field have developed a tripartite classification scheme that helps managers to appraise stakeholders in terms of their power, legitimacy, and urgency. Placing a stakeholder in the right category offers a pointer on how that stakeholder should be handled.

To start with power - what is usually meant by power is that one party has the means to get his/her way, even in the face of resistance by others. Power can take different forms. The bluntest is coercive power, which can entail physical force, violence, or restraint. A common source of power in companies, based on the formal hierarchy, comes from the control of financial resources. Finally, symbolic or invisible power can be very compelling. It derives from personal authority, respect, acknowledged expertise or charisma.

Of course, power of all kinds can be temporary, easily lost. Everyone can think of examples of how the mighty have fallen.

Today, it is arrogant companies that can be headed for a fall, when they ignore important interest groups. Power may be latent, i.e., it is not exercised. Managers must be conscious of stakeholders who are quiescent until their interest is awakened, perhaps because some management behaviour has aroused their anger or resistance.

A second way of classifying stakeholders is by means of their legitimacy. An obvious basis of legitimacy is that some relationship exists between the firm and the stakeholder, such as exchange transactions or joint participation in value creation. The firm may be significantly responsible for a stakeholder's well-being.

A moral claim also constitutes legitimacy. Some stakeholders may be involuntary. For example, people living in the vicinity of a plant that pollutes the local air and water are legitimate but unwilling stakeholders.

The third dimension to classify stakeholders is that of urgency. Urgent stakeholders are those with a time sensitive claim involving a stake critical to either themselves or the company or both.

While each of the three dimensions can grab the attention of managers, in some combinations, they are likely to be even more salient. The combination of power, legitimacy and urgency creates a definitive stakeholder. An instance is the role of an important institutional investor if the executives of a company are trying to stave off a takeover bid. In the UK, a famous case was the hostile takeover of the Forte Hotel Group by Granada when a major investment fund, Mercury Asset Management (now itself taken over by Merrill Lynch) threw its weight behind the acquirers.

There may be disagreement about the extent of the attributes possessed by different stakeholders. For example, Microsoft's managers and shareholders would regard the company's competitive positioning as legitimate. This is not a view shared by the US Department of Justice, and of course, by Microsoft's competitors. Managers over-estimate - or under-estimate - the extent of stakeholder attributes at their peril.

Dr Eleanor O'Higgins is a lecturer in strategic management and business ethics at the Smurfit Business School, UCD.