José Luis Álvarez
17 February 2003
Handling the new relevance of legitimacy and its demands is not easy for executives. The author offers tips on dealing with constant public exposure, scrutiny and assessment in a world where information often lacks.
Capitalism’s capacity for increasingly growing complexity is truly fascinating. A new environment is being institutionalized today, one based on social legitimacy. Companies must adapt to these new circumstances - not just to obtain results, but to survive.
Firms now face a variety of demands to conform with social values in more advanced societies, such as social responsibility, ecological concerns, corporate-governance practices, human resources policies and philanthropy. Save certain exceptions, these are neither legally enforceable nor specifiable ex ante, but they do receive social or political assessment from groups with preferential coverage in the news media.
The principal challenge for executives, when adapting to this new environment, is the lack of precise, reliable information. There is nothing that could be considered even remotely similar to a pricing mechanism that could determine – in supply-and-demand terms of legitimacy – the value (a term never more appropriately used) of organizations, groups or individuals.
[*D Companies are subjected to constant scrutiny, assessment and comparisons *]
For that reason, partly to satisfy the craving for information on these issues, we are seeing a proliferation of rankings of business practices, hit parades, awards and classifications of the best and the worst. These are published by a variety of organisations - consultants, academic institutions, civil society groups, business associations and others. What they have in common is not simply that they are public, but that they also seek the maximum exposure possible and the attention of the news media. As a result, in this new context, companies are subjected to constant scrutiny, assessment and comparisons.
Seven hints can help companies handle the new exposure.
One. Recognize the existence of this glass-fronted capitalism and follow a sound organizational logic. A new environment calls for specialization within the company. That means a unit specialized in this environment - in the same way that there is a unit specialized in a certain sector of activity, such as finance.
Two. Staff the department with experts. Both the content and the mass media involved in these questions require specialists. But do not turn your department into one merely offering image or spin. These new demands are not resolved solely with good public relations.
Three. This specialized department must be represented on the Board and report directly to the CEO. Legitimacy is a strategic issue and is extraordinarily fragile; reputations are gained slowly and lost quickly. Management must keep a close watch on events.
Four. Be proactive, invest in training in these issues and develop advanced practices. Numerous firms around the world are adopting strategies to adapt to these growing demands. They are worth analyzing, and perhaps emulating.
Five. Imitate Caesar’s wife: be – and be seen to be – transparent. Nothing attracts scrutiny like opacity. Provide as much data about the company as is competitively reasonable. This information must be accurate (the competition is watching). But do not worry about results of those rankings. It is sometimes better not to be number one (losing the top spot always makes the news).
Six. Ensure consistency between what you say and do. Do not follow the directors of a certain Spanish bank who, some years ago, boasted about being first to employ a business code of ethics and now stand accused of tax fraud. Advanced societies are tolerant and forgive much, but not inconsistency or hypocrisy. Similarly, do not openly display social or ecological values. Simply hold them, and unassumingly put them into practice. At the end of the day, a company’s management does not control everything; things always go wrong, mistakes are made, incompetent or immoral subordinates crop up and accidents happen.
Seven. Two different scenarios exist for adapting to this context of legimitacy: normality (proaction) and crisis (reaction.) Bear in mind that in a public crisis you and your company will not be judged so much on mistakes made, but rather on your reaction. In such cases, appearances – the way things are done – are of the utmost importance. The political consequences of the ecological disaster in Galicia following an oil spill, provide a tremendous lesson in this respect.
This glass-fronted, or showcase capitalism is here to stay, for two reasons. First, the need companies have to acquire legitimacy – beyond the merely financial aspect – is real, because state institutions have ceased to satisfy social and public needs. Thus major corporations, faute de mieux, are often the only organizations with sufficient resources for response. Second, because in democracies with popular capitalism – where large sectors of the population are proprietors, shareholders or financiers – economic and political issues are subjected to the same rules of exposure and public criticism. There is no alternative: companies simply have to compete in this context, too. And they must do so with professionalism, discretion and transparency.