Start here. Agency theory has two parties; real decisions have a dozen. This phase gives you a way to rank claimants instead of listing them, and then connects that to Williamson's question of where the firm's boundary should sit. The link is contracting: when a relationship cannot be governed by a contract, it has to be governed by ownership or by the board — and stakeholders whose contracts are incomplete are exactly the ones who become powerful.
In plain English
Plain English: lots of groups care what a company does — owners, staff, customers, suppliers, lenders, the local town, the regulator. You cannot please all of them at once, so you need a way to decide who you must listen to this week. Ask three things: can they hurt or help you, is their claim fair, and is it urgent.
The advanced view
Advanced view: Mitchell, Agle & Wood (1997) define stakeholder salience by three attributes — power (ability to impose will, coercive, utilitarian or normative), legitimacy (a socially accepted claim) and urgency (time sensitivity plus criticality). The combinations give seven classes: latent (dormant, discretionary, demanding, holding one attribute), expectant (dominant, dependent, dangerous, holding two) and definitive (all three). Salience is dynamic: acquiring urgency turns a dormant claim into a dangerous one overnight, which is why crises reorder management attention so violently.
One attribute makes a latent stakeholder you can monitor. Two makes an expectant stakeholder you must manage. All three makes a definitive stakeholder whose claim goes to the top of the agenda immediately. In a transformation, map the groups onto this picture before you design the communication plan — the analysis usually explains resistance better than any culture survey.
The seven classes, with a working example
Dormant (power only)
A large investor who is not engaged, or a regulator with unused authority. Monitor; cheap to ignore until it wakes.
Discretionary (legitimacy only)
A charity or community group with a fair claim and no leverage. Voluntary, reputational response.
Demanding (urgency only)
A noisy single-issue campaigner without legitimacy or power. Costly to over-serve.
Dominant (power + legitimacy)
Owners, key lenders, the works council. These populate the board agenda and the formal governance machinery.
Dependent (legitimacy + urgency)
Injured customers, affected communities: a fair, pressing claim needing an advocate to gain power.
Dangerous (power + urgency)
Wildcat strike, activist short-seller, coercive campaign — no legitimacy but real damage. Manage, do not legitimise.
Definitive (all three)
A dominant stakeholder whose claim becomes urgent: the lender at a covenant breach, the regulator after an incident. Act now.
Deeper
Shareholder value versus stakeholder value, without the slogans
The honest version of the debate is about measurability and accountability, not about who deserves what. A single objective — long-run market value of the firm — is testable and makes trade-offs explicit; multiple objectives let management justify any decision after the fact, which is itself an agency problem. That is Jensen's enlightened value maximisation: take long-run value as the objective function, and treat stakeholder relationships as the constraints and inputs that determine whether that value can be earned at all.
Practically the two collapse into each other over a long horizon. Underpaying staff raises turnover cost, squeezing suppliers reduces resilience, an unmanaged environmental liability becomes a provision and then a cash outflow. ESG analysis is most useful when treated exactly this way — as governance and risk with cash-flow consequences and a date, not as sentiment.
So when a case asks whether to close a plant, do the value arithmetic and then name the constraints: severance and consultation law, customer concentration, the political cost of the specific site, and the credibility your next restructuring will need.
Deeper
Williamson: why some relationships cannot be left to a contract
Transaction cost economics asks a narrower question than strategy usually does: given that this activity must happen, what is the cheapest way to govern it — market, hybrid contract, or hierarchy (own it)? Three attributes decide. Asset specificity: how much value is lost if the relationship ends (site, physical, human, dedicated capacity, brand). Uncertainty: how much the contract would have to anticipate. Frequency: how often the exchange recurs, and so whether specialised governance is worth building.
High specificity is the dangerous case. Once you have built the tooling that only fits one customer, the customer can renegotiate — the hold-up problem — and knowing that in advance, nobody builds the tooling. Ownership solves it by removing the counterparty, at the cost of bureaucracy, weaker incentives and lost scale from serving only yourself.
This is the same logic as the governance phases, one level down. Where contracts are incomplete, someone must hold residual decision rights: within the firm that is the board's ratification role, and at the firm's boundary it is the make-or-buy decision. Vertical integration, outsourcing, joint ventures and long-term supply agreements are all answers to the same question.
Low specificity and infrequent exchange: buy on the market. High specificity plus high uncertainty and frequency: bring it inside, because no contract can cover the states of the world in which you would be held up. Hybrids — long-term contracts with safeguards, JVs, exclusive supply — occupy the middle, and are where most real outsourcing decisions actually sit.
The make-or-buy calculation, with the hold-up term
Buy cost = price × volume + contracting cost + expected hold-up loss Make cost = cash operating cost + capital charge (WACC × invested capital) + bureaucracy / lost focus Expected hold-up loss = probability of renegotiation × value of specific investment at risk Integrate when Make cost < Buy cost, and revisit whenever specificity or volume changes
Worked example — outsource the specialised component or build the line?
Step 1 of 8
- 1Annual volume 200,000 units; the supplier quotes 12 per unit, so buy cash cost =
Must know cold
- ✓Salience = power + legitimacy + urgency; two attributes means manage, three means act now.
- ✓Enlightened value maximisation: one objective function, stakeholders as constraints and inputs.
- ✓Asset specificity, uncertainty and frequency decide market vs. hybrid vs. hierarchy.
- ✓Hold-up is the cost of specific investment under an incomplete contract; ownership is one cure, safeguards another.
- ✓Always include the capital charge when comparing make with buy, and state the volume at which the answer flips.
Common pitfalls
- ×Listing stakeholders without ranking them. The list is not analysis; salience is.
- ×Granting legitimacy to a dangerous stakeholder because they are loud, or ignoring them because they are not legitimate.
- ×Using 'stakeholder value' to avoid a trade-off. Name the trade-off and then decide.
- ×Comparing outsourcing quotes against in-house cash cost only, with no capital charge and no hold-up term.
- ×Integrating for control when a contractual safeguard would do the same job for a tenth of the capital.
Where this lands in strategy
TCE is the firm-boundary half of corporate strategy: vertical integration, outsourcing, platform versus pipeline, and how much of the value chain to own. Stakeholder salience is the delivery half: it predicts where a transformation will stall, which is the bridge to the organisational diagnosis cases.
Exercises
Try each one on paper before revealing the worked solution.
Exercise 1
A manufacturer breaches a leverage covenant in the same week as a local newspaper campaign against its plant emissions and a customer-safety complaint. Rank the three claimants using salience and say what management does first.
Exercise 2
A structuring exercise. A retailer is deciding whether to keep running its own last-mile delivery fleet or outsource to a 3PL. Structure the decision, then compute the flip point given: 3M deliveries a year, 3PL price 5.20 each, in-house cash cost 4.10 each, fleet capital 22M, WACC 9%, depreciation 12%.