Business at a Crossroads The Crisis of Corporate Leadership_10 doc

If democracy is to come to the large modern company, the omnipotent CEO has to go.. Case’s second conclusion is that OBM companies are “companies of businesspeople.” Transparent companie

title” the executive director Graham Parker told Jennifer Higgs.6 A few

hours after the core team has met the full orchestra assembles to

rehearse In “the executive,” board and orchestra members may have

different roles – musicians may have administrative roles; staff members

may sit on orchestra committees “We try and mix it up as much as we

can,” says Parker Orpheus is tinkering constantly with its system

Richard Hackman, a Harvard Business School professor, was recently

appointed to the board (see Chapter 6) He is working with Orpheus to

improve integration, communications, and accountability Hackman

introduced Orpheus to the linking pin model where the team sits at the

center of a horizontal and vertical matrix, and groups radiate from it

Orpheus is the 2008 award winner at WorldBlu Inc., a design studio

founded by organizational democracy evangelist, Traci Fenton The

25-strong, 2008 WorldBlu List of Most Democratic Workplaces also

included a Fortune 500 group for the first time – DaVita, a leading U.S

supplier of dialysis services A company much admired by Fenton and

many other organizational democracy advocates is Semco Group, a

Brazilian supplier of industrial machinery It has a charismatic leader in

Ricardo Semler, but the CEO is elected As the principal architect of

Semco’s democratic system, Semler thinks he has too much power He

spends as much time writing books and spreading the gospel at business

schools and elsewhere, as he does at Semco The company, which before

the 2009 recession had recorded 14 years of uninterrupted,

double-digit growth, ran perfectly well without him for several months in early

2005 when he was recovering from a car crash (see box at the end of

this chapter)

The election of the company’s senior managers by employees, rather

than shareholders, is the crucial democratizing step There is no

avoiding it In The Democratic Enterprise, Professor Lynda Gratton

follows former London Business School colleague, Sumantra Ghoshal,

in assigning a key role to leaders in corporate reformations She says

that in the democratic enterprise “it is in the creation of a shared purpose

that the role of the leadership is most vital,” and that without the

containment of such a purpose people will “simply go their own way

and the organization rapidly becomes an adhocracy … the leaders’

personal philosophy pervades the company and their sense of purpose

articulates a common vision for the realization of freedom and choice.”

Gratton’s book is an excellent survey of the business benefits of a

demo-cratic workplace, but she advocates benign tyranny, rather than

democ-racy She doesn’t acknowledge the possibility that leaders are the

problem, not part of the solution.7

In their book The End of Management and the Rise of Organizational

Democracy,8 Kenneth Cloke and Joan Goldsmith take that crucial step

and advocate the election of CEOs by employees They also advocate

the replacement of hierarchies by what they call “heterarchies” in which

the employees “make decisions for themselves and one another

horizon-tally.” I approve fully of the sentiment and the shape, but in English

English, “heterarchy” means rule by an alien Companies are already

heterarchies, because in theory they’re ruled by their shareholders

Cloke and Goldsmith democratize leadership itself, by arguing that

it is a quality required at every level and that companies should try to

develop “ubiquitous, linking leadership.” This is similar to the

“context-specific” leadership developed by the Nhunggabarra in Australia tens of

thousands of years ago (see Chapter 6)

I have no quarrel with this kind of leadership, but it is not what most

people understand by the word If democracy is to come to the large

modern company, the omnipotent CEO has to go

In the political world tyrannies can be overthrown by revolutions

and replaced by democracies, but you cannot turn business tyrannies

into democracies overnight You have to take one step at a time as

Ricardo Semler did at Semco You have to nudge

Numbers that nudge

When I was doing my research on Gini coefficients for Chapter 4, it

occurred to me that companies wishing to establish reputations for

being fair organizations might consider publishing their own Gini

coef-ficients To save you leafing back let me remind you The Gini

coeffi-cient is a measure of inequality A coefficoeffi-cient of zero is perfect equality;

everyone in the population measured has the same income A

coeffi-cient of one is perfect inequality; one person has all the income Insofar

as able people think extremely high levels of executive pay are wrong,

unfair, or merely unfashionable in this day and age, they will be attracted

by a company with a Gini below the average for its sector

Numbers such as these can make a difference If a graduate has two

equally attractive job offers, he or she might choose the one from the

company with the lower Gini It would be easy to calculate the Semco

Gini, because the pay of every employee, including Ricardo Semler’s, is

an open book This was part of the democratization of Semco; the

opening up, the laying of cards on the table, an end to secrecy Most

writers on organizational democracy make much of the need for

open-ness or “transparency” as the modern parlance has it In conventional

companies the possession of information is closely linked to power The

higher up the hierarchy you are, the more you are allowed to know, and

vice versa Giving everyone access to the important numbers is a vital

step toward democracy

open-Book management

Giving everyone access to the critical numbers is called open-book

management (OBM) Ricardo Semler was an OBM pioneer So was

Jack Stack, CEO of Springfield ReManufacturing Corporation The

idea is that a company performs better when everyone involved knows

how it is performing It is also in tune with demands for openness in

our institutions, and a dislike of secrecy and obfuscation People are less

willing to be pawns in other people’s games and stories, and are more

financially sophisticated these days They have more skin in the business

game and have become more interested in the wealth creation process

The OBM evangelists argue that, if that interest is satisfied by opening

the books, employees will understand how their work contributes to

wealth creation, and more wealth will be created

But you can’t stop there “Opening the books” is opening Pandora’s

box It unleashes a host of new desires, hopes, and anxieties that can

initiate changes so profound the OBM company could soon become

unrecognizable

In The Open-book Management Experience John Case tells the tale of

Jack Stack’s experiment at Springfield ReManufacturing and of many

other companies that have implemented OBM.9 He reaches three main

conclusions The first is that it is pointless to tell people the whole,

unvarnished truth in a language that’s foreign to them It follows from

this that OBM implies an obligation to educate and explain, so that the

critical numbers disclosed are understood

Since the goal is to get people to work more effectively, and make

better decisions, OBM also requires a strong form of empowerment,

because it would be fruitless to help people understand how they

contribute without giving them responsibility for, and the freedom to

increase, their contributions Case’s second conclusion is that OBM

companies are “companies of businesspeople.”

Transparent companies, employing “businesspeople” are

risk-sharing companies, because employees who see the critical numbers

“moving south” know they will have to tighten their belts Their

know-ledge restrains them but, in return for their restraint in hard times, they

will feel entitled to more rewards when the numbers tell them the good

times have returned This is Case’s third conclusion OBM requires

employees to have “a stake in success,” because they will not feel they

own the critical numbers unless they own some of the value they

measure Case sees bonuses as “an integral part of the whole

manage-ment system [which are] expected, not only to motivate employees, but

to help them learn.” He says bonus plans should be “fair, generous and

comprehensible” and designed by employees But surely an

employee-designed bonus scheme would favor employees, at the expense of

share-holders? Apparently not “For reasons I don’t entirely understand,”

Case reported, “the opposite is more common.” This is indeed puzzling,

until one learns that most of the open-book companies Case studied are

owned in whole or in part by their employees When employees are

owners a miserly, employee-designed bonus scheme reflects people’s

preferred mix of income and capital appreciation

Employee ownership or part ownership is an implicit destination of

OBM, because equity can be seen as the capitalization of income from

bonus schemes In large companies in which employees cannot, in the

short term at any rate, own a significant proportion of the equity, and

the contribution of an individual has only a marginal impact on overall

performance, the performance benefits of OBM are likely to be less

evident than in small companies But insofar as OBM does improve

performance, there are two implications for large companies The first

is that small and medium-sized companies that adopt OBM will

outper-form their larger rivals, and so become more attractive to able people

The second is that large companies that seek the benefits of OBM

should review their bonus schemes

OBM bonus schemes are “fair, generous and comprehensible.”

Schemes that are confined to senior executives are unfair, they’re

usually extremely generous, but only to senior executives, and their

blend of salary-based bonuses and grants of options and restricted

stock make them incomprehensible to the average employee It is an

axiom of OBM that everyone contributes to company performance

The bonus schemes at most large companies implicitly deny this

obvious fact, and imply instead that only top executives, particularly

the chief executive, create value

A significant step toward democracy, and to a fairer distribution of

valued added, would be to put everyone on the same bonus scheme

and, as far as possible, to base the bonus of each employee on the

economic value he or she adds

measuring Ceo performanCe

It’s often said that you can’t measure the economic value added by

CEOs, because they’re members of the staff function, and the staff

function’s job is to consume value (and how!) supporting the line

func-tion All you can do is ensure that the interests of the staff are aligned

as closely as possible with those of shareholders

An implication of this argument is that if the value added by a CEO

personally, rather than employees collectively, could be measured, she

or he would not have to be paid so much (unless of course, she or he

was adding enormous, and measurable amounts of value Were I a

shareholder, I would be willing to take my chances on that)

I’m not aware of any attempt to measure CEO value added For

their part, CEOs are unlikely to see it as in their interests to partake in

such a study But, given the potential savings, it would surely be in the

interests of shareholders to explore the possibility

The obvious approach is to apply the activity-based costing method

that has revolutionized management accounting and ask each area of

the business – manufacturing, marketing, distribution, public and

investor relations, accounting, human resources, and so on – touched

by the CEO how much it would be willing to pay for the services he or

she has rendered Negative figures would be acceptable Some value

could be added to the total for strategic moves and balance-sheet

trans-actions such as acquisitions, but only insofar as they can be shown

subsequently to have created value

It would be useful for assessing the value added by the CEO in the

company’s strategic and other balance-sheet moves, and appropriate in

a company committed to openness and candor, if the board, the board

committees, and the executive committee were all required to publish

the minutes of their meetings

It wouldn’t be easy to calculate CEO value added and the result of

such a calculation would not be precise, but precision wouldn’t be

necessary A ballpark figure would do The objective is to bring some

proportion and clarity to CEO pay, so that both employees and

share-holders can be confident that taking as much as possible into account,

the CEO’s pay packet is reasonable

It’s entirely possible, of course, that an activity-based analysis of the

CEO’s value added will produce such a small number that the company

will decide it can do without a CEO

Redeeming the corporation

The dramatic events of the past two years or so in banking and in

busi-ness at large, offer an unprecedented and, hopefully, never to be

repeated opportunity, which should not be wasted, to take stock of our

economic arrangements and institutions

The large listed joint stock company is an enormously powerful and

successful institution and is, in large part, the creator of the modern

world If things had turned out differently, other forms of enterprise

might have done a better job, and might still do so in future, but the

corporation as we know it today has been and will continue to be for

the foreseeable future the main engine of world economic

develop-ment But although its achievements are all around us and its strengths

are formidable, it has serious weaknesses

I have argued in this book that it has recently become a liability for

liberal capitalism, because the huge sums of money it pays its top

execu-tives, which are not required for the efficient conduct of modern business,

are eroding the consensus on which the liberal capitalist system depends

Excessive executive pay was tolerated before the crash because the

system seemed to be working Now that those highly paid executives

running the system have turned out collectively to be reckless and

incompetent the trust invested in them has dissipated and the myth of

business leadership has been dispelled

As shown by the furor over the $165 million worth of bonuses that

were to be paid to executives of U.S insurance giant AIG, after it

received $152 billion of bailout cash, people are angry They feel badly

let down The least that they, as the ultimate owners of big business

(through pension funds and savings) had a right to expect from such

well-paid servants was prudence and competence They got neither,

because as the past two years have made abundantly clear, the CEO-led

system of corporate governance doesn’t select for such qualities

The danger, in these times of turbulence and anger, is that deeply

disillusioned and resentful voters will insist that the commanding

heights of their economies be taken into state ownership, and that the

liberal capitalist experiment be abandoned

To pre-empt such a backlash, the large listed company must reform

itself It must become freer, fairer, more open, more reasonable in its

dealings with its various constituencies, and more decent In its shape,

governance, and distributions of power and rewards, it must come to

resemble more closely the political system we call liberal democracy to

which it owes its freedoms

State ownership of our large companies is too drastic a remedy for

what ails big business Its poor record disqualifies it It would cost too

much in lost efficiency, dynamism, and the disciplines of competition

My prescription is decapitation; the removal of the institution’s head; of

the position of CEO The CEO-led system, in the power it gives to

individuals (untested during their climbs to the top for prudence and

competence), and the inequalities within companies and society at large

it creates, is the source of almost all the company’s own problems and

of the problems it creates

In this chapter I have suggested how such a decapitation might be

executed, so to speak, and proposed other steps companies can take to

make themselves more democratic

Democratic companies will be driven, not by the dreams and visions

of omnipotent CEOs, but by the interactions of interested and

self-confident employees empowered to make decisions and motivated by

fair rewards and their hunger for self-esteem, to be innovative and

entrepreneurial They will perform better than unreformed CEO-led

companies, because they will find it far easier to attract and keep able

people who want work to be, not a price they have to pay to be

them-selves outside work, but an interesting, challenging, and deeply

satis-fying part of their lives

We must move away from the current system, which John Rawls

called the “capitalist welfare state,” because it concentrates too much

power, wealth, and story in the hands of a small elite to allow the full

flowering of liberal principles We must create a new kind of liberal

capitalism Rawls proposed a “property owning democracy,” in which

ownership of wealth and productive assets is spread more widely, or a

“liberal socialist regime” in which political power is widely shared and

economic power is dispersed within companies, as when, for instance,

employees elect managers and own a significant proportion of their

company’s shares.10

Ordinary people in search of self-respect will be the sculptors of the

reformed system They will seek out organizations and forms of

associa-tion that don’t retain power, wealth, and story in the hands of a small

elite and, instead, allow each contributor to feel that he or she is being

fairly rewarded and is the author of his or her own story There’s no

reason why people should continue to be mere “extras” in the stories of

superstar CEOs They can be the authors of their own work narratives

and play significant roles in stories of enterprise with beginnings,

middles, and ends

1 Managing Across Borders: The Transnational Solution, Harvard Business Press, 2002.

2 The Individualized Corporation: A Fundamentally New Approach to Management,

Harper-Collins, 1997.

3 The Organization Man, Simon & Schuster, 1956

4 The Human Side of Enterprise, McGraw Hill, 1960.

5 The Open Society and its Enemies, Routledge, 1945.

6 Orpheus Chamber Orchestra embodies democratic principles Self-governing orchestra

empowers musicians, by Jennifer Higgs, Axiom News, October 28, 2008.

7 The Democratic Enterprise, Prentice Hall, 2005.

8 Jossey-Bass, 2002.

9 The Open-book Management Experience: Lessons from Over 100 Companies that Have

Trans-formed Themselves, Nicholas Brealey Publishing, London, 1998.

10 Justice as Fairness: A Restatement, Belknap Press, 2001

Semco’s steps to democracy

ricardo semler’s guru and principal ally in the democratization of semco was Clóvis

da silva Bojikian, a radical educator and admirer of a s neil’s summerhill school in

england they took it slowly

the first step was to respond to complaints about the cafeteria by asking employees to help improve it a group of employees ended up running it it was a

small step from there to let employees choose the color of their uniforms and the

paint on factory walls

the são paulo rush hour is notorious – semco employees spent hours in traffic jams travelling to and from work no problem they can set their own hours, and

travel at non-peak times skeptics within semco’s management warned of disaster,

but it worked fine, because employees sorted out schedules that suited them and

the factory.

it was another small step from setting their own hours, to setting their own pay

Benchmarks based on pay at 35 comparable companies were established and 10

percent was added to help reduce employee turnover everyone’s pay, including

semler’s, is published peer pressure produces differentials that are seen as fair it

was not a huge step from there to allow subordinates to appoint and review their

supervisors and ultimately for employees as a whole to elect the senior executives.

it was not as easy as all that, of course there were problems and arguments along the way and the whole democratization process took nearly five years But the

results, in terms of performance, speak for themselves.

Source: “ricardo semler Won’t take Control,” by Lawrence fisher, Strategy + Business,

issue 41, January 2006.

Index

A

Accenture 166

Acorn Computers 167–8

activity-based costing 59, 190

administrative coordination 52–5,

60

agency costs 10, 38, 45, 53, 54,

65, 81, 94, 97, 98, 111, 112,

117, 119

AIG 191

Andersen Consulting

See Accenture

Apache Software Foundation

138

ARM Holdings 167–70

Armstrong, Lord 67

artificial life 169

asset-skimming 92–5, 98

A T Kearney 167

B

Barclays Bank 184

Barnevik, Percy 179

Barrett, Matt 184

Bartlett, Christopher 178–82

Berle, Adolf 37, 62

Black-Scholes 84, 85, 95

Booz-Allen & Hamilton 166,

167

Branson, Sir Richard 26, 63, 90

Brimm, Michael 26–8

Broughton, Philip Delves 61

B-schools

See business schools

business schools 60, 61, 102, 107,

109, 113, 186 Buttrick, John 58

C

Canonical 137 capitalism entrepreneurial 62, 63, 66, 67, 131

family 62, 63, 67 financial 62, 63 investor 63, 99 managerial 60, 62, 63, 66, 67,

99, 131, 175 Case, John 188, 189 Catalyst 150

Catcher in the Rye 143

CEO -led company 8, 11, 17, 29,

120, 123, 124, 127, 135,

138, 139, 148, 163–7, 170,

171, 174, 175, 176, 185,

191, 192 pay, pay packet 1, 5, 6, 7, 10,

24, 45, 54, 63, 67, 69, 72, 78–86, 88–98, 100, 102,

104, 106, 110, 114, 117,

119, 143, 148, 159, 165,

174, 175, 182, 183, 184,

187, 190, 191 system 61, 105, 109–11, 113,

114, 117, 119, 132–5, 142,

149, 177, 181–3

Chambers, John 26

Chandler, Alfred 43, 44, 48, 51–6,

58, 60–7, 69, 71, 99, 124, 125,

127, 131, 163, 179

chief executive officer

See CEO

Chrysler 99, 162, 163

Clapham, Sir John 57

Clive, Robert 38, 42

Cloke, Kenneth 187

cloud computing 137

Coase, Ronald 52, 53,

complex adaptive systems 132,

133, 142, 170

coping classes

See Woods, Judith

corporate community 148, 149,

corporate purpose 96, 133, 145,

146, 147, 181, 186

corporate social responsibility

See CSR

corporate soul 148, 149

Cranfield University 150

Crystal, Graef 82, 85

CSR 147, 148, 150, 155

D

Dawkins, Richard 34

Deering, Anne 170, 171, 173,

174

Deloitte 123

Deming, Edwards 163

democracy 3, 9, 11, 17, 18, 20,

29, 48, 69, 71, 90, 118, 131,

149, 185–9, 191, 192, 193

democratization 20, 187, 193

de Quincey, Thomas 41

difference principle

See Rawls, John

distributive justice 24, 70, 71, 145

E

Eagly, Alice et al 154

Economic Policy Institute (EPI)

95, 96 economies of scale 162 English East India Company (EEIC), the 37, 38, 53 environment of evolutionary adaptedness

See EEA 8, 10, 43, 44, 52, 54,

55

F

Fels, Anna 153

Female FTSE Report, The 150

Fenton, Traci 186 Fink, Albert 125, 126 fitness landscape 129, 130 Follett, Mary Parker 154–6, 160, 165

Frank, Barney 81 Free Software Foundation 135,

136, 139 Frenier, Carol 156 Fukuyama, Francis 17, 18, 63

G

Gates, Bill 26, 90, 175

GE 96, 100, 101, 105, 114 Gekko, Gordon 89

General Electric

See GE

Gent, Sir Christopher 94 Gerstner, Louis 106, 126 Ghoshal, Sumantra 178, 179, 180,

181, 182, 186 Gilligan, Carol 159 Gini coefficient 72, 73, 74, 76, 187

in China 73–4

in the UK 75–7, 82

in the US 75, 82 Gini, Corrado 72 GNU 135, 136, 142 GPL 135, 137, 138