Bryan Fenech – Founder and Director

Building the Organisation of Tomorrowwww.oot.org

Why organisations need to fundamentally change

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Contents

Introduction

Key Characteristics of the Modern Organisation

Critique of the Modern Organisation

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INTRODUCTION

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Introduction

• This presentation describes and critiques the key characteristics of today's dominant organisational form – – Hierarchy– Division of labour– Bureaucracy– Exclusion of market forces– Separation of ownership and control, and– Legal fictions of the corporate person and the

corporate veil (limited liability and other protections)

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Introduction

• The presentation highlights how, due to the combination of these characteristics, the business and government institutions upon which individuals and society depend are increasingly failing their customers, employees, owners, investors and other stakeholders

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Introduction

• Specific issues explored in this respect include:– Degradation of organisational performance

and destruction of value– Exploitation and inequality, environmental

damage, and animal cruelty– Distortion of markets and manipulation of

democratic processes

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Introduction

• This topic involves an exploration of our assumptions about the intersection and relationship between– Individuals (cognition, autonomy, self

organisation, etc.) and institutions (culture, rules, control, etc.)

– Markets and organisations

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KEY CHARACTERISTICS OF THE MODERN ORGANISATION

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The standard organisational model

• Our modern conception of ‘organisation’ is a highly complex, dynamically emergent coalescence of ideas and assumptions over the last 200 years

• While there are individual organisational differences, these tend to be variations on consistent themes

• We can deconstruct this standard organisational model down into 6 key elements

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Contents

Hierarchy

Division of Labour

Bureaucracy

Exclusion of Market Forces

Separation of Ownership and Control

The Corporate “Person” and “Veil”

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Hierarchy

• Hierarchy theory • Characteristics of hierarchy• Hierarchy as an organising principle• Discussion

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Hierarchy theory

• Hierarchy theory is a subset of general systems theory

• Herbert Simon (Economist), Ilya Prigogine (Chemist) and Jean Piaget (Psychologist)

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Characteristics of hierarchy1

• Levels in a hierarchy are populated by entities whose properties characterise the level in question

• The relationship upwards between levels is asymmetrical

• Applied to organisations, upper levels are above lower levels by reasons of being the context of or offering constraint to lower levels

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Hierarchy as an organising principle

• Simon in The Architecture of Complexity (1962) proposed hierarchy as a universal principal of the structure of complex things that emerges inevitably because hierarchies are stable2

• Chandler in Strategy and Structure (1962) asserted that hierarchy is selected for due to the need for clear lines of authority3

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Discussion

• Are organisations engineered or the result of adaptation and selection?

• To what extent are stability and clear lines of authority historically contextual?

• In the case of organisations, does the emergence of the internet and related innovations in communications technologies change things?

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Division of labour

• Division of labour theory• Characteristics of division of labour • Division of labour as an organising

principle• Discussion

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Division of labour theory

• Division of labour theory is a subset of labour economics theory

• Adam Smith (Pioneer of Political Economy), Karl Marx (Political Philosopher), Émile Durkheim (Sociologist), Friedrich Hayek (Economist)

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Characteristics of division of labour

• Specialisation and concentration of labour around specific tasks and roles – c.f., a craftsman who is responsible for the entire production process of goods and services

• Specialisation and concentration increases as the environment becomes more complex

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Division of labour as an organising principle

• Smith in The Wealth of Nations (1776) asserted that the division of labour increases productivity and eliminates long training periods required for craftsmen4

• Durkheim in The Division of Labour (1893) asserted that focusing workers on their single subtasks leads to more throughput than would be achieved carrying out the original broad task5

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Discussion

• To what extent are the improved productivity and throughput effects of the division of labour contextual to economic conditions?

• Are the same effects likely to be achieved, or even desirable, in an environment where mass customisation has been supplanted by a need for differentiation through creativity and innovation?

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Bureaucracy

• Bureaucracy theory• Characteristics of bureaucracy• Bureaucracy as an organising principle• Discussion

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Bureaucracy theory

• Bureaucracy theory is a subset of government theory

• Karl Marx (Political Philosopher), John Stuart Mill (Political Scientist), Max Weber (Sociologist)

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Characteristics of bureaucracy

• System of administration conducted by trained professionals according to fixed calculable rules ‘without regard for persons’

• Sine ira ac studio – without anger or passion

• Systematic and meritocratic but not representative

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Bureaucracy as an organising principle

• Weber in Economy and Society (1922) argued that bureaucracy constitutes the most efficient and rational way to organise human activity and is necessary to maintain order, maximise efficiency and eliminate favouritism6

• Mill in Representative Government (1861) noted bureaucracies’ accumulation of experience and knowledge7

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Discussion

• How important is formality over interpersonal relationships in an age of collaboration?

• How important is conformity and predictability in an age of creativity?

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Exclusion of market forces

• Exclusion of market forces theory• Characteristics of excluding market

forces• Exclusion of market forces as an

organising principle• Discussion

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Exclusion of market forces theory

• Organisational exclusion of market forces theory is a subset of market economics theory

• Ronald Coase (Economist)

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Characteristics of excluding market forces

• Organisations arise when it becomes cheaper to gather people, tools and material ‘in-house’, rather than going out to find the best deal every time labour or materials are required

• The main objective of establishing an organisation is to avoid the costs of the using the price mechanism

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Exclusion of market forces as an organising principle

• Coase in The Nature of the Firm (1937) argued that with respect to internal allocation of resources, market forces are eliminated and exchange transactions are substituted with bureaucratic direction8

• For example, if organisations operated internally under market forces the cost of frequently re-negotiating many contracts would be prohibitive

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Discussion

• To what extent is the balance of organisation and market transaction costs contextual to economic conditions?

• What impact has technology had on these transaction costs?

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Separation of ownership and control

• Separation of ownership and control theory

• Characteristics of separation of ownership and control

• Separation of ownership and control as an organising principle

• Discussion

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Separation of ownership and control theory

• Separation of ownership and control theory is a subset of intuitional economics

• Irving Fisher (Economist), Adolf Berle (Economist), Gardener Means (Economist), William Edwards Deming (Statistician)

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Characteristics of separation of ownership

• The separation of ownership (shareholders) and control (management) – c.f., owner run businesses

• As capitalism developed and shareholders became more numerous and diverse, separation of control became an essential element of efficient corporate governance

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Separation of ownership as an organising principle

• Fisher in The Nature of Capital and Income (1906) articulated the presumption that profit is the only thing shareholders want (or would serve their diverse interests)9

• Deming in Out of Crisis (1986) described how shareholders (principles) control management (agents) through a raft of incentives and supervisory schemes10

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Discussion

• If the most valuable organisational asset is knowledge and knowledge exists tacitly in people’s heads, and embedded in social relationships, just what is it that shareholders ‘own’ and that managers ‘control’?

• Is maximising profit the best way to serve the diverse interests of shareholders today?

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Corporate ‘person’ and corporate ‘veil’

• Corporate ‘person’ and corporate ‘veil’ theory

• Characteristics of corporate ‘person’ and corporate ‘veil’

• Corporate ‘person’ and corporate ‘veil’ as organising principles

• Discussion

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Corporate ‘person’ and ‘veil’ theory

• Corporate ‘person’ and corporate ‘veil’ are legal fictions developed in corporate law

• Salomon v Salomon [1897], Lord Denning in DHN Food Distributors v Tower Hamlets [1976]

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Characteristics of corporate ‘person’

• There is an assumption that the corporation is a ‘legal person’ separate from its shareholders

• It is exceptional for courts to go beyond the corporate ‘veil’ and hold shareholders liable for the actions of the corporation

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Corporate ‘person’ as an organising principle

• Shareholders (principles) cannot be held liable for the acts of management (agents) unless there is fraud

• Individual subsidiaries within a group are treated separately and the parent company is not liable for the debts and insolvency of the subsidiaries

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Discussion

• Does limited liability make sense where management is tightly controlled by powerful blocks of shareholders?

• Are corporations ‘grants of monopoly privilege’?

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CRITIQUE OF THE MODERN ORGANISATION

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Organisations failing stakeholders

• The business and government institutions upon which individuals and society depend are increasingly failing their customers, employees, owners, investors and other stakeholders

• This is not the result of a particular defect that is easily cured but the flawed nature of the standard organisational model

• The standard model has 3 categories of negative impact

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Contents

Degrading Organisational Performance

Exploiting People, Environment and Animals

Manipulating Markets and Democracy

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Degrading organisational performance

• Researchers have noted the impact of organisational form on the following aspects of organisational performance – Capacity to innovate (Dougherty11,

Leonard-Barton12, Barley13)– Enacting strategy (Davies14)– Becoming more entrepreneurial (Miles et

al15)– Constructing new knowledge (Wenger &

Snyder16, Dovey & White17)

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Degrading organisational performance

– Meeting customers' needs more effectively (Zuboff & Maxmin18)

– Developing of trust and other social capital resources (Dovey & Fenech19)

– Transformational capacity (Dovey & Fenech, ibid)

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Degrading organisational performance

• Principles– The impersonal rigidity of bureaucracy is

inconsistent with the development of social capital resources like trust

– The segregation and alienation of people through the division of labour is inconsistent with the need for collaboration and knowledge construction activities

– Hierarchical decision making kills trust and is inconsistent with autonomy

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Degrading organisational performance

– Bureaucratic rules sustain dysfunctional practices and impedes change

– The primacy of the profit motive undermines development of loyalty and other forms of social capital

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Exploitation and inequality

• The primacy of profit over all else leads to perverse outcomes for people, the environment and animals

• Hierarchy prevents resistance from being voiced and actioned

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Exploitation and inequality

• Getting to the top – Alan de Botton16

• Anxiety culture: work hell17

• Zuboff & Maxim op cit examples• Naomi Klein18 examples• Worldcom, Enron, the GFC• Pharmaceutical companies over

servicing in the vet and medical industries

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Distortion of markets and democracy

• “One of the great paradoxes of our time is that it is totalitarian, centrally planned organizations, owned by outsiders, that are providing the material wherewithal of the great democracies” – Charles Handy19

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Distortion of markets and democracy

• While free markets are generally accepted as being superior to centrally-planned economic systems, the workings of most business and government organizations still resemble Soviet-era command and control characterized by central planning, hierarchical control systems and rigid organization of resources and assets within silos

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Distortion of markets and democracy

• The setting of executive remuneration is transparent only after the event, is carried out by the parties that benefit, and there is only token linkage to business results and value

• Such transactions meet the definition of cabal behaviour and collusion and are anti competitive, a relic of the 19th century origins of corporate law

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Distortion of markets and democracy

• Who controls the world?• See James B Glattfelder20

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Distortion of markets and democracy

• Hierarchical control makes corporations a tool of control for elites

• Manufacturing consent through the media21

• Barley22 highlights 3 ways in which powerful corporations manipulate democracy – promoting legislation that benefits them rather than the public good, capturing regulatory agencies, and privatisation

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Distortion of markets and democracy

• Examples– Carbon policy– Taxation policy and corporate welfare– Current attacks on independence of ABC

and BBC

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Visit www.oot.org

Bryan FenechFounder and Director About www.oot.org

• www.oot.org is the website of Building the Organisation of Tomorrow, a networked community and set of resources to assist leaders to meet the imperative for organisational renewal

• All institutions are under increasing pressure to adapt to 21st century technological and socio-economic forces. Successful leaders need appropriate frames of reference to manage these processes of transformation; however, such frames of reference are rare

• Find articles, presentations, book reviews, and other resources

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References

1. Allen, T. F. H. ‘A Summary of the Principles of Hierarchy Theory’ http://www.botany.wisc.edu/allenlab/AllenLab/Hierarchy.html

2. Simon, H. A. (1962) ‘The Architecture of Complexity’, Proceedings of the American Philosophical Society, 106(6), 467-482

3. Chander, Jr., A. D. (1962) Strategy and Structure: Chapters in the History of the Industrial Enterprise. Cambridge, MA: Harvard University Press

4. Adam Smith (1776) An Inquiry into the Nature and Causes of the Wealth of Nations

5. Émile Durkheim (1893) The Division of Labour in Society6. Max Weber (1922) Economy and Society7. John Stuart Mill (1861) Considerations of Representative Government8. Coase, R. H. (1937) ‘The Nature of the Firm’, Economica, 4(16), 386-

4059. Fisher , I. (1906) The Nature of Capital and Income10. Deming, W. E. (1986) Out of the Crisis, MIT Press

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References

11. Dougherty, D. (1999) ‘Organizational Capacities for Sustained Product Innovation’, Advances in Management Cognition and Organizational Information Processing 6: 79-114

12. Leonard-Barton, D. (1995) Wellsprings of Knowledge: Building and Sustaining the Sources of Innovation. Boston: Harvard Business School Press

13. Barley, S. (1986) ‘Technology as an Occasion for Structuring’, Administrative Science Quarterly 31: 78-109

14. Zuboff, S. & Maxmin, J. (2002) The Support Economy: Why Corporations are Failing Individuals and the Next Episode of Capitalism. New York: Allen Lane.

15. Dovey, K. A. & Fenech, B. J. (2007) ‘The role of enterprise logic in the failure of organisations to learn and transform’, Management Learning 38(5), 573-590

16. de Botton, A. (2004) Status Anxiety, Penguin Books, London, p 9917. http://www.anxietyculture.com/workhell.htm18. Klein, N. (200), No Logo, Flamingo Books, London, p 486

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References

19. Drucker P. F., Dyson E., Handy C., Saffo P. and Senge P. M. (1997) ‘Looking Ahead: Implications of the Present’, HBR, 75(5):18-32

20. http://www.ted.com/talks/james_b_glattfelder_who_controls_the_world.html

21. Herman, E. S. and Chomsky, N. (1988) Manufacturing Consent, Pantheon Books, New York

22. Barley, S. (1986) ‘Technology as an Occasion for Structuring’, Administrative Science Quarterly 31: 78-109.