Anybody can spend the company’s money; job responsibilities are negotiated among peers and compensation is peer-based. It is a company that has dispensed with ‘management’ as conventionally understood, that is, a set of chosen people in whom decision-making is concentrated.
Does this make sense? Can it work? Well, Morning Star claims it has had double-digit growth in revenues and profits; the industry’s rate is 1%. It is said to have funded its growth entirely through internal resources. It says it is the most efficient tomato processor in the world.
One reason firms exist is that markets cannot coordinate amongst the sort of complex activities that are required in, say, a manufacturing operation. Within a firm, the coordination happens through a hierarchical structure. Those at the higher levels of the hierarchy direct and monitor the ones below. Morning Star defies this assumption.
The idea is not entirely novel. In the mid-1960s, Peter Drucker had propounded the idea of the modern organisation of ‘knowledge workers’ (distinct from manual workers) in which it would benecessary to reduce the levels of hierarchy. Drucker argued that people with highly developed skills or expertise can give their best only through self-motivation, not guidance from above. He forecast that with the rise of ‘knowledge workers’, firms would tend to become flatter. He was proved right.
Investment banks, which have a high concentration of knowledge workers, have very few levels. A large investment bank has hundreds of managing directors. A star trader could be designated managing director without having anybody report to him. However, while the number of levels has fallen steeply, few firms have been able to dispense with them entirely. Morning Star’s achievement is that it has been able to abolish hierarchy altogether and that too in a manufacturing context.
How does it all work? Who takes decisions, sets targets, reviews performance? The answer, it turns out, is: everybody. A key element in Morning Star’s model is what is called the Colleague Letter of Understanding (CLOU). Every employee negotiates his CLOU with all those affected by his work. This letter sets out what each employee is to accomplish in a given year. Similarly, the company’s 23 business units negotiate CLOUs with each other.
Can this model be replicated in a company with a lot more employees? Hamel thinks it can. He doesn’t mention this but there is a celebrated example of self-management in a company with a lot more employees. A Brazilian firm, Semco, has 3,000 employees, a turnover of over $200 million and has been growing at 20-30% every year.
Semco does have managers but employees have more freedom than elsewhere. They can choose their hours of work, decide their salaries and pick their bosses. Managers are anonymously evaluated every six months by their subordinates. Semco has practised this philosophy for 25 years now.
Ricardo Semler, the owner of Semco, has questioned the whole mystique of ‘leadership’, which implies that the ability to take decisions or lead is a gift that a few people have; those down the line must look up to these great men and women for guidance.In reality, leadership qualities are to be found at alllevels. And when decision-making is spread across more people, you end up getting better results.
For all the talk of ‘empowerment’, it is hard to see top management in hierarchical companies embracing any of this. Those at the top do not want to lose power and control. Besides, we are all conditioned on the notion of ‘moving up’ in life. For the most part, companies still cling to the command-and-control model originally borrowed from the army. Even the mannerisms of corporate bosses mimic the ways of the army: the stiff demeanour, the curt nod, the abrupt dismissal.
This presents us with a jarring contradiction. Modern democracies harbour within themselves corporate organisations that are fundamentally undemocratic in character. The prevailing corporate model is justified on grounds of performance. And yet, as Morning Star and Semco have shown, it is possible to resolve the contradiction while delivering performance.