More than 25 years ago, William Sahlman wrote the HBR article “Why Sane People Shouldn’t Serve on Public Boards,” in which he compared serving on a board to driving without a seatbelt, that it was just too risky—to their time, reputations, and finances—for too little reward.
Board service has always been very demanding. When Warren Buffett retired from Coca-Cola’s board in 2006, he said he no longer had the time necessary. When you consider all of the retreats, travel, reading, meeting prep time, transactions, and committee meetings involved, it is a wonder anyone serves at all.
So why would a busy executive agree to sit on a board? Why is there is a cottage industry of executive search firms focusing on “reverse board searches,” where they proactively work to place executives on outside corporate boards? What do executives gain from serving on boards?
This question was at the heart of a recent study we conducted that is forthcoming at the Academy of Management Journal. In an effort to explore executives’ motivations for serving on boards, we looked at how board service is evaluated in the executive labor market. Specifically we studied whether or not board service increased an executive’s likelihood of receiving a promotion, becoming a CEO, and/or receiving a pay increase.
We hypothesized that being a board director would help an executive in two main ways: First, sitting on a board serves as an important signal or “seal of approval,” for an executive. It means that other people think this executive has potential and value as a result of being selected to serve on a board. Second, board service is an avenue for an executive to gain access to unique knowledge, skills, and connections, so firms actively use external board appointments as a way to groom and develop executives. As Mary Cranston, former CEO and Chairman of Pillsbury, LLP said in an interview, “Being on that board really helped me develop as a CEO because I had another CEO to watch. It was an incredible leadership school for me. On a board you’re together a lot, and you’re working on problems together and you have a shared fiduciary duty, so it creates very tight bonds of friendship.” Similarly, Sempra CEO Debra L. Reed has also said that sitting on the board of another company is “better than an M.B.A.”
To test our idea that board service would help advance the careers of executives, we created a sample of roughly 2,140 top executives in S&P 1500 firms from 1996-2012. We matched executives who were serving on boards with executives at similar firms and with similar job profiles who had never served on a board. We found that serving on a board increases an executive’s likelihood of being promoted as a first-time CEO to an S&P 1500 firm by 44%–and even if they weren’t promoted, we found that serving boosts an executive’s subsequent annual pay by 13%.
For instance, executive Glenda Jane Flanagan joined the board of Credit Acceptance Corp. in 2004, and in 2005, her total compensation from her home firm, Whole Foods Market Inc., increased by over $300,000. And consider the example of Jeffery W. Yabuki, who was the COO of H&R Block Services Inc in 2003. In 2004, he joined the board of Petsmart Inc., and later that of MBIA Inc. Just two years later, Yabuki was appointed the CEO of Fiserv, a Fortune 1000 firm. It appears that board service directly contributed to his promotion.
So what do these findings mean for today’s boards of directors and aspiring CEOs? The evidence shows that board appointments increase an executive’s visibility and give him/her access to unique contacts and learning opportunities. Further, these opportunities translate into tangible economic benefits, specifically promotions and raises, which help explain why a sane person would choose to sit on a board.
Further, our findings suggest that if firms are looking for external talent, looking at which executives have received board appointments in their home firm or at other firms is a strong signal that these leaders have potential. This finding is important as hiring external CEO candidates is becoming more common, CEO turnover is on the rise, and the majority of newly appointed CEOs have not previously served as CEOs. Ultimately board service is a key professional development tool in grooming potential CEOs that executives and boards alike are beginning to recognize and value.
Finally, our findings have implications for firms seeking new board members. Following the Sarbanes-Oxley Act, which was passed in 2002 and created a number of new governance rules for firms as well as stricter penalties for governance misconduct, the number of current CEOs willing to serve on outside boards has dwindled. In part, the workload of boards has sharply increased, so serving offers limited benefits relative to the risk endured by current CEOs. Further, many companies have also created rules limiting the number of external board seats that their CEOs can fill, which has reduced the supply of CEOs available to serve as directors.
To fill this void, firms may look to the executive ranks below the CEO level. Our research suggests that these individuals may be motivated to join outside boards to reap the benefits that increase their career trajectories.
The technology most likely to change the next decade of business is not the social web, big data, the cloud, robotics, or even artificial intelligence. It’s the blockchain, the technology behind digital currencies like Bitcoin.
Blockchain technology is complex, but the idea is simple. At its most basic, blockchain is a vast, global distributed ledger or database running on millions of devices and open to anyone, where not just information but anything of value – money, titles, deeds, music, art, scientific discoveries, intellectual property, and even votes – can be moved and stored securely and privately. On the blockchain, trust is established, not by powerful intermediaries like banks, governments and technology companies, but through mass collaboration and clever code. Blockchains ensure integrity and trust between strangers. They make it difficult to cheat.
In other words, it’s the first native digital medium for value, just as the internet was the first native digital medium for information. And this has big implications for business and the corporation.
Much of the hype around blockchains has focused on their potential to fundamentally change the financial services industry – by dropping the cost and complexity of financial transactions, making the world’s unbanked a viable new market, and improving transparency and regulation. Indeed, it is already having a big impact on that sector. However, our two-year research project, involving hundreds of interviews with blockchain experts, provides strong evidence that the blockchain could transform business, government, and society in perhaps even more profound ways.
In the early days of the web, many management thinkers, present company included, speculated that the internet would reduce companies’ internal and external transaction costs, especially the cost of search, coordination, and communication. Surprisingly, however, the internet had only a peripheral impact on corporate architecture, falling short in materially dropping many transaction costs in business.
As we enter the second generation of the internet, which focuses on value as well as information, blockchains may radically drop many transaction costs. For example, a global searchable database of all transactions would dramatically lower the costs of search. Smart contracts (software programs that self-execute complex instructions) on blockchains will plummet the costs of contracting, enforcing contracts, and making payments. Autonomous agents (bundles of smart contracts acting like rich applications) on the blockchain hold the promise of eliminating agency and coordinating costs, and can perhaps even lead to highly distributed enterprises with little or no management.
Consider the music industry, where intermediaries capture nearly all the value and artists get paid last. Now, companies like Mycelia, founded by Grammy-winning artist Imogen Heap, have developed intelligent songs with smart contracts built in, which enable artists to sell directly to consumers without going through a label, financial intermediary, or technology company. This means that royalties and licensing agreements execute automatically and instantly—and artists get paid first. Spotify, Apple, Sony Music and other massive media companies stand to lose or gain depending on how quickly they embrace this technology.
Blockchain technology can also take networked business models to a new level by supporting a whole host of breakthrough applications: native payment systems that run without banks, credit card companies, and other intermediaries will cut cost and time from transactions. Reputation systems built on social and economic capital and controlled by individuals, rather than by intermediaries like rating agencies and credit rating services, will change the dynamic between consumers and companies. Trustless transactions, where two or more people need not know nor trust each other to do business, will be feasible. There are staggering implications beyond financial services.
While we’re only starting to see the possibilities of the blockchain, we expect these areas to be the first to experience a profound impact:
Solving the problem of IP in a digital age.
During the first generation of the internet, many creators of intellectual property were not properly compensated. Musicians, playwrights, journalists, photographers, artists, fashion designers, scientists, architects, and engineers were not only beholden to record labels, publishers, galleries, film studios, universities, and large corporations (vestiges of the pre-digital age) —these inventors now also had to deal with digital piracy that became possible on the web.
Blockchain technology provides a new platform for creators of intellectual property to get the value they create. Consider the digital registry of artwork, including the certificates of authenticity, condition, and ownership. A new startup, Ascribe, which runs on the blockchain, lets artists themselves upload digital art, watermark it as the definitive version, and transfer it, so similar to bitcoin, it moves from one person’s collection to another’s. The technology solves the intellectual property world’s equivalent of the double-spend problem better than existing digital rights management systems; and artists could decide whether, when, and where they wanted to deploy it.
Creating a better sharing economy.
Most so-called sharing economy companies are really service aggregators. They aggregate the willingness of suppliers to sell their excess capacity (cars, equipment, vacant rooms, handyman skills) through a centralized platform and then resell them to users, all while collecting a cut off the top and valuable data for further commercial exploitation.
Blockchain technology can provide the suppliers of these services a means to collaborate that delivers a greater share of the value to them. Just about everything Uber does could be done by smart agents on a blockchain. The blockchain’s trust protocol allows for cooperatives, or autonomous associations, to be formed and controlled by people who come together to meet common needs. All revenues for services, except for overhead, would go to members, who also control the platform and make decisions.
Opening up manufacturing.
3D printing is proving to be another revolutionary technology that is moving manufacturing closer to users and bringing new life to mass customization. But today, makers still need centralized platforms to sell their wares and have trouble protecting the IP of their creations. With blockchain, data and rights holders could store metadata about any substance, from human cells to powered aluminum, on the blockchain, in turn opening up the limits of corporate manufacturing while also protecting intellectual property. New markets could enable buyers and sellers to contract more easily in an open market.
The so-called Internet of Things will need blockchains to manage ultimately trillions of daily transactions. Traditional financial services companies cannot manage micropayments and settle payments, such as when a factory light purchases power from a public power auction. The Internet of Everything needs a Ledger of Everything.
Changing enterprise collaboration.
Today, collaboration tools are changing the nature of knowledge work and management inside organizations. But there are clear limitations to today’s suites of tools, as we still need central intermediaries to establish trust and coordinate much of the capability. This creates an opportunity for blockchain-based systems. For example, if every employee had their own elaborate profile, which they owned and controlled, employees and companies would be able to keep their data, rather than give it to large social network companies. If current development projects, such asEnigma, being run out of MIT, are any evidence, blockchain social networks will have dramatically richer and more customizable functionality, where data is protected and consumers empowered, compared to incumbents. Existing vendors will either face disruption or embrace blockchain technologies to deliver much deeper capability to their customers.
In the mid-1990s, smart managers worked hard to understand the internet and how it would affect their businesses. Today, blockchain technology is ushering in the second generation of the Internet, and if companies don’t want to get left behind, they’ll need to dodge the Innovator’s dilemma and disrupt from within.
A corporate co-worker friend used to complain about the dirty looks he got sitting in his office reading The Wall Street Journal. As the corporate media relations manager, he was charged with the responsibility of knowing current industry trends, responding to business publicity developments and personally handling stockholder relations. That duty required keeping up to date on financial news so he could respond appropriately with his subsequent communications; but he appeared “lazy” to others. They judged without full knowledge, letting an impression based on false premises bias their assessments.
Passersby disapproved of his apparent neglect ofImportant Business (whatever that means). Many suit-wearing people found in stiff-necked corporate headquarters seem to jump to conclusions based on quick superficial judgments. After all, anyone with an office in the C suite must be focused, intense and harried … right? Well, such self-important executives certainly expect their peers to be seen acting a certain way in order to be deemed worthy. It is not enough to be effective; you must also LOOK busy.
Arriving early and leaving late in order to be witnessed “working” on site might be passé in this era of remote access and virtual office relationships, but the old attitudes about appearances trumping reality still linger in many organizations … and are increasingly reflected in labor laws. As discussed before, American employers face increased pressures to substitute the superficial external accidents (in metaphysical terms) of work for the fundamental essential necessities that create economic justifications for compensation.
Government prefers that wages should be decoupled from productivity output and based on process inputs like time instead. That kind of thinking can usually be ignored when it is merely theoretical (unless you are deeply immersed in transactional communication or philosophical debates). But when the context is a rule controlling the compensation element of human resource management, it demands our close attention.
What counts for worker compensation is an important question. Modern management theory has emphasized results produced, but the American regulations governing worker payments require (with limited exceptions) that remuneration be rationed by time spent rather than related to the production generated from that work time. Business values work results; government insists pay be based on time spent working. When regulators order employers to ignore results in favor of measuring methods, it creates a dramatic dissonance in occupational job evaluation priorities – and perhaps even in worker behaviors.
This resonates in certain cultures where compensation is based on behaviors rather than on objective productivity. In some societies:
· how something is done is more important than what is accomplished;
· external trappings outweigh essential elements;
· academic theory displaces practical experience;
· style takes priority over substance;
· and appearance trumps reality.
Those are not the principles found in the reward programs that have successfully created the major economies of the world. Cultures that place primacy on input methods over output results tend to flounder and struggle in their futile attempts at prosperity. Similarly, enterprises that value worker inputs more than outputs find it difficult to survive. Managers who routinely confront these issues understand what is at stake. Evaluation concepts are relevant to business decisions like what skills are needed for mission accomplishment, how individual employee performance is evaluated for adequacy and what is required for correction/improvement.
Take a moment to consider what we value, because it is not always what we pay for. Have we lost sight of where we want to go? Can we find our direction any more?
Boards Aren’t the Right Way to Monitor Companies, less control, more advice
One of the key functions of a board of directors is to oversee the CEO to ensure that shareholders are getting the most out of their investment. This idea has led to regulation such as the Sarbanes-Oxley Act (2002), as well as requirements by the NYSE and NASDAQ that boards have a majority of independent directors and that members on the audit committee have financial expertise. Such rules rest on the premise that if we can just structure the board properly, management misconduct can largely be prevented. But is this a realistic expectation for directors? Maybe not.
Over the past few years there has been a growing gap between what shareholders and regulators expect of boards and what academic research shows they are capable of. For instance, consider what it means to be a director of a company like General Electric. GE states, “The primary role of GE’s Board of Directors is to oversee how management serves the interests of shareowners and other stakeholders.” However, GE’s annual revenues last year were $117 billion, and it had over 300,000 employees. The company provides services in a myriad of industries, such as health care, water treatment, aviation, and financing.
While we are not aware of any instances that demonstrate particularly poor monitoring by GE’s board members, this example does illustrate the complexity and sheer amount of information that directors of large firms have to deal with. Do we really expect that part-time directors who attend approximately 13 meetings a year are going to be able to understand GE’s businesses in such depth that they can vigilantly evaluate potential actions and determine which ones are good for shareholders?
This question prompted us to conduct a study, which we recently published with our coauthor Ruth Aguilera in the Academy of Management Annals. Analyzing nearly 300 research articles that examined the effectiveness of board monitoring, we came to the conclusion that it is unreasonable to expect boards to be able to do an effective job at ongoing monitoring. We show that for most boards there are significant barriers at the director, board, and firm level that prevent them from being effective monitors.
One of the barriers that we identify and discuss at the director level is outside job demands. Consider that many directors who sit on boards hold senior management positions at other firms, and some sit on the boards of multiple companies. For example, Marijn Dekkers, who served as the CEO of Bayer, is also the chair of Unilever, an independent director on GE’s board, president of the German Chemical Industry Association, and vice president of the Federation of German Industry. Many directors have similarly demanding positions at firms other than the one they serve as a director. Given the large demands placed on these individuals, how do they have enough time to vigilantly protect shareholder interests?
A potential barrier at the board level is that it is often considered improper for directors to become too involved in checking the day-to-day operations of a firm, even if they have the time and will to do so. Most boards have strong cultures that promote deference to the CEO. Consequently, this makes directors feel that their job is not to directly challenge the CEO,but instead to ensure that the CEO is performing adequately, and if not, to find someone who can. In addition, there is evidence that boards suffer from many of the same group decision-making biases as other work groups, and the infrequency with which boards meet can make these dysfunctional group dynamics an even bigger issue.
Firm size and complexity create barriers at the firm level. Is it realistic for a limited number of mostly part-time directors to understand the inner workings of today’s enormous firms? Especially when the firms themselves employ hundreds, if not thousands, of accountants and also hire outside companies to double check their employees? While each firm’s board has an audit committee that a few directors sit on, it is unreasonable to expect that in general they can spot a mistake that has not already been found by an outside auditing firm.
Taken together, much of the research we reviewed shows that these barriers are so prevalent and significant that consistent monitoring just isn’t very likely. Even when boards are filled with capable, motivated directors, we believe that there are simply too many barriers that prevent them from effectively protecting shareholders. In order to gain the full value from a board, we believe that shareholders and regulators need to focus on what boards can do, and then recalibrate their expectations.
First, we need to stop blaming boards for every failure. Too often the press, shareholders, and legislators blame corporate governance failures on directors, suggesting are unmotivated or unwilling to do their job properly. This was illustrated in 2012 when Groupon’s board came under fire for the company revising its earnings. JPMorgan Chase directors were similarly criticized for not preventing a $6 billion trading loss in the company’s investment office back in 2013.
Boards can do a better job in some cases, but these types of criticisms are often misguided. We have found that most directors are hardworking and capable — they’re just placed in a context that makes it virtually impossible for them to do what is expected of them.
Second, we need to focus more on boards’ ability to provide expert advice to CEOs based on their significant knowledge and experience. Board members often are able to provide insights that top executives may not have considered. Going back to GE’s board, most of the directors have expertise in a specific industry and can therefore draw on that experience to connect managers to external resources and knowledge that can benefit the firm. In addition to providing expert advice, boards can take a much more active role in guiding firms during times of crisis, such as when a CEO is being replaced, when the company is in financial distress, or when there is a significant merger or acquisition under consideration.
Third, if shareholders and regulators insist that boards must monitor, then we need to do a better job of removing the barriers in their way. For instance, if external job demands make it impossible for a director to devote enough time and mental energy to their duty as a director, perhaps we need to change our perception that the best directors are active CEOs of other firms. Maybe we also need to work to promote cultural change within boards through increased sharing of information and by using technology to allow them to meet more frequently.
Boards can and do play an important role in the success of companies. Instead of criticizing them for not meeting impractical expectations, we should value them sharing knowledge, providing advice, and lending legitimacy to firms by virtue of their reputations in the industry.
For Corporate Ethics you Can’t fill Boards’ meeting just with Compliance
As Aristotle famously said, “We are what we repeatedly do. Excellence, therefore, is not an act, but a habit.” Virtues in turn permeate the broader organizational culture and define “the way things are done around here.” That’s a force that’s a lot stronger than a narrow focus on following the rules.
At companies across the globe, the layers of compliance mechanisms are growing. At first blush this seems to make sense: Perhaps the most obviously straightforward method of preventing unethical or damaging behavior is increasing the number of rules designed to curtail it. However, one of the more unsettling and unintended consequences of a singular focus on ethics-as-compliance is a checkbox mentality that gives the illusion of reducing risk without really doing so. Moreover, unless an organization is careful, a compliance-focused approach to eliminating unethical behavior can stunt a company’s efforts to innovate and to take intelligent risks.
So what can a company do to excel ethically? Instead of focusing on the poor choices you want employees to avoid, focus on the positive virtues you want them to exhibit.
Plato emphasized a virtue-based system of ethics 2,400 years ago in his Academy. The philosopher believed that virtues were best encouraged through questions and discussions rather than through statements and proclamations. In other words, we learn ethics in conversation with others.
So rather than getting together with senior managers to craft a “values statement,” corporate leaders should instead foster a series of structured conversations between leaders at all levels and their teams. The goal of these conversations should be to develop a common language to help frame examples of how people live out the organization’s values or classical virtues. This is inherently a social process — virtue is learned, not inherited. Leaders are already teachers of their culture, whether they are aware of it or not, so they should ask themselves how they can teach it better.
Here are questions for each of the seven classical virtues that companies can use to shape these conversations and shift their focus from complying with the rules to excelling ethically.
Trust: confidence in one another.
When has trust made us faster and more agile?
How can we restore trust?
At our best, how do we earn and deepen trust?
Compassion: an understanding of another’s challenges.
How does compassion support our business goals?
How does compassion increase engagement?
When have acts of compassion improved our business results?
Courage: strength in the face of adversity.
When have you witnessed courage in our company?
Who is effective at encouraging people to be courageous?
How can we help people to be more courageous?
Justice: a concern for fairness.
As a company, when did we go out of your way to help a coworker?
How can we further empower our people so they are more engaged in setting their own performance criteria?
When have we been our best in serving the needs of each of our stakeholders?
Wisdom: having good, sound judgment.
What have been our wisest decisions?
When faced with our most difficult decisions, when did we choose the best course and have strength to endure?
How can we be more intentional about integrating wisdom into decision making?
Temperance: having self-restraint.
How can we balance two competing rights, such as concern for the company and concern for the individual, or compassion and justice?
How can we help people practice self-control?
When have we been our best at encouraging life-work balance?
Hope: a positive, optimistic expectation of future events.
What are the parts of working for our company for which you are grateful?
What do we do well, and how could we do more of it?
When was our culture at its best?
Leaders can assess how well they’re modeling virtue-based ethics by asking employees five questions about how the company is exercising its moral muscle:
How well are we teaching character in our company?
How might character development benefit our company?
What is being done to encourage or discourage character development in our company?
How does character development reduce risk?
How does character development promote growth?
The goal isn’t perfection; organizations are neither completely virtuous nor completely free of virtue. The goal is for companies to be better than they have been and for leaders to teach virtuous behavior by example.
We suggest that it is strategically smart for an organization to make sure that stories about the practice of virtue are actively and intentionally shared throughout the organization. Character is the result of daily actions — planning meetings, quarterly reports, RFPs, customer interactions, and so on.
As Aristotle famously said, “We are what we repeatedly do. Excellence, therefore, is not an act, but a habit.” Virtues in turn permeate the broader organizational culture and define “the way things are done around here.” That’s a force that’s a lot stronger than a narrow focus on following the rules.
Coworking spaces are on the rise, from Google’s “Campus” in London to NextSpace in California. Much has been made of these shared workspaces as a brand-new idea, one that barely existed 10 years ago. But the way they function reminds me of a very old idea: the Renaissance “bottega” (workshop) of 15th-century Florence, in which master artists were committed to teaching new artists, talents were nurtured, new techniques were at work, and new artistic forms came to light with artists competing among themselves but also working together.
The Renaissance put knowledge at the heart of value creation, which took place in the workshops of these artisans, craftsmen, and artists. There they met and worked with painters, sculptors, and other artists; architects, mathematicians, engineers, anatomists, and other scientists; and rich merchants who were patrons. All of them gave form and life to Renaissance communities, generating aesthetic and expressive as well as social and economic values. The result was entrepreneurship that conceived revolutionary ways of working, of designing and delivering products and services, and even of seeing the world.
Florentine workshops were communities of creativity and innovation where dreams, passions, and projects could intertwine. The apprentices, workers, artisans, engineers, budding artists, and guest artists were interdependent yet independent, their disparate efforts loosely coordinated by a renowned artist at the center — the “Master.” But while he might help spot new talent, broker connections, and mentor younger artists, the Master did not define others’ work.
For example, Andrea del Verrocchio (1435–1488) was a sculptor, painter, and goldsmith, but his pupils weren’t limited to following his preferred pursuits. In his workshop, younger artists might pursue engineering, architecture, or various business or scientific ventures. Verrocchio’s workshop gave free rein to a new generation of entrepreneurial artists — eclectic characters such as Leonardo da Vinci (1452–1519), Sandro Botticelli (1445–1510), Pietro Perugino (c. 1450–1523), and Domenico Ghirlandaio (1449–1494).
What can those who want to create more innovative and collaborative workplaces today — whether that’s a better office in a traditional organization, a coworking space, a startup incubator, or a fab lab — learn from the workshops of the Renaissance? The bottegas’ three major selling points were turning ideas into action, fostering dialogue, and facilitating the convergence of art and science:
Turning ideas into action. Renaissance workshops were not just a breeding ground for new ideas; they helped ideas become reality. Likewise, today’s innovative workplaces need to be equipped with everything people need to turn their insights, inspirations, and mental representations into new products and ventures. Coming up with new ideas is hard enough, but the real challenge for many organizations is figuring out how to exploit them and turn a profit.
Fostering dialogue. Ferdinando Galiani, a Neapolitan economist of the 18th century, argued that markets are conversations. The quality of the network — that is, the combined intelligence of people and organizations with different skills and abilities — plays a critical role in innovation.
In Renaissance workshops, specialists communicated with each other consistently and fluidly, facilitating mutual understanding. The coexistence of and collision among these diverse talents helped make the workshops lively places where dialogue allowed conflicts to flourish in a constructive way. The clash and confrontation of opposing views removed cognitive boundaries, mitigated errors, and helped artists question truths taken for granted.
Today, we often recognize the need for these kinds of illuminating conversations without really making space for them in our organizations, either because organizations are too afraid of conflict or because people are simply too busy to try to expand their understanding of each other. But Renaissance workshops offer proof of how important it is for collaborative workplaces to draw on sources of opposing ideas and controversial opinions.
Facilitating the convergence of art and science. While often remembered as primarily artistic today, in truth the Renaissance workshop was transdisciplinary. This helped create a holistic approach to creativity, which stands in opposition to our own organizations, in which people in different specialties are often separated into silos.
For example, during the Renaissance nature was seen as a convergence of art and science, as in the famous “Vitruvian Man” drawing by da Vinci. Many of today’s most exciting business opportunities are similar meetings of technological advances and aesthetic beauty. Bringing these disciplines together fosters mutual learning through experiments that lead to business opportunities.
Whether you are running a coworking space or trying to get your own organization to be more creative and collaborative, think about some of the ways you might follow the example of a Renaissance workshop.
With the US consumer sector changing at an unprecedented pace, retailers and consumer-goods manufacturers are actively reshaping their business and strengthening their presence in new and fast-growing markets and channels. To help fund their efforts in these new growth areas, companies are on a seemingly constant quest to cut selling, general, and administrative costs—and many of these cost-cutting programs involve reorganization. Indeed, according to our analysis, approximately 60 percent of companies in the S&P 500 have launched large-scale cost-reduction and reorganization initiatives within the past five years.
Yet our research shows that only 26 percent of those companies have successfully prevented costs from creeping back up. Worse, many consumer companies are failing to reallocate resources even as their strategies change: their budgets remain skewed toward mature, low-growth brands rather than newer, high-potential brands, or they continue to invest heavily in traditional capabilities such as retail real estate while underinvesting in newer capabilities such as digital marketing and data analytics.
How can companies capture—and sustain—the impact of their cost-cutting and restructuring efforts? We believe part of the answer lies in jettisoning widespread but outdated beliefs about organizational redesign. Our extensive work with leading retailers and consumer-goods companies has shown us that, in many cases, companies would be better off doing the opposite of what conventional wisdom tells them to do. In this article, we outline five new rules of organizational redesign. By following these rules, companies can simultaneously cut costs and drive growth—and do so for the long term.
Rule one: Shake up the core of the organization.
When embarking on cost-cutting programs, many consumer companies adopt a hands-off posture toward what they consider strategic functions—those they see as core to the business, such as marketing and merchandising—and focus instead on finding back-office efficiencies. Companies have repeatedly searched for savings in their cost centers and support functions by implementing lean techniques as well as through more transformative changes such as automation and outsourcing. The core functions, on the other hand, remain full of unexplored opportunities. For example, even companies that have shifted a considerable portion of their media budget from print to digital media continue to retain their print-marketing infrastructure.
The entire organization—no exceptions—should be in scope when contemplating a cost-reduction effort. In our experience, when companies assess the savings potential in all their departments, they identify twice as much savings in the core functions as they do in back-office functions.
Looking at interactions across departments can surface even greater savings potential. Many companies—particularly those that have been in belt-tightening mode for several years—have already tapped into the most obvious savings opportunities within departments or business units, but they’ve yet to examine inefficiencies in cross-functional, cross-channel, or cross-regional activities and processes. One example of a cross-cutting activity is retail promotions, which typically involve the marketing, sales, and merchandising departments and require coordination across channels (stores, catalogs, and online).
A global beverage manufacturer had been hesitant to even consider trimming its market-research budget, as the company had always viewed market research as central to its success. But, as part of a broad cost-cutting effort, the company decided to review market-research spending line by line: who had commissioned each piece of research, for what purposes, which suppliers conducted the research, and how the results were used across the organization. The company found that its market-research spending was more than twice the industry average and that its supplier base was highly fragmented, consisting of more than 50 providers. Based on its findings, the company made several changes: it redesigned and simplified cross-functional work flows, consolidated its vendor relationships, and created rate cards for standard research types. These changes lowered the company’s market-research costs by 20 percent without adversely affecting revenues.
As this example suggests, a cost-cutting program—which companies sometimes view as a necessary evil—can actually help a company become more effective and more agile. Reducing costs, especially in core functions, can be a catalyst for creating a leaner, faster, and ultimately healthier organization.
Rule two: Play favorites.
Every part of the business must be fair game for cost cutting, but that doesn’t mean that every part of the business should have identical cost-reduction targets. When it comes to budgets, management would be smart to play favorites.
An equitable mandate—for instance, “All business units must cut costs by 10 percent”—may sound sensible and wise; after all, it’s much easier to get buy-in from across the organization when everyone sees that the burden is shared equally. But such an approach misses the point of a reorganization. Setting across-the-board targets is counterproductive if the goal is to reallocate resources from low-growth to high-growth areas.
Some companies already play favorites, but in a way that doesn’t support their strategic priorities. For example, at a global specialty retailer, the bulk of the merchandising department’s staff and budget was dedicated to mature brands as opposed to newer, high-growth brands (exhibit). This situation persisted even though the company’s strategic plan had called for greater investment in the newer brands. We’ve seen the same kind of misalignment at several other consumer organizations, from food manufacturers to household-products companies.
A better approach is to set different cost-reduction targets and investment levels based on a business unit’s growth and efficiency potential. Leaders should also define the capabilities that are critical to growth and invest in those capabilities while “leaning out” other areas to free up funding.1For example, a global retailer reduced head count in its copywriting team by having copywriters work in both print and digital media instead of exclusively in one media channel. This consolidation helped fund new positions in digital analytics.
Rule three: Ask for bad ideas.
An ambitious cost-reduction initiative will have the best chances of success if people in the organization are empowered to think creatively and to make bold—even outlandish—suggestions. Role modeling by senior leaders goes a long way here: when leaders aren’t shy about offering up ideas that could be controversial or unpopular, they embolden others to do the same.
One hindrance to idea generation is a territorial profit-and-loss (P&L) owner. Conventional wisdom prescribes that the person with P&L responsibility also take charge of a cost-cutting program, because that person will be the most motivated to make it successful. The flip side is that the P&L owner has largely brought about the current state of affairs and therefore may not have an objective view. He or she may find it difficult—even impossible—to envision different ways to structure the work or different roles for individuals he or she hired. The P&L owner might concede to incremental moves but resist a fundamental rethinking of the organization, which in some cases is what’s needed.
One proven approach for ensuring objectivity is to form a steering committee comprising the functional leaders and at least two C-level executives. The steering committee’s role is to make decisions for the benefit of the entire company rather than just one business area.
Committee members should regularly challenge the status quo and push for a “no sacred cows” mentality—for instance, spurring the business unit to consider options that it may have previously viewed as off-limits (such as automation and the use of third-party providers). What might seem a terrible idea to the P&L owner could be an intriguing idea to committee members. Even rejected ideas shouldn’t be permanently discarded, but instead kept on a running list to be revisited in the future.
At a US multicategory retailer, the steering committee asked to be informed of all cost-reduction ideas—even those that the business unit had considered and rejected. One such idea was to do away with the gift boxes given to shoppers during the holidays. The business unit felt the move was too radical and would annoy customers who had come to expect retailers to provide free boxes for their holiday-gift purchases. The steering committee implemented it anyway, and the result was $2 million in annual savings. The retailer’s chief competitors soon followed suit, eliminating their own practice of giving customers free gift boxes.
Another way to ensure the objective evaluation of ideas is to appoint a neutral “cost-category owner” who can ask tough questions and bring a fresh perspective. At a packaged-goods company, the head of supply chain served as the category owner for marketing co-op funds. This executive was able to discover maverick spending that marketing executives hadn’t been aware of.
Rule four: Move beyond benchmarks.
Managers either love or hate benchmarks. Those in the former camp see benchmarks as valuable metrics for understanding the competitive landscape and for triggering important internal discussions; they believe companies should strive to meet or exceed benchmarks. Those in the latter camp argue that every company is unique and that it’s therefore unhelpful and illogical to compare one company’s decisions, structure, and head count to another’s.
Both camps are right, to some extent. Organizational benchmarks can tell a company, for example, the average number of employees its competitors have in each department. But that information is meaningless without deeper insights into what those employees actually do. Thoughtful leaders use benchmarks not as default targets, but rather as indicators that shed light on areas in which a company’s investment differs markedly from competitors, and then as a starting point to generate ideas for how to operate more efficiently.
Leading companies complement benchmarks with a thorough diagnostic, encompassing internal quantitative and qualitative analyses (such as time-allocation surveys that highlight the activities to which employees devote most of their workdays). Done right, a diagnostic will surface what should change: Where are the bottlenecks in core processes? Are employees using cutting-edge tools, or are manual processes limiting their productivity? Are they spending too much time on low-impact tasks?
Through benchmarking, a retailer saw that its marketing team was 45 percent larger than the marketing teams of several competitors. Instead of reflexively cutting head count, the retailer dug deeper and discovered that its marketing team produced more than twice the number of catalogs as comparable retailers did. These findings led to data-driven discussions about the retailer’s marketing investments. It decided to discontinue its least profitable catalogs, reduce the number of in-store events, and consolidate all marketing-analytics functions—previously dispersed across the company—into centers of excellence. These moves helped shave 15 percent off the company’s baseline marketing spend.
Rule five: Skip meetings and stop writing reports.
A reduction in force won’t necessarily lead to a reduction in work. Leaders must spell out exactly which activities should cease, which ones should change, and which should continue. Otherwise, those critical decisions will be left up to lower-level employees, and costs will quickly creep back up.
We’ve found that, in many companies, certain activities take up an inordinate amount of time but yield little benefit. One example is the often dreaded meeting. In general, meetings occur too frequently, last too long, involve too many people, and often don’t end with clear next steps. When a US apparel retailer administered time-allocation surveys among members of its product-development team, it found that designers were spending an astounding 70 percent of their week either preparing for or attending meetings. The survey results were an eye-opener and became a powerful case for change. The retailer reduced the number and frequency of meetings as well as the number of meeting attendees, in part by allowing team members to give certain approvals via email or online instead of in person.
Another way to reduce work is to examine a company’s decision-making processes. Many companies find that they can halve the number of people involved in making certain strategic decisions. Typically, after an organizational redesign, about 80 percent of decision rights are obvious; only 20 percent—we call them “pinch points”—are murky (in many cases due to shared responsibility) and thus need senior-leadership attention. As part of an effort to increase organizational effectiveness and agility, a global retailer identified its “high-value, high-pain” pinch points—cross-functional decisions that had far-reaching financial or strategic implications but that were widely perceived as slow and painful. A clean-sheet redesign of three pinch points led to faster, simpler decision making. In each of the pinch points, up to 20 percent of process steps were eliminated, and the duration of one monthly process was reduced from ten days to five days.
Like meetings, business reports can be time wasters. At a global food-and-beverage company, the finance function was constantly churning out financial reports. After close investigation of who was requesting the reports and how frequently, how long they took to prepare, and how they were being used, the company eliminated the laborious but low-impact reports. In total, the finance staff stopped producing 25 percent of the reports, thereby freeing up time for more-valuable activities such as deeper financial analysis.
There may be other activities, beyond meetings and reports, that companies can either de-emphasize or stop doing entirely. Leaders could come up with a list of such activities by asking questions such as, “What tasks are being done purely because the company has always done them? What tasks are employees constantly complaining about as not being worth the time and effort? Are there operations that we could shut down without major repercussions?” The answers may prove surprising.
An organizational redesign won’t “stick” without thoughtful change management.2One aspect of change management can be compared to a marketing campaign, aimed at making the case for change and inspiring and motivating the organization—perhaps through frequent CEO missives and heartfelt testimonials from leadership. Another is more like a military campaign, concerned with adjusting budgets, establishing checks and balances, and monitoring progress. Retailers and consumer-goods companies that pay close attention to both these hard and soft aspects of change management—while keeping in mind the five rules outlined above—will be well on their way toward building an organization that can continually control costs while also, crucially, building new muscle for growth.
Tra vent' anni sarete più delusi per le cose che non avete fatto che per quelle che avete fatto. Quindi mollate le cime. Allontanatevi dal porto sicuro. Prendete con le vostre vele i venti. Esplorate. Sognate. Scoprite. - Mark Twain