Warren Buffett

Unlike most other conglomerates, whose executives exert tight control over their subsidiary companies and often make the major financial, operational, and strategic decisions their subsidiaries, Berkshire Hathaway apparently entrusts their subsidiaries with a high degree of discretion and with broad decision-making powers.

Berkshire Hathaway’s annual Letter to Shareholders from February 2010 states:

“We tend to let our many subsidiaries operate on their own, without our supervising and monitoring them to any degree. That means we are sometimes late in spotting management problems and that both operating and capital decisions are occasionally made with which Charlie and I would have disagreed had we been consulted. Most of our managers, however, use the independence we grant them magnificently, rewarding our confidence by maintaining an owner-oriented attitude that is invaluable and too seldom found in huge organizations. We would rather suffer the visible costs of a few bad decisions than incur the many invisible costs that come from decisions made too slowly – or not at all – because of a stifling bureaucracy.”

Stanley D. Truskie

Truskie recommends the following leadership practices to help companies quickly adapt and stay at the forefront of their industries:

• Lead from the center.
• Focus on culture.
• Implement 3-C planning.
• Move swiftly.

Truskie argues that “old-style, top-down” management is outdated and that rigid, hierarchical organizations run the risk of falling behind in today’s rapidly changing competitive environment.

Click here to read the entire opinion article.

Moore said, “It’s been my dream all along to turn this company over to the employees, and to make that dream a reality on my birthday is just the icing on the cake.  To me, this is the ultimate way to reward employees for their contributions to our ongoing success and growth. We have many loyal and long-time employees who I expect will be joined by many new faces over the years to run the company.”

Operations VP Dennis Vaughn, said, “The partners could have sold this company many times for a lot more money, but to them this company is about so much more than the money. I’m just proud to wear the Bob’s Red Mill logo because anywhere I go in this country people say nice things about the company.”

Bob’s Red Mill, a leading provider of whole grain natural foods, has averaged an annual growth rate of 20%-30% over the past 10 years and in that time their mostly North America distribution has expanded internationally.

Netflix employees are encouraged to take as much vacation time as they want as long as it doesn’t interfere with their work. 

To executives who might worry about such a policy vacuum being taken advantage of by employees, Brian Carney, the author of Freedom, Inc., responds “In a large enough organization, there might be a couple of people who would take two or three months’ vacation–but if a vacation policy is the only thing holding them back from that, they’re probably ‘vacationing’ at their desks anyway.”

• How is it that companies are willing to trust employees with their customers, their expensive equipment, and their cash, but are unwilling to trust them when it comes to using the Web at work or loading their own programs onto their workplace PC?
• Do IT staffers really believe that conscientious, committed employees turn into crazed, malicious, hackers when given a bit of freedom over their IT environment?
• If leading edge IT tools are, as many claim, essential to unleashing human creativity, why would any company force all of its employees to use the same computers, phones and software programs?

Hamel recommends giving employees more freedom over their IT tools.  We agree.  One of the best ways to cultivate innovation and engagement is to empower people with the ability to decide how they can best do their jobs.

We believe that this shift represents another stage in the ongoing evolution in the typical organizational structure – from a top-down, hierarchical system to a decentralized, democratic organizational model.

“The fashion for faceless chief executives is part of an understandable reaction against yesterday’s imperial bosses, many of whom were vivid characters. Some, such as Jeff Skilling of Enron and Tyco’s Dennis Kozlowski, broke the law and helped inspire a dramatic tightening of government regulation, in the form of the Sarbanes-Oxley legislation. Others, such as Home Depot’s Bob Nardelli and Hewlett-Packard’s Carly Fiorina, paid themselves like superstars but delivered dismal results.“

Talented, motivated, and innovative professionals are no longer willing to work for arrogant dictators in exchange for a sizeable paycheck.  Instead, employees are becoming more and more selective about the quality and type of work environment that their employers offer, and they are increasingly seeking award-winning employers that share decision-making powers and that do not tolerate workplace jerks.

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What makes a company ‘democratic’?

A company is democratic when it operates using the principles of organizational democracy, such as accountability, transparency, and decentralization, as opposed to a top-down, command-and-control model. This mode of operation is fundamentally determined by the design of the organization, and it influences performance on the individual, leadership, and systems and processes levels.

Why should companies consider democratizing their workplace?  What are the advantages of democratic companies?

Operating democratically can have a huge impact on the bottom-line. A recent Gallup poll showed that 73% of the workforce in the U.S. is disengaged at work, costing the US economy over $300 billion a year. This is an incredible waste of resources and talent. Democratic workplaces tend to have lower turnover and absenteeism, attract and retain top talent, have higher levels of productivity and efficiency, and are more innovative. Gallup has also found than people who work in democratic or highly engaged workplaces are both physically and psychologically healthier. Plus, the people who work in democratic organization are just plain happier too!

Additionally, in today’s economy, advances in technology are requiring organizations to be faster, more creative, networked, and non-hierarchical. Generations X and Y expect their workplaces to be authentic, personal, and flexible, and they thrive in that type of environment. Customers are eyeing companies with increasing scrutiny and are demanding more transparency and accountability.  The current economic crisis has caused companies to rethink their rules of corporate governance, systems and processes, and operating values. Organizational democracy offers a new business design that addresses these challenges.

In addition to being financially successful, democratic organizations can make a social impact, fighting corruption, and increasing economic prosperity, peace, and civic engagement in their communities, according to research by the Ross School of Business at the University of Michigan.

Please tell us about the WorldBlu List of Most Democratic Companies.

The annual WorldBlu List of Most Democratic Workplaces™ is a global award that shines a spotlight on visionary companies successfully practicing organizational democracy. 

Any for-profit, non-profit, governmental or non-governmental organization can apply for the WorldBlu List award as long as they have a minimum of five full or part-time employees in have been in operation at least one full year. The process is simple – once they sign up their employees compete a survey evaluating how democratic the organization is based on the WorldBlu 10 Principles of Organizational Democracy. Unlike other awards and certifications, the employees themselves – not an outside panel of judges — let us know if the organization is democratically designed or not.

The WorldBlu List award has been recognized by global media worldwide, including The Wall Street Journal, The New York Times, The Christian Science Monitor, The BBC, BusinessWeek, US News & World Report and Fast Company magazine, to name a few. 

We are accepting applications now  for the WorldBlu List 2010. I invite your readers to learn more by clicking here.   The deadline to apply is November 30, 2009.

Can you give us a few examples of innovative and successful democratic policies that some of the WorldBlu companies have implemented?  How have these policies impacted those companies?

One of the companies on the WorldBlu List 2009 that used organizational democracy from the very beginning was Menlo Innovations, based in Ann Arbor, MI. I had the opportunity to visit Menlo back in January of this year and was so impressed with how they work. For example, team members are paired together and do their work on a shared computer. Yes, that’s one computer, two people. The pairs then change each week to ensure transparency and accountability across the organization. By using this system, Menlo avoids bottlenecks that occur when only one person knows information and builds high levels of trust among team members. Menlo’s employees also get to design their open work environment. The space contains lightweight tables and electrical/network drops from the ceiling that provide for infinite flexibility in layout.

Most people think that organizational democracy can only work in small companies. But DaVita, a healthcare company that provides dialysis services, proves that it can work in FORTUNE 500® companies too. But it wasn’t always that way.

Back in 1999, DaVita was struggling and they brought a new CEO, Kent Thiry, on board. He then transitioned DaVita into a democratic company, a decision that resulted in an increase in annual revenue from $1.4 billion in 1999 to $6 billion in 2008. DaVita’s democratic practices include opportunities for employees to vote on significant decisions for the company, regular Town Hall meetings between the senior leadership and staff members, and a decentralized structure that allows each of DaVita’s 1,400 clinics to determine their own rules and guidelines.
 
What are some initial steps that companies can take in order to become more democratic?

1. Open the books. Provide information to employees about the company’s financial health, strategies, and even salaries, and teach them what the numbers mean. The Great Game of Business and Zingerman’s offer courses on how to practice open-book management. 
 
2. Create and strengthen opportunities for dialogue and listening across all levels. This practice can take the form of DaVita’s Town Hall meetings that I mentioned before, having an employee participate in management meetings at every level, or having seats on the Board reserved for elected employees.

3. Co-create the company vision and purpose statements. This practice give employees a greater feeling of ownership of the company’s purpose and vision, and it also allows each staff person to find the greatest alignment between his or her individual purpose and vision, and that of the company.

4. Give employees a voice in decisions that impact their work. This practice can range from letting employees participate in strategic planning and goal setting, to letting them to choose their work, projects, and teammates, to letting them determine new hires and salaries.

The Invisible Hook shows how pirates’ search for plunder led them to pioneer remarkable and forward-thinking practices. Pirates understood the advantages of constitutional democracy–a model they adopted more than fifty years before the United States did so. Pirates also initiated an early system of workers’ compensation, regulated drinking and smoking, and in some cases practiced racial tolerance and equality. Revealing the democratic and economic forces propelling history’s most colorful criminals, The Invisible Hook establishes pirates’ trailblazing relevance to the contemporary world.

What is the “invisible hook” and how does it relate to workplace democracy?

The “invisible hook” is the piratical analog to Adam Smith’s “invisible hand” idea, which describes how individuals’ self-interest seeking guides social cooperation among legitimate persons. My argument is that, similarly, criminal self-interest seeking guided social cooperation among pirates. As my book describes, in pirates’ particular economic context, rational self-interest seeking led pirates to socially cooperate through a kind of workplace democracy in which pirates were more-or-less equal shareholders in their ship and its proceeds and democratically made important workplace decisions.

How did pirates’ organizational structure differ from that of law-abiding merchant ships?

On pirate ships, crewmembers democratically elected important officers, such as the captain, and enjoyed similar perquisites of crew membership. Further, power was divided among multiple officers, such as the captain and quartermaster, who checked one another’s authority. In this sense, pirates’ organizational structure was ‘flat.’ On merchantmen, in contrast, the organizational structure was much more hierarchical. The captain wielded the lion’s share of the power and the ordinary crewmembers were subjected to his largely uncontrolled authority. Authority was much more concentrated and ship-board governance mirrored governance in landed legitimate society in being much more autocratic.

Why did pirates organize their activities democratically?

Pirates organized their ships democratically becuase this organizational arrangement maximized profits in pirates’ particular economic context. Unlike crewmembers on merchantmen, where a very different economic context dicated a different profit-maximizing organizational  structure, crewmembers on pirate ships were owners and employees of the ‘firm.’ It therefore made economic sense for each man to have a say in the firm’s enterprise–to make decisions democratically. Democratic organization was ‘cheap’ for pirates to adopt (in contrast for merchantmen for reasons discussed in the book) and yielded large benefits in the form of effectively preventing officer predation, which plagued merchant ships.

What effects did the pirate organizational structure have on the crew?

Pirates’ democratic organization had at least two major effects on the crew. First, it empowered pirates to popularly elect and depose important officers, which gave pirates great control over their ‘leaders.’  This in turn created strong incentives for pirate ‘leaders’ to wield their power in the crew’s interest rather than against the crew’s interest for personal benefit. Second, since pirates’ democratic organization extended to their method of pay as well–each pirate received a roughly equal share of the booty–it created several “collective action problems” for pirates that they needed to solve. For instance, this method of payment encouraged crewmember shirking, which pirates overcame by instituting a system of social insurance and bonuses.

What lessons can today’s managers learn from pirates?

Among the most significant modern management lessons from 18th-century pirates is the importance of letting the pursuit of profit determine ideas about a firm’s organizational features rather than the other way around. It’s tempting to conclude from pirates’ success with workplace democracy that this highlights the desirability of this organizational form more generally. But that would be mistaken. In pirates’ particular case–a relatively small ‘workforce’ operating a firm that required no external financiers in which information about each laborer’s contribution to production was difficult to glean by observation–workplace democracy was profit maximizing. And for other firms that also satisfy these economic conditions this will also tend to be true. But for firms that don’t satisfy such conditions, for instance large firms, or those that require lots of external capital to function, or those in which it’s relatively easy to measure laborers’ contribution to team production–which is the vast majority of firms–workplace democracy won’t be a profit-maximizing form of firm organization. Workers would be better off under a different organizational arrangement. Thus what pirates teach us is the desirability of letting profit dictate the particular organizational features a firm adopts rather than the universal desirability of particular organizational features across firms.

Tony Hsieh, Zappos’ CEO, credits his company’s meteoric rise in a highly competitive market to the company’s laser-like focus on providing excellent service and support. 

As many democratic and decentralized companies have realized, the key to offering fantastic support is to enable employees to rely on their instincts and to trust them to make their own decisions.  At Zappos, customer service call center reps are not required to read from scripts.  Instead, they are encouraged to use discretion in making their own decisions without seeking approval from their supervisors. 

Zappos has worked hard to blur the lines between managers and employees that are common in traditional organizational hierarchies.  The company’s goal is to develop a fun, playful work environment where coworkers and bosses feel more like friends.  Managers are required to spend time socializing with their employees.   

Inc.com provides a detailed look at ‘the Zappos way of managing’.

Without decentralizing the management structure and decision-making processes, simply turning the employees into shareholders at GM and Chrysler will have minimal impact on rectifying the core problems and overcoming the obstacles that have crippled these companies.  It is not enough for employees to hold ownership stakes if their employers still function as top-down hierarchical bureaucracies. 

Remaining innovative and competitive in today’s rapidly changing environment depends on a highly engaged and motivated workforce.  Employees can only break free from the confines of bureaucracy if they are able to act and feel like owners in the day-to-day management of the company. 

Employees will not feel like motivated owners until they are aware of the company’s goals and the ongoing progress towards those goals.  Financial and operational data should be shared freely among all employees.  In today’s information age, there is no reason to keep secrets and for executives to hoard information, even with regards to “sensitive” information like salary data.

Employees, especially those closest to the customers, need to have the power to make quick decisions autonomously, without having to wait for approvals to trickle down the management hierarchy.  Team-based, bottom-up decision making should replace the command-and-control, top-down structure that was so successful at stifling innovation, common sense, and competitiveness at GM and Chrysler.

In order for these companies to stand a chance at surviving the current crisis, General Motors and Chrysler must not limit their innovative turnaround efforts to their product and operational strategies.  They must also adopt cutting edge and creative solutions for transforming their organizational processes and culture.

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