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Spotlight On Arie De Geus
Arie de Geus is head of an advisory group to the World Bank, adviser to the Office of the Auditor General of Canada, and adviser to the Dutch Ministry of Transport and Communications. He is Visiting Fellow at London Business School and has been involved in the creation of the Sloan School's Organisational Learning Centre. He is also consultant to corporations in the USA, The Netherlands, Sweden, Finland, Germany and South Africa.
In this issue of Spotlight, the influential management author, Arie de Geus, talks to editor Sarah Powell and compares the vitality and frequent longevity of what he dubs the "living company", the subject of his award-winning book, with the more widespread, and generally less successful, "economic company" model.
Spotlight: It sounds considerably more challenging to run a "living company" than a traditional "economic company" because, while more motivating and satisfying, the "living company" would seem to demand much more of its people?
Arie de Geus: It is certainly easier to manage machines than it is to manage people. The problem nowadays is that there are many more companies that are comparable to, say, modern media companies – which are dependent on people – than there are companies that are comparable to the old-fashioned steel mills or even automobile factories which are more dependent on capital assets for their success. Meanwhile, if you look at the Financial Times Top 100 or the Fortune 500, the new winners are nearly always companies that have no or few capital assets but are completely dependent on people. Many of the problems we read about today stem from the fact that we still have generations of managers who are trained in managing machines and the emphasis of the present management generation and the financial world is clearly all on maximization of shareholder value and profit. Such priorities mean companies are just machines to make money and their managers are machinists. I find it more than coincidence that so many of them "die" and I find it remarkable that there is little debate about these issues.
Spotlight: In your book The Living Company you discuss the pitfalls of the "economic company". Have you perceived any move away from this model in recent years?
Arie de Geus: Before answering this question, we need to recall that most companies are limited liability companies which, by definition, means that they have shareholders. Especially in the UK and in the USA, the legislation relating to ownership by the shareholders gives the latter considerable legal powers over life-and-death questions for companies. Many start-up companies choose a plc or limited liability legal structure, even if initially they retain the holding within the company, i.e. restricting it to the founders and possibly, later, employees. However, it is clearly the intention that at some stage some of these shares will be sold, creating new, outsider, shareholders who will have powers vested in them by company law. When that happens, it is very difficult for a company to extricate itself.
Coming back to your question, you asked whether there are any examples of companies moving away from the old economic model. The answer is that, yes, there are a few, difficult though it may be. You will recall that there have been a few cases here in the UK where, for various reasons, original owners/founders have tried to buy back their shares from the market.
However, some newer companies have been motivated to adopt more modern organizational methods because they have recognized their total dependency on their people to produce results. Such firms are likely to be, for example, software companies, architectural practices, consultancies, media firms.
One particular example I would cite is that of St Luke's, a remarkably successful media company in London. This company has deliberately set itself up as an entirely employee-owned "community of work" with a unique organizational structure characterized by the absence of bosses and emphasis on the connection between co-ownership, creativity, collaboration and competitive advantage.
Other similar initiatives involved change in more traditional companies. Booz Allen, for example, was a company that was originally a partnership and then went public – a profitable exercise for some of the original founders. However, the remaining partners eventually bought back their shares and this company, like St Luke's, now works along community of work lines, in a deliberate move away from the emphasis on profits and maximization of value for shareholders.
However, ignoring such alternative options, consultants and lawyers continue to advise new entrepreneurs to adopt the classical limited liability formula even though this incorporates numerous pitfalls deriving from company and fiscal law.
Of course, one of the reasons why many people steer clear of partnerships is that this can entail unlimited personal liability. But the law is, nevertheless, flexible. In the UK, for example, you can establish a company limited by guarantee which limits an individual's personal liability for debts taken on by the partnership.
Meanwhile, contrary to such options, we continually hear of companies with a community focus or mutual structure that are being converted into limited liability companies. What you have here is an underlying motivation that is entirely different to that underpinning the living company. What we are seeing is the present generation capitalizing on, and pocketing, the benefits accumulated by the previous generation; this then means also that they are denying these benefits to the next generation. Such moves can only be motivated by personal greed.
Another aspect in corporate organization that is little talked about is the counterbalance to managerial power afforded by shareholders. Where you choose to pursue the concept of a living company, a work community, there also need to be very clear rules within the company as to how to thwart any possible attempts to centralize power and control into the hands of a few people at the top. If you look at companies such as McKinsey, Booz Allen or St Luke's you will see that each company has built counterbalancing forces into its organizational structure. Such provisions do not always exist in other unquoted companies.
I consider one of the most interesting "living" companies currently to be Visa International which has a very different legal structure from that of most organizations. The best description would be to say that it consists of an agglomeration of "clubs" united by a common constitution. As such, it rather resembles the modern nation state. There are no shares and therefore no shareholders. Power flows from the members, from below, upwards so concentration of power is not possible. Banks can become members of one or several of these "clubs" and "clubs" can be both set up, and liquidated. But they are all integrated into Visa International and each has to sign a statement of purpose and principle – the "Constitution".
Visa International is undoubtedly one of the most successful commercial organizations of the past 20 years and it is another good example of a very modern, and very successful, work community that does not follow the traditional capitalist shareholding model.
Spotlight: You have highlighted the ability of a living and learning company to change, when and where necessary, to ensure continued success. Yet much of today's emphasis on "organizational learning" seems to relate to formal learning from past experience through case studies, focus on benchmarking and so on. How useful is this when the need for a company is to adapt to change, act with foresight, innovate or reinvent itself and are we not talking more about the need for a very different way of thinking about business and the business environment?
Arie de Geus: That's a very good question. But, underlying any answer is the need, when thinking about companies as living systems, to make an analogy with another living system that we know something about, i.e. the human being, you and me. If we want to be successful in our lives, whether in our economic, social or family life, we must learn constantly. We are all aware of the many theories in the cognitive sciences and in psychology about the role of learning in developing oneself and one's life; I draw an analogy with companies as they too move through a life.
One of the most powerful definitions of learning, and I see this as underpinning the answer to your question, is that of the Swiss developmental psychologist Piaget. His theory is that we are constantly bombarded with signals from the outside world; either we are prepared for them and have structures in place to receive those signals; or we must rapidly make internal structural changes which involves developing new ideas and a new way of behaving.
Companies are also bombarded with signals from the outside world. The competition, technology, the political systems and social values are constantly changing and companies must gauge whether they are ready for these changes, whether they can act, or whether, first of all, they need to develop new ideas and new structures internally. This is in line with Piaget's ideas of learning. So, part of the answer to your question is that, if you do your learning mostly based on past experience, you are probably always "fighting the last war". Companies must base their learning on the new signals coming in from the outside world. As a result, the priority in learning is to develop a way to increase powers of perception; companies must "hear" more; and in order to do so they must be receptive to, and be a part of, the outside world.
I identify this outward-looking capability in the early part of my book when I discuss the characteristics of successful living companies. Managers of machines, meanwhile, are much more inclined to be navel-gazers and, if you constantly stare at your navel, you see very little of the outside world and can be rudely surprised. As noted, learning depends on deliberately being a part of, and open to, the outside world. That was, and still is, the key to the power of the scenario development system we introduced at Shell.
Spotlight: The discussion in your book of the need for a company to build up what you term an "organizational memory" of the future and the example of the "scenario development" at Shell was revealing but posed the question as to whether this was possible in small companies as well as large?
Arie de Geus: I struggled with that very question when I retired, assuming that scenario development was typically more of a solution for a large company. Since then, I have concluded that what Shell has developed is the "Rolls Royce" of scenario systems, but you can also adopt a "Ford Fiesta" version which can do the same job, albeit perhaps less "luxuriously".
Over the past few years, both alone and working with various consultants, I have carried out scenario exercises with a number of much smaller organizations and these were very effective. The goal in such exercises is to increase powers of perception of what is happening "out there" … A medium-sized company may have a founder or a boss who is very outward-looking; alternatively it can bring in a consultant or an academic to help. The power of scenario development is that the management team then discusses what should be done if the scenarios identified were to come about. This enables companies to build up an important "memory" of the future.
Spotlight: I was very interested in your conclusion that a company's country of origin does not impact on corporate longevity. I would have thought that certain cultures might have been more skilled than others in motivating employees and fostering the corporate pride, care, trust and engagement that you highlight as so important in promoting corporate success?
Arie de Geus: I would have thought exactly the same. However in both the Shell study of long-living successful companies, and the US Collins and Porras study of the same phenomenon, the interesting thing is that success is apparently not sensitive to culture. Taken together, these studies investigated some 45 companies from all over the northern hemisphere – what we could call "the aristocracy" in business – and concluded that a considerable part of the explanation of the business success notched up must be attributed to successive management generations that have succeeded in creating and maintaining a community feeling and community values.
In common with their peers, these companies occasionally go through difficult periods; but their cohesion allows them to steer themselves out of difficulty. The shared values and sense of community mean that employees all pull together. In an economic company, when problems emerge, those at the centre frequently tend to look out for themselves, discarding those at the periphery.
Spotlight: What are the implications for recruitment in a successful "living company?" Do recruiters with a living company philosophy perhaps tend to choose people similar to themselves and therefore be more than likely to perpetuate their method of working and thinking?
Arie de Geus: The short answer to that question is yes. Where there is a strong value system, recruiters tend to choose people who are happy to accept this value system. We saw this in Shell. Shell typically loses up to 15 percent of new recruits in their first five years. What happens is that within this period either the company decides that an individual does not "fit" or that person decides that this is not the place where he or she wants to work. The remaining 85 percent are people who are happy in their chosen workplace. This poses questions. Speaking slightly flippantly, we need to ask ourselves: are companies playing God? Are they recreating themselves in their own image? And, perhaps more seriously, what happens to diversity in such cases?
These were issues that concerned me over the years in Shell and I questioned whether it was a good thing to recruit in our own image. But then the reality was that we recruited up to 50 different nationalities in the top echelons alone, and that we managed to find people from all these different nationalities, who, despite cultural diversity, were prepared and happy to share a particular value system. The same is true of many companies identified in the Shell and the Collins and Porras studies.
Spotlight: Does not the trend towards outsourcing and flexible working reinforce economic company values given the absence of formal working relationships with suppliers and consequent weakening of bonds of loyalty?
Arie de Geus: Outsourcing happens in both kinds of companies but for very different reasons. The goal of outsourcing in economic companies is to reduce costs, prune the workforce and maximize profits, whereas in a living company outsourcing ensures that the people remaining in the company are the real members of the community and have "signed up" to the company philosophy. I often cite the example of the British Medical Association. When new members apply, their professional qualifications are not discussed because they are essential – without them you cannot join. The second most important criterion for membership is signing of the BMA's statement of ethical and moral principles.
While not all the companies in the two studies of successful businesses cited have such a formal statement, some do. Shell, for example, has a statement of business principles that all employees must sign and it is very clear that Shell recruits people who are most likely to "belong" and adhere to the company's value system.
On the other hand, many companies are likely to have on their payroll people who were employed to perform a particular task or project required at a particular point in time. Such people will not necessarily "belong"; they are in situ for a particular skill and could be outsourced. Benetton, for example, employs only a very limited number of people who are "members" of the company while up to 90 percent of functions are performed by outside contractors.
Spotlight: How should a living company train its management and other staff?
Arie de Geus: A good analogy here would be that of a football club. You get young players in and let them play but you also train them all the time. You do that because you want to increase their potential. The same goes for new company recruits. They are people in a particular phase of their development and with potential for development. In a living company it is essential that the company develops this potential because developing the potential of individual members creates the potential of the company.
In today's Microsoft, consultancy or media firm the competitive success of the company is totally dependent on developing the potential of its people, not simply its products, its office buildings or office equipment. And by training I do not mean simply skills training but the development of each individual's human potential.
I believe the most powerful means of achieving this is through on-the-job training. This can be organized in a variety of ways including action learning, ad hoc working or project groups, communities of learning, etc. At St Luke's, for example, personal development also comes through such means as role changing and development of multiple skills, experimentation, and performance evaluation.
People develop when they are under pressure, doing things, sharing things, but they need to do this together, in groups, in teams. In addition, people learn in a social context, through dialogue. Research by Xerox revealed the huge amount that was learned over a drink at the end of the day when maintenance workers shared their knowledge, their experiences, their stories about customers …
Spotlight: Nurturing a "living company" would for many, if not most, organizations seem to indicate the need for a substantial cultural change. Are there particular guidelines to introducing such change and how important are the people within an organization and their relationships with one another?
Arie de Geus: While I can offer no guidelines, there is one short answer I would venture … more women at the top would help in many companies because women have particular skills in creating communities and establishing a unity of purpose. In the USA this is beginning to happen and I don't think that this is a coincidence.
Spotlight: From all you have said, it is clear that relationships between people are absolutely crucial in a successful living company.
Arie de Geus: Very much so. While the acronym HR is "shorthand" for human resources, to me it will always denote human relations. Human relations are the essence and certainly one of the essential characteristics of the management of people – which is all about relationships. The use of the word "resources" dismisses the human element. You cannot run a business on a resource base or according to a mathematical formula – that is just not possible; companies are by their nature communities of humans. But this is something the financial community, the legal establishment, business educators and many consultants seem to have forgotten in the advice they give to their clients, but which they had better learn very quickly in the way in which they run their own people-based business and work communities.