• Erwan Hernot

Do Leaders Move Away From People And Work?

Those at the top (be it in business or politics) face the usual argument that they are far away from the « real » people. Some are more critical and say they move away from « real » work too. Truth is, business contexts promotes this trend: leaders insulate themselves and just a few of them think differently.



Structure vs people

As the number of people in the organization grows, it becomes increasingly difficult to coordinate their activities and still get in touch with them. In a command & control mindset (which is still the core assumption of most leaders), control allows this coordination. Therefore, the simplest mechanisms that organizations use to deal with this problem is to create additional layers in the hierarchy aka to stop thinking of individuals and focus instead on functions, tasks and operations. The old conception (before Industrial Revolution) was, « if you had the right man, you could give him the choice of method ». With taylorism and factories built in the beginning of the last century, the independence and artisanal subjectivity was not considered reliable. It seemed necessary to extract the strength, skills, intelligence or memory of the workers to incorporate them into a structure because it was seen as easily controllable. This management’s quest to get a handle on a complex organization also lead to the expansion of procedures for reporting, decision making, requiring evermore coordination bodies, meetings, and report writing. « In the past, man was first; in the future, the structure must be first ». (1) Then top leaders focused on the structure. Designers of this structure in a company (rules, processes, organisational charts) can fall into the trap of not knowing what is - really - going on, but they have an additional cultural handicap: their own occupational culture, which puts less value on human effort and more value on the design itself. What this means is that every mature organization has a potential disconnect between the executives and the actual operators who do the daily work of the company.


The journey to leadership

As people grow from employee to manager to top leader (assuming that the evolution is possible in the same company), they recognise that they know less and less about how things actually work in the trenches. Take a supermarket chain for example (2): a store manager succeeded mainly by achieving to involve all of his staff. This was possible because he knew all of his employees personally. When he was promoted to district manager over three stores, he still tried to maintain this contact by visiting all the stores and spending as much time as he could with store and department managers. Promotion came again. He became regional manager over 10 districts only to realize that he could no longer visit stores because he was now “a stranger whose visits occasioned sprucing up the store and kow-towing to the high-level boss.” Human touch was no longer a major advantage and he began to manage by rules and policies and could be personal only with his immediate 10 district managers. As he moved into national headquarters he realized he now had to find ways to develop his regional managers and help them develop their subordinates but that his performance was now measured by the financial returns of each region. More and more of his time was spent on looking over financial results and justifying them to the CEO and the board. The gap between two jobs is - indeed - especially deep when a newcomer crosses the threshold from individual contributor to manager or from manager to leader. This newcomer must basically change how he thinks, and what he does to achieve the same success he enjoyed in the past. Our leader soon realized that all of this time he was becoming more and more dependent on the organization below him because he knew less and less about how things actually worked. There was an even greater remove between him and those further down the organizational chart engaged in the actual activities which organization is dedicated.


Metrics as human proxies

As people grow in experience and seniority, they do less doing and more deciding. Comprehension of concrete cases is difficult (pessimists would say « impossible »). Furthermore, those at the top face to a great degree a cognitive constraint: making decisions despite having limited time and ability to deal with information overload. The obvious solution for these leaders overloaded with information is to have it aggregated. Metrics are this hard information (numbers) top aggregated. Then, they are a tempting means of dealing with this bounded rationality and engaging with matters beyond one’s comprehension. Leaders as most of us can have a behavioral tendency (known as surrogation (3) to confuse what is being measured and the metric used. Even worse: the spell of metric fixation can drive leaders to distrust the experience judgment of those under them. They are more willing to try to control subordinates through a variety of strategies of which metrics is a central component. But this hard information is often limited in scope, lacking richness and often failing to encompass important non-economic and non quantitative factors. The expiration on customers fees can be information for the manager on the ground, not for the top leader. The problem is that a great deal of information is lost in such aggregating. How much does the bottom line tell about the condition of an enterprise; what do patents registered review about what is going on in research laboratory? This kind of situation leads to a knowledge gap between deciders and doers. And a certain kind of top leaders (technocrats) tend to focus on the numbers instead of the nuances, systems instead of subtleties, especially when parachuted into context they do not understand, feel insecure and so grab onto whatever controls are available. The consequence is overcentralization in some areas though the making of decisions that should have been delegated, and overformalization in others by expecting systems to control what direct decision making cannot. Those top leaders are too controlling and too disconnected from people at the same time.


Leaders’ point of view

Top leaders see their company as a player linked to its market, its competitors, its partners networks. The company's performance is perceived globally. Leaders decide on economic, strategic (relevance of different choices regarding survival / development), structural (process, rules, etc.) criteria. Their decisions are still constrained by compliance with regulations, results to be produced for shareholders, but also by company culture (artefacts, espoused beliefs and values, basic underlying assumptions). They relate to investments, strategies, critical skills. At this level, leaders do not see a person but a resource (or human capital) holding a part of the skills that enable the performance of the company to produce value. Business skills that produce competitive advantages are particularly taken care of. From "resources" to "payroll" then to "expenses", there are only a few steps taken when leaders develop strategies to redeploy human resources in line with new objectives.


Isolation

When people and this is true regardless of personality, wield power, their ability to lord it over others cause them to become more focused on their own needs and wants, become less focused on others needs, wants and actions. They act as rules that all others are expected to follow don’t apply to them. For leaders, this happens in two ways. First, compassion gets lost in the pursuit of success. In theirs strivings, they start to see employees, (seldomly) shareholders, and customers as accessories to personal ambition, as instruments to be used and abused as necessary. Second, leaders lose theirs compassion in the achievement of success. A position of power, once attained, insulates some of them from the human consequences of theirs actions.


The principal-agent theory

This theory conceived of organizations as networks of relationships between those with a given interest (the principals) and those hired to carry out that interest: the agents. The version of the theory prominent in the management literature calls attention to the gap between the purposes of institutions and the people who run them and are employed by them. It focuses on the problem of aligning interests of shareholders in maximum profitability and stock price with the interests of corporate executives, whose priorities might primarily diverge from those goals. Indeed, the vision can be quite grim: people are supposed to maximize the shareholder value. But how can one get excited about making money for people they have never met? Principal/agent theory articulates the general suspicion that those employed in institutions are not to be trusted, that their activity must be monitored and measured that those measures need to be transparent to those without firsthand knowledge of institutions and that pecuniary rewards and punishments are the most effective way to motivate agents. Here too, numbers are seen as a warrantee of objectivity and as a replacement for intimate knowledge and personal trust. So, the answer has been to concentrate power in the hands of a single individual: The CEO is alone responsible for the entire performance of the company. "The shareholders have bought off the CEOs" (4). They have empowered them to disempower everyone else with the help of process, rules and the likes. Power in corporation has thus become centralized around the CEO. But this theory ignores the range of psychological motives for why agents derive reward from working and provide a truncated conception of motives. It ignores intrinsic motivation for only acknowledging extrinsic motivation. As a consequence, some beliefs are near canonical (at least among CEOs of a particular generation and ideological bent): the paramount objective of a business is to make money (rather than to enhance human well-being in economically efficient ways). Corporate leaders should only be held accountable for the immediate effects of their actions (and not for the second- and third-order consequences of their single-minded pursuit of growth and profits). « Executives should be evaluated and compensated on the basis of short-term earnings (rather than on the basis of long-term value creation, both financial and social) » (5).


A choice to make

Principal/Agent theory is a powerful factor to move CEOs away from their people. Is it still relevant? In the digital era, we tend to move from exploitation to exploration and everybody knows that start-ups are firsthand exploratory exercises rather than usual exploitation workouts ;) It is a difficult arbitration for leaders though. On one hand, operation is based on the efficient use of acquired skills, it produces reliable results but presents the risk of missing out on more promising alternatives. On the other hand, exploration consists in looking for new possibilities at the risk of not deepening them enough to reap the benefits of their mastery. The optimal strategy depends in particular on the stability of the environment and the time horizon. In the digital era, exploration should prevail. And exploration needs an economy of relationships, not just transactions like those implied by governing by metrics and conforming to Principal/Agent theory. The new wave of automation and the omnipresence of algorithms extend, in an apparently irresistible way, the field of a new Taylorism which is by nature "transactional", where human intervention is limited to the design of structures and their surveillance. The rise of “transactional” mode can also be seen in the proliferation of formalized procedures, routines of all kinds or even automated processing of big commercial data. One can have the feeling that, the algorithms are taking all the power. I think it is an error of perspective. Admittedly, the “transactional” mode is expanding its empire, but the contemporary economy is, in reality, more and more “relational”, in the sense that performance depends more and more on the quality of relationships (open, interpersonal, dialogical) between the actors. In the vast majority of modern industrial sites, "machine productivity" has a greater economic impact than "labor productivity". It creates considerable, non-linear differences in performance between sites. And it depends primarily on the quality of relationships. But what holds true for a productive site also holds, in others forms, for the firm as a whole. Unlike a financial transaction, exchanges between actors in a productive sector need time, memory, shared experiences, building forms of mutual insurance and trust that accelerate learning and gradually create collective performance. The more integrated and therefore fragile the technical systems, the more "relational" the real source of efficiency. Leaders need to factor that in their equation. It is difficult to imagine the firm where all is relational except those at the top. As a leader, your success increasingly depends less on what you do and more on your vision of the future and how effectively you motivate others to achieve it. Behaviors matter materially—they change things and get things done. They also matter symbolically—employees do not really care that much what the values statement on the wall says, they care more how leaders behave. What you do as a leader shouts louder than what you say. While, as a leader, you would like to be judged by your intentions, in fact, the world judges you by your actions. Don’t expect then, if you let the system move you away from your people, to lead them straight to success …


(1) F.W. Taylor in 1911. Except the word « structure ». that I changed. Taylor talked about « system ». But systems took another meaning later in the 20ieth century.

(2) Quoted by Edgar Schein in « Organizational Culture And Leadership » 2016.

(3) Michael Harris, Bill Taylor « Don’t Let Metrics Undermine Your Strategy » Harvard Business Review September October 2019.

(4) Henry Mintzberg, « Managers, Not MBAs » 2004.

(5) Gary Hamel, « What Matters Now » 2012.

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