Checks & Balances

Organizations make decisions all the time: who to hire, which vendor to use, what marketing strategy to employ, which businesses to acquire, and even what mission to adopt. In some cases, a single person has the unilateral ability to make a decision — but the majority of consequential changes to the status quo require the consent of more than one person. Organizations impose checks and balances to ensure that decisions are made appropriately.

One method for establishing checks and balances is to require approvals from a decision-maker’s superiors or from an independent department. An alternative method for checks and balances is to use committees to make decisions.

Which approach is best in which situations?

In many corporations, a hiring decision is made by the new employee’s manager. While the hiring manager generally has the discretion to hire the employee he or she feels best, the HR department might ensure that salary is set appropriately and that appropriate efforts were made to increase employee diversity. Similarly, while the Vice President of a division may well identify an acquisition target, the CEO’s approval is generally required to consummate the deal. In these situations, one party (the hiring manager or VP) is responsible for proposing a course of action (to hire a new employee or acquire a company), while another (HR or the CEO) is responsible for confirming that the action is consistent with the organization’s overall policies.

On the other hand, committees have multiple members and, in general, do not permit unilateral action by any individual member, including the committee chair. For example, a board of directors will often form a hiring committee to select a CEO. The committee will vett candidates and select (by a vote of the members) the best available candidate. The full board will then confirm (or, in rare cases, reject) the selection. In this example, there are two levels of check-and-balance; no individual committee member controls the nomination process, and the full board must approve the committee’s recommendation.

The use of committees is inherently conservative, in the sense that committees tend not to favor radical change. Most committees operate largely by consensus; a single objector may be able to block action, and a super-majority is usually needed to move forward. Committees are typically formed by choosing representatives of different stakeholder groups (e.g., representatives from legal, finance, and sales, or representatives from shareholders, labor unions, and government). Those stakeholder groups often have divergent interests and objectives, with the result that it is difficult to obtain consensus for any change.

In contrast, when authority is concentrated in a single person (even if approvals are required from other people), the organization is likely to change much more rapidly. The empowered manager can effect relatively rapid change by hiring or firing people, buying or selling assets, and by changing policies. While various stakeholders may disapprove or resist some changes, the determined executive can overcome most objections.

Broadly speaking, organizations are in one of two modes: conservation or transformation. An organization that is in conservation mode is trying to continue doing what it is doing, whereas an organization in transformation mode is trying to do something different. A start-up will often be in transformation mode, whereas the dominant incumbent in a market may be in conservation mode. Conservation mode is best implemented via committees, whereas transformation happens better when managers are empowered to enact change.

Neither model is inherently better or worse. While most startups rightly favor rapid change (e.g., Facebook’s “move fast and break things” motto), more mature companies (and non-profits) are often better served by stability. (Even Facebook, now a large public company, has changed its motto to reflect its circumstances.)

When an fast-moving organization becomes mature, it may become appropriate for management to create committees to reduce risks. That transition is relatively easy, provided that the senior managers in the organization recognize the benefits of the transition.

Moving in the other direction, however, is quite difficult. If customers begin to strongly value a different set of product attributes, or if labor costs increase dramatically, or an important new technology arises, an organization may be under significant pressure and need to effect a quick transformation. Unfortunately, an organization that has been conservative may find it nearly impossible to embrace rapid change when necessary, particularly if the organization makes heavy use of committees to make policy. The heavy use of committees may impede such a change.

The only solution in such a situation is aggressive action by the board of directors to explicitly empower management. As the board is itself a committee, making that decision is itself difficult, especially if the board itself is large. Take heed when considering expanding a board!

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One thought on “Checks & Balances

  1. Pingback: Who’s in Charge Here? | Keeping Busy

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