Structuring for Accountability

Can a manager have clear responsibilities and yet not be accountable? Unfortunately, because of poor organizational structure, this situation is not uncommon.

As an example, let us look at the debacle of Enron, which went bankrupt in 2001 amid charges of investor fraud. When Enron collapsed, there were calls for government regulation as a cure for corporate “creative accounting.” But I believe a better solution lies in restructuring organizations to ensure accountability.

Theoretically, Enron CEO Kenneth Lay should have been accountable for any irregularity in Enron’s accounting and reporting. But was he?

I suggest that although CEOs should have all of the authority, power, and influence they need to carry out their responsibilities, they rarely do. If the organization is structured incorrectly, the CEO may be deprived of information that would be the source of his power, authority, and influence.

When that occurs, the CEO is like the emperor in the children’s story “The Emperor’s New Clothes”: He parades through the company’s offices and corridors believing himself to be adorned in full CEO regalia, in possession of all the authority, power, and influence in the world; and everyone applauds and genuflects when he passes, as if he really does. But in reality, he is nude. Why? Because the information that would allow him to truly guide the organization is not reaching him.

In order to get the information that provides him with the power to drive the organization and be responsible for its behavior, a CEO must always have two sources of information. If he only has one source, he loses his discretionary power to make decisions, in effect ceding all his power over to the other person and becoming totally dependent on him. He becomes a virtual prisoner of that source.

A perfect demonstration of disastrous structuring can be found in the CFO phenomenon, a position embraced with almost religious fervor among American industries. Treasury, investor relations, budgeting, and controlling the bookkeeping( accounting) all report to the CFO; in many organizations, he also supervises the administrative functions: The Legal Department, HR, and even IT.

This structure puts control of all the company’s financial data in the CFO’s hands. Because he is responsible for showing profitability, the temptation will be great for him to “spin” the information, interpreting and presenting it in the most positive light. And because he alone controls access to this information, it is easy for him to manipulate the numbers – to impress investors, show profitability, or demonstrate return on investment.

Instead of a CFO, two people – a Finance VP and a corporate controller – should report directly to the CEO. The Finance VP should determine whether the company is getting a good enough return on its investment, how best to handle cash flow, and what the company should do with its money. The corporate controller’s focus is on collecting adequate and precise information and ensuring its integrity.

Naturally, these two will be in conflict. Finance will constantly challenge the corporate controller's information, and the corporate controller will disagree with how Finance interprets the data. It is precisely through such conflict that the CEO will hear various perspectives and be able to judge them for himself.

CEO accountability will derive from structuring the information hierarchy to ensure that he receives dissenting information, enabling him to judge the merits of different opinions and make decisions. Until that happens, we can throw one CEO after another in jail, but it won’t change anything. The next CEO won’t improve unless we make him feel accountable.

When the Tail Wags the Dog

Ideally, an organization’s strategy should direct its structure. That is what Alfred Chandler taught us already in 1948 and it became the guiding light of all consultants: Strategy precedes structure. As in the architecture example above, once an organization has set the functions it wants or has to perform, its (P), it can determine which structure will best support those objectives. If the strategy is to move to the right, for instance, then we need to change the engine settings, reducing the power on the right and increasing it on the left. That is what should happen but not what is happening.

But more often than not, it is the other way around: The structure determines the strategy. What is happening – not what should be happening, what is happening – is that the way the engine is already set is what’s going to steer the boat, regardless of how much you shout that the new strategy dictates a change in direction. Basically the form is leading the function to behave in a certain way.

Why does this occur? One reason is that changing the power structure is extremely difficult and painful, in any organization – and risky to those who initiate or support it. Some people’s power positions will inevitably be challenged, and anyone entering that crossfire could get hurt. Any time you want to decrease power on the right and increase it on the left, the left side will be delighted, but the right side is going to fight you tooth and nail because it’s losing ground. That is why Machiavelli said, “It must be remembered that there is nothing more difficult to plan, more doubtful of success, nor more dangerous to manage, than the creation of a new system. For the initiator has the enmity of all who would profit by the preservation of the old institutions, and merely lukewarm defenders in those who would gain by the new ones.”2

By contrast, changing strategy is relatively easy: You look at the environment, look at a map, and decide. But the bottom line is that changing the strategy – standing at the top of the boat and shouting new instructions into the wind – is not going to change the boat’s course by even one degree. The only effective way to change the direction of the boat is to change the power settings.

Nevertheless, here’s what happens in many companies: The managers relax on deck and talk about which way they think the organization should go. Then they see rocks ahead, and they panic: “Oh my god! Pull to the right! Come on, people, we can do it! Turn to the right, all together! Let’s see some teamwork! Let’s get motivated! To the right!”

But who is actually adjusting the dials to shift the boat’s course to the right? Nobody!

This kind of strategy is the equivalent of doing a rain dance in the Sahara. Unless you change the power structure – unless you tilt the globe to bring rain into your area – the desert is going to remain a desert. All this talk about process, teamwork, quality of people, vision, values – it’s all useless if the power settings are stuck in one place.

How and why do those power settings get stuck? When the same process is repeated and repeated and repeated, it becomes a habit; eventually, after more repetition, the habit becomes a form. And if the form isn’t regularly examined and analyzed and tweaked or changed, it becomes petrified.

When that happens, structure (form) and process (function) exchange places. In the beginning, the process dictated the structure; by the end, when the structure is petrified, it takes over and impacts the process.

Picture water trickling down a mountain. Slowly, gradually, it is sculpting the river bend. But as it repeats and repeats itself, working deeper and deeper into the ground, it slowly becomes a canyon. At that point, it is no longer the water that influences how the river bends; it is the river bend that directs how the water flows.

Sow a thought, and you reap an act;

Sow an act, and you reap a habit;

Sow a habit, and you reap a character;

Sow a character, and you reap a destiny.

—Samuel Smiles (1812-1904) in “Life and Labor” (1887)

This phenomenon is so common in organizations that, once I’ve analyzed the power structure of a company, I can tell what strategy it will implement, regardless of its stated goals and desires. The present structure has become so overwhelming and powerful that it dictates nearly every future decision.

To avoid that situation, it is essential to consider all the pieces of the organizational whole – and in the proper order. There is a generic template to the desired structure. That is how I start all my restructuring efforts. That in itself relaxes the setting on the engines of the motor boat. That creates space for (E)s and (A)s and (P)s and (I)’s. than we go forward and adapt the template to the specific needs the organization has in the future. These adaptations are more easy to be accepted by the organization because in the first draft of the restructuring I have already created organizational ecology for all (PAEI)s to have their adequate power bases. I am not alone in making change. I have allies.

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