Sunday, December 27, 2009

Corporation as a Totalitarian State: Reasons and Remedies

Over the centuries of industrial and economic development, the corporation has grown as the most powerful and pervasive form of human organization for achieving economic goals. There has, however, been significant debate over the last few decades as to whether the typical corporation is run with the most optimal objectives and outcomes, which are appropriate in a broader economic and social context. The debate has become shriller with the emergence of individual corporate malfeasance such as Enron and Satyam or collective corporate misdemeanor as that found in recent collapse in the Wall Street. Concepts of exchange regulations, corporate governance, corporate social responsibility, board independence or CEO accountability have provided certain ameliorative measures but have not altered the way the typical corporation is fundamentally run.

Whether the overall context of the country is democratic or autocratic, the corporation itself has surprising global commonality in its primary characteristics, across countries and cultures. In essence, provocative though the statement may appear, the corporation continues to be set up and managed as a totalitarian entity. As one is aware, a totalitarian state is one where a government subordinates the individual to the state and strictly controls all aspects of life by coercive means. In the initial years of the corporation when Theory X management was the dominant practice, a typical corporation was completely exploitative. Emergence of Theory Y management and understanding of organizational behavior, no doubt, brought in individual motivation as a key anchor of modern management. Yet, it cannot be disputed that the corporation continues to be run as a totalitarian entity where the employee has to be subordinate to the Corporation.

Corporate totalitarianism would not be an issue but for the paradoxical convergence in the mindsets of employees and the leadership to be run in a totalitarian manner. The leadership of a corporation is charged with the task of wealth maximization. More specifically, it has to maximize the corporation’s revenues, profits and market capitalization at all times. So long as a corporation is in a legally approved domain it has to do, and will do, all it can to maximize its financial parameters. A corporation in the tobacco or spirits industry, for example, seeks to maximize the consumption of the tobacco products or liquor products despite the harm such goals may cause to the society and environment. In an analogous manner, employees are increasingly tuned to concepts of variable pay and stock options which link their compensation structure and career growth to business maximization. The individual in today’s material world is completely subordinate because of either individual volition or leadership compulsion to a paradigm of corporate totalitarianism.

Defining (and defying) corporate totalitarianism

Definition of corporate totalitarianism is a complex subject. In a democratic state the ruling political party and its government secure a mandate, however imperfect the democratic processes are. They, therefore claim some transparency and legitimacy in translating a mandate into action, recognizing that a gross travesty could vote them out of power the next time. In an autocratic state, where a single monolithic party dominates the governance, as in the case of China, the government can claim the backing of a well articulated party ideology in seeking to govern in a totalitarian way. In a corporation, however, despite the existence of shareholder mechanisms it is the corporate leadership that determines how a corporation should be run. As long as a corporation remains in legal and regulatory confines, and in addition delivers reasonable investor returns, the manner in which a corporation is run never begets a question. As a result, what a corporation should have, and would have, achieved with better corporate democracy or ideology, as the case may be, is never understood.

Difficult though it is to define, corporate totalitarianism lends itself to certain markers. A corporation which remains rooted in businesses that are socially less desirable or in markets that are prone to questionable practices is often blinkered from exploring better but more challenging options due to lack of free thought and open ideology in the corporation. A corporation where leadership positions are filled through nepotism or crony capitalism is able to do so due to the abject surrender of employee merit to leadership muscle. A corporation which always maximizes short run profits to the detriment of long term value does so because it is more expedient to run a generic business than create an innovative business. In all such cases, and more, lack of enduring values that optimally bind the corporation and the society is a key cause.

Progressive and intelligent corporations mitigate the temptations of totalitarian behavior by enabling free intellectual thought in their organizations, which in turn helps them move into better product-market segments, subscribe to corporate meritocracy and embrace science and technology in a big way. The case of ITC Ltd in India is a case in point in respect of product-market segments. Once completely confined to the socially inimical domain of cigarette manufacture ITC, the corporation became a socially responsive conglomerate by diversifying into paper, stationery, hotels, hospitality, food processing, agri-business and information technology as well as e-choupals (rural electronic marketplaces). The case of Hindustan Unilever is a case in point in respect of corporate meritocracy. Though traditionally in simple product lines like soaps and oils, HUL became a pioneer in nurturing highly competent organizational talent that introduced several innovative concepts of business growth and inclusive marketing in India, offering in the process its leadership talent to the parent Unilever’s global operations. The case of Tata Motors is a compelling case study of an Indian corporation becoming a global leader by acquiring leading edge scientific and technological capabilities in design and manufacture of automobiles.

Corporate leadership that is intellectually driven as much as it is financially driven has a better chance of resisting totalitarianism and instead promoting inclusive, yet competitive business growth. Such corporations institutionalize the anti-totalitarian DNA in the organization by recruiting the brightest talent through open recruitment practices from educational campuses, establishing intensive on-the-job and off-the-job training programs, providing challenging professional environment and undertaking objective assessment of performance for differentiation. This, however, is easier said than done because of the way corporations are organized to concentrate power in its leadership and the manner in which the university system turns out talent of varying levels. There is a four-way grid that combines two dimensions of leadership with two dimensions of talent pool.

4Q leadership-talent grid

Essentially there exist two types of leadership, autocratic and participative, and two types of talent systems, meritocracy and mediocracy. These are, of course, representative of two extremes in each case, identified for conceptually illustrative purposes. There could be shades of grey in each case as well as multiple combinations. Autocratic leadership implies top-down administration of vision, strategy and execution, together with controlled employee management. Participative leadership, on the other hand, represents a consultative evolution of vision, strategy and execution, together with facilitative employee management. Meritocracy implies presence of, and reward for, high levels of skills across the organization. Mediocracy represents middling, average skill levels across the organization, and are rewarded uniformly regardless of performance.

These four combinations may be viewed simplistically as autocratic mediocracy, autocratic meritocracy, participative mediocracy and participative meritocracy. Autocratic mediocracy represents the face of a completely totalitarian corporation where the leadership’s writ is total and unquestioned not because of its strength but because of the inability of the organization to engage in constructive intellectual debate. Autocratic meritocracy represents a paradigm where the ability of the organization to chalk out and execute creative strategies is often stymied by the insistence of the leadership to conduct the affairs in its own way, thus eliminating grassroots ownership and participation. Participative mediocracy reflects an enlightened leadership relying on a pliant organization to develop consensual approaches that fail to be competitive in the marketplace. Participative meritocracy is the only optimal combination that brings out the synergy of progressive leadership and competent talent pool.

Leadership teams and organizations need to realize the importance of participative meritocracy as a means to eliminate totalitarian trends from the corporation and promote healthy internal debate in the corporation. Participative meritocracy helps in the development of economically sustainable and socially responsive corporate ethos and establishment of a process and systems driven organizational eco- system. Comprehensive and thorough planning, focused and speedy execution, and differentiated and rewarded performance are the hallmarks of participative meritocracy. Each corporation can then develop its unique identity which unequivocally reflects the value system that it subscribes to, with customized reference to the business domain it operates in.

Totality of purpose, the true anti-totalitarian marker

Willy-nilly, corporations and leadership teams become prisoners of their own history and legacy. In today’s fast changing world product lifecycles and even business lifecycles are becoming shorter than ever. A company committed to the paper and publishing business, for example, cannot support all of its growth plans only through the conventional paper medium, given the pervasive impact of the digital age. A manufacturing industry can no longer conduct its operations oblivious to its carbon footprint and in ignorance of clean technologies. The inability of organizations and leadership teams to recognize such trends of inflection makes them all the more defensive, getting increasingly rooted in a past which has no connect with a dramatically different future. Such corporations attempt to survive by totalitarianism only to wither by that.

Corporations and leadership teams, on the other hand, must keep an open mind on the totality of purpose of their existence and identify the right motive force for growth. This requires the leadership teams to challenge the very domains that provide today’s revenues. One may hypothesize that had the global automobile industry been more proactive in bringing out clean motive power it would have made a more proactive and positive contribution to the phenomenon of climate change. Novo Nordisk derives all of its billions of dollars of turnover from injectable insulin products. It requires a great openness of mind on the part of its leadership team to develop an insulin pill, as it is presently doing, which if successful could not only change the face of anti-diabetes treatment but also threaten its own established investments in the injectables domain.

Lack of intellect, competence and free thought in organizations promotes corporate totalitarianism to the detriment of a corporation’s broader economic and social purpose. Progressive leadership teams must assiduously seek the totality of the corporation’s purpose by upgrading their own competencies from time to time and nurturing a climate of open intellectual thought in their organizations. Those corporations and leadership teams which provide the due importance to free and creative thought, and eliminate undue emphasis on executive compliance and conformity would be providing the right incentives foe knowledge driven transformation. This approach would help the corporations to lead change, and leverage change for achieving a totality of sustainable purpose, with reference to the economy and society.

Posted by Dr CB Rao on December 27, 2009


Narayanan said...

Insightful article on a topic that deserves more attention in future. I would think corporate culture and geography will play an influential role in progressive transformation from autocratic mediocracy to participative meritocracy. In some measure, what we seek is a corporate version of "ownership society" with key ingredients of Responsibility, Liberty and Prosperity practiced at the individual level albeit with a duality of purpose - economic and social enrichment of self and the organization. C-suite and senior leaders have a strong role in nurturing such a culture that celebrates courage and creative thought as much as it rewards compliance and conformity. In the absence of strong accountability and transparent governance mechanisms, perhaps it is rank and file that will lead this change for leaders to follow?

Unknown said...

As usual this write up from you is extremely relevant and I think each management should very honestly rank themselves on scale of 10 for each of the seven constructs to understand where they stand presently and create internal program to improve the score by design. Such approach would surely enhance sustainability of performance and that too with high degree of satisfaction all around

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Anonymous said...

Coincidentally stumbled upon your article, because I've been having similar thoughts about corporations and totalitarian systems recently.

I like your article, and I strongly agree with your observations. However, I do not entirely share your conclusions. History knew one example of autocratic meritocracy (Nazi Germany) and one example of autocratic mediocracy (Soviet Union in the 1930s). Both states were highly efficient, progressive and forward thinking, also compared to the democratic world powers France and England.
Furthermore, this example shows that one cannot state a priori whether autocratic meritocracy is better or worse than autocratic mediocracy.

In my opinion, the totalitarian corporations usually have huge structural ethical problems, while remaining economically efficient.