Friday, January 9, 2009

Corporate Growth and Collapse:A Competence-Conscientiousness Interplay?

Enron, Tyco, Worldcom and Xerox of the recent years, the Wall Street of the recent months and Satyam of the recent days raise the question as to how just one or two top ranking leaders of a company can perpetuate gross operational mistakes and / or financial falsification of the magnitude reported in each case. The occurrence of such events in a public listed company is even more surprising given the size and scale of operations a large company has, the public visibility it receives and the innumerable transactions it has with thousands of its stakeholders.

One conclusion that emerges is that such adverse outcomes cannot be attributed to just one leader, however powerful he or she is in an organization but probably are the result of a number of individuals working collectively together, knowingly or unknowingly, towards such outcomes. However, even this conclusion is paradoxical in the context of such organizations being expected to have people with established backgrounds and appropriate perspectives. Are these adverse outcomes caused by an organizational behaviour dynamic that is not adequately researched?

The answer probably lies in the interplay between two critical dimensions that drive human behaviour. Competence and conscientiousness are the two dimensions which drive the behaviour of any personality, in an organizational context. Competence is the important skill (or skill-set) that is needed to do a job effectively. Such competencies are acquired through education and experience. Conscientiousness is the part of an individual’s thought process that judges the morality of the individual’s own actions.
Competence stems from knowledge and awareness. The more competent a person the more likely the person is likely to be able to contribute in his or her role to the organization. A competent person is likely to be aware of the various decisions he takes and the implications for business growth and propriety. More importantly, competence provides a unique sense of self-worth and the requisite confidence to an individual to operate as per the fair dictates of his or her profession. A competent person is thus likely to stand his ground against any undue pressures and conduct his activities in a performance oriented and ethical manner. As a corollary, an incompetent person is likely to be a pliant individual susceptible to various types of pressures besides being a poor contributor to corporate performance.

Conscientiousness provides the sense of right or wrong to an individual. It helps a person with the requisite sensitivity to analyse whether the decisions and actions he takes by himself or is asked to take by his superiors are consistent with professional and business ethics and practices of good governance. A conscientious person is more likely to exercise his competence in a positive manner for the good of the business and society. As a corollary, a person who is not conscientious is likely to be more amenable to undue pressures and questionable ways, and worse still may even put his competence to misuse in pursuit of short run gains.

A person’s contribution to and influence over the ethical performance of a company is thus an interplay of these two essential dimensions of a personality. The issues one encounters in various organisations are linked to the variability that is found in each of these the two dimensions. Like every attribute or outcome in the universe, competence and conscientiousness also follow stochastic distributions. In a well-run organisation, the talent pool is likely to reflect a normal distribution in terms of levels of competence and conscientiousness each.

One can, therefore view the human resource base of an organization, irrespective of the domain specialization or hierarchy level to which the talent pool belongs, in terms of a 2 X 2 matrix which classifies people in terms of high or low levels of competency or conscientiousness. Organizations being the sum-total of individual profiles, the aggregation of competency-conscientiousness profiles of the individuals also contributes to the organizational DNA. An interplay of these two dimensions of a collective human resource base results in organizations which are clearly differentiated, as shown by the 2 X 2 organizational grid below.

High in Competence and High in Conscientiousness: Virtuous and vibrant organizations
High in Competence and Low in Conscientiousness: Aggressive and mercenary organizations
Low in Competence and High in Conscientiousness: Ethical and static organizations
Low in Competence and Low in Conscientiousness: Opaque and shallow organizations

Organizations which have people with high levels of individual competence and conscientiousness turn out to be virtuous and vibrant organizations which demonstrate industry leading performance in business, ethics, governance and safety. These firms figure consistently as the top rankers in the blue chip league and often set the tone in all aspects of corporate behaviour. Companies such as Toyota fall in this category.

Organizations which have large pools of highly competent people but with low levels of conscientiousness typically post high business growth rates. However, the methods they deploy to achieve the performance could be questionable. These organizations are typically driven overwhelmingly by a performance criterion and are likely to choose the quantitative goals of performance over qualitative ideals of ethics, governance or safety if it were to come to a crunch ever. Most performance-centric companies which are loved by investors for the momentum of their earnings tend to fall in this category.

Organizations which have a preponderance of people who subscribe to high levels of ethics but have not bothered to equip themselves with the competencies required to handle the challenges of modern-day business would be virtuous organizations but with pedestrian performance. Though such organizations have the ability and intent to do good to the economy and the society they would be unable to do so for want of requisite technical and managerial bandwidth. Most traditional family-held businesses and NGOs run by individual champions fall in this category.

Organizations which are low in competence and conscientiousness are a drag to the economy as well as society for they represent a waste of public resource. In addition, if these companies desire to emulate the high performance companies without the inherent competence and conscientiousness they could pose a grave risk to the economy and society. Such companies could resort to questionable means to grow in business. Short term tactics deployed by such companies under the cover of opaque management processes result in hollow and risky business models that are susceptible to collapse at the first downturn. From Enron to Satyam, gigantic corporate failures take place in companies with such low levels of competence-conscientiousness mix that fail to support aspirations of high achievement.

Given the interplay discussed above, the top leadership in an organization has to aim at enlarging the human resource pool that is truly both competent and conscientious while shrinking the human resource base that is patently low in competence and conscientiousness. This is easier said than done for a couple of reasons. Competence is often measurable and visible as quantitative outcomes of performance while conscientiousness is qualitative and perceptional. It is a matter of further complication that high level of quantitative performance could itself be due to low levels of conscientiousness.

Organizations have to deploy 360 degree analysis during recruitment, training and performance appraisal phases of its human resource management so that each individual is analyzed in terms of not only the individual’s competence and conscientiousness levels but also how he or she integrates these two essential factors in terms of a performance work ethic. The top leadership of a company has to necessarily set the pace for processes which recognize and reward individuals only when their competencies are combined with conscientiousness. Such an approach will doubtless help create an organizational DNA that is virtuous and vibrant, leading to high performance with high ethics.

Posted by Dr CB Rao on January 9, 2009



It is an interesting analysis. One could argue that it is an over simplification of human resource attributes in the organizational context. Nevertheless, it is helpful in the understanding of optimization issues in the ethics-efficiency debate. There are several related concerns that require some more clarity.

First, it is not easy to slot organizations in any of the cells of the 2x2 matrix without understanding the critical minima of individuals who would determine the outcome for the organization. In a temporal sense, transition of organizations from one cell of the matrix to any other can not be avoided. In some cases it may even be desirable if such movement is for the positive. When such transition does occur, what would be the telling signs or symptoms? What could be the early warning signals that would enable organizations to take timely steps to retain the core human resource who may tilt the aggregate towards the desirable mix of high ethical values (conscientiousness)and high efficiency values (competence)away from the lower values on both counts.

Second, the issue is complex because this macro mix at the level of the organization is not merely the arithmetic aggregate of individual value mixes. What is that 'extra' factor productivity possessed by organizations that goes beyond the simple aggregation of individual counts of ethics and efficiency or conscientiousness and competence?

In the two factor model suggested by dr c b rao, that extra could only be the outcome of interaction among individuals in an organization i.e. the outcome of transactions between the personality blend of competence and conscientiousness of one individual with the blend of other individuals in the group or division or vertical or horizontal functional delineations in the organization.And there would be several such transactions taking place simultaneously. What are the outcomes of such transactions? Often, the degree of competence or efficiency in one individual i.e. the intellectual capacity and skill levels would be accentuated and influenced by the experiences and competence of others individually and collectively. The reverse is also possible. Learning from peer group and superiors and even juniors, are made possible through the transactions of group dynamics. Even ethical values in others can often rub off. However, while for the acquisition of influences in regard to competence is possible from every other individual or group, the latter namely the conscientiousness can be imbibed more readily from superiors and peer groups rather than from others. This is why the leaders as role models are important in any organization. Unfortunately in each of the organizational failures that we have witnessed across the globe - why single out only the Indian ones - leaders have failed. Thus the third concern that one needs to address is the undue and disproportionate weight that the quantum of conscientiousness among the leadership in any organization carries in the outcomes and in the situation of organization in our 2x2 matrix.

Fourth, the transactions discussed in preceding paragraphs are not limited to interactions among those within the organization - human influences continue across the confines of the organization. Don't we learn from our vendors, our competitors, our distributors, our dealers, our advertising agencies? Ofcourse, we do.

Fifth, the role of education and a myriad other influences in society can also accentuate the imbibing of conscientiousness among individuals - but that is a broader issue and could be treated as a given because the external influences not peculiar or specific to an organization is equally so for other organizations in the economy or society as well.

(to be continued....)

cb@strategy said...

I agree that leadership is the most important determinant of how this 2X2 matrix plays out at individual level as well as organisational level. But the leaders themselves can be analysed through this matrix. Yes, the matrix is simple but is an effective first pass filter. A company's HR department has the responsibility to watch for early warning signs as well as manage the process of migration across the quadrants. I appreciate the insights of Troglodyte.