Ask the CHO: How do you run a business without managers

Dilbert bossRobert asked this question in a comment on a previous post:

If I remember correctly Alexander, I read on your site here that one of your companies did not have any managers? Do you elaborate on that anywhere and if not could you?

It seems that a lot of the problems seem to come from low to middle management and as someone who is looking to start my own software company I don’t want this to happen in my organization. A no managers approach seems pretty appealing.

You’re right Robert. In Enterprise Systems, the IT company I co-founded back in 1997, we decided not to have any managers. We wanted plenty of leadership, but we wanted dynamic leadership that could change as the situation warranted.

So rather than have presidents, vice presidents and managers, all employees had an equal say in running the company. This was backed up by the fact that all employees were also co-owners, every new hire being offered a stake in the company after six months on the job. While I and my two co-founders retained a majority of the shares, this gave us no greater power in making day-to-day decisions.

So how did we make decisions? We had two major structures in place:
Areas of responsibility
We sat down and made a list of all the categories of tasks we had in the company. Sales, finance, intranet, our website, personnel, etc. There were around 20 in all. Then instead of appointing managers responsible for each of these, we asked who in the company would like to do it, and let people choose for themselves where they wanted to be involved. Interestingly, everyone signed up for at least a couple of these and every single task got at least one person assigned to it.

The result was that all these tasks were done by people who liked doing it – and who therefore invariably did a great job.

The people who took on such an area of responsibility were responsible for making a lost of all tasks, for making a budget if required and for making sure that everything worked as it should.

Company meetings
Every two weeks we had a company meeting for all employees. This was also important because many of us didn’t work out of the office but at a customer’s site. At these meetings, we made larger decisions or any decisions that didn’t readily fall under one of the established areas of responsibility. When we voted, it was one man, one vote, regardless of seniority or number of shares.

So how did this work in practice? Here’s an example: When it looked like we needed a new and larger office, we raised the issue at a company meeting. Did we need new offices? Yes! What were our preferences for size, price, location, etc.? Discussion ensued.

We then appointed a task force and asked them to go look at offices and return with some options. Who was in the task force? The people who volunteered to be, of course. The group came back with some ideas, and we all voted on which one we preferred. We had ourselves a new office. The task force went on to find us a designer to spruce up the place and some cool furniture. This being a major(!) expense, the budget was approved at another company meeting.

The advantages of this model are:

  • Ownership. Everyone is as involved as they want to be. No one is sulking because a decision was made over their head.
  • Motivation. People are insanely motivated, because they’re a part of running the company – they don’t just work there.
  • Implementing decisions. Because people are involved in making decisions, it becomes much easier to implement them. You don’t have to sell decisions to reluctant employees.

The disadvantages are:

  • Time. Sometimes it takes time to arrive at a decision. This was never a problem for us, but if your business climate requires constant quick leaderhip decisions, this may not be the right model.
  • Petty discussions. If you’re not careful, meetings can devolve into endless, petty talk about mindless minutiae. In this case it’s important to stop and delegate or to trust someone who cares to make a good decision.

The proudest moment for our model came in the company’s darkest hour. We were never a dotcom company, but when that era ended, we were in trouble too. Suddenly about half our customers were no longer buying from us, and we were in deep trouble. Basically we were out of money and it didn’t look like new customers were coming in.

In a traditional company this is where the CEO steps in and makes the tough decisions needed, and I have to tell you, we were sorely tempted to offload this decision onto one person who could then call the shots. Luckily we held onto our process and in a series of company meetings that ranged from playful to painful we talked about how we would handle it.

We narrowed it down to two choices: Taking a 25% pay cut or firing 5 people. Discussions raged. I, for one, held out for the pay cuts. That became a unanimous decision. And a good one too – just 6 months later we had signed new customers, and every single consultant was back in business. If we had fired people back then, we would have missed them sorely.

I realize that this experiment worked for an IT company of just 20 people and that you can’t possibly generalize from that to larger companies in other fields. And yet I believe that this is certainly a viable way to go. That what companies really need is leadership that is dynamic, distributed and entirely voluntary. Leadership that switches from person to person, depending on who has the will and the energy, rather than what it says on somebody’s business card.

Here’s some more reading on the topic:

36 thoughts on “Ask the CHO: How do you run a business without managers”

  1. I’m very interested in the idea of an employee owned company. To me this seems like the most productive model because the people doing the work are the ones who stand to gain from it. I know that personally I work much harder when I’m working for myself. I’ll be sure you read up in your other posts about Enterprise Systems.

  2. What a wonderful story! The older I get, the more perplexed I am at the notion that appointment to a position suddenly suggests a particular range of expertise.

    John Wesley, if you are interested in employee ownership, I’d suggest that you look at the story of Robert Beyster – founder of SAIC and now founder of the Beyster Institute. Great story, his. For about 35 years his company profits and revenue grew about 35% – each year! When he retired, SAIC was the largest employee-owned company in the world. Great success story and now the Institute offers information about employee ownership.

  3. Awesome. I’ve been mulling over the feasibility of forming a company that is limited by guarantee rather than shares (this is common in the UK at any rate for sports clubs, etc.), the advantage being that without shareholders one avoids the inevitable conflict of interest between employees and shareholders. [It also means I can avoid having to read and digest a large section of the Companies Order :o) ] However, even a company limited by guarantee has members and can employ mechanisms by which to distribute profits amongst its members, so this doesn’t necessarily avoid that conflict of interest. Your approach of essentially making all the employees members of the company does get around that. Nice going. Definitely the sort of organisation I’d want to work for – the satisfaction to be gained has to be way beyond the norm.

  4. Thank you very much for elaborating on that subject for us. If it had not been an IT company I might not have taken as much interest in it and thus asked the original question, but I’ve worked at companies where there can be a lot of animosity between management and the staff and so it really peaked my interest.

    This one is definitely getting bookmarked!

  5. Ron: SAIC is a great story – I’d never heard of it. I always get the question: Can this work on a large scale… The answer, it seems, is yes.

    Michael: Very interesting! It’s different from our model, but it sounds great.

    Robert: Glad you liked it. Please let me know how you end up using it.

  6. Pingback: A Mogul To Be
  7. Employee ownership works on a large scale but I don’t think that Beyster used your notion of emergent leadership. How large is SAIC? Their revenues now top $7 billion.

  8. Alexander, have you worked with any mid-size (100+ employees) or large companies (1000+ employees) to scale this idea of shared leadership?

  9. Very interesting. I’m curious: how did you guys set and adjust salaries? I’m thinking of what happens when you have “leadership that switches from person to person, depending on who has the will and the energy”.

  10. Ron: Good point, I hadn’t made that distinction!

    Nneka: I’ve (sadly) never worked with other companies to introduce this model. Though I’d love to. Any companies out there need some advice on democratic leadership – just let me know :o)

    kd: Great question! We had a whole system for setting salaries. First, we decided together what would count and what wouldn’t count in setting salary. We wanted customer satisfaction (how much our customers liked your work), engagement (how engaged you were in the company) and market value (what would someone with your skills be worth “out there”) count the most.

    On the other hand, your education and seniority did not have an influence on your salary, except for how they influenced the quality of your work, of course.

    Then we appointed a 3-man group who set everyone’s salaries based on this. If anyone disagreed or wanted to know why their salary had been set to that amount (it happened but rarely), they took a meeting with one of the three. The three guys set each other’s salary, ie. the other 2 did it for the 3rd guy,

    And of course, everybody knew everybody else’s salary, which saved us no end of trouble.

    Scott: I agree Ricardo Semler Rocks!

    HomerSimpson: Ohmygodohmygodohmygod – Ricardo Semler. Woohooo! :o)

    Mario: Thanks for the tips – those are great links!

  11. I’ve been in more than a few organizations that worked by discussion and consensus, and I’ve almost invariably found that the one thing that kills them all in the end is time and turnover.

    In order to start up such a system, there has to be a lot of initial goodwill and a great deal of “buy-in.” My feeling is that as time goes on, and people turn over, and as areas of responsibility tend to crystallize, the initial goodwill tends to dissipate, and eventually a more impersonal system descends. At that point, the decentralized decision structure becomes more of a liability than anything else.

    It seems to me that the only way of really working around this problem in a permanent way is to divide and delegate authority, but then you really are talking about managers, just using a different word. That said, I think you could use some of these principles to set up an organization that encouraged good managers (the traditional hierarchical management structure isn’t conducive to this, IMO), but that’s the goal to focus on.

    I.e., the golden standard isn’t “no managers,” but “better managers.” And perhaps “a bad manager is worse than no manager at all,” which is also a viable claim.

  12. > Ron: SAIC is a great story – I’d never heard of it. I always get the
    > question: Can this work on a large scale… The answer, it seems, is yes.

    As a former SAIC employee fscked over during the post acquistion IPO of NSI, I can tell you first hand that SAIC is not all it is cracked up to be. To believe otherwise is to be ignorant of the facts

    They practice the sleaziest of tactics just like every other corporate whore on the governmetn dole… I rejoiced the day I quit that company for a far more interesting journey in life.

  13. That’s a great model until you have a few dozen people and someone abuses it. Corruption is a real thing.

    For example…

    Someone has a brother who needs to rent some office space… it doesn’t take long before that individual gets involved with anything having to do with real estate, and funnels business to his relative.

  14. adam: You definitely have a point, in that this system is easier to get started than to keep going. I think you CAN do it, but it takes constant attention and updating of the model.

    anonymoustroll: Thanks for the reality check on SAIC!

    Justin: I’ve read about St. Lukes, and they’re an inspiration.

    Brian: It IS a risk, but I’m not sure the risk is bigger in our type of organization. It’s true that more freedom means more risk of abuse, but so does tight control and a demotivating organization.

  15. I work at a similarly sized company that operates very similarly to the organization described in this blog. Although in our case it’s much less a case of a conscious decision and more a case of lack of leadership at the upper levels.

    One of the pitfalls that we regularly run into that is not mentioned above is the lack of resource management. My plate will often overfill with work from two or three different people who are completely unaware of what the other is loading up for me. When I have to delay their work because I’m simply out of capacity, they get jealous or angry, or have already made promises to the customer about delivery time lines. These situations are generally followed up by long periods where I’m struggling to find enough work to fill an eight hour day.

    Just a thought.

  16. Nice story.

    I’m not letting the big stockholders of the hook, by any means, because they really do rely on government-enforced privilege to collect monopoly returns on their equity.

    But that being said, the hired management probably screws over workers at least as much as the absentee owners do, and without doing the owners much good in the process.

    The big stockholders and workers would actually have a common interest in drastically scaling back or eliminating much management, switching over to some version of the Coventry self-management system, and putting management salaries into a worker profit-sharing plan instead.

    Despite the myth of management downsizing, the total percentage of the workforce involved in supervisory work is higher than it was in the ’80s, and the percentage of compensation going to supervisors is at a near high of around 40% (compared to 20-something back in the ’70s).

    Ever see Scott Adams’ proposed management system, OA5 (out at five)? It required eliminating all positions and spending that weren’t directly involved in creating value (people who write mission statements are right out the door), eliminating most meetings, and expecting everybody to leave on time in return for being productive while they’re actually at work.

  17. Julio: Good point. I can’t say that we never had problems along those lines, but we always solved them together. If people felt overworked or fell behind, they could always say so. Each one of us was responsible for our own workload, for not taking on more tasks than we could handle and for asking for help when needed.

    Kevin: I always appreciate your perspective on these things. It’s interesting to imagine how investors and employees might have a common case here. Unfortunately, you don’t see many investors demanding that the company give more power to the employees – even though many cases and studies do show this to be profitable.

    OA5 is pretty cool, and quite similar to what we did.

  18. I don’t know if ya’ll know this or not… but the ideas of self-management and worker-ownership are pretty old. It’s called Socialism.

  19. Superb story Alex, i really do think that employee owned organisations, or at least organisations where all employees make decisions about the company are a great thing, and hopefully will be more popular in the future.

    The best company that i have heard of that does a similar thing is a company called SEMCO in South America, run by Ricardo Semler, every decision taken by the organisation is down to all employees involved, they can even chose when they go to work and how much they get paid. Check it out if your interested. Thanks again for your post, i have an essay to write on leadership now and how important management and leadership is, so this will help argue a point.


  20. I would have to agree with everyone about Ricardo Semler and Semco SA. He took over the company in 1980 and started putting his motions into work the next day. Considering Brazil’s poor economy he has done a wonderful job. Employees choose where they want to work, how they would like to dress, have complete control over the companies finances, how many hours they would like to work, they choose their own salaries, they paint their own offices, design their own menus, have hammocks in the garden and all have a 23% of the profit the company makes in a year. There are a total of 3000 employees not including those who have left the company to setup their own businesses under the Semco brand and a waiting list of 3 years. The company enjoyed great growth in the 90s and continues to grow to this day. Semler also now runs a childrens school under the same principals where the students are in charge. Some other companies that use this type of management are easyJet, John Lewis and Goretex. Maverick and the Seven Day Weekend are definite recommended reads.

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