There is much talk about new organizational forms and paradigm shifts in organizational design. This article argues that what often appears new has its antecedents and is more a function of ever-changing conditions. By analyzing the changing faces of organizations along two dimensions, the boundaries and the functioning of organizations, the article establishes a cyclical model of organizations informed by the search for a balance of power and governance. It presents eleven governance cycles that help to understand the dynamic nature of organizations. The article concludes with a strong call to actively shape organizations in creative ways based on a thorough understanding of the conditions and options that influence organizational dynamics.
The Changing Faces of Organizations
The organization, defined as institutionalized collective action, is the dominant face of society and the economy. Whatever the desired outcome of the collective action may be, i.e. financial returns (‘money’), political power (‘might’) or thought leadership (‘mind’) (Casas, Hilb, and Lim 2021), the role of institutions is critical. While corporations dominate the economic value creation machine (‘money’), academic, civic, and religious institutions play an important role in shaping ideas (‘mind’), and political parties and government institutions are critical in shaping public decisions (‘might’). Although institutions are shaped by individuals and, in many cases, individuals embody organizations, e.g., the founder, the CEO, or the political leader, it is the institution that usually outlives the individuals and where value is eventually created or destroyed.
While the importance of institutions can be observed throughout human history, some of the characteristics have changed. In this context, two dimensions of change stand out:
The boundary of the organization: Which activities are bundled within an organization or in cooperation with other institutions or persons? Here we can distinguish between market-based and decision-based modes of governance.
The functioning of the organization: How are the activities within an institution organized and controlled? Here we can distinguish between hierarchy-based and democracy-based modes of governance.
The Boundary of the Organization (Outside View)
The delineation of organizations has been extensively discussed in various academic fields, such as sociology, economics, and law. Sociologist Weber (1922) recognized the importance of institutions as a means of collective action and explained their existence in terms of the superior power of collective over individual action.
Economist Williamson (1979) provided an alternative perspective, arguing with transaction costs as a key factor in determining the boundaries of the firm. According to his argument, economic decision makers must decide whether to buy a product in the market and hire employees to produce it internally. In making the decision, they must consider both price and the costs associated with transactions, such as controlling quality and the costs of hiring and training employees. His theory is helpful in explaining corporate decisions to in- and outsource activities.
Finally, from a legal perspective, the most important determinant of institutional boundaries is liability (Berle and Means 1933). Since institutions are juridical persons, they offer the possibility of limiting the liability of those involved in certain activities. At the same time, the decisions that lead to these activities must follow well-established procedures and be justified to underscore that individuals are acting in their best interests. A basic dichotomy emerges in all three perspectives: Market-based vs. decision-based modes of governance.
The Functioning of the Organization (Inside View)
Even more attention than the question of the optimal boundary of organizations has been given to the effective functioning of the organization. Here, the discussion revolves around the optimal positioning on a continuum between bottom-up and top-down decision-making, between influence- and command-and-control-driven leadership cultures, or between hierarchy- and democracy-based governance models.
The optimal set-up is not only determined by efficiency considerations, but also by philosophical values. In all three areas addressed, there is competition between leadership modes. While political (‘might’), academic and spiritual (‘mind’) organizations tend to use democracy-based governance modes, at least pretending to do so (even in dictatorships), commercial institutions (‘money’) often follow a more hierarchy-based approach.
Nonetheless, alternative approaches are often proposed at all three levels, be it the concept of benevolent dictatorship or holacracy. It could even be argued that all modes of governance are constantly being challenged.
The Governance Modes Under Scrutiny
The questioning of the dominant mode of governance is neither new nor likely to be discontinued. On the contrary, this debate is of great importance for institutional design. Although some of the arguments challenging the status quo appear to be new, counterarguments to the three main modes of governance have a long tradition.
Challenges to the market as a mode of governance originate not only on ideological grounds, i.e., questioning the capitalist nature of markets as a legitimate mode of governance (Marx, 1867), but also on efficiency grounds. As outlined above, Williamson (1979) sees limitations to markets as transaction costs may outweigh price efficiency effects. Others emphasize that the increasing dynamics of market conditions make it impossible to rely solely on competitive market mechanisms, but rather call for a combination of competitive market and cooperative nonmarket governance mechanisms, i.e., co-opetition (Nalebuff and Brandenburger 1996).
The governance mode of hierarchy is not only challenged by market purists as outlined above, but also by those who see operational constraints in a top-down culture and the need to move away from a command-and-control approach to grant more autonomy and decision-making power to individuals and teams in organizations. If the argument is taken to the extreme of abolishing hierarchy, concepts such as Holacracy (Robertson 2007) or related frameworks such as Wirearchy (Husband 2015), Podularity (Gray and Vander Wal 2014), or Unboss (Kolind and Bøtter 2012) emerge. They all argue for less hierarchical and more democratic governance of organizations.
While democracy as a mode of government may seem like an obvious counter proposal to the limitations of hierarchy, it has been challenged since its inception. Unlike opponents who propose hierarchy as a counter proposal, some challengers see the solution in sociocracy. The main argument against democracy in its purest form, i.e., full and equal decision-making power by all members, is based on two arguments. First, they doubt its feasibility, i.e., lack of time and knowledge, and the danger of manipulation, i.e., demagoguery or the formation of undemocratic alliances as a consequence. Instead, intellectuals in the 19th century, such as Comte (1851) or Ward (1893), proposed the concept of sociocracy, which allows decision-making by different groups at different levels in institutions. Others, such as Priest and Bockelbrink (2015), have taken the original concept and adapted it to contemporary conditions.
How can the longevity of the two modes of governance and their challenges be explained simultaneously? We believe that introducing the concept of power can not only help explain this ambiguity, but will also be helpful to better debate the future of organizations and discuss its implications.
Enter Power
The relevance of power in shaping organizations is nothing new. Machiavelli (1532) was not the first author to recognize the role of power both in terms of leadership and in shaping the organization to cement power. Modern management scholars such as Pfeffer (1994) have taken up the concept and introduced their own school of thought in strategy, the power school (Ahlstrand, Lampel, and Mintzberg 2001). It argues that understanding the power structure is critical to understanding, but also driving, business transformation. As is typical in any time of disruption, whether political, economic, or technological, the power structure also seems to be disrupted. While some refer to this as the emergence of a ‘new power’ (Heimans and Timms 2018), others view the change in power structures as indicative of the prevalence of power as an eternal factor shaping society and the economy, with direct implications for how organizations operate and function (Pfeffer 1994).
We sympathize with the latter position and consider power as a key factor to better understand the choice of governance modes. More specifically, we see governance mode choice as related to power structure. How is power related to governance?
Power and Governance - Towards a Balance?
To relate power and governance, we assume a correlation between power concentration and how it is reflected in the chosen governance mode by conceptualizing how centralized governance is. The combination of these two dimensions provides an indication of how the concentration of power is reflected in the governance model chosen. In this sense, if we assume a direct correlation between power and governance, two states would result. In the case of high power concentration, we would see more centralized governance models, while in the case of distributed power, we would see more decentralized governance models.
This aligns very well with Ferguson's (2019) characterization of Square and Tower structures. In his historical analysis of the prevalence of power structures, he found that periods during which power was expressed in centralized ways were followed by periods in which more bottom-up networks prevailed. He thus identified not only the two archetypes in history, but also a pattern of succession. Therefore, can we assume that the two phases identified indicate a natural equilibrium?
We believe that the relationship between power and governance may be driven by a natural search for equilibrium, but may be quite unbalanced along the way. Therefore, we also assume the existence of two other potential correlations, i.e., high power concentration but use of more decentralized governance models and high power distribution and more centralized governance models. Based on this assumption, we extend the perspective of Ferguson (2019) by adding more governance models, the Souk and the Fortress. Therefore, we will distinguish four governance models:
Square: This describes a governance model in which power is distributed among participants without a centralized governance structure. Therefore, decisions are made informally, mostly on an ad hoc basis.
Souk: The Souk governance model is characterized by deliberately decentralized leadership. While power is concentrated among a few and the powerful could claim decision-making power for themselves, they prefer to delegate it to the periphery, which enables agility and flexibility.
Tower: In the Tower governance model, power is concentrated among a few who also exercise it in a centralized manner. As a result, the organization is run in a hierarchical manner with key decisions concentrated at the top.
Fortress: Finally, the Fortress governance model describes a state in which legitimate power is widely distributed, but decision-makers cling to their decision-making power for lack of legitimacy. As a result, decisions must be enforced through fear and pressure, otherwise those who receive the orders may not follow.
If we map the four governance models with the three governance modes presented earlier, we can see certain patterns. First, all four governance models have a primary correlation to one of the governance modes. Second, all governance models with the exception of the Fortress model appear to be a hybrid of at least two governance modes. We will see in the next section what this says about the sustainability of governance models.
Power and Governance – A Dynamic Perspective
As mentioned above, we assume the four governance models to be temporary states in a never-ending search for equilibrium. Therefore, we will take a dynamic perspective on how the four models evolve and depend on each other.
The Evolution Governance Cycles
The four governance models are not only closely related, but build on each other. They represent a logical evolution. We could even argue that they reflect the natural course of organizational evolution in the lifecycle of a company.
1. Rationalization: Every organization begins in the Square mode when several people decide that they should align to achieve a particular result that could not be achieved by a single person alone. As a result, there is an inherent degree of power-sharing and often little formalized leadership structure. As these organizations evolve, the concentration of power becomes apparent: new individuals joining the organization may have less power than the founders or, as in most cases, may be employees who are compensated for working on behalf of the institution. This also requires establishing internal rules and regulations while trying to maintain agility and flexibility. Thus, the organization streamlines and becomes what we call a Souk.
2. Ratification: While the Souk offers excellent conditions for generating new ideas and developing them into products, proposals and measures, the governance model reaches its limits when the focus shifts to external competition. Suddenly, it is not so much about innovation and creativity as it is about winning against other institutions. This often leads to a ratification of power and a more centralized governance model, i.e., the Tower. In this model, decisions are made by a small group of decision-makers to ensure quick action and reaction when threatened or in attack mode.
3. Resistance: While the Tower governance model can be effective and beneficial to all participants in a competitive environment, there is a danger that decision-makers become too accustomed to their privileged position and unwilling to share their decision-making power. Instead, they may focus their energy on cementing the status quo, resisting any opportunity, and preventing others from becoming decision-makers. As a result, their leadership style can be likened to a Fortress whose main goal is to defend the status quo.
4. Revolution: If decision-makers cannot find a way to balance legitimate power and effective decision-making power, they will be forced into an even more defensive position. This often leads to further resistance from those who challenge the status quo. This vicious cycle is rarely broken, leading to open revolution. Those in the Fortress may be able to resist the revolutionary forces for a time but they are often defeated, creating the conditions for the Square governance model to prevail.
The Intervention Governance Cycles
Fortunately, not all organizational developments lead to disaster. Various intervention options exist along the way:
5. Reorientation: One way to keep the spirit of the Square governance model constant is to reorient and allow the emergence of new collaborative partnerships between the different parties. The shift between groups is largely driven by ever-changing needs and expectations.
6. Recollection: For the Souk model to endure, a constant reminder of the cultural rules is required. Since the shared leadership of the members of the Souk are the basic principles, they must be regularly reflected and acted upon.
7. Rejuvenation: If the guiding principles of the Souk prove too limiting, rethinking the Square governance model may be the solution. This rejuvenation of the original spirit can release the energy needed to ignite new ideas.
8. Renovation: A common intervention method for maintaining the Tower governance model is the renovation approach. While the underlying logic and structures are maintained, the detailed rules are updated and refreshed to better reflect the new realities.
9. Renewal: If the Tower governance model proves to be unfit for purpose, for example in times of dynamism and disruption, renewal may be necessary. This means questioning the tenant structure of the Tower organization and returning to the Souk structure.
10. Retreat: The behavior in the Fortress organization of resisting change can often be described as a complete retreat. Those in power decide to bunker down in the Fortress, ignoring any call for change and trying to avoid the inevitable, i.e., revolution.
11. Reform: An alternative approach to avoiding the inevitable, for those trapped in the Fortress governance model, is reform, i.e., changing the rules and structures to regain credibility with those who hold ultimate power. This often requires a change in the parties holding power to make the changes credible.
In summary, the four governance evolutions and seven intervention cycles presented earlier can be depicted as follows:
Implications
What can we learn from governance modes, models, and cycles? More importantly, how do these lessons inform our understanding of the future of the organization in times of rapid change?
First, we have seen that the three governance modes in their purest form usually do not lead to the desired outcomes, but rather need to be combined. Second, governance models should be viewed from an evolutionary perspective: They evolve over time in search of an equilibrium that they never achieve. Third, while there are natural evolutionary cycles of governance models, there are various interventions that can influence the evolution and allow the governance model to adapt to the purpose of the ever-changing conditions.
Since any organization today and in the future will be exposed to several such conditions, some of which are currently known while others have yet to be discovered, we can assume that any organization of the future is likely to be a combination of governance models that must change over time to be fit for purpose in the face of external demands and conditions.
For decision-makers, this means complexity on the one hand. On the other hand, it offers a wide range of opportunities to intervene and not only adapt the governance structure to its current purpose, but also to help make the organization truly future-proof.
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This article was published as a chapter in the book Governance of Ecosystems in October 2021.