The business and government institutions upon which individuals and society depend are increasingly failing their customers, employees, owners, investors and other stakeholders. These negative effects derive from the combination of 6 key characteristics of today's dominant organisational form – Hierarchy Division of labour Bureaucracy Exclusion of market forces Separation of ownership and control, and Legal fictions of the corporate person and the corporate veil (limited liability and other protections).

1. Bryan Fenech – Founder and Director
Building the Organisation of Tomorrow
www.oot.org
Why organisations need to
fundamentally change

2. Contents
Introduction
Key Characteristics of the Modern Organisation
Critique of the Modern Organisation
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3. INTRODUCTION
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4. Introduction
• This presentation describes and critiques
the key characteristics of today's
dominant organisational form –
– Hierarchy
– Division of labour
– Bureaucracy
– Exclusion of market forces
– Separation of ownership and control, and
– Legal fictions of the corporate person and
the corporate veil (limited liability and other
protections)
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5. Introduction
• The presentation highlights how, due to
the combination of these characteristics,
the business and government institutions
upon which individuals and society
depend are increasingly failing their
customers, employees, owners, investors
and other stakeholders
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6. Introduction
• Specific issues explored in this respect
include:
– Degradation of organisational performance
and destruction of value
– Exploitation and inequality, environmental
damage, and animal cruelty
– Distortion of markets and manipulation of
democratic processes
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7. Introduction
• This topic involves an exploration of our
assumptions about the intersection and
relationship between
– Individuals (cognition, autonomy, self
organisation, etc.) and institutions (culture,
rules, control, etc.)
– Markets and organisations
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8. KEY CHARACTERISTICS OF THE
MODERN ORGANISATION
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9. The standard
organisational model
• Our modern conception of ‘organisation’
is a highly complex, dynamically
emergent coalescence of ideas and
assumptions over the last 200 years
• While there are individual organisational
differences, these tend to be variations
on consistent themes
• We can deconstruct this standard
organisational model down into 6 key
elements
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10. Contents
Hierarchy
Division of Labour
Bureaucracy
Exclusion of Market Forces
Separation of Ownership and Control
The Corporate “Person” and “Veil”
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11. Hierarchy
• Hierarchy theory
• Characteristics of hierarchy
• Hierarchy as an organising principle
• Discussion
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12. Hierarchy theory
• Hierarchy theory is a subset of general
systems theory
• Herbert Simon (Economist), Ilya Prigogine
(Chemist) and Jean Piaget (Psychologist)
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13. Characteristics of
hierarchy1
• Levels in a hierarchy are populated by
entities whose properties characterise the
level in question
• The relationship upwards between levels
is asymmetrical
• Applied to organisations, upper levels are
above lower levels by reasons of being
the context of or offering constraint to
lower levels
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14. Hierarchy as an
organising principle
• Simon in The Architecture of Complexity
(1962) proposed hierarchy as a universal
principal of the structure of complex
things that emerges inevitably because
hierarchies are stable2
• Chandler in Strategy and Structure (1962)
asserted that hierarchy is selected for
due to the need for clear lines of
authority3
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15. Discussion
• Are organisations engineered or the result
of adaptation and selection?
• To what extent are stability and clear
lines of authority historically contextual?
• In the case of organisations, does the
emergence of the internet and related
innovations in communications
technologies change things?
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16. Division of labour
• Division of labour theory
• Characteristics of division of labour
• Division of labour as an organising
principle
• Discussion
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17. Division of labour theory
• Division of labour theory is a subset of
labour economics theory
• Adam Smith (Pioneer of Political
Economy), Karl Marx (Political
Philosopher), Émile Durkheim (Sociologist),
Friedrich Hayek (Economist)
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18. Characteristics of division
of labour
• Specialisation and concentration of
labour around specific tasks and roles –
c.f., a craftsman who is responsible for
the entire production process of goods
and services
• Specialisation and concentration
increases as the environment becomes
more complex
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19. Division of labour as an
organising principle
• Smith in The Wealth of Nations (1776)
asserted that the division of labour
increases productivity and eliminates
long training periods required for
craftsmen4
• Durkheim in The Division of Labour (1893)
asserted that focusing workers on their
single subtasks leads to more throughput
than would be achieved carrying out the
original broad task5
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20. Discussion
• To what extent are the improved
productivity and throughput effects of
the division of labour contextual to
economic conditions?
• Are the same effects likely to be
achieved, or even desirable, in an
environment where mass customisation
has been supplanted by a need for
differentiation through creativity and
innovation?
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21. Bureaucracy
• Bureaucracy theory
• Characteristics of bureaucracy
• Bureaucracy as an organising principle
• Discussion
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22. Bureaucracy theory
• Bureaucracy theory is a subset of
government theory
• Karl Marx (Political Philosopher), John
Stuart Mill (Political Scientist), Max Weber
(Sociologist)
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23. Characteristics of
bureaucracy
• System of administration conducted by
trained professionals according to fixed
calculable rules ‘without regard for
persons’
• Sine ira ac studio – without anger or
passion
• Systematic and meritocratic but not
representative
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24. Bureaucracy as an
organising principle
• Weber in Economy and Society (1922)
argued that bureaucracy constitutes the
most efficient and rational way to
organise human activity and is necessary
to maintain order, maximise efficiency
and eliminate favouritism6
• Mill in Representative Government (1861)
noted bureaucracies’ accumulation of
experience and knowledge7
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25. Discussion
• How important is formality over
interpersonal relationships in an age of
collaboration?
• How important is conformity and
predictability in an age of creativity?
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26. Exclusion of market forces
• Exclusion of market forces theory
• Characteristics of excluding market
forces
• Exclusion of market forces as an
organising principle
• Discussion
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27. Exclusion of market forces
theory
• Organisational exclusion of market forces
theory is a subset of market economics
theory
• Ronald Coase (Economist)
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28. Characteristics of
excluding market forces
• Organisations arise when it becomes
cheaper to gather people, tools and
material ‘in-house’, rather than going out
to find the best deal every time labour or
materials are required
• The main objective of establishing an
organisation is to avoid the costs of the
using the price mechanism
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29. Exclusion of market forces
as an organising principle
• Coase in The Nature of the Firm (1937)
argued that with respect to internal
allocation of resources, market forces are
eliminated and exchange transactions
are substituted with bureaucratic
direction8
• For example, if organisations operated
internally under market forces the cost of
frequently re-negotiating many contracts
would be prohibitive
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30. Discussion
• To what extent is the balance of
organisation and market transaction
costs contextual to economic
conditions?
• What impact has technology had on
these transaction costs?
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31. Separation of ownership
and control
• Separation of ownership and control
theory
• Characteristics of separation of
ownership and control
• Separation of ownership and control as
an organising principle
• Discussion
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32. Separation of ownership
and control theory
• Separation of ownership and control
theory is a subset of intuitional economics
• Irving Fisher (Economist), Adolf Berle
(Economist), Gardener Means
(Economist), William Edwards Deming
(Statistician)
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33. Characteristics of
separation of ownership
• The separation of ownership
(shareholders) and control
(management) – c.f., owner run
businesses
• As capitalism developed and
shareholders became more numerous
and diverse, separation of control
became an essential element of efficient
corporate governance
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34. Separation of ownership
as an organising principle
• Fisher in The Nature of Capital and
Income (1906) articulated the
presumption that profit is the only thing
shareholders want (or would serve their
diverse interests)9
• Deming in Out of Crisis (1986) described
how shareholders (principles) control
management (agents) through a raft of
incentives and supervisory schemes10
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35. Discussion
• If the most valuable organisational asset
is knowledge and knowledge exists tacitly
in people’s heads, and embedded in
social relationships, just what is it that
shareholders ‘own’ and that managers
‘control’?
• Is maximising profit the best way to serve
the diverse interests of shareholders
today?
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36. Corporate ‘person’ and
corporate ‘veil’
• Corporate ‘person’ and corporate ‘veil’
theory
• Characteristics of corporate ‘person’ and
corporate ‘veil’
• Corporate ‘person’ and corporate ‘veil’
as organising principles
• Discussion
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37. Corporate ‘person’ and
‘veil’ theory
• Corporate ‘person’ and corporate ‘veil’
are legal fictions developed in corporate
law
• Salomon v Salomon [1897], Lord Denning
in DHN Food Distributors v Tower Hamlets
[1976]
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38. Characteristics of
corporate ‘person’
• There is an assumption that the
corporation is a ‘legal person’ separate
from its shareholders
• It is exceptional for courts to go beyond
the corporate ‘veil’ and hold
shareholders liable for the actions of the
corporation
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39. Corporate ‘person’ as an
organising principle
• Shareholders (principles) cannot be held
liable for the acts of management
(agents) unless there is fraud
• Individual subsidiaries within a group are
treated separately and the parent
company is not liable for the debts and
insolvency of the subsidiaries
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40. Discussion
• Does limited liability make sense where
management is tightly controlled by
powerful blocks of shareholders?
• Are corporations ‘grants of monopoly
privilege’?
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41. CRITIQUE OF THE MODERN
ORGANISATION
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42. Organisations failing
stakeholders
• The business and government institutions
upon which individuals and society
depend are increasingly failing their
customers, employees, owners, investors
and other stakeholders
• This is not the result of a particular defect
that is easily cured but the flawed nature
of the standard organisational model
• The standard model has 3 categories of
negative impact
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43. Contents
Degrading Organisational Performance
Exploiting People, Environment and Animals
Manipulating Markets and Democracy
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44. Degrading organisational
performance
• Researchers have noted the impact of
organisational form on the following
aspects of organisational performance
– Capacity to innovate (Dougherty11, Leonard-
Barton12, Barley13)
– Enacting strategy (Davies14)
– Becoming more entrepreneurial (Miles et al15)
– Constructing new knowledge (Wenger &
Snyder16, Dovey & White17)
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45. Degrading organisational
performance
– Meeting customers' needs more effectively
(Zuboff & Maxmin18)
– Developing of trust and other social capital
resources (Dovey & Fenech19)
– Transformational capacity (Dovey & Fenech,
ibid)
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46. Degrading organisational
performance
• Principles
– The impersonal rigidity of bureaucracy is
inconsistent with the development of social
capital resources like trust
– The segregation and alienation of people
through the division of labour is inconsistent
with the need for collaboration and
knowledge construction activities
– Hierarchical decision making kills trust and is
inconsistent with autonomy
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47. Degrading organisational
performance
– Bureaucratic rules sustain dysfunctional
practices and impedes change
– The primacy of the profit motive undermines
development of loyalty and other forms of
social capital
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48. Exploitation and
inequality
• The primacy of profit over all else leads to
perverse outcomes for people, the
environment and animals
• Hierarchy prevents resistance from being
voiced and actioned
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49. Exploitation and
inequality
• Getting to the top – Alan de Botton16
• Anxiety culture: work hell17
• Zuboff & Maxim op cit examples
• Naomi Klein18 examples
• Worldcom, Enron, the GFC
• Pharmaceutical companies over
servicing in the vet and medical industries
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50. Distortion of markets and
democracy
• “One of the great paradoxes of our time
is that it is totalitarian, centrally planned
organizations, owned by outsiders, that
are providing the material wherewithal of
the great democracies” – Charles
Handy19
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51. Distortion of markets and
democracy
• While free markets are generally
accepted as being superior to centrally-planned
economic systems, the workings
of most business and government
organizations still resemble Soviet-era
command and control characterized by
central planning, hierarchical control
systems and rigid organization of
resources and assets within silos
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52. Distortion of markets and
democracy
• The setting of executive remuneration is
transparent only after the event, is
carried out by the parties that benefit,
and there is only token linkage to business
results and value
• Such transactions meet the definition of
cabal behaviour and collusion and are
anti competitive, a relic of the 19th
century origins of corporate law
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53. Distortion of markets and
democracy
• Who controls the world?
• See James B Glattfelder20
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54. Distortion of markets and
democracy
• Hierarchical control makes corporations
a tool of control for elites
• Manufacturing consent through the
media21
• Barley22 highlights 3 ways in which
powerful corporations manipulate
democracy – promoting legislation that
benefits them rather than the public
good, capturing regulatory agencies,
and privatisation
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55. Distortion of markets and
democracy
• Examples
– Carbon policy
– Taxation policy and corporate welfare
– Current attacks on independence of ABC
and BBC
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56. Visit www.oot.org
Bryan Fenech
Founder and Director About www.oot.org
• www.oot.org is the website of
Building the Organisation of
Tomorrow, a networked community
and set of resources to assist
leaders to meet the imperative for
organisational renewal
• All institutions are under increasing
pressure to adapt to 21st century
technological and socio-economic
forces. Successful leaders need
appropriate frames of reference to
manage these processes of
transformation; however, such
frames of reference are rare
• Find articles, presentations, book
reviews, and other resources
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57. References
1. Allen, T. F. H. ‘A Summary of the Principles of Hierarchy Theory’
http://www.botany.wisc.edu/allenlab/AllenLab/Hierarchy.html
2. Simon, H. A. (1962) ‘The Architecture of Complexity’, Proceedings of
the American Philosophical Society, 106(6), 467-482
3. Chander, Jr., A. D. (1962) Strategy and Structure: Chapters in the
History of the Industrial Enterprise. Cambridge, MA: Harvard
University Press
4. Adam Smith (1776) An Inquiry into the Nature and Causes of the
Wealth of Nations
5. Émile Durkheim (1893) The Division of Labour in Society
6. Max Weber (1922) Economy and Society
7. John Stuart Mill (1861) Considerations of Representative
Government
8. Coase, R. H. (1937) ‘The Nature of the Firm’, Economica, 4(16), 386-
405
9. Fisher , I. (1906) The Nature of Capital and Income
10. Deming, W. E. (1986) Out of the Crisis, MIT Press
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58. References
11. Dougherty, D. (1999) ‘Organizational Capacities for Sustained
Product Innovation’, Advances in Management Cognition and
Organizational Information Processing 6: 79-114
12. Leonard-Barton, D. (1995) Wellsprings of Knowledge: Building and
Sustaining the Sources of Innovation. Boston: Harvard Business
School Press
13. Barley, S. (1986) ‘Technology as an Occasion for Structuring’,
Administrative Science Quarterly 31: 78-109
14. Zuboff, S. & Maxmin, J. (2002) The Support Economy: Why
Corporations are Failing Individuals and the Next Episode of
Capitalism. New York: Allen Lane.
15. Dovey, K. A. & Fenech, B. J. (2007) ‘The role of enterprise logic in the
failure of organisations to learn and transform’, Management
Learning 38(5), 573-590
16. de Botton, A. (2004) Status Anxiety, Penguin Books, London, p 99
17. http://www.anxietyculture.com/workhell.htm
18. Klein, N. (200), No Logo, Flamingo Books, London, p 486
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59. References
19. Drucker P. F., Dyson E., Handy C., Saffo P. and Senge P. M. (1997)
‘Looking Ahead: Implications of the Present’, HBR, 75(5):18-32
20. http://www.ted.com/talks/james_b_glattfelder_who_controls_the_
world.html
21. Herman, E. S. and Chomsky, N. (1988) Manufacturing Consent,
Pantheon Books, New York
22. Barley, S. (1986) ‘Technology as an Occasion for Structuring’,
Administrative Science Quarterly 31: 78-109.
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