CHAPTER 11 Associations, Boards and Employment Hierarchies
In Chapter 5 we discussed broad categories of social organisation. Here we examine many different types of organisations more specifically. A scout troop, the Anglican Church, General Motors, the City of Pasadena, the Red Cross, a Law Partnership and the Army can all be accurately described as organisations, yet their purposes, structures, financial sources, systems, leadership, members and employees (if any) all differ. It is important to distinguish them because their purpose and nature lead to appropriately different work relationships.
One common classification separates organisations into public, private and voluntary, but that is of little help in understanding in detail how they operate.
Although the tripartite classification serves some useful societal, political and tax purposes, it does not help to inform us regarding leadership, organisational structure, internal and external processes or the design of their systems. Here we separate out two concepts, those of association and employment hierarchy. These concepts have been identified by Brown (1971) and Jaques (1977). Here we describe the qualities of each, including critical issues that need to be considered if organisations are to be effective. We start with a summary.
Associations
Box 11.1 Wilfred Brown’s Definition of Association
Associations are people coming together for a purpose. The purpose is either agreed tacitly or expressed in a written document. (Brown, 1971: 48)
Almost all of us are members of one or more associations. As a shareholder, you are a member of a business corporation. Many workers are members of a union. You may be a member of the Red Cross, which is a voluntary association.
The written document, providing guidance to the governance of the association, may be a constitution, a charter, and articles of incorporation or authorising legislation. Some associations such as neighbourhood groups may not have a written document or formal rules, but they will have, at a minimum, verbal agreement about who they are and their purpose for associating.
Box 11.2 Members are Equal
Whatever the relationships between members, each member of an association has the same authority. One share gives one vote, one citizen has one vote, or one union member has one vote. In a corporate association additional shares command additional votes.
Table 11.1 Characteristics of associations and employment hierarchies
| Associations | Employment Hierarchies (Bureaucracies) |
| Primary | Secondary (to the Association/Board) |
| Independent | Dependent (on an Association) |
| Authority relationships based on the law, charter and social customs and practice | Authority relationships based on the law charter and the policies of the Board of Governors. Social customs and practice set some of the limits on authority |
| Members | Employees |
| Members are equals | Employees are in superior/subordinate relationships |
| Act through representatives who are held accountable by members | Act through employees who are held accountable by higher-level managers. Top manager held accountable by elected Board of the association |
| Leaders held accountable by members | Leaders hold direct reports/employees accountable |
| Operate through consensus, debate, persuasion, voting | Operate through executive decision processes |
| Set objectives and policies of the association within the authority of the charter and the law … Where necessary seek vote of members | Receive initial objectives and policies from the association. Formulate plans and policies for Board decision/vote |
| Take instructions from members and advise | Listen to suggestions from subordinates, decide, assign work |
| Representatives, relationships collegial | Manager/subordinate relationships hierarchical |
| Representatives have term of office | Employees have open-ended employment contract |
| Members need not perform in order to remain a member; only obey rules of the association | Employees must perform or lose job |
Membership in these associations has a different meaning for the members according to their commitment and the purpose of the association.
Associations operate through discussion, debate and persuasion and makes decisions on the basis of voting and/or consensus. Except in the case of very small associations, members usually elect a few of their number to be their representatives in a governing body that is authorised, usually through articles of incorporation, a charter, or authorising legislation, to act on behalf of the members. These representatives set overall association policy within the limits allowed by their charters, and when necessary, ask the membership to vote on changes that go beyond the charter or seek to amend the charter. When the workload of the association becomes too large to be handled by the Board and its members, the Board can be authorised to employ staff (employees) to carry out the association’s purpose.
Figure 11.1 illustrates generic patterns of member, representative, ‘governing board’ and employee relationships.
In a business, the articles of incorporation set the authorities of the Board and indicate the requirements for election to the Board. Once the Board is created, shareholders must vote to accept the Board Members and annual elections are held where the shareholders must reaffirm all or part of the Board. If an original entrepreneur controls a majority of shares, then he or she may also, in effect, control the Board.
As businesses grow, organisations have found it to be much more effective to have the entire Board made up of outside members except for the Chief Executive. Should employees subordinate to the Chief Executive be members of the Board, their work relationship with the Chief Executive can, and often does, come into conflict with their work as a Board member to represent the best interests of the owners – members of the association.
It is our position that it is preferable to have an outside chair of the Board rather than the CEO acting as chair. Again, there is a potential conflict of interest if the CEO holds both roles. In fact, these practices are now being put forward as proposed legal requirements in the US after recent abuses and scandals. In some jurisdictions it is now almost universal as it is considered to be current best practice.
Box 11.3 Essential Work of the Board: The failure of Boards to do their work effectively has had catastrophic results not least the Financial Crisis of 2008
The authority of the Board is a collective authority. Members of the Board are authorised to act as a body, not as individuals. As such, it is their work to articulate and review the purpose of the company and submit its proposal to the association for their approval that authorises the Board to organise the work required to achieve that purpose. It is the work of the Board to ensure there are policies and systems in place to maintain that purpose so that the company continues over time. This is highly significant work, even though the Board requires others to enact the policies by way of systems (this is the work of the CEO and other executives).
The Board is not there simply to ensure that the company complies with the law. It is a much wider brief and needs to be more active in assessing on-going performance to ensure the employment hierarchy is working as it is intended to work. All its activity, however, can be traced back to the fundamental work of defining the purpose and authorising on behalf of the owners, the business plan by which the purpose is to be achieved. In this way the work of the Board is consistent with our definition of work: ‘turning intention into reality’. The Board’s work is turning the intention of the members of the association into a functioning social reality in the world that achieves the purpose it approved. In doing so the Board must also assess risk to the purpose. Systems Leadership can provide the tools to do this through Systems and Symbols Audits, the Design of Systems and the analysis of Critical Issues. Boards that cannot see into their organisations and assess reputational risk are in danger of major disasters (see below).
Morality and ethics
We have argued, and will argue, that higher-level work must go beyond the concrete and deal with the abstract in all its complexity. The intangible variables become more critical as the work becomes more complex. For a company to be successful, it is not just a question of having cash in the bank but also whether the company is trusted by the people it hopes and relies upon to support it. Only a company that sustains the trust of the society in which it is embedded will be allowed to exist over time. It is part of the work of the Board to ensure the company and the behaviour of its employees is acceptable to society at large. It is for the Board, working with the CEO and executive team, to establish a general ethical framework, which in turn will inform policy.
This ethical framework does not have to be articulated in detail, as it gains its expression through policy and its enactment through the systems of the organisation. It is the policy statements that provide the overall sense of ‘what we stand for and how we do business’. The ethical framework is experienced by stakeholders whether they be employees, customers or members of the community. It is what the advertisers try to express in their campaigns, usually implicitly, and may vary according to the business or sector. While superficially it may be referred to as ‘image’ or ‘brand’, it is in fact much deeper. It is the reputation of the organisation based on the reality and experience of how it behaves as it goes about achieving its purpose.
Failure to set and enforce an ethical framework can be extremely costly. On 2 December 2001, Enron had to declare bankruptcy as a result of fraud; its share price went from a peak of $90.75 to $0.26, costing shareholders billions. Thousands of employees lost their jobs, a major accounting firm was also put out of business for obstruction of justice, and some top executives went to prison. More recently Wells Fargo Bank was fined $185 million, and had to dismiss 5,300 employees for cheating their customers. Volkswagen was fined $15 billion by consumers and the State of California for falsifying emissions in their diesel engine vehicles. In addition they had to pay $4.3 billion to the federal government, six top executives were criminally indicted and the damage to reputation may prove to be more costly than the fines.
Policies
As stated above, the formal expressions of the organisation’s ethical framework lies in the policies of the organisation. Policies are statements of intent. They are often aspirational and must be formulated to act as clear directions for behaviour. While an overarching policy is clearly ‘do not break the law’, again this is not sufficient. Policies often reflect dilemmas. For example, what is the policy with regard to equal opportunity if you are a UK-based firm with a subsidiary in Saudi Arabia? What is your policy with regard to minimum wages? Is it purely determined by the country you operate in? Similarly, with age of employment, benefits and all terms and conditions of employment? What about environmental issues, land usage, relations with indigenous people and local communities? The formulation of policies in these areas will determine the nature of the organisation and how it is perceived. This is core work for the Board with advice and recommendations from the CEO and the executive team.
EMPLOYMENT HIERARCHIES
Employment hierarchies begin, in the simplest case, when a governing Board is authorised to employ an individual to work to achieve the association’s objectives. This person is authorised, when the workload becomes too large for one person to handle, to hire additional employees within constraints of the association’s objectives, budget, personnel and policies as set by the Board, a legislature or directly by the membership (see Box 11.3).
An employment hierarchy is a form of organisation that is subordinate to an association. In such an employment hierarchy, people are employed for a wage or salary to carry out the purposes articulated for the association by its governing body. Authority is distributed hierarchically, in that the Chief Executive is authorised by the governing body, while the roles subordinate to the Chief Executive have authority determined by the Chief Executive such that they form a coherent hierarchy of order and scope of authority. In such a hierarchy, the authority of any role is subordinate to the authority of the role of its manager. All are subordinate, however, to the policy and systems authorised by the Board.
The exceptions to this hierarchical order of authority apply to some specified roles in larger organisations in which audit, legal and financial roles are required to report directly to the Board on specific tasks.
The CEO agrees to be held accountable by the governing body for his or her own work and for the work performance of his or her direct reports. This form of work relationship where acceptance of accountability forms an essential element is required between each manager and his or her individual reports throughout the organisation. It is the work of the CEO to distribute the authority to each role that is necessary for it to function correctly.
If the organisation is based on a meritocracy (see Chapter 7) this enables the organisation to cope with a changing environment and to have people in roles performing the work required for the organisation to achieve its purpose. An employment hierarchy is not, and by its very nature cannot be, a democracy; it is an authority hierarchy.
Individuals can have dual roles, being both members (perhaps through owning shares), and employees of the corporation. There has been considerable discussion of how the ownership of shares may change the behaviour of the employee. Often higher-level managers are encouraged to be shareholders, as well as employees, based on the belief that they are more likely to increase shareholder value if they themselves are shareowners. In some businesses share ownership is required of Board members.
Unionised workers are members of one organisation, the union, and employees of another organisation, the business or public agency. Union members’ commitments to their unions may vary depending upon the felt need for protection from perceived management abuses and the competence of the leadership of the union.
Members of voluntary associations may have greater or lesser degrees of attachment to their association. Some members may simply write a cheque to a cause they support. Others may take a more active role as a paid or volunteer worker. One of the interesting dilemmas in voluntary associations is to manage the work of both employees and volunteers, often a highly sensitive issue (see the case study on the website ‘Parish Life in the Anglican Diocese of Perth, Western Australia – the Bellevue–Darlington Story’).
Box 11.4 Wilfred Brown’s Definition of Employment Hierarchy
Employment hierarchy: ‘that network of employment roles set up by an association of people to carry out work required to achieve the objectives of the association’. (Brown, 1971: 49)
Employees’ ideas and contributions to the setting of policies and direction are essential for success over time. What employment does mean, however, is that the authority to act comes from the association and that employees can use those authorities as a resource to perform work on tasks assigned to them by their manager. This allows them to accept the basis for review of their work, and accept that they will be called to account for their work performance by their manager. The Chief Executive is called to account for his or her work performance by the Board.
Employment hierarchies are both secondary and dependent institutions. They are secondary in that they cannot be formed in their own right; there must first be an employing body that decides to establish an organisation and provide the authorities within which employees carry out their work. They are dependent in that their continuity depends upon the continued existence of the employing body.
A variation on this theme is the entrepreneur who sets up a business and initially embodies both the association and the employment hierarchy. The entrepreneur decides the purpose of the business, the business plan, whom to hire, whom to fire, how to structure the organisation and what systems will be used – albeit within the law of the land. Once the business moves beyond the sole proprietor stage and must seek articles of incorporation, then the association of shareholders is brought into being. The entrepreneur may still control the association through majority share holdings, but there is now both an association and an employment hierarchy though the entrepreneur may control both if he or she chooses to remain as Chief Executive officer.
The differences in the roles and relationships within associations and within employment hierarchies are illustrated in Table 11.1. The failure to make such distinctions leads to significant difficulties and confusion, both theoretical and practical. These two institutional forms differ and the roles of individuals within them differ fundamentally. To be an elected representative of an association is profoundly different from being an employee of that association. Even where terms like ‘leader’ or ‘accountability’ are, correctly, or incorrectly, applied to both roles, the ideas and the lived reality behind these terms are significantly different.
The elected union leader is in a very different relationship to the workers who elect him or her than is the CEO of the corporation who employs those same workers. In the case of the union leader, the workers are members who can, through the election process, throw the union leader out of office. The CEO is in a position to hire the workers and to fire them within the limits of law, organisation policies and the union contract if such exists. They, in turn, are not in a position to remove the CEO (though very bad CEOs may find their subordinates undermining them, which can result in dismissal by the Board).
Unions also hire staff who are employees of the union and therefore part of an employment hierarchy. They too may have their own union. The executive director of a union and the employed staff are in the same relation to the union leadership as is the CEO and staff of a corporation to the corporate Board. Much to the embarrassment of employing unions, their staff union may, and some have, called strikes and have walked out over pay or working conditions.
Voluntary associations may become even more confusing since they too may hire an executive director and staff who are employees, while at the same time using volunteers who are members of the association to carry out some of the work. Employees and volunteers of such organisations can testify to the difficulties that occur in this situation. As members, the volunteers are the ultimate ‘bosses’ who elect the governing Board. As workers, they may be subordinate to a full-time employee – a tricky relationship unless authorities and work of each role are fully articulated and understood.
Wilfred Brown (1971: 48–59) has discussed some of these relationships extensively, particularly for those working in government and voluntary associations where the association/ employment hierarchy relationship is more complex. The theories and models presented in this book apply to all types of employment hierarchies, though the primary model we are using is the simplest model, that of a corporation. This, we believe, will allow us to make the general principles clear, and in turn, they can be applied in other organisational settings.
While many of the theories and models we present apply in a variety of human interactions, the theory of a stratified structure initially developed by Jaques and Brown, applies primarily to the employment hierarchy. The structural concepts have relevance in other settings such as partnerships, but that requires some alternative ways of applying them in practice. The theories of human capability apply to all humans, but their significance is different in the association and the employment hierarchy. Just because the association governs the employment hierarchy, it does not imply the members or their representatives are, or should be, of higher Mental Processing Ability. The knowledge and skills required to be a representative are significantly different from the knowledge and skills required of an employee. Although it is very helpful to have at least one member of a governing Board who is equal to, or preferably one step above, the Chief Executive of the employment hierarchy in Mental Processing Ability, it is not a necessary condition. We can therefore see that employment hierarchies as bureaucracies operate very effectively as meritocracies (See Chapter 7).
Conclusion
It is important to understand the difference between associations and employment hierarchies because they have appropriately very different structures and decision-making processes. When they have become muddled, as we have seen more generally in Chapter 5, they become inefficient and counter-productive. It is especially important to distinguish the work of the Board and the Executives. The poor understanding of the role and work of Board members has led to catastrophic results, perhaps the most spectacular being the global financial crisis.