Provide Clear Principles and Boundaries

In every organization, people at all levels need clear guidelines so they know what they can and cannot do. Whereas in the control-oriented organization these were based on mission statements, plans, and budgets, in the empowered organization they are based on clear principles, values, and boundaries. Essential boundaries include the strategic domain and the codes of conduct and ethical and environmental considerations within which managers can operate, the time between reporting intervals, and the discretionary area between what managers must do and what they might do. In the empowered organization, people are empowered to make mistakes and equally empowered to fix them.

At Borealis, leaders know that the new management style can only operate effectively if there is high trust supported by open information. But if this trust is breached, then the sanctions are clear—people will not survive. Notes Bogsnes: “We are ruthless on policy violations. They usually lead to dismissal. We have a simple ‘ethics test’ so that people know whether or not their action is acceptable. They just need to ask the following question: Is it acceptable if the results of their actions appear on the front page of the newspaper? If yes, go ahead. If no, don’t do it.”

As we have noted, customer ownership is a key boundary issue. At firms such as Ahlsell and Handelsbanken, branches own customers whatever their size. Most customers (especially large ones) want to talk to decision makers. Whereas in most organizations these are at the regional or head office, at Handelsbanken they are at the branch. Some large customers find this difficult at first (they want to talk to someone at the head office). Not all accept it, but those that do usually build a strong local relationship that invariably leads to increased satisfaction and longer-term profitability.

Clear policies and principles provide a protective shield against unscrupulous practices, particularly if pressure is applied from a higher level. Pressure invariably arises from the need to meet fixed performance contracts. This indeed was the case at two high-profile cases (Kidder Peabody and Barings Bank).² Such problems are less likely to occur inside adaptive and devolved companies because there is no direct connection between fixed targets and rewards. This disconnection strengthens the whole governance process.

Bind People to a Common Purpose and Shared Values

Although many of the organizations we have examined have produced exceptional returns for shareholders, none of them states that creating shareholder value is its overarching purpose. Instead, leaders endeavor to bind people to a cause rather than some nebulous mission statement, plan, or budget. Handelsbanken aims to make a better contribution to society than other banks by offering a better service while using fewer of society’s resources (that is, by having lower costs). This provides a clear and rational reason for being for all employees. Wealth creation is necessary and has a social purpose. Each generation of Handelsbanken leaders seeks to leave the organization in better shape than when they inherited it. Pride and passion are values that everyone can identify with.

IKEA is another firm totally committed to leading by setting a clear purpose, inviolate principles, and shared values. The driving force for success is not so much profit but improving the quality of life for as many people as possible. Such words as humility, modesty, responsibility, simplicity, and enthusiasm populate the IKEA vocabulary. Reacting to the cartel-like agreements among Swedish furniture manufacturers and retailers that kept furniture prices beyond the reach of young people trying to set up their first homes, Ingvar Kamprad, the founder of IKEA, started his company in 1953 not only to exploit a business opportunity (and create wealth for shareholders) but also to tackle a social problem.

Adopt a “Coach and Support” Leadership Style

Empowerment is unlikely to work unless leaders become coaches and mentors rather than commanders and controllers. Handelsbanken uses a coaching style of management. Even if senior managers can see at first hand that poor decisions are being made, all they will do is send an e-mail or make a brief phone call to inquire about the problem. It is up to the local manager to react. This discipline by leaders not to interfere is one of the toughest elements of the empowerment process. As Chairman Arne Mårtensson has noted, “You have to learn to keep your hands down by your side even when you could intervene and help solve a problem.”

Trust and confidence take time to build, however. Handelsbanken (now over thirty years into its devolution program) has driven decision making down to front-line branch office staff, but Fokus Bank (only six years into a similar program) has only devolved similar decisions to regional staff. These contrasting positions capture the progressive steps that empowerment takes as managers grow into their new roles and confidence matures.

Champion Relative Performance

Fixed performance contracts tie operating managers to specific agreements and reduce their flexibility. Breaking free from these contracts is perhaps the single most important step that leaders can take to create a culture of empowerment. Jan Wallander and Gunnar Haglund are both devout believers in relativity. Indeed, the adoption of relative measures, perhaps above anything else, was the key to replacing the budgeting culture at Handelsbanken and Ahlsell. Wallander’s beliefs are rooted in his economic philosophy. “The fundamental purpose of a firm in a market economy,” he believes, “is to deliver as high a return on capital invested in the company as possible. A company is successful and will survive if it gives a higher return than other companies in the same field. The real target is thus not an absolute sum in dollars and cents but a relative one. Beating the competition is the real target.”

Challenge Ambition

All the leaders in the companies we examined had great ambition and spent much of their time challenging their people. This isn’t just about new products and strategies but about rethinking every element of their concept of business. In other words, it is about thinking differently. It’s about insight and collaboration. Dismantling the budgeting model and clearing away the rubble of industrial age management practices are perfect examples. When asked at an interview what was the new role of the CEO in this empowered management model, Handelsbanken Chairman Arne Mårtensson replied, “I spend much of my time visiting regions and branches and challenging teams to improve their performance.”

Balance Competition and Cooperation.

Fostering internal competition and cooperation is a delicate balancing act. Leaders don’t want to create competitive teams that become archenemies as they fight for customers and resources. Handelsbanken overcame this potential problem by making an overarching rule that every customer be attached to a branch; thus, there would be no debate as to who would gain the benefit of customer orders. In practice, the opposite benefit happened: Branches shared information about customers, knowing that there were clear and inviolable boundaries. The other key decision at Handelsbanken was to create a companywide profit-sharing pool. Again, this defused any notion of gaining financial advantage by beating internal competitors. While it was peer pressure that provided the motivation to win, it was profit sharing and customer ownership that encouraged people to share knowledge.

Challenge Assumptions and Risks

Leaders don’t become passive once they transfer strategy to business unit teams. Indeed, their role remains highly active. They use their time to involve themselves in the strategy development process, though their role becomes one of challenger rather than developer. In other words, they must challenge the assumptions and risks implicit in any strategy presented to them, and ensure that better alternatives are not available.

After abandoning budgeting at Bulmers, more responsibility for developing detailed strategies has been placed on the shoulders of operating managers. Whereas budgets usually meant agreeing on numbers with little thought as to how those numbers would be achieved, the new process means committing to targets and justifying to the whole management team how these targets will be met. This forces people to think deeply about the business, especially about constraints, commitments, innovation, investment, competencies, and risks. In other words, the knowledge and creativity of key managers (most of whom have been there for many years) are now being used much more productively in achieving stretch goals.

Involve Everyone in Strategy

If local managers make fast decisions to respond quickly to emerging threats and opportunities, they are bound to make some mistakes, but as most enlightened leaders would say, that’s how people learn. Conversely, no matter how many times the CEO tells people that “they have all the power and authority of the chairman,” they will not make strategic decisions (certainly not those that involve any risk) if they believe that they will be punished if those decisions prove to be wrong. At all the firms we examined, leaders involve the whole team in local strategy and the results of their decisions. Handelsbanken branch managers have regular team meetings to review the strategic issues facing them. Assembly teams at Leyland Trucks can see the results of their decisions on screens around the plant. This inclusiveness is an important part of the process and instills in every worker a sense of personal responsibility.

Empower Teams to Make Decisions

In organizations that have abandoned budgeting, leaders make managers accountable for delivering competitive results compared with internal or external benchmarks. This is much more than delegation of authority within the constraints of budgets. Handelsbanken managers at every level are accountable for competitive results and are free to decide what action is needed to achieve them. They know that if they are not performing well there is no hiding place. They cannot make excuses with the numbers. League tables showing performance rankings and the relative position of every branch and region appear every month. And at the end of the quarter and year, the regions’ overall performance of the bank is similarly measured.

Create a Network of Small, Customer-Oriented Teams

The idea of an organization as a set of interdependent human relationships is deeply embedded in the philosophy of leaders at adaptive and devolved organizations. They see their organizations as communities. These communities are composed of multiple teams that deliver customer value. Creating large numbers of small units doesn’t mean wholesale restructuring, nor does it mean the disappearance of the hierarchy (although there is a lot less of it). It is the relationships and the information flows between levels and across the business that change. For example, business unit teams are solely responsible for their results and how they compare with agreed-upon benchmarks. They don’t need controlling—they need supporting. And if they fail to perform consistently, then they will not survive for long.

Leaders at Handelsbanken believe that its six hundred responsibility centers provide clarity and simplicity in setting the performance management framework. Managers are exposed and must accept full accountability for their performance. Performance comparisons are easily made, and peer pressure plays a major role in driving continuous improvement. Small independent units also stimulate entrepreneurial activity and give ambitious managers the opportunities they crave. This is a virtuous circle as the most talented managers look for companies that can give them these challenging roles.

Base Recruitment on Fit with the Team

Not everyone is cut out for the kind of open management style demanded by the adaptive and devolved organization. Some managers prefer the tightly drawn rules of the hierarchy. At Handelsbanken and Ahlsell, new recruits soon learn that they are expected to use their intuition and judgment to make value-enhancing decisions. This means that they must learn how to use information and understand the dynamics of the business.

Christer Dahle, Human Resources Manager (IT) at Handelsbanken, explains his recruitment policy.

Enable Teams to Respond to Customer Demand

Significant performance responsibility has now been devolved to customer-focused units at Leyland Trucks. Leaders learned, however, that empowerment cannot be “given” to teams; it can only be “taken.” In other words, teams must want to engage in the management process and accept responsibility. However, the realization (through surveys) that this is exactly what most of them did want took senior management by surprise. Senior managers also recognized that it was vital that authority and freedom to act be balanced by ability and responsibility.

Leaders at Ahlsell, Leyland Trucks, and Handelsbanken work on the principle of “customers first.” Ahlsell managers can do whatever they think right to meet the needs of customers. However, they are responsible for achieving high performance standards in terms of return on sales. Handelsbanken abandoned central product targets and quotas many years ago. Now, apart from new product launches, almost the only marketing is at the level of the branch. Thus, local people are empowered to know and satisfy customer needs. They have the ability to put together customer solutions, and they have control over pricing. Loss leaders can be agreed upon provided the overall business case (i.e., a profitable customer account) is kept firmly in mind.

Encourage Teams to Share Knowledge across the Business

In hierarchical structures, knowledge is, more often than not, seen by employees as a source of personal power or, at the very least, security against losing their job. But to maximize the effectiveness of knowledge, leaders must change this view. To be effective, all managers within a network need the same information at the same time. Moreover, such information should be action based, be instant, and be online.

IKEA believes in an open information system and the sharing of best practices. Sharing and integration are also fostered on what chairman Ingvar Kamprad calls the “mouth to ear” basis. The company assigns “IKEA ambassadors”—specially trained by Kamprad himself not only in the company’s values and culture but also in how to spread the message—to key positions in all units, both to socialize newcomers into the IKEA philosophy and to facilitate the transfer of ideas and best practices across the company’s dispersed operating units.³

Sharing of best practices is a key element in the IKEA success story. As one IKEA executive explained, “the newly set-up stores would look at the previously developed stores and try their hardest to improve on them. One would set up a green plant department, so the next would create a clock section.” It was through such an institutionalized entrepreneurial process that some of the distinguishing characteristics of the typical IKEA store emerged: supervised play areas for children featuring a large “pool” filled with red Styrofoam balls, in-store cafes serving inexpensive exotic meals such as Swedish meatballs, and fully equipped nursery and baby-changing facilities.⁴

Make Information Fast and Open

Handelsbanken has based its empowerment model on fast and open information. It delivers relevant information to the right people at the right time. Such a system provides front-line managers with the capability to make fast and well-informed decisions, to effectively manage project-based strategic initiatives, and to bounce ideas around with colleagues across the company before taking important decisions. It enables support services managers to keep up to date with best practices. It enables divisional managers to see trends, patterns, and breaks in the curve long before their competitors and thus make crucial decisions regarding products and markets. And it enables senior executives to keep asking important questions concerning strategic assumptions and risks while ensuring that operating units remain within acceptable performance parameters. Above all, it helps to share knowledge throughout the company so that strategic changes can be made quickly and potential problems solved before they fester and grow.

Set High Ethical Standards for Information Flow

Leaders in adaptive and devolved organizations believe in having only one set of numbers that is transparent throughout the whole organization. Maintaining one set of books is the key to high levels of ethical practice. This is exactly what such firms as Handelsbanken and Ahlsell do. Indeed, they have an information system based on the highest ethical values.

Providing an open and honest view of future outcomes works best in a culture underpinned by trust. It is crucially important that bad news be circulated without delay. Bad news must be assimilated quickly and dealt with as a team. By so doing, local managers will not be afraid of building the results of such bad news into their forecasts—the sting will have already been taken out of them. Handelsbanken managers share bad news immediately. For example, if one branch loses a customer, it needs to either try to recover the situation and gain the help of others that might have relevant knowledge or to replace the lost business, in which case it might solicit the help of regional managers.