I’ve found few exceptions to this observation: Large, hierarchical organizations over 30 years of age are poorly led, a drag on their societies, and unable to adapt. This applies to diverse organizations like Goldman Sachs, J.P. Morgan, BP, General Motors, the US Army, Penn State University, the Catholic Church, many governments, and most political parties. I believe there are structural causes for such pathetic leadership. These institutions have structured themselves to promote only those individuals who will protect and defend them. Potential leaders of change were the impatient, disruptive subordinates who either left in frustration or were expelled for cause. They were heretics and whistle blowers who directly threatened statuses, perks and self-images.
Promotions through middle management are filtered by five criteria (listed in their order of importance): 1. Perceived loyalty to the immediate superior and that superior’s status within the organization, 2. Perceived loyalty to the existing system as defined by senior management, 3. Likability, 4. Seniority, and 5. Apparent competence, usually equated to an accumulation of the system’s merit badges and an absence of accountable failures.
This promotion process effectively stabilizes the inner workings of an institution and makes relationships among its members predictable and enduring. Mediocre executives may administer with ease, so long as neither the mission nor the organization needs to change. Those who have reached the top are old (in their 50s or older), cautious, semi-competent administrators, supported by slightly younger, risk-averse subordinates awaiting their turns. The statuses and perks within these organizations go to those who play the game and get along. Subordinates are rewarded for impeding change, covering up organizational failings, and avoiding risks associated with altering the mission or initiating reforms.
Change, innovation, and bold leadership normally come from small, youthful, informal establishments with self-anointed leaders in their twenties or thirties who are intensely focused on their missions and thrive on taking risks. They attract subordinates who provide critical abilities and passionately pursue the institutional objectives. In the early years, a natural filter attracts worthy applicants and discourages most of the others: the organization is risky, ill-defined and without a history of success.
An ugly reality about innovative startups is that most of them fail or become members of the living dead. A venture capitalist friend told it to me this way: “When a successful VC invests in 10 companies, on average two or three of them will succeed and make him a hero. Three will fail. Worst of all, four will become very attractive small businesses which suck up his time.” I will add that the three which succeed will eventually join the next generation of large, hierarchical organizations run by lousy leaders who replace the founders.
An old bureaucracy will be poorly led until its culture embraces uncertainty, youthful bulls, and institutional failures. I can’t see that happening in the military, Goldman Sachs, Wells Fargo, BP, or the Catholic Church; just to mention a few. They will have to fail drastically before they might renew themselves. It’s tragic for society that some businesses and financial institutions have been allowed to become “too big to fail.” They need to be broken up until they’re small enough to fail and then prevented from growing through mergers and acquisitions.
How to select and develop capable leaders
Almost everyone sucks at selecting potential leaders (as opposed to selecting prudent administrators) because they use the wrong criteria. Potential leaders are too young, too aggressive, make too many mistakes, and are usually arrogant and obnoxious. They are out to accomplish something on their own and don’t want to report to others. They aren’t trying to be selected by others; they do the selecting. Most of them won’t be successful. And few can predict who will and who won’t succeed. It is easy to identify Steve Jobs as a winner after the fact. However, early on, the board of wise old venture capitalists at Apple summarily replaced him with a man who had all the credentials but no vision and no balls. That man took Apple to the verge of bankruptcy before Steve took over again. It is also easy to identify Ulysses Grant as a great leader after the fact, and likewise to realize that McClellan and other Union Army generals had all the military credentials but no vision and no balls. But even Lincoln hesitated to put Grant in charge of the Army of the Potomac. Grant was crude, a drinker, had been cashiered from the army and had failed repeatedly at business. However, he had won a series stunning, bold, high-risk victories on the Western front.
There is a proven way to develop a source of leaders for any centralized hierarchy which is willing to take some risks. It is somewhat counter-intuitive and totally at odds with the inner workings of a lumbering bureaucracy. Thus, it is seldom attempted. However, the Chinese used it successfully to lessen its leadership crisis caused by 40 years of ruthless, centralized rule. It is one of the reasons for China’s stunning economic success since then. I’ll explain.
Between 1984 and 1987, I spent over 4 months on the Chinese mainland conducting hi-tech business. It was intensely frustrating at first because no one I dealt with, not even senior government officials, could endorse specific agreements. Meetings invariably ended with “memorandums of understanding” which went up the chain of command until they reached an individual or committee high-up in the government which could or would authorize actions. This often took months. Managers flocked to do business with us Westerners in hopes that we would help them succeed within their own bureaucratic quagmire.
Oddly enough, as I was told by my Chinese associates, their government’s initial solution to the leadership crisis came from studying Hong Kong. Chinese peasants who had left everything, risked death, and fled to Hong Kong with nothing but the clothing on their backs, would often become sufficiently wealthy to smuggle food and gifts back to their villages. So the PRC set up special economic zones (well walled off from the rest of the mainland) in which the economic culture of Hong Kong was emulated. It was difficult and risky for Chinese to immigrate to these zones because they had to leave their iron rice bowls and their families in order to do so. Once in an SEZ, it was nearly impossible to return home. It was do-or-die. Risk adverse people stayed at home. Of those who stayed, a few succeeded in developing major companies. Over the years, successful people from the SEZ’s have become business and government leaders of the PRC.
In short: in order to develop a pool from which to select effective leaders, a centralized bureaucracy must enable isolated venues for adventurous, young, aggressive people willing to risk everything to pursue their disruptive visions; a farm system walled off from the main organization. Darwinian selection will reveal the fittest leaders.
An alternative, pursued by a handful of desperate businesses, is to acquire highly successful smaller organizations whose leadership teams then run the combined organizations.
Comment: A rich source of potential leaders comes from the ranks of legal and illegal immigrants and their immediate families. These people are proven risk-takers. Their immigrations helped to generate the rapid pace of innovation in the 19th and early 20th century USA and reinforce relative stagnation in the nations they left.