Understand and practicing effective sustainability governance starts with developing a foundational background in the key principles and best practices of corporate governance, leadership and management. This chapter provides readers with an introduction to corporate governance and formal governance structures and explores appropriate roles, activities and styles of sustainability leaders and managers._______________
Dyllick and Hockerts observed that consideration and debate regarding sustainability in the 21st century has involved integrating long-standing concerns about economic growth and social equity with concern for the carrying capacity of natural systems.1 In their words, sustainability “embodies the promise of societal evolution towards a more equitable and wealthy world in which the natural environment and our cultural achievements are preserved for generations to come”. Simply put, problems relating to economic growth, social equity and the environment must be addressed and solved simultaneously.2 Emerging from all this has been the drive for “sustainable development” that has led to international treaties relating to the protection of bio-diversity and climate change and governmental programs focusing on national and local sustainability. In addition, sustainable development has been adopted at the firm level as companies have accepted “corporate sustainability” as a precondition for doing business, integrated sustainability into their governance structures by appointing corporate sustainability officers, published sustainability reports and incorporated sustainability into their communication strategies.3
According to Montiel, interest in corporate sustainability surged after the United Nations World Economic and Development Commission popularized the term “sustainable development” in its famous 1987 “Brundtland Report” and researchers began to adapt the concept to companies by declaring that they could pursue sustainability by meeting their present needs without compromising the ability of future generations to meet their own needs.4 During the 1990s and early 2000s academics and practitioners began to argue that corporate sustainability required simultaneous attention to, and satisfaction of, environmental, social, and economic standards.5 For example, Dyllick and Hockerts
1 T. Dyllick and K. Hockerts, “Beyond the Business Case for Corporate Sustainability”, Business Strategy and the Environment, 11 (March 2002), 130.2 M. Keating, The Earth Summit’s Agenda for Change (Geneva: Centre for Our Common Future, 1993).3 T. Dyllick and K. Hockerts, “Beyond the Business Case for Corporate Sustainability”, Business Strategy and the Environment, 11 (March 2002), 130, 131.4 I. Montiel, “Corporate Social Responsibility and Corporate Sustainability: Separate Pasts, Common Features”, Organization and Environment, 21(3) (September 2008), 245, 254 (citing UN World Commission on Environment and Development, Our common future (Oxford, UK: Oxford University Press, 1987), 43).5 Id. For further discussion, see P. Bansal, “Evolving sustainably: A longitudinal study of corporate sustainable development”, Strategic Management Journal, 26(3) (2005), 197; and T. Gladwin and J. Kennelly, “Shifting paradigms for sustainable development: Implications for management theory and
suggested that when the fundamental principles of sustainable development are translated to the firm level, it leads to defining corporate sustainability as “meeting the needs of a firm’s direct and indirect stakeholders (such as shareholders, employees, clients, pressure groups, communities etc.), without compromising its ability to meet the needs of future stakeholders as well”.6 A few years later, Laughland and Bansal described “business sustainability” as follows:
”Business sustainability is often defined as managing the triple bottom line – a process by which firms manage their financial, social, and environmental risks, obligations and opportunities. We extend this definition to capture more than just accounting for environmental and social impacts. Sustainable businesses are resilient, and they create economic value, healthy ecosystems and strong communities. These businesses survive external shocks because they are intimately connected to healthy economic, social and environmental systems.”7
The steadily growing attention to corporate sustainability has been accompanied by a rise in the popularity of corporate social responsibility (“CSR”). Like sustainability generally, researchers and commentators have suggested a variety of definitions for CSR.8 One of the simplest descriptions of CSR is actions taken by a company to further some social good which is outside of the company’s immediate interests yet required by law. Some have focused on CSR as a strategic tool that increases the competitiveness of the company and strengthens the company’s reputation, each of which ultimately contributes to improved company performance. As noted above, definitions of corporate sustainability tend to incorporate the dimensions of the “triple-bottom-line” and conceptualize corporate sustainability as the long-term maintenance of responsibility from economic, environmental and social perspectives. The consensus is the both CSR and corporate sustainability are based on attempting to operate businesses in a more humane, ethical and transparent way9; however, there is an important distinction: CSR is generally seen as being a voluntary action in and of itself or as part of the company’s CSR strategy while corporate sustainability is an organizational practice that is integrated into the entire business and business strategy of the company. This is important to understand because integrating sustainability into organizational practices is a time-consuming process that is heavily influenced by the organization’s history, people, interests and action. The specific organizational practices that are related to sustainability are those that are implemented in order to reduce the adverse environmental and social impacts of the company’s business and operations.
research”, Academy of Management Review, 20(4) (1995), 874.6 T. Dyllick and K. Hockerts, “Beyond the Business Case for Corporate Sustainability”, Business Strategy and the Environment, 11 (March 2002), 130, 131.7 P. Laughland and T. Bansal, “The Top Ten Reasons Why Businesses Aren’t More Sustainable”, Ivey Business Journal (January/February 2011), http://iveybusinessjournal.com/publication/the-top-ten-reasons-why-businesses-arent-more-sustainable/ [accessed July 30, 2017].8 For further discussion of corporate social responsibility, see “Corporate Social Responsibility: A Library of Resources for Sustainable Entrepreneurs” prepared and distributed by the Sustainable Entrepreneurship Project (www.seproject.org).9 M. Marrewijk, Concepts and Definitions of CSR and Corporate Sustainability: Between Agency and Communion, Journal of Business Ethics, 44(2) (May 2003), 95.
Both corporate sustainability and CSR are like any other important management initiative and require proactive leadership from the top of the organization. In fact, it is clear that the “tone at the top” is an important factor in the success or failure of any sustainability initiative and the directors, executive officers and senior managers of the corporation are uniquely positioned to act as internal champions of sustainability and proactively communicate with everyone in the organization on a daily basis about the impact of new environmental and social products, services and activities (e.g., philanthropic projects) and sustainability-related systems and processes. These organizational leaders must also commit to investing the time and effort necessary to explain the corporation’s sustainability initiatives to customers and other stakeholders and develop and implement metrics for tracking and reporting progress. While sustainability and CSR certainly extend “beyond the law”, directors and officers must be mindful of their fiduciary duties and understand how laws, regulations and standard contract provisions are rapidly evolving to incorporate environmental and social responsibility standards.
Among the issues and activities that will need to be considered in establishing and maintaining effective governance and management processes for sustainability and CSR implementation are the following:
Understanding the drivers of enhanced board oversight of sustainability including investors’ expectations as to the role and responsibilities of directors and changing societal beliefs regarding the political and social roles of corporations
Understanding how CSR is changing the traditional fiduciary duties of directors and officers including the ascendance of the stakeholder-focused model and the introduction of alternative legal architectures for sustainability-oriented businesses
Ensuring that the board of directors integrates environmental and social responsibility into the governance structure and the traditional roles and responsibilities of directors
Designing and implementing of an effective framework for board oversight of CSR and corporate sustainability
Development and implementation of CSR commitments and instruments under the authority and supervision of the directors and senior management
Incorporating reports on CSR initiatives into board meetings and understanding how to create effective environmental and social responsibility committees and integrate sustainability into the activities of other board committees
Developing and maintaining a sustainability-supportive organizational culture Developing job responsibilities for the senior social responsibility officer and
designing effective internal organizational structures and systems for managing CSR initiatives and programs and supporting CSR commitments and expectations such as preparation and distribution of sustainability reports and stakeholder engagement
Implementing formal management systems relating to sustainability-related issues such as the environment; social responsibility and supply chain security including processes for collecting and analyzing information to assess CSR performance
Reviewing and modifying job responsibilities and compensation arrangements of executive team members, particularly the chief executive officer, to incorporate CSR commitments and attainment of CSR-related performance goals
Providing education and training to directors and executive team members on sustainability issues including the creation and management of stakeholder advisor groups and teams of external experts
Supporting directors, executive team members and managers and employees within the internal sustainability group to carry out their roles with respect to key CSR-related activities such as transparency and disclosure and stakeholder engagement
Identifying and counseling directors, officers, managers and employees on ethical issues that will arise as they discharge their responsibilities with respect to CSR and work to enhance and maintain the reputation of the organization
Conducting continuous audits and assessments of the sustainability governance and management framework through the use of certification and rating systems in order to evaluate and improve CSR performance and effectiveness
CSR requires organizations to look beyond traditional economic performance to consider the impact of their activities on the environment and society in which they operate; however, pursuit of CSR relies on many of the same basic governance and management processes that have been developed in the business world. As such, this initial chapter of a publication which is dedicated to sustainability governance and management takes a moment to introduce several fundamental topics that need to be understood by directors, executive officers, senior managers and employees: governance, leadership and management. While considered separately, the topics are closely related and overlapping. In fact, as discussed below, there is debate about how best to distinguish “leadership” and “management”. In addition, one of the most important jobs of the members of the governance group, the board of directors in the case of a corporation, is selecting the management team, providing them with directions and monitoring and evaluating how the skills and actions of the managers (e.g., planning, acquiring and deploying resources, building products and systems and monitoring execution of day-to-day operations) have contributed to achievement of the overall goals and objectives set by the governance group.
Leadership plays a role for both governance and management processes: the directors interact with the various stakeholders of the organization to understand their interests in organizational performance and then provide the executive officers and senior managers with goals and purposes and those officers and managers are then expected to lead their respective teams and influence their team members to comply with the policies and systems approved by the directors. In a properly functioning governance and management process, all of the players are ultimately accountable for their actions. Executive officers and senior managers are accountable to the directors for executing the directors’ instructions regarding overall goals and objectives for the organization. As for the directors, they are accountable to the ultimate beneficiaries of the organization’s activities. For a long time, director accountability was limited to the owners of the organization (i.e., the shareholders in the case of a corporation); however, as discussed below and elsewhere in this publication, directors must now answer to a range of stakeholders. The emergence of CSR has also spawned new skill sets including sustainable leadership and ethical management, each of which are discussed at length in separate chapters in this publication.
Corporate governance can be thought of as the way in which corporations are directed, administered and controlled and the actual activities of the directors and senior executives, the persons responsible for the governance and management of the corporation, have been referred to as steering, guiding and piloting the corporation through the challenges that arise as it pursues its goals and objectives. Jamali et al. explained that the “control” aspect of corporate governance encompassed the notions of compliance, accountability, and transparency, and how managers exert their functions through compliance with the existing laws and regulations and codes of conduct.10 At the board level, the focus is on leadership and strategy and directors are expected to deliberate, establish, monitor and adjust the corporation’s strategy, determine and communicate the rules by which the strategy is to be implemented, and select, monitor and evaluate the members of the senior executive team who will be responsible for the day-to-day activities associated with the strategy. In addition, directors are expected to define roles and responsibilities, orient management toward a long-term vision of corporate performance, set proper resource allocation plans, contribute know-how, expertise, and external information, perform various watchdog functions, and lead the firm’s executives, managers and employees in the desired direction.11
Corporate governance has been a matter of intense focus and debate for public companies over the last few years and a wide array of new statutes and regulations have been adopted that impact fiduciary obligations of directors and officers to shareholders; the composition and responsibilities of the audit and other committees of the board of directors; and the duties of professional advisor to public companies, notably accountants and lawyers. While this has created additional expense and risk for public companies it has also raised the bar for privately-held emerging companies that are now expected to set and meet higher standards with respect to internal controls and ensuring the appropriate compliance and risk management programs have been implemented and followed. Corporate governance does demand investment of significant resources, including the time and attention of senior management; however, the effort can pay substantial dividends in terms of employee morale and creating a position impression and 10 D. Jamali, A. Safieddine and M. Rabbath, “Corporate Governance and Corporate Social Responsibility Synergies and Interrelationship”, Corporate Governance, 16(5) (2008), 443, 444 (citing K. MacMillan, K. Money, S. Downing and C. Hillenbrad, “Giving your organization SPIRIT: An overview and call to action for directors on issues of corporate governance, corporate reputation and corporate responsibility”, Journal of General Management, 30 (2004), 15; and A. Cadbury, “The corporate governance agenda”, Journal of Corporate Governance, Practice-Based Papers, 8 (2000), 7). Additional definitions and descriptions of corporate governance can be found in a later chapter of this publication and in A. Gutterman, Corporate Governance: An Introduction to Theory and Practice (Oakland CA: Sustainable Entrepreneurship Project, 2019) available at www.seproject.org.11 K. MacMillan, K. Money, S. Downing and C. Hillenbrad, “Giving your organization SPIRIT: An overview and call to action for directors on issues of corporate governance, corporate reputation and corporate responsibility”, Journal of General Management, 30 (2004), 15; A. Cadbury, “The corporate governance agenda”, Journal of Corporate Governance, Practice-Based Papers, 8 (2000), 7) and J. Page, Corporate Governance and Value Creation (University of Sherbrooke, Research Foundation of CFA Institute, 2005).
reputation in the investment community and among the consumers of the company’s products and services.
The importance of corporate governance for companies and countries all around the world has been succinctly summarized as follows in a United Nations publication:
“In a more globalized, interconnected and competitive world, the way that environmental, social and corporate governance issues are managed is part of companies’ overall management quality needed to compete successfully. Companies that perform better with regard to these issues can increase shareholder value by, for example, properly managing risks, anticipating regulatory action or accessing new markets while at the same time contributing to the sustainable development of the societies in which they operate. Moreover these issues can have a strong impact on reputation and brands, an increasingly important part of company value.”12
If this statement is true, the primary push for corporate governance standards will come from individual firms, responding to market requirements and consumer perceptions of their reputation and brands, as opposed to formal rulemaking by the state.
Setting the strategy for the corporation obviously requires consensus on the goals and objectives of the corporation’s activities and the parties who are to be the primary beneficiaries of the performance of the corporation. Traditionally, directors were seen as the agents of the persons and parties that provided the capital necessary for the corporation to operate—the shareholders—and corporate governance was depicted as the framework for allocating power between the directors and the shareholders and holding the directors accountable for the stewardship of the capital provided by investors. While economists and corporate governance scholars from other disciplines recognized that the governance framework involved a variety of tools and mechanisms such as contracts, organizational designs and legislation, the primary question was how to use these tools and mechanisms in the best way to motivate and guarantee that the managers of the corporation would deliver a competitive rate of return.13 All of this is consistent with what has been described as the “narrow view” of corporate governance, one that conceptualizes corporate governance as an enforced system of laws and of financial accounting, where socio/environmental considerations are accorded a low priority.14
While it has long been accepted that the principal participants in the corporate governance framework were the shareholders, management and board of directors, the scope of corporate governance began to change during the 1990s as new and different
12 S. Nisa and K. Warsi, “The Divergent Corporate Governance Standards and the Need for Universally Acceptable Governance Practices”, Asian Social Science, 4(9) (2008), 128-136, 128 (citing “Who Cares Wins: Connecting Financial Markets to a Changing World”, UN Global Compact, 2004, p. i).13 H. Mathiesen, Managerial Ownership and Finance Performance (Dissertation presented at Copenhagen Business School, 2002).14 K. Saravanamuthu, “What is measured counts: Harmonized corporate reporting and sustainable economic development”, Critical Perspectives on Accounting, 15 (2004), 295.
goals for corporate activities were suggested. Sir Adrian Cadbury, Chair of the UK Commission on Corporate Governance, famously offered the following description of corporate governance and the governance framework in the Commission’s 1992 Report on the Financial Aspects of Corporate Governance:
“Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society.”
Cadbury’s formulation of corporate governance brought an array of other participants, referred to as “stakeholders”, into the conversation: employees, suppliers, partners, customers, creditors, auditors, government agencies, the press and the general community. As described by Goergen and Renneboog: “[a] corporate governance system is the combination of mechanisms which ensure that the management (the agent) runs the firm for the benefit of one or several stakeholders (principals). Such stakeholders may cover shareholders, creditors, suppliers, clients, employees and other parties with whom the firm conducts its business.”15 The principles of corporate governance of the Organisation for Economic Cooperation and Development clearly state that the corporate governance framework should recognize the rights of stakeholders (i.e., employees, customers, partners and the local community) as established by law and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.
The focus on interested parties beyond shareholders is the hallmark of a broader view of corporate governance that emphasizes the responsibilities of business organizations to all of the different stakeholders that provide it with the necessary resources for its survival, competitiveness, and success.16 In this conception, managers remain primarily accountable to the stockholders who have placed their wealth in the hands of those managers; however, managers, particularly the members of the board of directors, are also responsible to groups of stakeholders that have made equally significant contributions to the corporation and these stakeholder responsibilities impose additional constraints on managerial action and the primacy of shareholder rights.17 Rahim, noting that the roles and responsibilities of directors have been described as the “board as manager”, pointed out that the duties of board members have been vastly extended as CSR has moved from the margins to the center of corporate governance attention.18
15 M. Goergen and L. Renneboog, “Contractual Corporate Governance”, Journal of Corporate Finance, 14(3) (June 2008), 166.16 K. MacMillan, K. Money, S. Downing and C. Hillenbrad, “Giving your organization SPIRIT: An overview and call to action for directors on issues of corporate governance, corporate reputation and corporate responsibility”, Journal of General Management, 30 (2004), 1517 J. Page, Corporate Governance and Value Creation (University of Sherbrooke, Research Foundation of CFA Institute, 2005); and N. Kendall, “Good corporate governance”, Accountants’ Digest, 40 (1999).18 M. Rahim, Legal Regulation of Corporate Social Responsibility: A Meta-Regulation Approach of Law for Raising CSR in a Weak Economy (Berlin: Springer, 2013), 13, 22 (citing M. Eisenberg, “The Modernization of Corporate Law: An Essay for Bill Cary”, University of Miami Law Review, 37 (1982),
The stakeholder approach to corporate governance arose out of a growing sense that more consideration had to be given to “the whole set of legal, cultural, and institutional arrangements that determine what public corporations can do, who controls them, how that control is exercised, and how the risks and return from the activities they undertake are allocated.”19 The impact and importance of corporate governance was emphasized by Gourvevitch and Shinn in the following quotes from their book on the “new global politics of corporate governance”20:
“Corporate governance–the authority structure of a firm–lies at the heart of the most important issues of society”… such as “who has claim to the cash flow of the firm, who has a say in its strategy and its allocation of resources.” The corporate governance framework shapes corporate efficiency, employment stability, retirement security, and the endowments of orphanages, hospitals, and universities. “It creates the temptations for cheating and the rewards for honesty, inside the firm and more generally in the body politic.” It “influences social mobility, stability and fluidity… It is no wonder then, that corporate governance provokes conflict. Anything so important will be fought over… like other decisions about authority, corporate governance structures are fundamentally the result of political decisions. Shareholder value is partly about efficiency. But there are serious issues of distribution at stake – job security, income inequality, social welfare.”
Governance Structure
Corporate governance begins with the establishment of rules and procedures for allocation of authority among groups and persons at various levels within the organizational hierarchy of the company. A person or group vested with “authority” has the legitimate power to hold the people reporting to him/her or them accountable for their actions and performance and the ability to directly influence, or control, the scope of the duties and responsibilities of such persons and the manner in which they discharge those duties and responsibilities. Authority within a company is typically described through a “chain of command,” which is the system of hierarchical reporting relationships within the company’s organizational structure that also identifies where people (and groups of similarly-situated people, such as shareholders) rank in relation to one another and their formal scope of authority within the company. For example, a large US corporation with multiple business units may have five levels in the organizational hierarchy ranging vertically from top to bottom as follows:
The shareholders, who are the owners of the corporation;
187, 209-210).19 M. Blair, Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century (1995).20 P. Gourvevitch and J. Shinn, Political Power and Corporate Control: The New Global Politics of Corporate Governance (Princeton NJ: Princeton University Press, 2007) (as compiled by J. McRichie at https://www.corpgov.net/library/corporate-governance-defined/)
The board of directors and the various committees thereof, all of which serve as trustees of the interests of the shareholders in overseeing the activities of the managers of the corporation;
The senior, or executive, management of the corporation including the chief executive officer (“CEO”), the president or chief operating officer (“COO”), and the various executive and senior vice presidents responsible for oversight of major functional and business units;
The divisional managers, who perform the day-to-day management functions within each of the business units (i.e., units focusing on products or markets); and
The functional managers, who perform the day-to-day management functions within each of the functional units (i.e., units focusing on functional activities such as research and development, manufacturing, sales and marketing or finance).
The multi-level hierarchy described above is certainly correct from an ideal perspective as well as a matter of US corporate law; however, it does not represent the typical system of reporting relationships for an operations viewpoint. For example, while the shareholders are at the top of the pyramid they are not directly involved in issuing orders to, and exercising control and authority over the day-to-day activities of, the employees of the company. Instead, the key reporting decisions that must be made relate to the senior executives and the divisional and functional managers. Similarly, the members of the board of directors do not expect to be able to walk into the company’s facilities and give instructions to the employees. The directors look out for the interests of the shareholders and carry out their duties and responsibilities by selecting the CEO and the other members of the executive team and evaluating their performance. The relevance of this model is limited in the case of large public corporations given the large number of shareholders and the practical limitations that exist on their ability to quickly and directly influence the composition of the board of directors in spite of recent shareholder activism. However, in the case of small, but rapidly growing, “emerging” companies the outside shareholders—generally venture capitalists and other professional investors—are very involved in the designation of directors and in the selection and evaluation of each of the members of the executive team.
Board of Directors
Regardless of the size of the company and any other rules to which the company may be subject due to its status as a “public company”, the board of directors is the focal point for corporate governance activities and responsibilities. Each jurisdiction has its own set of statutory rules regarding the composition of the board and the method for selecting directors and these rules apply to all companies regardless of their size. However, with regard to public companies, as well as larger privately held businesses that either have a large number of outside shareholders or may be looking to become a public company in the future, notice must be taken of development such as those that have been occurring in the US, which has seen a substantially increased role and authority for independent directors; expanded responsibilities of various committees of the board of directors, notably the audit committee; and imposition of requirements relating to the financial
expertise of board members, particularly those serving on the audit committee, and education and training of directors.
Audit committees of the boards of directors of public companies have become the foundation of many aspects of the emerging corporate governance scheme for public companies in the US. Specific rules have been promulgated regarding the structure and composition of audit committees, and such committees have been given broad responsibilities with respect to oversight of various activities and procedures include engagement of outside auditing firms, establishment and monitoring of internal controls and creation of procedures for receipt and investigation of complaints regarding questionable accounting or auditing matters. The audit committee is also a key participant in the company’s efforts to assess risks and develop and implement risk management strategies. Minimum qualifications for service on an audit committee have been promulgated by the Securities and Exchange Commission and the major exchanges and place a premium on education and experience in the accounting and finance areas and the ability to critically evaluate the recommendations and decisions of senior management and the outside auditors with respect to financial reporting issues.
CEO and Executive Team Members
While there are examples of organizations that are led by a single individual exercising what appears to be dictatorial control over day-to-day activities and long-term strategy the realities of an increasingly complex business environment, even for smaller companies, generally dictate the creation of teams of top managers to coordinate the activities of the business units that are part of the organizational structure of the company. These teams are commonly referred to as “executive teams” since they are composed of the CEO of the entire company and the CEOs of key functional departments—research and development, manufacturing, sales and marketing, finance and human resources—and any major business units with a non-functional focus such as divisions formed to concentration on specific products or markets.
While the formal role of the members of the executive team, as officers of the company, is to act as agents for the directors and shareholders of the company, as a practical matter the executive team exerts substantial authority over the acquisition and use of the company’s resources and the decisions made by the members of the executive team are the determining factors in the success or failure of the strategies pursued to increase shareholder value. The size and composition of the executive team evolves with the growth of the company, changes in its key operational activities and decisions about which products and markets should be pursued using the company’s scarce resources. In most cases executive team members wear multiple hats—they are responsible for overseeing the activities of various key business units (i.e., departments or divisions) and looking out for their interests while simultaneously working to create and execute integrating mechanisms and lateral processes to ensure that all of the groups, including their own, collaborate effectively to achieve the overall goals for the entire company. Members of the executive team must have the deep experience and knowledge necessary to lead the company toward development of a core competency in their area of
specialization as well as the personal skills to positively interact with other team members and the ability to think strategically on behalf of the company and all of its stakeholders.21
In most instances, the person with the most responsibility for, and control over, the organizational design of the company—the recognized leader of the executive team—is the CEO. While the CEO “reports” to the board of directors and the board of directors is vested with more legal authority than any officer of the company, including the CEO, it is the CEO to whom the directors turn for leadership in setting strategy and putting the assets and other resources of the company to work in order to achieve the stated goals and objectives of the company. The CEO is almost always a member of the board of directors and, until recently, the common practice among public companies in the US was for the CEO to also serve as the chairperson of the board of directors. While it is now the general rule that US public companies, as well as many larger privately-held companies, will fill a majority of the seats on the board of directors with outsiders (i.e., non-employees and persons who do not represent a large shareholder block) it is nonetheless still true that the CEO exerts significant influence over the board of directors even in those circumstances.
Every CEO has a broad, if not overwhelming, set of duties and responsibilities. Some of these duties are formal and prescribed by law and the governing documents of the company; however, most of the expectations imposed on the CEO are often vague and are left to the CEO to define and execute. A CEO is confronted with challenges in a number of different areas and from various stakeholders and he or she must be able to balance and prioritize the demands on his or her time and intellectual resources. For example, at any point in time the CEO may be focusing on the timetable for launching a new product or service and establishing and testing specifications for the product or service; evaluating and responding to unforeseen actions by competitors; responding to the concerns of key customers; reviewing the suggestions of the marketing team regarding shifts in brand strategy and image of the company; and preparing for the next board meeting and a presentation to prospective new investors.
Many of the basic duties and responsibilities of the CEO remain the same regardless of the size of the company and its stage of development; however, successfully steering an emerging company into the marketplace does not necessarily mean that the CEO will thrive as the leader of a public company nor is it always the case that a CEO of a large multi-national firm can seamlessly take over the reins of a new business. As the company grows the CEO must be able to appreciate the need for more formal planning and creation of internal controls and must be prepared to delegate authority in many areas to the members of the executive team that the CEO is responsible for recruiting and managing. In addition, the CEO of an emerging company, often a member of the
21 The legal framework relating to the composition of the executive team and the duties of each of the members is laid out in applicable statutes as well as in the formation and governance documents of the particular company (e.g., the articles of incorporation and bylaws of US corporations) and in any agreements among the shareholders and/or special resolutions of the board of directors regulating the duties and powers of the officers.
founding group, must be willing to change his or her style of leadership to facilitate greater participation by other executive team members and key managers at lower levels of an increasingly taller organizational hierarchy. Finally, as the company expands the CEO will need to invest more time in building and maintaining relationships with new stakeholders including vendors, customers, investors and journalists and will need to focus on new issues such as financial reporting and accounting practices, risk management and globalization.
Empirical studies, as well as anecdotal information, confirm that the skills, energy and judgment of the members of the executive team are important factors in determining the success or failure of any business venture. Some well-known venture capitalists, notably Arthur Rock, one of the initial backers of Apple Computers, have a decided preference for investing in strong management teams even if the associated business model is less than fully developed. On the other hand, many investors will not blindly follow executives that have been successful in the past if the proposed business model does not make sense and will insist upon a showing the company will be able to forge and maintain a competitive advantage and develop the right products for the right markets. Even in that case, however, the ultimate viability of the business model will depend on the decisions that the CEO, working with the other executives of the company, make with regard to each of the key elements of organizational design--strategy, including vision, governance and comparative advantage; organizational structure, including power and authority, information flow and organizational roles; organizational culture and values; business processes and lateral linkages, including information technology; compensation and reward systems; and human resource management, including organizational learning.22
Leadership
Governance is the means by which companies can be effectively led and the key players in the governance structure—the directors and executive officers—must accept and embrace their leadership responsibilities. Leadership is a universal phenomenon that has preoccupied scholars, politicians and others for centuries.23 Zagoršek observed: “. . . the simultaneous appearance of social institutions such as government, organized religion, and a significant role for individual leaders argues that there may well be something about people in complex organizations that provides a social value in having ‘leaders’—they arise to fulfill a basic social function.”24 In the management context leadership has been consistently identified as playing a critical role in the success or failure of organizations and some surveys have pegged up to 45% of an organization’s performance
22 For further discussion, see “Organizational Design: A Library of Resources for Sustainable Entrepreneurs” prepared and distributed by the Sustainable Entrepreneurship Project (www.seproject.org).23 See, e.g., B. Bass, “Does the Transactional-Transformational Leadership Paradigm Transcend Organizational and National Boundaries?”, American Psychologist, 52(2) (1997), 130-139; and M. Peterson and J. Hunt, “International Perspectives on International Leadership. Leadership Quarterly”, 8(3) (1997), 203-232.24 H. Zagoršek, Assessing the impact of national culture on leadership: A six nation study (Ljubljana, 2004).
on the quality and effectiveness of its leadership team.25 Apart from organizational performance, researchers have consistently found a strong correlation between leadership styles and behaviors and the job satisfaction and performance of subordinates.26
During the early years of serious research in the leadership area the focus was primarily on Western leadership styles and practices. This occurred for various reasons including the location of the critical mass of researchers in the US and the fact that most companies operated primarily in the US with some cautious expansion into foreign markets with similar linguistic and cultural traditions. However, several factors—globalization of the workforce, expansion of operations into numerous around the world and exposure to increase global competition—has forced leadership scholars to incorporate culture into their research and theories since leaders of businesses of all sizes in all countries must be prepared to interact with customers and other business partners from different cultures and leaders of larger companies have the additional challenge of managing multinational organizations and aligning a global corporate culture with multiple and diverging national cultures.27 Another driving force in the push for more work on the relationship between culture and leadership has been the emergence of an international research community that includes scholars living, working and observing in all parts of the world and this has led to expansion of the scope of inquiry to include such diverse topics as leadership styles of managers and entrepreneurs in Russia and other countries that were formerly part of the Soviet Union.28
25 B. Bass, Bass & Stogdill's Handbook of Leadership: Theory, Research, and Managerial Applications (3rd ed.). (New York: Free Press, 1990); D. Day and R. Lord, “Executive Leadership and Organizational Performance: Suggestions for a New Theory and Methodology”, Journal of Management, 14(3) (1988), 453-464.26 C. Schriesheim and L. Neider, “Path-Goal Theory: The Long and Winding Road”, Leadership Quarterly, 7 (1996), 317-321; J. Howell and D. Costley, Understanding Behaviors for Effective Leadership (Upper Saddle River, NJ: Prentice Hall, 2001).27 H. Zagoršek, Assessing the impact of national culture on leadership: A six nation study (Ljubljana, 2004). With regard to managing the cultural aspects of multinational corporations, see V. Miroshnik, “Culture and international management: A review”, Journal of Management Development, 21(7) (2002), 521-544. Excellent reviews of the literature relating to international and cross-cultural leadership research can be found in R. House, N. Wright and R. Aditya, “Cross-cultural research on organizational leadership: A critical analysis and a proposed theory”, in P. Earle and M. Erez (Eds.), New perspectives on international industrial/organizational psychology (San Francisco, 1997), 535-625; P. Dorfman, “International and cross-cultural leadership research”, in B. Punnett and O. Shenkar (Eds.), Handbook for international management research (Oxford, UK: Blackwell, 1996), 267-349; P. Dorfman, “International and cross-cultural leadership research”, in B. Punnett and O. Shenkar (Eds.), Handbook for international management research (2nd Ed.) (Ann Arbor, MI: University of Michigan, 2003); M. Dickson, D. Den Hartog and J. Mitchelson, “Research on leadership in a cross-cultural context: Making progress, and raising new questions”, The Leadership Quarterly, 14 (2003), 729-768 and T. Scandura and P. Dorfman, “Leadership research in an international and cross-cultural context”, The Leadership Quarterly 15(2) (April 2004), 277. For further discussion of the study of cross-cultural leadership in the context of the general evolution of cross-cultural studies, see “Cross-Cultural Leadership Studies” prepared and distributed by the Sustainable Entrepreneurship Project (www.seproject.org).28 See, e.g., A. Ardichvili, R. Cardozo and A. Gasparishvili, “Leadership styles and management practices of Russian entrepreneurs: implications for transferability of Westerns HRD interventions,” Human Resource Development Quarterly, 9(2) (1998): 145-155; and A. Ardichvili and K. Kuchinke, “Leadership styles and cultural values among managers and subordinates: a comparative study of four countries of the former Soviet Union, Germany and the US,” Human Resource Development International, 5(1) (2002): 99-
The effective study and understanding of leadership begins with constructing a workable definition of the term “leadership”. Interestingly, while leadership has been rigorously studied and discussed for centuries, a consensus regarding how the term “leadership” can and should be defined has been elusive. In this regard, Stogdill observed that “there are almost as many definitions of leadership as there are persons who have attempted to define the concept” and Fiedler wrote that [t]here are almost as many definitions of leadership as there are leadership theories—and there are almost as many theories of leadership as there are psychologists working in the field”.29 Dickson et al. succinctly described leadership as involving “disproportionate influence” and noted that leadership roles around the world are universally associated with power and status and that it is therefore important to understand how power and status are distributed in a society in order to obtain a clear picture of leadership roles in that society.30 The researchers involved in the Global Leadership and Organizational Effectiveness (“GLOBE”) project defined leadership as “. . . the ability of an individual to influence, motivate, and enable others to contribute toward the effectiveness and success of the organizations of which they are members”.31 The potential influence of leaders is substantial as the following observation of the GLOBE researchers illustrates: “When individuals think about effective leader behaviors, they are more influenced by the value they place on the desired future than their perception of current realities. Our results, therefore, suggest that leaders are seen as the society’s instruments for change. They are seen as the embodiment of the ideal state of affairs.”32
Eckmann offered a short and not inclusive list of leadership definitions from a variety of sources and activities that included the following33:
The creative and directive force of morale A process of mutual stimulation which, by the successful interplay of relevant
individual differences, controls human energy in the pursuit of a common cause The process by which an agent induces a subordinate to behave in a desired manner Directing and coordinating the work of group member, a definition that is more
appropriate for management activities
117.29 R. Stodgill, Handbook of Leadership (New York, Free Press, 1974), 259; F. Fiedler, Leadership (Morristown, NJ: General Learning, 1971), 1.30 M. Dickson, D. Den Hartog and J. Mitchelson, “Research on leadership in a cross-cultural context: Making progress, and raising new questions”, The Leadership Quarterly, 14 (2003), 729-768, 737.31 R. House, P. Hanges, M. Javidan, P. Dorfman and V. Gupta (Eds). Culture, Leadership, and Organizations: The GLOBE Study of 62 Societies (Thousand Oaks CA: Sage, 2004), 15.32 Id. at 275-276.33 See H. Eckmann, History of Leadership Studies, http://www.jameslconsulting.com/documents/history-of-leadership-studies.pdf [accessed December 10, 2018] (includes citations to sources of leadership definitions)
An interpersonal relation in which others comply between they want to, not because they have to, a formulation similar to the concept of “transformational” leadership discussed elsewhere in this Guide.
The process of influencing an organized group toward accomplishing its goals and the creation of conditions for the team to be effective, both closely linked to the study and practice of team leadership
The thing that wins battles, a contribution by General Patton
Muczyk and Holt defined “leadership”, in a general sense, as: “. . . the process whereby one individual influences other group members toward the attainment of defined group or organizational goals. In other words, the leadership role describes the relationship between the manager and his or her subordinates that results in the satisfactory execution of subordinates’ assignments and, thereby, the attainment of the important goals for which the leader is responsible and is instrumental in setting. At the very minimum, leadership requires providing direction and impetus for subordinates to act in the desired direction.”34 They believed that it was important to distinguish leadership per se from actions or behaviors of leaders that are actually “enablers” or “facilitators” of effective leadership, such as the traits, tendencies and practices of leaders with respect to such things as planning, communicating, motivating and decision making.
Leadership Roles and Activities
While leaders can be distinguished from managers, leaders nonetheless are responsible for a number of the same functions typically categorized as “managerial” such as setting goals and designing strategic plans to achieve those goals, communicating directives to other members of the organization, overseeing execution of the organizational strategy and setting guidelines for motivating organizational members and assessing their performance. All leaders, regardless of their position, are engaged in the following core roles and activities provided by the four-factor theory of leadership proposed by Bowers and Seashore: support, in the form of leader behaviors that enhance a subordinate’s feelings of personal worth and importance; interaction facilitation, in the form of leader behaviors that encourage organizational members to develop close and mutually satisfying relationships; goal emphasis, in the form of leader behaviors that motivate organizational members to achieve excellent performance and fulfill the goals set for the organization; and work facilitation, in the leader behaviors that support achievement of the organizational performance goals, including activities such as coordinating, planning and scheduling and providing subordinates with the requisite tools, materials and technical knowledge necessary for them to do their jobs.35 In addition, leadership roles and the focus of leader activities vary depending on where he or she is located within the organizational
34 J. Muczyk and D. Holt, “Toward a Cultural Contingency Model of Leadership”, Journal of Leadership & Organizational Studies, 14(4) (May 2008), 277-286, 280 (citing also J. Muczyk and T. Adler, “An attempt at a consentience regarding formal leadership”, Journal of Leadership and Organizational Studies, 9(2) (2002), 2-17; and G. Yuki, Leadership in Organisations (Upper Saddle River, NJ: Prentice Hall, 1998)).
hierarchy. Finally, other factors such as the type of business engaged in by the organization, the environmental conditions that the organization is facing, the stage of the organization’s development, the leader’s role in the launch of the organization (e.g., a “founder”) and the scope of the organization’s global business activities will have an influence on the leader’s role and the behaviors needed in order for the leader to be effective.36 The list below lays out various core leadership roles and activities derived from the research and observations on the subject.37 _______________
Core Leadership Roles and Activities
Selecting and defining goals and objectives for the organization; designing strategic plans to achieve those goals and objectives; and identifying, promoting and managing changes required to achieve future goals and objectives
Communicating ideas about their vision for the organization and providing directions to other members of the organization regarding actions to be taken to realize the vision
Designing and implementing an organizational structure that promotes efficient flow of information and collaboration among members of the organization to develop new products and services and solutions for problems and issues raised by customers
Overseeing execution of the organizational strategy and establishing procedures for assessing the performance of organizational members
Implementing human resources management practices that support their vision and provide members of the organization with access to training necessary to maintain and improve the skills required for them to positively participate in the execution of the vision
Engaging in proactive pursuit and collection of information from internal and external sources and implementation of procedures for efficient analysis and dissemination of relevant information among members of the organization
Engaging in behaviors that support organizational members and enhance their feelings of personal worth and importance
Engaging in behaviors that facilitate interaction among organizational members; encourage members to develop close and mutually satisfying relationships; create high quality teams; and train members of the organization on team building techniques
Engage in behaviors that motivate organizational members to achieve excellent performance and fulfill the goals set for the organization using a range of techniques such as formal authority, role modeling, delegation of authority, setting specific and challenging goals, and adroit and intelligent use of rewards and punishments
Engage in behaviors that support achievement of the organizational performance goals, including activities such as coordinating, planning and scheduling and providing organizational members with the requisite tools, materials and technical knowledge necessary for them to do their jobs
Engage in behaviors consistent with service as a steward of the assets, resources, mission, reputation and legacy of the organization including selection and development of potential future leaders and representing the organization with integrity in the communities in which it operates
_______________
Leadership Styles
35 J. Muczyk and T. Adler, “An attempt at a consentience regarding formal leadership”, Journal of Leadership and Organizational Studies, 9(2) (2002), 2-17. 36 Id. For discussion of the roles and activities of organizational founders, see A. Gutterman, Founders (New York: Business Expert Press, 2018). 37 A. Gutterman, Practicing Leadership (New York: Business Expert Press, 2018). See also D. Dudley, This Is Day One: A Practical Guide to Leadership That Matters (New York: Hachette Books, 2018).
One of the most interesting, and voluminously researched, topics in leadership studies is “leadership style”. In general, leadership style focuses on how leaders interact with their followers and has been more specifically defined as “the manner and approach of providing direction, motivating people and achieving objectives”.38 While there a number of different models of leadership style, several of which are discussed in the following sections, three fundamental dimensions are often represented: the leader’s approach to influencing the behavior of his or her followers; the manner in which decisions regarding the direction of the group are made, with a specific emphasis on the level of participation offered to followers; and the balance struck between goal attainment and maintaining harmony within the group (sometimes referred to as group “maintenance”).39 For example, two alternative approaches to influencing the behavior of follows are the transactional leadership, which views the leader-follower relationship as a process of exchange, and transformational leadership, which relies on the leader’s ability to communicate a clear and acceptable vision and related goals that engender intense emotion among followers that motivates them to buy into and pursue the leader’s vision. Contrasting styles for decision-making are found when distinguishing authoritarian (autocratic) and participative (democratic) leaders. Finally, the balance between goals and maintenance is emphasized in those models, such as Blake and Mouton’s Grid Theory, that analyze the degree to which leaders exhibit task and/or relationship orientation in their interactions with followers.
Many commentators, notably Kotter, have observed that coping with change is one of the most important challenges confronting leaders of organizations, particularly given the unending pressures caused by globalization, innovations in technology and communications and turbulent economic times.40 Reardon et al. suggested that five phases of change could be identified—planning, enabling, launching, catalyzing and maintaining—and that each required a leader to use one of four different types of leadership styles—commanding, logical, inspirational or supportive—that was most appropriate for that phase.41
Muczyk and Adler have questioned the feasibility of this model given that it calls for an uncommonly versatile and flexible leader.42 However, other researchers who have studied the evolution of organizations have also concluded that appropriate leadership
38 C. Fertman and J. van Liden, “Character education: An essential ingredient for youth leadership development”, NASSP Bulletin, 83:609 (October 1999), 9-15. See also R. Ashkenas and B. Manville, Harvard Business Review Leader’s Handbook (Cambridge MA: Harvard Business Press, 2018).39 R. Scholl, What is Leadership Style? (2000).40 Kotter distinguished “leadership” from “management” and argued that it was the job of “leaders” to cope with change and set direction while managers tended to dealing with complexity and planning. See J. Kotter, “Leading Change: Why Transformation Efforts Fail”, Harvard Business Review OnPoint, March-April, 1995, 1-10; and J. Kotter, Leading Change (Cambridge, MA: Harvard Business School Press, 1996) .41 K.K. Reardon, K.J. Reardon and A. Rowe, “”Leadership styles for the five stages of radical change”, Acquisition Review Quarterly, 6 (1998), 129-146.42 J. Muczyk and T. Adler, “An attempt at a consentience regarding formal leadership”, Journal of Leadership and Organizational Studies, 9(2) (2002), 2-17. Muczyk and Adler have also proposed the existence of a “leadership cycle” that anticipates a change in leadership style as organizations go through various stages of development.
styles do tend to change as time goes by and that while it may not be feasible for a single leader to attempt to change his or her style, changes at the top of the organizational hierarchy may be needed from time-to-time in order to bring in the right person for the particular situation.43
_______________
Leadership Styles
Definitions and descriptions of leadership styles typically are based on three fundamental dimensions:
• The leader’s approach to influencing the behavior of his or her followers • The manner in which decisions regarding the direction of the group are made, with a specific emphasis
on the level of participation offered to followers• The balance struck between attaining goals and maintaining harmony within the group (sometimes
referred to as group “maintenance”)
Among the styles included in representative models of leadership styles are the following:
• Authoritarian or autocratic; participative or democratic; and delegative or “free reign” (sometimes referred to as “laissez faire”)
• Exploitive authoritative, benevolent authoritative, consultative system, and participative• Country Club Leadership (High Concern for People/Low Concern for Production), Produce or Perish
Leadership (Low Concern for People/High Concern for Production), Impoverished Leadership (Low Concern for People/Low Concern for Production), Middle-of-the-Road Leadership (Medium Concern for People/Medium Concern for Production), and Team Leadership (High Concern for People/High Concern for Production)
• Directive autocrat, permissive autocrat, directive democrat, and permissive democrat• Coercive, authoritative, affiliative, democratic, pacesetting, and coaching• Leadership “approaches”: strategy, human-assets, expertise, “box”, and “change”• Servant_______________
One highly discussed concept of leadership style that is particularly relevant to sustainability is “transformational leadership”, a term first used along with “transactional leadership” by James MacGregor Burns in 1978.44 Burns began by defining leadership as “leaders inducing followers to act for certain goals that represent the values and the motivations—the wants and needs, the aspirations and expectations—of both leaders and followers.” For Burns, leaders had the greatest impact on their followers when they were able to “motivate followers to action by appealing to shared values and by satisfying the higher order needs of the led, such as their aspirations and expectations”. He went on to say that “. . . transforming leadership ultimately becomes moral in that it raises the level of human conduct and ethical aspiration of both leader and the led, and thus it has a
43 Id. (citing J. Muczyk and B. Reimann, “The Case for Directive Leadership”, The Academy of Management Executive, 1(3) (1987), 301-311; R. Quinn and K. Cameron, “Organizational Life Cycles and Some Shifting Criteria of Effectiveness: Some Preliminary Evidence”, Management Science, 1983, 33-51; L. Greiner, “Evolution and Revolution as Organizations Grow”, Harvard Business Review, July/August 1972, 37-46; and P. Hersey and K. Blanchard, Management of Organizational Behavior (5 th Ed) (Englewood Cliffs, N.J.: Prentice-Hall, 1988)).44 References, and quotes attributed, to Burns in this section are adapted from J. MacGregor Burns, Leadership (New York: Harper and Row, 1978).
transforming effect on both.” While Burns clearly had feelings about the value of transformational leadership he also recognized that leaders often needed to engage in another form of leadership, which he referred to as “transactional”, and which was based on transactional exchanges of value between leaders and followers; in other words, leaders offered and awarded items of value under his or her control in exchange for followers providing needed inputs such as services.45
Management
Given that “management” has been so widely studied and practiced for literally thousands of years, it is not surprising to find a wide array of possible definitions of the term. At the most basic level, the verb “manage” derives from the Italian word “maneggiare”, which is means “to handle”. A number of definitions of “management” have focused on the specific tasks and activities that all managers, regardless of whether they are overseeing a business, a family or a social group, engage in, such as planning, organizing, directing, coordinating and controlling. One of the simplest, and often quoted, definitions of management was offered by Mary Parker Follett, who described it as “the art of getting things done through people”.46 The notion of “management through people” can also be found in the work of Weihrich and Koontz, who began with a basic definition of management as “the process of designing and maintaining an environment in which individuals, working together in groups, accomplish efficiently selected aims”.47
They then went on to expand this basic definition with the following observations:
Managers carry out certain universally recognized basic managerial functions, including planning, organizing, staffing, leading and controlling
Management applies to any kind of organization. Management principles apply to managers at all levels of the organization, not just
executives and senior managers positioned at the top of the organizational hierarchy. The goal of all managers is the same: to create a “surplus”. Managers are concerned with improving productivity, which implies both
effectiveness and efficiency.48
Elements mentioned by Weihrich and Koontz in the explanations and observations above have figured prominently in other definitions of management. For example, Jones et al. referred to management as “the process of using an organization’s resources to achieve specific goals through the functions of planning, organizing, leading and controlling”.49
45 For further discussion, see A. Gutterman, Practicing Leadership (New York: Business Expert Press, 2018). 46 M. Follett, “Dynamic Administration” in H. Metcalf and L. Urwick (Eds.), Dynamic Administration: The Collected Papers of Mary Parker Follett (New York: Harper & Row, 1942).47 H. Weihrich and Koontz, Management: A Global Perspective, 10 th Edition (New York: McGraw-Hill, 1993) (as summarized in H. Weihrich, “Management: Science, Theory, and Practice”, http://moosehead.cis.umassd.edu/cis365/reading/Management.pdf)48 Id.49 G. Jones, J. George and C. Hill, Contemporary Management (2nd Ed) (New York: Irwin/McGraw-Hill, 2000).
The importance of the managerial functions was also emphasized by Weihrich in his explanation of the “systems approach to organizational management” based on an “input-output” model in which “inputs” from an organization’s external environment (i.e., people, capital and technology) were transformed into “outputs” demanded by various organizational stakeholders in a transformation process based on and guided by managerial functions such as planning, organizing, staffing, leading and controlling.50
Weihrich has discussed the interesting question of whether management is best seen as a “science” or as “art” and has suggested that “[m]anaging, like so many other disciplines—medicine, music composition, engineering, accountancy, or even baseball—is in large measure an art but founded on a wealth of science.”51 He went on to caution that “[e]xecutives who attempt to manage without . . . management science must trust to luck, intuition, or to past experience” and that managers seeking to avoid the tedious and dangerous path of learning through “trial and error” must be able to access the knowledge that has been accumulated regarding the practice of management.52 Weihrich wrote that application of scientific methods to management, including determination of facts through observation followed by identification of causal relationships that can have value in predicting what might happen in similar circumstances, allows us to classify significant and pertinent management knowledge and derive certain principles that can be used as guidelines for managerial decisions and instructions. For example, a manager in a growing organization will eventually be confronted with the need to begin delegating authority and Weihrich suggests that the manager can turn to various principles of management that are relevant such as “the principle of delegating by results expected, the principle of equality of authority and responsibility, and the principle of unity of command”. Principles are merely predictive; they do not guarantee a particular result. However, they do provide a tested starting point for the manager. Also important in the management field are “techniques”, which Weihrich defined as “ways of doing things, methods for accomplishing a given result”.53 Like principles, techniques are originally based in theory and are tested to validate their effectiveness. Examples of management techniques listed by Weihrich include budgeting, cost accounting, networking planning and control techniques, managing-by-objectives and total quality management.
As time has passed, management has come to be recognized as one of the core factors of production along with machines, materials, money, technology and people. It is well-known that productivity has become a leading indicator of organizational performance and Drucker has argued that “[t]he greatest opportunity for increasing productivity is surely to be found in knowledge, work itself, and especially in management”.54 Bloom et al. coordinated a survey and analysis of more than 4,000 medium-sized manufacturing operations in Europe, the US and Asia and their findings released in 2007 confirmed that “firms across the globe that apply accepted management practices well perform
50 H. Weihrich, “Management: Science, Theory, and Practice”, http://moosehead.cis.umassd.edu/cis365/reading/Management.pdf51 Id.52 Id.53 Id.54 P. Drucker, Management, Tasks, Responsibilities, Practices (New York: Harper & Row, 1973), 69.
significantly better than those that do not”.55 Surveyed management practices included activities relating to shop floor operations, performance management and talent management, and performance metrics included labor productivity, sales growth and return on capital employed. The US led the way with respect to the quality of management among firms included in the survey; however, companies from other countries were gaining ground quickly and, in fact, at that time over 15% of the Indian and Chinese firms included in the survey were characterized as “better managed” than the average US firm.
Management and Leadership
One threshold question that should be addressed when studying management systems and practices is the differences between “management” and “leadership” and, correspondingly, the distinctions between “managers” and “leaders” in the context of operating an organization.56 One way to approach this topic is to review some of the opinions of various researchers and commentators who have devoted a substantial amount of time to the topic of leadership and understanding just what makes an “effective leader”. For example, Bennis has said: "There is a profound difference between management and leadership, and both are important. To manage means to bring about, to accomplish, to have charge of or responsibility for, to conduct. Leading is influencing, guiding in a direction, course, action, opinion. The distinction is crucial." Bennis has also compiled the following list of differences between managers and leaders57:
The manager administers; the leader innovates. The manager is a copy; the leader is an original. The manager maintains; the leader develops. The manager focuses on systems and structure; the leader focuses on people. The manager relies on control; the leader inspires trust. The manager accepts reality; the leader investigates it. The manager has a short-range view; the leader has a long-range perspective. The manager asks how and when; the leader asks what and why. The manager has his or her eye always on the bottom line; the leader has his or her
eye on the horizon. The manager imitates; the leader originates. The manager accepts the status quo; the leader challenges it. The manager is the classic good soldier; the leader is his or her own person. The manager does things right; the leader does the right thing.
55 N. Bloom, S. Dorgan, J. Dowdy and J. Van Reenen, “Management Practice & Productivity: Why they matter”, http://www.stanford.edu/~nbloom/ManagementReport.pdf The surveyed companies were located in the US, India, Italy, Germany, Portugal, Sweden, United Kingdom, Poland, France, Greece and China.56 Portions of the discussion in this section are adapted from material in G. Ambler, “Leaders vs. Managers ... Are they really different?”, The Practice of Leadership, April 8, 2008, http://www.thepracticeofleadership.net/leaders-vs-managers-are-they-really-different For further discussion of the relationship between management and leadership, see A. Gutterman, Practicing Management (New York: Business Expert Press, 2018).57 W. Bennis, On Becoming a Leader (Reading, MA: Addison-Wesley, 1989).
Kotter has also addressed the distinction between management and leadership. After joining Bennis in noting the importance of both activities—“Leadership and management are two distinctive and complementary systems of action . . . Both are necessary for success in an increasingly complex and volatile business environment”—Kotter elaborates on some of the differences: “Management is about coping with complexity . . . Without good management, complex enterprises tend to become chaotic . . . Good management brings a degree of order and consistency . . . Leadership, by contrast, is about coping with change . . . More change always demands more leadership.”58 Kotter also provided a short list of some of the principal activities associated with management and leadership, noting the manager, who is concerned with managing complexity, is expected to focus on planning and budgeting, organizing and staffing and controlling and problem solving while the leader, who should be guiding his or her organization through “constructive change”, must be adept at setting the direction for the organization (i.e., a vision of the future and strategies that should be followed to achieve that vision) and aligning the human resources of the organization and motivating and inspiring them to move in the direction established by the leader.59
Management Roles and Activities
In order to understand whether someone is being an effective manager it is necessary to have some idea of the expectations regarding the person’s roles and activities within the organization. A number of different approaches have been taken in creating models of managerial functions or activities. Fayol famously argued that there were five principle managerial functions—planning, organizing, commanding, coordinating and controlling—and others have accepted these categories and added a handful of others such as staffing and rewarding. Mintzberg criticized Fayol’s “five functions” as being an inaccurate reflection of the complex and chaotic nature of the manager’s tasks and suggested an alternative model of the ten core “roles”, or organized sets of behaviors, identified with a managerial position, which he divided up into three groups: interpersonal roles, informational roles and decisional roles. Others have pointed out that it is useful to distinguish between “functional” and “general” managers, each of whom have their own unique duties, responsibilities and skill requirements. Finally, the position or level of the manager in the organizational hierarchy is likely to be relevant to his or her roles and activities: “first-line” managers focus primarily on supervision of operational employees, “middle managers” focus primarily on supervising the first-line managers and/or staff departments, and “top-level” or “senior” managers focus on setting the strategic direction for the entire organization.60
58 J. Kotter, John P. Kotter on What Leaders Really Do (Cambridge, MA: Harvard Business Publishing, 1999).59 Id.60 Managers interested in overviews of managerial roles, activities, skills and styles should review L. Belker, M. McCormick and G. Topchik, The First Time Manager (AMACOM, 6th Edition, 2012); S. Lebowitz, “10 Books Every First-Time Manager Should Read” (January 29, 2016), https://www.inc.com/business-insider/books-new-managers-should-read.html; K. Blanchard and S. Johnson, The New One Minute Manager (New York: William Morrow, 2015); The Essential Manager's Handbook: The Ultimate Visual Guide to Successful Management (London: DK Publishing, 2016); and
Researchers and commentators have attempted to identify the skills, motivations and behaviors that managers and administrators must have in order to effectively carry out their duties and responsibilities. The search has led to a plethora of suggestions and the challenge is to devise methods for assisting both new and experienced managers in identifying, acquiring and practicing the tools they need in order to be successful in their managerial roles. There is no single answer since the particular skills that a specific manager may need will vary depending on whether he or she is engaged in “general” or “functional” management and where the manager fits into the overall organizational hierarchy, and other situational factors certainly play an important part in determining what might be “effective management” in a specific context. Moreover, success in formal management education does not guarantee that someone will be a strong manager and learning from experience, including mistakes, is necessary to improve existing skills and acquire new skills.
Researchers such as Fayol and Mintzberg focused their attention on the functions and roles of managers and the implicit message was that managerial skill development should concentrate on building the capacity to be effective in performing these functions and roles.61 Mintzberg’s efforts to identify some of the distinguishing characteristics of managerial work, which ultimately led to the creation of his model of “managerial roles”, were accompanied by his assessment that effective managers must recognize and master a number of important “managerial skills”, including development and nurturing of peer relationships (i.e., liaison contacts), negotiation and conflict resolution skills, the ability to motivate and inspire subordinates, establishment and maintenance of information networks, the ability to communication effectively when disseminating information, and the ability to make decisions in conditions of extreme ambiguity and allocate resources, and he argued that the entire process of identifying the various managerial roles and related skills, while not guaranteeing that a manager will be effectiveness and successful, provided a framework for setting priorities and establishing a managerial training regimen. Mintzberg’s work provided support for managerial skills posited by others: the need to deal with an unrelenting pace of activities and decisions, the need to cope with complexity; the need to manage the scarce resources of time and attention; preferences for verbal media; and the need to create and nurture communication relationships with superiors, outsiders and subordinates. A general review of the literature expands the list of desired managerial attributes, activities and skills to include an even wider range of things such as leadership, people focus, human resource management, communications and interpersonal skills, conflict resolution, information processing, the ability to make decisions under ambiguous conditions, resource allocation, entrepreneurship and introspection._______________
The Harvard Business Review Manager's Handbook: The 17 Skills Leaders Need to Stand Out (Cambridge MA: Harvard Business Review Press, 2017).61 For discussion of views of Fayol and Mintzberg on the functions and roles of managers see A. Gutterman, Practicing Management (New York: Business Expert Press, 2018).
Cameron and Whetten went on propose a list of the skills that are performed by “effective” managers, a process that began with their own study of managers at various levels of a number of public and private organizations and then was supplemented with a comparison of their results with the findings of other scholars who had proposed their own collection of characteristics of effective managers. 62 The result was the following list of both personal and interpersonal skills that was limited to characteristics that had “trainable behavioral components”63:
Self-awareness (personality, values, needs and cognitive style) Managing personal stress (time management, personal goals and activity balance) Creative problem solving (divergent thinking, conceptual blocks and redefining problems) Establishing supportive communication (listening, empathy and counseling) Improving employee performance and motivating others (needs/expectations, rewards and timing) Effective delegation and joint decision making (assigning tasks, evaluating performance autonomous
versus joint decision making) Gaining power and influence (sources of power, converting power to influence and beneficial use (not
abuse) of power) Managing conflict (sources of conflict assertiveness and sensitivity and handling criticism) Improving group decision making (chairing meetings, avoiding pitfalls of bad meetings and making
effective presentations)_______________
Management Styles
As with other topics that have been intensely reviewed in the management literature, there is a wide array of definitions of the term “management style”. A fairly simple approach is to view management style simply as the way that an organization is managed.64 Schleh referred to management style as “. . . [t]he adhesive that binds diverse operations and functions together. It is the philosophy or set of principles by which you capitalise on the abilities of your people. It is not a procedure on ‘how to do,’ but is the management framework for doing. A management style is a way of life operating throughout the enterprise. It permits an executive to rely on the initiative of his people.” 65
Yu and Yeh defined management style as “a preferred way of managing people in order to bind diverse operations and functions together, as well as to exercise control over employees, and is considered as a set of practices that has been adopted either by an individual, a department, or whole organization”.66 Others have approached descriptions of management style by attempting to identify various functions of the manager. For 62 The results of their own research were summarized in detail in D. Whetten and K. Cameron, Developing Management Skills (Glenview, IL: Scott, Foresman and Company, 1984). Other scholars whose works were considered included R. Boyatsis, The Competent Manager (New York: John Wiley and Sons, 1982); E. Ghiselli, “Managerial Talent”, American Psychologist, 18 (1963), 631-642; J. Livingston, “Myth of the Well Educated Manager”, Harvard Business Review, 49 (1971), 79-89; J. Miner, “The Real Crunch in Managerial Manpower”, Harvard Business Review, 51 (1973), 146-158; and H. Mintzberg, “The Manager’s Job: Folklore and Fact”, Harvard Business Review, 53 (1975), 49-71.63 K Cameron and D. Whetten, “A Model for Teaching Management Skills”, Organizational Behavior Teaching Journal, 8(2) (1983), 21-27, 22.64 T. Quang and N. Vuong, “Management Styles and Organisational Effectiveness in Vietnam”, Research and Practice in Human Resource Management, 10(2) (2002), 36-55.65 E. Schleh, “A Matter of Management Style”, Management Review, August 1977, 9-13, 10.
example, Quang and Vuong noted that Khandwalla defined management style as “the distinctive way in which an organisation makes decisions and discharges various functions, including goal setting, formulation and implementation of strategy, all basic management activities, corporate image building and dealing with key stakeholders”.67
Quang and Vuong pointed out that there is no single management style that applies in all instances and that an organization’s “operating conditions” will influence the style that is selected.68 This assertion is consistent with other indications that management styles are influenced and determined by a number of different factors. Some believe that societal culture has the biggest impact on the management styles selected and used by organizations operating within a society and there is ample evidence for the proposition that one can find distinctive management styles in different countries such as France, India, Japan, the US, and Vietnam.69 This has led to the argument that each societal culture has its own “core style” of management based on the values and norms that predominate in that culture, with some allowances for local variations.70 However, other researchers have conducted exhaustive studies of large number of organizations in the same country and found evidence of a wide range of management styles within the same societal culture. For example, Burns and Stalker identified two very different management styles in the United Kingdom—organic and mechanistic71--and Khandwalla was able to come up with seven categories of management style in Canada72 and found variations in management styles between firms in different industries in India as well as differences among Indian firms operating in the same industry.73
While not making it any easier to create prescriptions for effective management styles, the reality seems to be that there are a number of factors that likely have an impact on the selection and effectiveness of management styles, including the type of organization, business purpose and activities of the organization, size of the organization, operating environment, corporate culture, societal culture, information technology and communication and, finally, the personal style and behavior of the owner or chief executive. Quang and Vuong noted that the authoritarian management styles often used
66 Pei-Li Yu and Quey-Jen Yeh, “Asian and Western Management Styles, Innovative Culture and Professionals’ Skills”, http://www.scribd.com/doc/61439046/HR-Abstracts [accessed December 17, 2018] (citing C. Schleh, “A Matter of Management Style”, Management Review, 66 (1977), 9-13; F. Clear and K. Dickson, “Teleworking Practice in Small and Medium-Sized Firms: Management Style and Worker Autonomy”, New Technology Work and Employment, 20 (2005), 220-233; and T. Morris and M. Pavett, Management Style and Productivity in Two Cultures, Journal of International Business Studies, 23 (1992), 169-179).67 T. Quang and N. Vuong, “Management Styles and Organisational Effectiveness in Vietnam”, Research and Practice in Human Resource Management, 10(2) (2002), 36-55 (citing P. Khandwalla, Management Styles (New Delhi: Tata McGraw-Hill Publishing Co. Ltd., 1995)).68 Id.69 For further discussion, see A. Gutterman, Comparative Management Studies (New York: Business Expert Press, 2018).70 W. Evans, K. Han and D. Sculli, “A Cross-cultural Comparison of Managerial Styles”, Journal of Management Development, 8(3) (1989), 5-13.71 T. Burns and G. Stalker, The Management of Innovation (London: Tavistock, 1961).72 P. Khandwalla, The Design of Organization (New York: Harcourt Brace Jovanovich, 1977).73 P. Khandwalla, “Management in our Backyard”, Vikalpa, 5 (1980), 173-184.
in state-owned enterprises in many developing countries reflected the governing styles of their political leaders.74 They also suggested that in small and mid-sized firms it could be expected that the size of the organization would lead to the personal style of the owner or chief executive having a significant impact on how the firm operated and subordinates behaved.75 Lewis argued that advances in communications and information processing technology could change the way that managers work and interact with their subordinates.76 Reddin’s model of management styles emphasized the importance of “situational factors” and was based on the fundamental principle that managerial behaviors and styles will and must vary depending on the where the manager is in the organizational hierarchy and the type of activities that he or she is overseeing.77 Finally, management styles will change as firms transition to new business models based on changing trends in the marketplace, such as greater emphasis on quality and customer service and satisfaction.78
Management Systems
A management system refers to what an organization does to manage its structures, processes, activities and resources in order that its products or services meet the organization’s objectives, such as satisfying the customer’s quality requirements, complying with regulations and/or meeting environmental objectives. Elements of a management system include policy, planning, implementation and operations, performance assessment, improvement and management review. By systemizing the way it does things, an organization can increase efficiency and effectiveness, make sure that nothing important is left out of the process and ensure that everyone is clear about who is responsible for doing what, when, how, why and where. While all organizations should benefit from some form of management system, they are particularly important for larger organizations or ones with complicated processes. Management systems have been used for a number of years in sectors such as aerospace, automobiles, defense and health care and guidance on content and implementation of such systems is now readily available through standards bodies such as the International Organization for Standardization (“ISO”) (www.iso.org).79
74 T. Quang and N. Vuong, “Management Styles and Organisational Effectiveness in Vietnam”, Research and Practice in Human Resource Management, 10(2) (2002), 36-55.75 Id. (citing M. Davidmann, Style of Management and Leadership (2nd Ed) (1995)).76 P. Lewis, S. Goodman and P. Fandt, Management: Challenges in the 21st Century (3rd Ed.) (Mason, OH: South Western College Publishing, 2001).77 W. Reddin, “The 3-D Management Style Theory: A Typology Based On Task and Relationships Orientation”, Training and Development Journal, April 1967, 8-17. 78 S. Dolan and S. Garcia, “Managing by Values: Cultural Redesign for Strategic Organizational Change at the Dawn of the Twenty-First Century”, Journal of Management Development, 21(2) (2002), 101-117.79 See the chapter on “Management Systems” in this publication for further discussion of designing and implementing quality and management systems based on ISO 9001 (“quality”), ISO 14001 (“environment”) and ISO 26000 (“social responsibility”). See also A. Gutterman, Practicing Management (New York: Business Expert Press, 2018).
This chapter was written by Alan S. Gutterman, whose prolific output of practical guidance and tools for legal and financial professionals, managers, entrepreneurs and investors has made him one of the best-selling individual authors in the global legal publishing marketplace. His cornerstone work, Business Transactions Solution, is an online-only product available and featured on Thomson Reuters’ Westlaw, the world’s largest legal content platform, which includes almost 200 book-length modules covering the entire lifecycle of a business. Alan has also authored or edited over 90 books on sustainable entrepreneurship, leadership and management, business law and transactions, international law and business and technology management for a number of publishers including Thomson Reuters, Practical Law, Kluwer, Aspatore, Oxford, Quorum, ABA Press, Aspen, Sweet & Maxwell, Euromoney, Business Expert Press, Harvard Business Publishing, CCH and BNA. Alan is currently a partner of GCA Law Partners LLP in Mountain View CA (www.gcalaw.com) and has extensive experience as a partner and senior counsel with internationally recognized law firms counseling small and large business enterprises in the areas of general corporate and securities matters, venture capital, mergers and acquisitions, international law and transactions, strategic business alliances, technology transfers and intellectual property, and has also held senior management positions with several technology-based businesses including service as the chief legal officer of a leading international distributor of IT products headquartered in Silicon Valley and as the chief operating officer of an emerging broadband media company. He has been an adjunct faculty member at several colleges and universities, including Berkeley Law, Golden Gate University, Hastings College of Law, Santa Clara University and the University of San Francisco, teaching classes on corporate finance, venture capital, corporate governance, Japanese business law and law and economic development. He has also launched and oversees projects relating to sustainable entrepreneurship and ageism. He received his A.B., M.B.A., and J.D. from the University of California at Berkeley, a D.B.A. from Golden Gate University, and a Ph. D. from the University of Cambridge. For more information about Alan and his activities, and the services he provides through GCA Law Partners LLP, please contact him directly at [email protected], follow him on LinkedIn (https://www.linkedin.com/in/alangutterman/) and visit his website at alangutterman.com.
About the Project
The Sustainable Entrepreneurship Project (www.seproject.org) was launched by Alan Gutterman to teach and support individuals and companies, both startups and mature firms, seeking to create and build sustainable businesses based on purpose, innovation, shared value and respect for people and planet. The Project is a California nonprofit public benefit corporation with tax exempt status under section 501(c)(3) of the Internal Revenue Code dedicated to furthering and promoting sustainable entrepreneurship through education and awareness and supporting entrepreneurs in their efforts to launch and scale innovative sustainable enterprises that will have a material positive environmental or social impact on society as a whole.
