Accountability Is Not The Only Solution To Enron
by Dr. Ichak Adizes (Ichak@Adizes.com)
Accountability is in the news today. With the debacle of Enron, WorldCom, and other companies, the issue of accountability is taking prominent space in newspapers, newsletters, and other literature. Corporate governance is being touted as the solution.
May I suggest that corporate governance is only a partial solution and, in my judgment, is not even a sufficient solution to the problem of accountability.
In order to see why governance is insufficient and only a partial solution to what needs to be done, we must define accountability. Accountability should mean that one could identify results with the clear knowledge of who and what produced those results.
How different is the word accountable from the word responsible?
I define responsibility as what results a person is expected to deliver for the task assigned. In other words, responsibility is what are you obliged to deliver based on your task. That is your responsibility.
Accountability is more than responsibility. You are accountable only when you are able to deliver what you are responsible for -- which means that you have sufficient authority, power, and/or influence to carry out your responsibility.
If the above definition is accepted, it means that some people could be responsible but could not be held accountable. How could that happen? It could happen if, because of a bad job description, responsibilities were defined but, for various reasons, the person doesn’t have sufficient authority, power, or influence to carry out the responsibility.
I suggest that the jobholder can’t be held accountable for something that the jobholder cannot deliver because of a lack of sufficient authority, power, or influence.
There is another component that will create accountability, and that is the reward system. Although a person can be held accountable if he knows his job responsibility and he has sufficient authority, power, and/or influence to carry it out, he will not feel accountable unless he feels he is rewarded adequately for the duties that must be fulfilled.
Thus, to hold a person accountable three variables have to be met: One, does he know what he is responsible for; two, does the person have sufficient authority, power and/or influence to carry out his responsibilities; and three, does he feel he is adequately rewarded for carrying out his responsibilities.
Does he know what he has to do, can he do it, and does he have a good reason to want to do it.
The media is now focusing mostly on governance as the solution to the lack of accountability.
I suggest that corporate governance could easily lead to further centralization of authority in the organization, and that could disempower executives from the capability of carrying out their responsibilities. As authority gets further and further from where the action actually takes place, the danger is that top management will be less and less able to hold the people under them accountable for the decisions that are being made or activities that are taking place.
The governance system should not disempower top executives. On the contrary, it should give them the authority and then hold them accountable.
How?
It is all in the definition of the organizational structure. If the organization is not structured correctly, the responsibility will not be aligned with authority, and people cannot be held accountable; then they won’t feel accountable. We might throw them in jail, but it won’t change anything. The next CEO will not do better unless we make him feel accountable.
May I suggest that in spite of the fact that he or she is a CEO, and the CEO should have all of the authority, power and influence needed to carry out their responsibilities, they rarely do. What should happen is not happening and it rarely does, and here are the reasons why:
When an organization is structured incorrectly, the CEO is deprived of information that is the source of the power, authority, and the influence. Thus, there are instances similar to the children’s story of the Emperor’s New Clothes where the King parades as if he is wearing beautiful clothes. Everyone is applauding, saying how beautiful the clothes are because that is what they are supposed to say and believe. The King acts as if he has all the authority, power, and influence in the word, but in reality he is nude because the information does not get to him in a way that allows him to control the organization.
How does this happen?
We need now to deviate a bit from the argument made so far, in order to describe a management theory from which we can derive theoretical insights of how to make CEOs accountable.
Organizations need to be effective and efficient in the short and long run. They should be structured to achieve these goals. We know that the short run undermines the long run. Thus, if the structure is organized incorrectly, the organization will be focused on the short run and the long run will suffer.
Let me give some examples to make it clear. If you have a VP for sales and marketing, and these two departments report to the same VP, the danger is that the sales orientation, which should be short-term oriented, will undermine the marketing orientation, which should be long-term oriented. In companies structured like this, companies usually have no marketing function. The department might exist in name, but not in reality. The marketing will be subservient to sales, creating sales support material, doing analysis of the sales organization’s delivery, but it will not be driving the sales organization -- it will be driven by the sales organization.
Furthermore, if you are VP of manufacturing, and the job oversight includes the following functions: process engineering, design engineering, production, and, God forbid, R&D, then R&D will suffer, process engineering will suffer, and design engineering will suffer. The organization will primarily be production oriented because of the short run orientation of production. The expedient and immediate will be taking the focus away from the long run. In these companies, engineering usually ends up doing maintenance work.
By the same token, there is an analogous and dangerous phenomenon that has become almost a religion in American industry - the CFO. Under the CFO, there is the finance function, treasury, and the controller function. Furthermore, in many organizations, the CFO is also responsible for the administrative functions so the CFO is actually a CFO/CAO. Thus, not only does he have treasury, investor relations, budgeting, and controlling, the CFO also has the legal department, HR, and even IT as well. Call it “Bureaucrats of the World Unite!” This creates a very strong power structure, which can be very dangerous to the organization. Finance should be dealing with what a company should do with the money, whether or not the company is getting a return on investment, and how to handle cash flow most efficiently. Accounting and the role of the controller should be to focus on adequate and precise information and on the integrity of the information that finance can use. This does not necessarily happen when they are under the same umbrella.
When you put the two together, there are two dangers. One is that the controllership function dominates and finance is practically nonexistent. The department becomes an accounting organization, and the financial function is in reality done by the CEO and the Board and not by Finance -- although it is called the Finance division. The CFO title is really only a title. The second danger, which I suggest is what happened in Enron’s case, is that since the CFO is financially oriented, he can easily subvert the accounting information in order to satisfy financial needs, i.e., to show profitability and to demonstrate return on investment. He could manipulate the information for the purpose of investor relations. The temptation can be too great when one wants to show results, and one has the capability to do so because accounting reports to him.
And where is the CEO in this scenario?
The CEO, in order to be held accountable, must have information and, thus, the power to drive the organization and be responsible for its behavior. In order to get the information and have the necessary power, the CEO must always have two sources of information - never one. When he only has one source of information, the CEO becomes a prisoner of the source of that information and has no control over it. Basically, whoever provides the information has control over the CEO. The CEO doesn’t have discretionary power to make decisions. If he had, say, two VPs, one for sales and one for marketing, there will be conflict between the two - one focusing on the long term and one on the short term. The CEO, having two sources of information, will have freedom now to decide what is more important: the long or the short run. He or she will be in control. He can be held accountable then. (I am skipping the reward variable, as compensation is more than adequate.)
Another illustration
If one VP is in charge of R&D and technology and someone else is in charge of production, again, there will be a conflict, but the CEO will have the information needed to make the decision in balancing between the long run (technology and R&D) and the repercussions on production in the short run. Again, he will be in control. If one VP came in and said: “I suggest we do this or that to manufacturing “ where is the dissention that can give the CEO the discretionary power to use his judgment? He will be a “prisoner” of the information given to him.
By the same token, the CFO role as it is today should be dismantled, and there should be a Finance VP, which includes the treasury function, who is responsible for providing adequate information to stockholders and the relationship with investors, the analysis of investment decisions, and the analysis of the financial results of the company. And there should be a Corporate Controller, who is responsible for providing precise information of what has transpired, and who will sign and be criminally accountable for the integrity of the information. And the Corporate Controller should not be reporting to the Finance VP. And, yes, these two will be in conflict. Finance will be challenging information that the corporate controller provides, and the corporate controller will challenge how finance is interpreting the data. And I like that a lot. Out of that conflict, the CEO will know what is going on and have the power to make a decision as to what is right and what is wrong. Then he can be held accountable for the decision he makes. If the Controller reports to Finance, the CEO is left out of the loop, and he could be in a position where he doesn’t know what is happening.
Organizations are power structures, and if you don’t organize a power structure correctly, you can be left out of the power loop. When you are left out of the power loop, you are less capable of managing the company correctly. You are nude like the king in the children’s story, and you can end up being tar and feathered.
Governance is not THE all-encompassing solution. Organization structure, dividing an organization’s power structure correctly so that the CEO has dissenting information that enables him or her to use his or her judgment, is what is going to produce effective CEO accountability.
©
Copyright 2003 by Ichak Adizes and the Adizes Institute
LLC. Reprinted with permission by ManagementVitality.
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