Introduction to a New Corporate Structure

Copyright © 1983 by David R. Woolley

Explanatory note:

This is something Jim Bowery and I cooked up in the early 1980’s when we were planning to start a company together. The business plans fell apart before we had a chance to implement our concept, so the corporate structure described here has never been tried. I’m no longer so sure it’s a good idea – it might even be a spectacularly bad idea. But who knows, maybe there’s the germ of something worthwhile here. It’s different, that’s for sure.

This paper was referenced in Thomas W. Malone’s 2004 book, The Future of Work.

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What We Want to Change

In designing a new corporate structure we had several goals in mind.

1. We wanted to give people much more freedom in determining their own roles within the corporation, rather than trying to cram unique individuals into predefined “jobs.”
2. We wanted the activities of the corporation to directly reflect the interests of the people working within it.
3. We wanted to pay people what they are really worth; that is, link their rewards directly with their contribution to the success of the company.
4. We wanted a structure that is as flexible as possible.

Interactions between people are very complex and varied, and the traditional “org chart” hardly begins to describe the infinite variety of interrelationships that a large group of people working together might actually share. Yet the chart has an official stamp of approval, and its existence puts all kinds of unnatural restrictions on communications and working relationships. We have designed our structure to be freely adaptable to changing needs. We expect the corporation to grow organically and mutate in strange and wonderful ways as people get used to their new freedom.

Basic Structure

The structure is based on a small set of simple rules, but I’m not trying to write a formal description here, and to really make the structure clear will take some explaining.

The basic structure is a recursive hierarchy of groups. In case you’re not familiar with computerese, “recursive” means you’ve got a thing with a certain set of characteristics, and inside it another thing just like it, and another thing inside that thing, and so on, until you reach some well-defined endpoint. In this case the “thing” is the group structure.

A group consists of one or more members. Each member is either an individual person or the elected representative of an affiliated group (i.e., a group at the next lower level of the hierarchy.) It’s important to understand the difference between a member and an affiliate, because it is a potentially confusing distinction. The affiliates of a group can be other groups or they can be individuals, and they are each allocated a share of the group’s budget. Members of a group, on the other hand, are always individuals. They are the people who work together on a peer basis and who vote in group decisions. Members do not get a share of the budget unless they are themselves affiliates; otherwise, their salaries come from the affiliated groups which they represent.

For a typical example, consider a group which is designing a new computer terminal. For simplicity, let’s say it has three members:

• Mel, representing the circuit board group
• Valerie, representing the keyboard and display group
• Gladys, a consultant familiar with all aspects of terminal design

But although there are only three members, our hypothetical group has four affiliates. The circuit board group and the keyboard and display group are both affiliates, of course, and so is Gladys. The fourth affiliate is Mel, who in addition to being a representative of an affiliated group is himself an affiliate. Valerie, on the other hand, is a member without being an affiliate. This terminal design group is itself an affiliate of a higher-level group, one in charge of all computer hardware design, let’s say. The group is entitled to elect one of its members to represent it to the higher group. This representative must be an affiliate, which restricts the choice to Mel or Gladys. If Mel is elected, he becomes a member of the hardware design group. Eventually, the hardware design group might decide to make Mel an affiliate, and might even choose him as their representative to a still higher group.

Groups can be connected together in all kinds of interesting ways. A group that does technical writing might be affiliated with several other groups which regularly need its services. The same thing applies to individuals. For example, you might be working as a programmer for three different groups at once, and hence be getting paid by all three according to your relative contribution to each. Or you could work simultaneously as a programmer and as a marketing analyst. The nice thing about this is that it allows people to try out new jobs a little at a time, working their way gradually into a new position without taking the drastic, irreversible step of quitting their old job.

A group can accept new affiliates at any time. All it takes is for one member to make a nomination, and as soon as the nomination has been approved by a two thirds vote, the new affiliate is accepted. The same procedure applies whether the new affiliate is another group, an individual who already works in some other group, a person from outside the corporation, or one of the group’s own members. In the same way, if a group is dissatisfied with the performance of one of its affiliates it has the power to “fire”, or expel, the offender by another two thirds vote.

Any time a group decides it is getting too big, it can split itself up. This can happen in any number of ways. Several members of the group could decide to form a group of their own, for example. All they need to do is to apply for affiliation with the group above them – or any other group, for that matter. They can even do so without seceding from the original group, because there is nothing in the rules to prevent one group from existing entirely within another group. In fact, the rules permit just about any bizarre arrangement you can imagine. It’s just up to the members of a group to decide what is practical and desirable.

Salaries

So far this probably sounds pretty chaotic, with groups forming, fissioning and fusing every which way. But that’s because we haven’t yet gotten to what motivates everyone to actually do something useful. Namely, money. It all starts with the group at the very top of the hierarchy, which looks at how much is coming in and decides how much of it to throw into which pots. For the moment, let’s concentrate on one of those pots labelled “incentives”, which is the fund out of which all salaries are paid. The way in which this money is distributed is key to maintaining the entrepreneurial spirit all the way down to the lowest levels of the hierarchy.

Every group is allocated a certain amount of money by the group above it. This allocation is then divvied up among the affiliates of the group by consensus opinion. Ideally, the share that each affiliate gets should reflect how well it is doing whatever it’s supposed to be doing. When you register your opinion on the distribution of funds you are actually evaluating the performance of the entire hierarchy that each member represents rather than the individuals themselves. Of course, some or all affiliates of your group might actually be individuals, in which case you are simply determining that person’s salary. So, the salary you get depends on your peers’ evaluations of your contribution to the work of the group and how big a slice of the pie you should get for this contribution – because who is in a better position to evaluate your work than your co-workers? And of course, the size of the pie depends on the performance of your entire group as evaluated by members of the group above you, and so on up the tree.

Besides rewarding productivity, this method of determining a person’s salary means that we don’t need a lot of silly rules about what hours a person must work, how much vacation is allowed per year, what college degrees are required for certain salary levels, mandatory retirement age, etc. If someone wants to work only six months out of the year, or one day a week, or whatever, that’s OK. That person’s contribution to the group is likely to be less than the contribution of someone working full time, though, so the other group members will probably give him or her correspondingly less money.

It might seem like there would be a lot of argument over how to slice the pie. Well, there probably will be, but we’ve designed the decision process in a way that we hope will encourage agreement and discourage selfishness. Each member of a group registers an opinion on how to divide up the available funds, in effect rating the relative value to the group of each affiliate’s work. This includes a self-evaluation. All of these ratings are compared, and each member is given an “agreement index” depending on how closely his or her ratings match those of the rest of the group. The ratings are then averaged, with a greater weight being given to the opinions of members whose ratings are in close agreement. The opinions that each member registers, as well as the final results of the pie- slicing, are considered public information. At any time, any employee should be able to see the structure of the entire hierarchy: all the interconnections between groups, who the members are, and how much money is going to each. Most people aren’t used to so much openness but we feel it is vital to the health of the company. There is no room for secret, under-the-table deals, and nobody will harbor sneaking suspicions that they are getting screwed somehow.

Election of Representatives

As long as we’re on the subject of voting, let’s discuss the issue of electing a representative. As with acceptance of new affiliates, this election is based on approval voting. Any person who is an affiliate of a group is automatically a candidate, and each member registers approval or disapproval for each candidate. You might say, “Well, Bill is still pretty inexperienced. DISAPPROVE. Rosemary would probably do a good job, though. APPROVE. So would Richard. APPROVE. Heck, I guess Icould handle it. APPROVE.” And so on. Whoever gets the highest percentage of approval and is willing to accept the job becomes the representative. But that doesn’t mean the representative is set for life, or even for a fixed term. Group members are free to change their approvals at any time, and whenever someone else’s approval rating rises above the rating of the current representative, that person can choose to displace the representative. The representative has more reason than the threat of displacement to remain responsive to the group’s needs, because the group also determines the representative’s salary as an affiliate of the group.

Note that there are times when a group might have more than one representative, since it is permitted one representative to each group with which it is affiliated. A group can choose one person to represent it to all higher-level groups, or it can choose a different representative for each.

There is one more complication to this approval voting system. Every member’s vote is not necessarily counted the same. Rather, the weight that is given to your approvals and disapprovals depends on how big a share of the group’s pie you have been allocated. At first that might sound unfair, but listen, there’s a good reason for it. Take a case where one member, Sally, represents the interests of 50 people in a hierarchy of lower-level groups, while another member, Ralph, represents only himself. The allocation of money will probably reflect this relationship (the group Sally represents might get something like 50 times the amount that Ralph gets personally) and Sally should have a correspondingly greater weight in the decision making process. This extends all the way down to the lowest levels, where one individual might be doing twice as much work as another, and should therefore get paid twice as much and have twice as much say in electing a representative. These weightings are also used in the voting for approval of new members. They might be used in other group decisions as well, but that’s up to the group, since the corporate rules do not dictate how other decisions should be made.

As a result of the election process, one individual could theoretically end up representing group A to group B, representing group B to group C, Group C to group D, and so on up to the top of the hierarchy. Such a person would be an affiliate of many groups and would get a slice of the income at each level. You might wonder what happens if group A, way down at the bottom, suddenly decides they don’t want this guy to represent them anymore. Actually, there’s no problem, because as the elected representative of group B he must be an affiliate of group B in his own right, even if group A elects a new person to represent them to group B. In practice, such multi- level representation probably won’t go very far, because both the lower-level group and the representative will realize that he can’t do an adequate job of representing their interests after being promoted to a higher level with more responsibility.

We’ve designed these rules with the idea that they will encourage people to talk to each other about what they are doing, and we expect that in our company there will be better communication between group members than in an ordinary corporation. Although decisions are made by consensus, we doubt that people will fall into the trap of spending all their time politicking. For one thing, there will probably not be more than 10 people involved in any one decision, since members of a group larger than that would not be able to keep track of what everyone else is doing. For another thing, the peer evaluation and approval is a continual process rather than being focused around elections at fixed points in time. This should smooth things out so that everyone will remain well aware of what is going on within the group but politics will never become the main focus of attention.

What’s at the Top

There is one remaining matter which I have only touched on briefly, and that is the group at the very top of the hierarchy. The question of this group’s organization and authority is closely linked with the question of stock: who owns the corporation? To get this business running we will need investments of cash as well as contributions of time and energy. We would like both types of investment to come from the same people as far as possible. There is a traditional conflict between the interests of capital and labor, which can be minimized by getting the same people involved on both sides. However, some people will be able to contribute more on one side than on the other, and both types of investment must be recognized and represented in corporate decisions. In most corporations, the stockholders elect a board of directors, which in turn elects the president. The president usually has the authority to hire and fire employees and generally run the corporation however he sees fit, answering only to the directors. This system obviously won’t work for us, since anyone wielding that kind of power could turn the structure I have outlined into a meaningless facade by bypassing its rules. We need to have a balance of power between the employee side and the stockholder side to ensure that this doesn’t happen.

In West German corporations, half of the board of directors represents the employees while the other half represents stockholders. We would like to do something similar. Our board of directors would be elected only by the stockholders, but it would share its authority with the group at the top of the employee hierarchy, which we call the board of executives. These two boards would jointly make several top-level decisions, such as the total incentive budget of the corporation, dividends to be paid to stockholders, and election of the president and other officers. The board of directors would not participate in the day-to-day management of the business, but their interests would be represented by the officers, who would share in all decisions made by the board of executives. The weight given to the officers’ votes would be set by the joint boards and could be anything up to half of the total voting power on the board of executives.

In the start-up of a traditional corporation, a large chunk of stock is reserved at the outset for the founders and “key employees.” As the founders of this particular corporation, we are really more interested in seeing the whole thing go than in trying to ensure that a few of us will become millionaires by grabbing the biggest pieces we can get our hands on. We want as many employees as possible to share in ownership of the company, so we plan to distribute stock over a period of time as the company grows. The joint boards will determine the rate of distribution, and the stock will flow down through the hierarchy in the same way as salaries, based on the same peer evaluations.

During the start-up phase we will have no cash income, so the only compensation we can offer is stock. We will base stock distribution upon the best estimate we can make as to the value of the work being put into the company, and will pay ourselves, and others who join us, “salaries” of stock based on an arbitrary value of $1.00 per share. People who make cash investments will also be given corresponding amounts of stock. As the business begins to generate a cash flow on its own, more and more of the incentive budget will be paid in cash, and stock distributions will decrease. We also recognize that people who invest time or money early on are taking a substantial risk, much more so than people who join an established company. To compensate for this we will raise the value of the stock as we pass milestones in our business plan which demonstrably reduce the risk. This will have the effect of increasing the value of early investments relative to later investments.

We aren’t yet well enough versed in corporate law to know for sure whether the top echelon of the corporation will take the form I have described, but I’ve stated the principles we intend to follow, and we will stick by them as closely as we can. We want to set up a company that we would feel good about working within, no matter where in the hierarchy we might find ourselves. We want to attract independent and creative people, involving them totally so they can make full use of their talents. We can’t do this by grabbing tight onto the reins. These people will really shine if they are working with us rather than for us.

Once this structure is in place we’ll just be in there with everyone else who joins us, playing by the same rules. Even speaking from a purely selfish viewpoint, it is in our best interests to allow others to rise above us in the hierarchy when consensus opinion determines that they are better suited for particular positions, because a small share of a successful company will be more valuable than a large share of a flop. Our job is to create a structure within which excellent people can flourish, set the initial direction, and watch it go. With enough visionary people involved, our potential is unlimited.

 

The world is ruled by letting things take their course. It cannot be ruled by interfering.
– Lao Tsu