Humanocracy

Cover

Humanocracy

Humanocracy

Humanocracy

Humanocracy

Humanocracy

Humanocracy

Humanocracy

The Core Incompetence of the Corporation

The Economic Case for Busting Bureaucracy

The Social Case for Busting Bureaucracy

Humanocracy

Human Beings Are Daring. Our Organizations (Mostly) Aren’t

Human Beings Are Resilient. Our Organizations (Mostly) Aren’t

Human Beings Are Creative. Our Organizations (Mostly) Aren’t

Human Beings Are Passionate. Our Organizations (Mostly) Aren’t

The Legacy of Bureaucracy

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Stratified and Myopic

Formalized and Ponderous

Specialized and Circumscribed

Standardized and Stupefied

The Curse of Bureaucracy

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A Formidable Enemy

The Courage to Act

Collecting Data

Making the Moral Argument

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Meet Nucor

Built on Freedom and Responsibility

Nucor’s Post-Bureaucratic Recipe

The Spirit of Humanocracy

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Meet Haier

The Road to Rendanheyi

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Employees versus Entrepreneurs

Autonomy and Upside

KKR: Turning Employees into Owners

Vinci: Entrepreneurship at Scale

Getting Started

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Collective Intelligence

Allocational Agility

Dynamic Coordination

Competitive Discipline

Getting Started

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Exaggerated Competence

Misjudged Competence

Overweighted Competence

Toxic Competence

Decontaminating Judgments about Merit

Aligning Wisdom and Authority

Matching Compensation to Contribution

Building Natural, Dynamic Hierarchies

Getting Started

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Alcoholics Anonymous

Strive Together

Buurtzorg: A Community of Communities

Toward Community

Getting Started

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The Allure of Open Innovation

Closed Minds

Open Minds

Closed Strategy

Open Strategy

Open Strategy in Practice

Getting Started

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The Bureaucratic Aversion to Experimentation

An Evolutionary Advantage

The Ethos of Experimentation

Intuit: Creating a Culture of Experimentation

Getting Started

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The Inescapability of Paradox

Certainty versus Uncertainty

Left versus Right

Mercy versus Justice

Unsubtle

Handelsbanken: Beyond Either-Or

Freedom and Control

Beyond the Iron Cage

Getting Started

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Meet Roche

Retooling Leadership Mindsets

Transformation at Genentech

Transformation at Pharma International

The Payoff

Lessons

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Detox for Bureaucrats

Giving Power Away

Excising Bureaucratic Stupidity

Hacking Management

Building Your Hack

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Enlarging Your Influence

Hosting a Hackathon

Rethinking Leadership

Rethinking Change

A Final Word

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Estimates of Administrative Occupations

Estimates of Manager and Administrator Compensation

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Chapter 2

Chapter 3

Chapter 4

Chapter 5

Chapter 6

Chapter 7

Chapter 8

Chapter 9

Chapter 10

Chapter 11

Chapter 12

Chapter 13

Chapter 14

Chapter 15

Chapter 16

Chapter 17

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Humanocracy

GROWING INCOME INEQUALITY: Across the OECD, income disparities are at a fifty-year high. Between 1979 and 2019, the incomes of America’s top-decile wage earners grew nine times faster than the incomes of those in the bottom decile. Since the pandemic, labor shortages and government transfers have bumped low-tier incomes higher, but these gains will likely prove temporary.

BALLOONING CEO PAY: In the 1960s and 1970s, the compensation ratio between the CEO of a large company and an average worker was less than 30:1. Since 1998, the ratio has averaged more than 300:1 (see figure 1-5). The ten-fold increase correlates with a run-up in corporate profits and share prices. But, as noted earlier, much of this increase was due to lower tax rates and borrowing costs, a highly favorable macroeconomic environment, and massive share buybacks. In his research, Michael Smolyansky found that between 1989 and 2019, the average annual growth in earnings before interest and taxes was actually lower than it had been in the years between 1962 and 1989. To put it bluntly, we’ve been paying skippers for the wind.

STAGNATING WAGES: Since 2000, corporate profits are up more than 300 percent in constant dollars. By contrast, total US wages and salaries increased by a meager 45 percent. (In this regard, it’s notable that in 2021, just 7 percent of US workers were part of an employee stock ownership plan.²⁵) Many things have contributed to the downward pressure on wages, including globalization, large-scale immigration, the shrinking power of unions, the growth of the gig economy, and increasing automation. (Amazon now has one robot for every two employees.)

DECOUPLING OF PRODUCTIVITY AND WAGE GROWTH: Between 1948 and 1979, productivity and wages advanced roughly in sync. During that time, productivity grew by 111.7 percent while nonsupervisory wages were up 91.7 percent (in current dollars). In the years since, the trend lines have diverged. From 1980 to 2023, productivity grew by 80.9 percent while average wages increased by just 29.4 percent (see figure 1-6).

SUBOPTIMAL: Every formal structure accentuates certain goals and attenuates others. A functional organization, for example, is well suited to building deep expertise and exploiting economies of scale but will be less good at serving diverse customer groups. Conversely, while an organization built around market segments will be more customer-focused, it will fragment functional skills and struggle to exploit upstream efficiencies.

PAROCHIAL: You’ve probably heard a bureaucrat say, “That’s not my responsibility.” In a highly formalized organization, individuals tend to be hyperfocused on their own unit-specific goals. Everything else is a distraction. Unfortunately, the future seldom lines up with the org chart. Parochialism not only makes new opportunities hard to spot, but hard to resource. Unit leaders often feel they have insufficient resources to deliver on their own commitments, let alone someone else’s. Share resources, and you risk missing your targets.

BYZANTINE: In a bureaucracy, every new challenge spawns a new fiefdom, usually headed by a CxO. Today, it’s not unusual for a company to have a chief compliance officer, chief digital officer, chief diversity officer, chief environmental officer, and chief transformation officer, among others. Each newly minted CxO establishes new structures, policies, and reporting requirements. That means more check-ins, sign-offs, turf battles, and cooks in the kitchen. The result: more overhead, less accountability, and longer decision cycles.

INFLEXIBLE: Formal structures are rigid and hard to change. In a major reorganization, job descriptions, performance metrics, and decision rules must be rewritten for hundreds of roles. Systems must be comprehensively redesigned, and thousands of individuals retrained. This sucks up a vast amount of energy, shifts attention inward, and creates waves of uncertainty and anxiety. Worse, the two- to three-year time frame for a big reorg means that by the time the changes take root, a new set of challenges is rushing over the horizon.

FIRST, AIM HIGH: The success of OWS was first and foremost the product of collective daring. OWS was launched on May 15, 2020, with a ridiculously ambitious charter: to help develop and deliver 300 million doses of a safe and effective vaccine by January 1, 2021. At the time, there were significant doubts about whether this could be accomplished and good reasons to be skeptical. Not only are the scientific odds long (typically, only 1 in 15 potential vaccines makes it through human trials), but developing and testing a new drug requires a vast amount of coordination. This is hard enough when all the resources reside within a single organization, but OWS needed to synchronize the efforts of hundreds of entities. This would have been impossible without a noble goal that united people from across the government and beyond in a common cause.

SECOND, MAXIMIZE FREEDOM AND ACCOUNTABILITY: To maximize initiative and accountability, OWS leaders pushed authority as close to the front line as possible, The clinical trials team is a case in point. Tasked with recruiting at least 30,000 participants to test each drug, team leaders John Mascola and Matthew Hepburn faced a tough challenge. Study participants needed to be at risk of exposure to the virus, but across the country, pandemic hot spots waxed and waned in unpredictable ways. To keep pace with the erratic path of the pandemic—while running some of the largest clinical trials in history—Mascola and Hepburn had full autonomy to revise the trial plan on the fly.

THIRD, BUILD STRONG NETWORKS: One of the toughest challenges for OWS leaders was to keep everyone in the loop while avoiding the paralysis that often occurs when interdependencies are managed top down. To prevent bottlenecks, they built strong peer-to-peer networks and charged them with synchronizing parallel work streams.

FOURTH, PRIORITIZE PROGRESS OVER PROCESS: Slaoui and Perna knew that when pressed to do something difficult and fast, the first impulse of a bureaucrat is to take refuge in process. That’s why, at every point, OWS staffers were encouraged to prioritize progress over protocols. The tone was set by Robert Charrow, the legal counsel for HHS. As Mango told us, “He and his team were pretty scrappy in finding ways to get things done and saying yes instead of no.” During Operation Warp Speed, support functions were expected to be truly supportive.

FIRST, SHRINK THE CENTER: In the first four months of his tenure, Daunt cut the number of head-office buyers and marketers by 50 percent. He also eliminated the lucrative publisher deals that had ensured cookie-cutter layouts nationwide. Today, a lean three-person team handles purchasing for the entire chain. Typically, they buy a minimum order of new books and then leave it to the stores to reorder as they see fit.

SECOND, EMPOWER TEAMS: The next move was to radically expand the decision rights of in-store teams. They were now free to curate their selections, arrange their displays, and adjust pricing based on local tastes and preferences. With greater freedom came greater accountability. Daunt’s message to local managers was simple: “We’re going to give you the tools to actually prove that you are good booksellers.” Store leaders would no longer be able to blame central decision-makers for lackluster results.

THIRD, CONNECT EMPLOYEES: While decentralization unleashed a torrent of energy and allowed booksellers to forge deeper connections with local clientele, Daunt understood the importance of creating mechanisms to facilitate learning and sharing across the network. To this end, he encouraged stores to connect with each other, urging them to “learn, copy, imitate, talk, [and] discuss.”²⁴

FOURTH, GET OUT OF THE WEEDS: While Daunt understood the imperative of flawless execution—“retail is detail”—he believed many of the company’s managers had allowed themselves to become distracted by minutiae. Buried under mounds of data, they often lost track of first principles. A case in point was the foot-traffic counters that had long been a fixture at store entrances. Daunt had these removed, arguing that managers should “concentrate on being nice” rather than obsessing over isolated data points.²⁵

FIFTH, CREATE MEANINGFUL CAREERS: Historically, Barnes & Noble stores relied on a small core of well-compensated full-time staff and a much larger pool of part-timers paid little more than minimum wage. That was a problem, since years of experience had taught Daunt that the difference between a great bookstore and a mediocre one hinges on the wisdom and passion of its staff. Thus a key priority has been to hire more full-time staff and develop better pathways for professional development.

WASTE: The average respondent works in an organization with six management layers. In large organizations (those with five thousand or more employees), frontline employees are buried under eight or more layers (see table 4-2).

FRICTION: Seventy-four percent of those from large organizations say that bureaucratic processes “significantly” or “substantially” frustrate high-tempo decision-making. Speed is not a hallmark of bureaucracy.

INSULARITY: Survey respondents spend 38 percent of their time on internal issues—resolving disputes, wrangling resources, attending meetings, negotiating targets, and the like. Most insular are executives in large companies, who devote nearly half their time to in-house matters. Preoccupied as they are, it’s little wonder they often fail to spot emerging trends.

AUTOCRACY: Nearly two-thirds of nonmanagers in large organizations report having “little” or only “moderate” control over their work methods and job priorities. Additionally, only a quarter of frontline employees surveyed indicate that they are “always” or “frequently” involved in the design of major change initiatives. This lack of autonomy saps initiative and limits creativity.

CONFORMITY: Roughly two-thirds of survey takers say that new ideas in their organization are met with indifference, skepticism, or outright resistance. That number jumps to eight out of ten for nonmanagers—a deeply worrying finding, given that new ideas are the lifeblood of every organization.

TIMIDITY: Equally troubling is a lack of support for experimentation. Ninety-four percent of respondents working in companies with more than a thousand employees report that it’s “not easy” or “very difficult” for a frontline employee to launch a new initiative. While companies like Amazon and Intuit recognize the value of bottom-up innovation, most organizations don’t.

POLITICKING: Forty-nine percent of respondents believe that political skills “often” or “almost always” determine who gets ahead. In large organizations, the figure jumps to 65 percent. When asked to rate the prevalence of overtly political behaviors, 61 percent of respondents in large companies say such conduct is “often” observed. In a bureaucracy, it’s the best infighters who end up on top, rather than those who are most creative or competent.

REWARDING PRODUCTIVITY: At Nucor, a team’s earning power is linked to its productivity. Base pay for frontline teammates is about 75 percent of the industry average, but once a team’s output exceeds a threshold, typically 80 percent of the plant’s rated capacity, a bonus plan kicks in. The bonus threshold is fixed and gets adjusted only when capital investments increase the rated output of a particular piece of machinery or the entire plant. Knowing this, team members have a powerful incentive to “sweat the assets,” since the only way to increase their bonus is to produce more steel for a given amount of capital. In practice, this means using their ingenuity to shrink costs and speed up workflows. When a new piece of equipment is installed, it’s not unusual for a team to blow through the rated capacity level in a matter of months.

SHARED RESPONSIBILITY FOR GROWTH: When demand is slack, paychecks reflect the idle capacity, so teams use the slowdown to visit customers and pitch new product ideas. Within the plant, crew members test those ideas by experimenting with changes to the production process. When, for example, demand softened at Nucor’s plate mill in Tuscaloosa, Alabama, teammates experimented with ways to make armored plate—a product that was new to the plant. An underutilized mill also turns up the heat on managers. Team members will grill their leaders: “What are you doing to help us innovate and find new customers?”

LESS POLITICKING: Nucor’s top team understands that when executives have the power to monkey with targets, the result is favoritism, sandbagging, and an erosion of trust. Nucor’s clear, consistent goals are designed to minimize gamesmanship. Simple, understandable goals also reduce the need for the sort of detailed, team-level KPIs that can lead to suboptimization when employees chase piecemeal targets rather than focusing on the health of the overall business.

FINANCIAL FLEXIBILITY: Nucor’s output-based compensation model allows the company to rapidly trim its labor costs when demand softens. This flexibility eliminates the need for layoffs and gives Nucor a head start in ramping up when the business cycle turns around.

SELECTIVE HIRING: Nucor hires people for a career, not a short-term gig. The expectation is that teammates will grow their skills over the arc of their career. Accordingly, Nucor’s hiring process is aimed at finding individuals who are eager to learn. The process includes a two-hour standardized test to gauge quantitative and verbal problem-solving skills, followed by a behavioral interview with a psychologist. The final hiring decision is made by teammates who take part in an hour-long panel interview. Typical questions include:

CROSS-TRAINING: Instead of specializing in a single task, Nucor teammates are trained for a variety of roles. In the Blytheville division, new members in the melt shop department rotate through multiple crews, like the furnace and caster. This gives them an overview of the entire production cycle and enhances their ability to solve cross-boundary problems. In many divisions, teammates can come in on their off days and get paid to train for a different role. In a typical year, more than 20 percent of teammates will receive some form of cross-training; for entry-level positions, the percentage is even greater.

BUILDING BUSINESS ACUMEN: While most companies focus blue-collar training on narrow technical topics, Nucor invests in developing teammates’ commercial skills. The company believes people need to understand the business if they’re going to improve it. As part of their training, Nucor teammates participate in a daylong Monopoly-like game called “Dollars and Tons,” where five-person teams run a fictional Nucor division. Teams make decisions on how much scrap to buy at what price, on how many people to hire, and when to invest in new equipment to expand capacity. At the end of the simulation, teams are assessed on profitability, return on assets, working capital management, and balance sheet strength—all drivers of a plant’s performance.

ENCOURAGING PERSONAL GROWTH: Many companies treat frontline employees like expendable resources, but not Nucor. Every team member has a personal development plan outlining five- to ten-year career goals. One department manager said, “We’re always trying to find something that a teammate wants to get better at. Some want to grow fast and some don’t, but we work to put people in the best position to succeed.”

LEARNING EXCHANGES: Every year, Nucor’s team members make thousands of “best-marking trips” to sister plants. During these visits, colleagues share operational expertise and tackle common problems. When the Hickman division set out to reduce the thickness of its sheet steel, a caster crew flew in from Nucor’s plant in Ghent, Kentucky, to share what it had learned when it engineered a similar change. Most visits last a few days, but when the technical challenge is significant, a best-marking trip may extend to several weeks.

SPONTANEOUS NETWORKS: When divisions identify a need for sustained coordination, they assemble a team. In a typical case, sales managers from thirteen bar mills developed a national pricing schedule to provide a consistent offering for their largest customers. Some teams are ad hoc while others are long-lasting. There’s a network of frontline team members, for example, that coordinates procurement of raw materials and parts. Most networks begin informally. Those that add value become quasi-permanent.

OPPORTUNITY MASH-UPS: Plants often share leads and collaborate on new business development. One of the most significant efforts involved a coordinated assault on the automotive market. A decade ago, Nucor lacked the ability to produce the high-grade, flexible steel that carmakers use for engine components and body stampings. Several divisions had flagged the auto industry as an attractive segment, but individually, they lacked the skills to make much headway. Recognizing this, they joined forces to crack the market.

TRANSPARENCY: Nucor’s capacity for collaboration rests on a foundation of transparency. Company policy encourages teammates to “share everything.” Every employee has access to detailed performance metrics, including tons produced, cost per ton, tons lost to defects, and much more. Commercial data is similarly open. This includes bids, orders, inventory, shipments, return on assets—anything that’s potentially relevant to running the business. Most of this information is available in real time, but in each facility, performance data also gets posted weekly near the plant entrance or in the cafeteria.

JOB SECURITY: Nucor has never laid off employees at its steel mills, a remarkable feat in an industry that shed 40 percent of its employees between 2000 and 2023.⁸ Nucor could have followed suit, but that would have violated the company’s long-standing promise to employees: “Do your job well today, have it tomorrow.” When orders plummet, the company reduces the work week, not the workforce. This reduces the odds of making the weekly bonus, but for most employees, that’s better than being laid off. In the rare instances when Nucor closes or scales back a plant, people are offered positions in other mills.

FEW STATUS SYMBOLS: In contrast to its competitors, where managers often wear uniquely colored hard hats (in one company, the CEO’s helmet is gold-plated), there are few status symbols at Nucor. Executives forgo the sort of perks often doled out in other large companies. There are no company cars, country club memberships, or personal trips on corporate aircraft.

REVERSE ACCOUNTABILITY: While Nucor does have a formal hierarchy, there’s a commitment to reverse accountability that’s seldom seen in large companies. This reflects Iverson’s belief that power should trickle up, not down: “A manager’s authority comes from employees. We have seen general managers fail to effectively lead people to the ambitious goals we set at Nucor. When that happens, we say, ‘the employees fired the general manager.’ It’s similar to when a football team loses faith in the coach. Who are you going to fire, the coach or the whole team?”⁹

PROFIT-SHARING FOR ALL: Nucor’s profit-sharing plan is another mechanism for building commitment. Each year, the company contributes at least 10 percent of its pretax earnings to the plan. In 2023, Nucor paid in $661 million, which worked out to a whopping $48,000 per employee. Teammates receive a small portion in cash, with the remainder going into a retirement account which, for many employees, constitutes their largest financial asset.

PEOPLE PLANNING AND PEER SUPPORT: Production teams manage attendance and shift planning. When, for example, teams in the Blytheville division decided to change from five-day eight-hour shifts to four-day twelve-hour shifts, they didn’t ask management for permission.¹⁰ Teammates are also the first to intervene when colleagues underperform. They’ll work to identify the underlying issue and typically resolve things without the help of a supervisor.

CAPITAL SPENDING: Nucor’s production teams have a degree of financial autonomy that’s unprecedented within the steel industry. Team members regularly issue purchase orders in the tens of thousands of dollars without consulting plant management. Before pulling the trigger, they’ll consult with colleagues, but the goal is to get input, not approval.

DEPLOYING NEW TECHNOLOGY: Nucor’s teams are constantly on the hunt for technology that will give their business a competitive edge. Here, as elsewhere, frontline operators are deeply involved in the decision-making process.

INTERACTING WITH CUSTOMERS: In large industrial companies, it’s rare for frontline employees to interact directly with customers, unless they’re in a sales or tech support role. Not so at Nucor. From the crane operator to the forklift driver, everyone knows the customer. Production teams make regular customer visits, known as “line-to-line meetings.” A mill team, for example, will spend a day at an automotive plant talking to the manufacturing teams who turn steel sheets into car parts. The visitors will pepper their hosts with questions: How does the machine handle our steel? How do results compare with our competitors’ products? Where can we improve? These conversations generate a myriad of ideas and create personal relationships that ensure future issues are speedily resolved.

CONTINUOUS EXPERIMENTATION: At Nucor, teammates have both the incentives and the freedom to experiment with new production techniques. The result: a company where everyone innovates. In one case, an employee in the Blytheville melt shop worked for several years to redesign the ladle—the giant container that feeds the caster with molten steel. Through a series of experiments, he reworked the cauldron’s liner using materials that were more resistant to decomposition. The new design doubled the reliability of the ladle and yielded reductions in downtime and maintenance expenses. Experiments like this happen across the company and are core to Nucor’s competitive advantage.

STRATIFICATION: Nucor has a formal hierarchy, but the company is far less stratified—fewer levels, fewer managers, and fewer top-down commands—than most organizations of its size. Nucor has distributed the work of managing to frontline team members by giving them expansive decision rights and a substantial voice in choosing their own leaders. At Nucor, there’s no caste system, no distinction between thinkers and doers.

STANDARDIZATION: Forced standardization chokes off innovation and turns employees into automatons. That’s why Nucor resists the temptation to dictate operating standards from the top down. Every plant is free to develop its own procedures and protocols. There are no attempts to impose uniformity merely for the sake of orderliness; there are no rigid policies designed to make the company more homogeneous and thus more easily managed from the top. Instead, transparent performance data and a shared passion for getting better facilitate the spread of bleeding-edge practices. At Nucor, production processes converge naturally when it makes sense, but not when it doesn’t.

FORMALIZATION: Every organization needs a certain amount of structure—boundaries that delineate teams, functions, and operating units. Yet despite having nearly a hundred divisions, Nucor isn’t balkanized. Rather than using corporate staff groups—planning, marketing, sales, and R&D—to harvest synergies, Nucor relies on social networks. As with standardization, coordination happens organically, when teams identify a common interest. Coordination is the product of collaboration, not centralization.

SPECIALIZATION: Nucor’s team members are deeply skilled, but they’re also multiskilled. Shared targets, cross-training, and malleable roles help them tackle the sort of tough, boundary-spanning problems that yield big productivity gains. There are no “slots” at Nucor and, thus, no artificial limits on where and how team members can contribute.

FLATTENING THE PYRAMID: To that end, Reynal collapsed the company’s pyramidal structure from ten layers to four. Henceforth, no manager would have fewer than eight direct reports. What had been a highly matrixed organization was decomposed into small operating units, each with its own P&L.

BUILDING BUSINESS LITERACY: As he was cutting layers, Reynal and his team were also working to increase the business acumen of hourly employees. Initially, the focus was on managing net working capital—speeding up receivables, keeping inventories lean, and handling payables more effectively. With a working capital-to-revenue ratio that was one of the highest in the industry, improvement in this area was crucial for hitting performance targets.

SOLVING PROBLEMS BOTTOM-UP: Frontline teams were not only encouraged to address a wide array of operational issues, they were also given a central role in defining new strategic initiatives—a step that required an overhaul of traditional planning process. Instead of specific targets cascading down, employees huddled with colleagues and customers to brainstorm ways of growing revenue and margins. That might involve cracking new market segments, generating recurring revenues from internet-connected products, accelerating innovative product designs, or improving employee engagement scores. Business units selected the most promising projects, and each initiative was led by a “board of directors”—a small cross-functional team that was granted the authority and resources to push the idea forward.

TRANSPARENT COMMUNICATION: A culture of shared ownership depends on transparency. At Ingersoll Rand, employees get regular updates through quarterly “all-owner meetings,” which are held locally and companywide. Most of the time in these sessions is reserved for employee questions. “There are no softballs,” says Reynal. He recalls that in one update meeting in India, there was a long conversation on how to apportion earnings between investment and dividends.

IMPACT: Since the initial public offering, Ingersoll Rand has been on a tear. Revenue growth has averaged nearly 17 percent per year, and earnings have increased by 20 percent per annum—atypical results for a “rust belt” company. Stavros and Reynal reckon that shared ownership has unlocked nearly $3 billion in incremental value—$400 million through better cash management and lower attrition and $2.5 billion from revenue and margin expansion attributable to employee ingenuity. As of this writing, Ingersoll Rand’s share price has more than quadrupled from its post-merger low in March 2020, outperforming the Dow Jones Industrial Average by a 4:1 margin.

FIRST, POSITIONAL AUTHORITY IS DANGEROUSLY EXPANSIVE: In a formal hierarchy, senior executives have broad decision rights. VPs, for example, get the last word on every issue within their purview. This leads to the common yet perverse case in which a senior executive, promoted out of a particular function, suddenly feels qualified to weigh in on matters where he lacks relevant expertise. A typical case is a career finance executive who, after being appointed CEO, believes himself to be an astute judge of product design.

SECOND, POSITIONAL POWER TENDS TO BE BLACK OR WHITE: Within the formal hierarchy, you’re either a VP, department head, or supervisor or you’re not. That means bumbling managers retain all their authority right up to the moment they’re fired or demoted. Because moving someone out of a role is practically and emotionally fraught, there are often long lags in realigning competence and authority, which undermines morale and degrades performance.

FINALLY, FORMAL HIERARCHIES GIVE SUBORDINATES LITTLE OR NO VOICE IN CHOOSING THEIR LEADERS: In a bureaucracy, a manager’s power doesn’t depend on the consent of the governed. Contrast this with the social web, where power trickles up, not down. If you’re an influencer with millions of followers on TikTok or Instagram, it’s not because someone appointed you. Instead, people chose to follow you because they found your content entertaining or instructive.

MORE RADICAL AND AMBITIOUS IDEAS: The odds of conceiving a game-changing strategy go up when the strategy conversation encompasses a large and heterogeneous group of participants. You need new voices to uncover new options.

HEIGHTENED COMMITMENT: Individuals feel a much greater commitment to a strategy if they’ve had a hand in creating it. A participative process yields a strategy that belongs to everyone, not just the CEO or the board.

GREATER CREDIBILITY: For most employees, strategy making is a black box. Occasionally it spits out a new priority, but why this one? What other options were considered? What criteria drove the final decision? Most employees haven’t a clue, but if you want people to trust a strategy, they need to know how it was built.

MORE GRANULARITY: Top-down strategies are inherently abstract. When a CEO says, “We have a big opportunity in health care,” what does that mean? How is it actionable? In contrast, when an open strategy process yields fifty or a hundred ideas related to health care, you can be sure the resulting strategy will be granular. Once you read below the headline, you’ll find specifics, not generalities.

FASTER IMPLEMENTATION: When strategy is made in secret, it can take months or years for employees to fully grok the new game plan—assuming there’s something to grok. In an open process, people see the strategy taking shape in real time. By the time the strategy gels, they’re primed and ready to act.

LESS INERTIA: As a company grows and bureaucracy multiplies, leaders start playing defense. Their motto: don’t screw with success. The result is inertia, and the only way to escape it is to create a constituency for the future that is larger and more powerful than the constituency for the status quo. An open strategy process gives rebels a share of voice and can be instrumental in breaking free of the timidity trap.

CROWDSOURCING SOLUTIONS TO DIVISIVE ISSUES: vTaiwan was designed to shape government policy by facilitating conversations and consensus-building between diverse opinion groups using open, participatory methods. To understand vTaiwan’s approach, consider how it was used to develop a new regulatory framework for ride-sharing apps. When Uber entered Taiwan in 2013, it immediately sparked the ire of taxi firms, their drivers, and a cross-section of the public. In the summer of 2015, the Ministries of Transportation and Economic Affairs asked Tang and her civic hackers to engage the public in developing a fresh set of regulatory proposals.

OPENNESS GOES MAINSTREAM: Riding the success of vTaiwan, Tang was appointed the country’s first digital minister in 2016. Her appointment was groundbreaking in more ways than one: she became the world’s first transgender cabinet member and Taiwan’s second-youngest minister. In her new role, Tang was determined to infuse the entire government with the ethos of openness and participation.

INNOVATION TRAINING: Designing experiments takes skill, and at Intuit, every employee gets the chance to become a pro. The company’s innovation curriculum, Design for Delight (D4D), is a weeklong course that builds skills in three areas: customer empathy, idea development, and rapid prototyping.

TIME FOR EXPERIMENTATION: Intuit also supports experimentation with “unstructured time.” All associates are encouraged to spend 10 percent of their time working on a passion project. Employees can consolidate this time into blocks and are encouraged to sync up with colleagues to tackle chunky problems. In a typical example, the team responsible for QuickBooks saved up its unstructured time over several months so it could devote a full week to brainstorming new product features. During the week, the team created a prototype for a mobile version of its signature product. Jeff Zias, an innovation leader at Intuit, reckons that over the last decade, unstructured time spawned five hundred discrete projects that eventually shipped products or services to internal and external customers.¹⁶

EXPERIMENTAL TEAMS: When an idea shows promise, Intuit assembles a small “discovery team” to push it forward. A typical team includes individuals from engineering, product management, and design—what Cook calls “a hacker, a hustler, and a dreamer.”¹⁷ Once constituted, these teams operate outside the chain of command and enjoy a high level of autonomy. To ensure they don’t get bogged down in bureaucracy, teams are matched up with executive sponsors. The SnapTax team, for example, was mentored by the VP of product management for TurboTax, Intuit’s VP of engineering, and Scott Cook. Sponsors meet with teams once a week to provide coaching, remove bottlenecks, and help secure resources. Further support comes from Intuit’s Innovation Catalysts—a group of two hundred experimentation “black belts” who dedicate 10 percent of their time helping colleagues identify customer needs, design experiments, and build prototypes.

DEDICATED FUNDING: Innovators at Intuit have multiple sources of experimental capital. Each department has an experimentation budget for upgrading current products. Would-be experimenters can also compete for funds in periodic innovation challenges and hackathons. Finally, innovators can seek support from the CEO Fund, a discretionary pool Cook established to ensure that outlier ideas aren’t starved of resources. Investments are typically small—tens of thousands of dollars over two to three months—but can amount to several million dollars when an idea needs longer incubation. Existing businesses are expected to match the CEO Fund for ideas that will benefit their customers.

ENABLING FUNCTIONS: Support functions are responsible for enabling experimentation. In 2012, Intuit’s IT department cut the time it took to set up an online test from two months to two hours. The following year, the legal department published guidelines on how to run an experiment without the need for a legal sign-off. More recently, Intuit introduced GenStudio, a dedicated development environment that gives Intuit’s developers easy ways to incorporate generative AI tools, workflows, and large language models in their experiments.¹⁸

GARY HAMEL is visiting professor of strategy and entrepreneurship at the London Business School. He has authored twenty articles for Harvard Business Review and published five books with Harvard Business Review Press, including The Future of Management (2007), which was named Amazon’s business book of the year. The Wall Street Journal ranked Hamel as the world’s most influential business thinker, while the Financial Times labeled him a “management innovator without peer.” As a consultant, Hamel has helped dozens of the world’s most respected companies increase their capacity for innovation and strategic renewal. He is a regular speaker at the world’s most prestigious conferences and is a fellow of the Strategic Management Society. Together with Michele Zanini, Hamel is cofounder of the Management Lab, an organization that builds technology and tools to support breakthrough management innovation. He lives in Northern California.

MICHELE ZANINI cofounded the Management Lab with Gary Hamel. As an adviser, he helps forward-thinking companies become fundamentally more entrepreneurial and innovative. His work appears in Harvard Business Review, Financial Times, Atlantic, Fast Company, and Fortune. He is a regular speaker at the Global Peter Drucker Forum and executive forums worldwide. At McKinsey & Company, he served as an associate partner leading the firm’s organization, strategy, and financial services practices while conducting pioneering research on internal markets, collaborative networks, and dynamic resource allocation. Before McKinsey, he worked for five years as a policy analyst at the RAND Corporation. Zanini holds degrees from Harvard University’s John F. Kennedy School of Government and the RAND School of Public Policy. He lives in Boston.

Bureaucratic Mass Index Survey Questions

The Birth of a Microenterprise

Humanocracy - Gary Hamel

“Rarely has the case for dismantling bureaucracy been made as effectively, passionately, and comprehensively. The time to start is now, and the book to read is Humanocracy, Hamel and Zanini’s practical guide to creating work environments that give everyone the opportunity to flourish. This is essential to revitalizing our organizations and reinvigorating our economies.”

—BENGT HOLMSTRÖM, Paul A. Samuelson Professor of Economics, Massachusetts Institute of Technology; 2016 Nobel laureate in Economics

“Hamel and Zanini have achieved two remarkable feats. They’ve produced one of the most cogent critiques of bureaucracy that I’ve ever read—explaining the many ways that bureaucratic organizations undermine human autonomy, resilience, and creativity. And they’ve issued a stirring call to do better—to build organizations that liberate the everyday genius of the people inside them. Packed with keen insights and practical guidance, Humanocracy is an essential book.”

—DANIEL H. PINK, #1 New York Times bestselling author, Drive and To Sell Is Human

“Humanocracy provides the reader with a road map to helping organizations unleash creativity, energy, and resiliency through leveraging the core of every organization—humans.”

—GEN. STANLEY MCCHRYSTAL, US Army, Ret.; author, Team of Teams

“Humanocracy is the most important management book I have read in a very long time. This is not just another book about the power of purpose or the joys of empowerment. Rather, it’s a detailed, well-researched, data-driven, compellingly argued exposé on the massive costs of bureaucracy in society. Hamel and Zanini offer an equally compelling argument for why it doesn’t have to be this way, complete with a practical guide for creating organizations that really work.”

—AMY EDMONDSON, Professor, Harvard Business School; author, The Fearless Organization

“Almost all large organizations create a bureaucratic system for the sake of elusive safety. In reality, bureaucracy paralyzes the organization and frustrates employees. Humanocracy is a practical guide about how to escape this trap and unlock the hidden potential of large organizations and, most importantly, of their biggest asset, their employees.”

—OLIVER BÄTE, Chairman and CEO, Allianz

“Great companies in today’s highly dynamic world need to unleash the power of their people to multiply value and impact. Humanocracy presents a compelling handbook for how large organizations can reduce bureaucracy, create a highly engaged workforce, and build leaders that serve their people.”

—VAS NARASIMHAN, CEO, Novartis

“If an organization has ever crushed your hopes and dreams, this book just might help to rejuvenate you. It’s hard to imagine a better guide to busting bureaucracies and building workplaces that live up to the potential of the people inside them.”

—ADAM GRANT,New York Times bestselling author, Originals and Give and Take; host, TED WorkLife podcast

“Hamel and Zanini have written a bold, essential guide to building an organization infused with the same spirit of creativity and entrepreneurship as the people who work there. Their ‘post-bureaucratic’ vision of work is not just timely but energizing.”

—ERIC RIES, author, The Lean Startup

“Fast technology and business innovations call for a big overhaul of traditional bureaucratic organizations. Humanocracy provides a stimulating and inspiring framework for creating the innovative organizations of the future.”

—MING ZENG, former Chief Strategy Officer, Alibaba Group; author, Smart Business

“Humanocracy makes the case for replacing chain of command with chain of trust and radical transparency. It’s a prescription for unlocking game-changing innovation and the value of every individual.”

—MARC BENIOFF, Chair and CEO, Salesforce; author, Trailblazer

“At last, a playbook to take a sledgehammer to bureaucracy. The reasons for bureaucracy have long vanished in the digital age—and yet it persists. Hamel and Zanini introduce us to an alternative that energizes people rather than crushing their souls, humanizing the organization for higher levels of accountability and impact.”

—DIANE GHERSON, former Chief Human Resources Officer, IBM

“For a business to perform its role of producing products and services that help people improve their lives, its employees must be fully empowered to continually improve their ability to contribute. This requires roles that fit their unique abilities and a culture that celebrates and rewards innovation, collaboration, challenge, and all the other elements of principled entrepreneurship. Humanocracy illustrates a basic condition for bringing this about—eliminating bureaucratic management. Such a change is not only essential for long-term business success but for a free and open society that gives everyone the opportunity to rise.”

—CHARLES G. KOCH, Chairman and CEO, Koch Industries; founder, Stand Together; and author, Good Profit

“In Humanocracy, Hamel and Zanini challenge the old order and, simultaneously, show the path to creating a new and better order capable of achieving higher goals for businesses and the communities they serve.

At a time when the digital revolution is changing every aspect of human life, the authors rightly caution businesses that their change-resistant and often wasteful bureaucratic structures are a drag on their growth. Bureaucracy impedes employees’ creativity, undermines their self-motivation, and hinders their workplace happiness.

Therefore, the need to transform business organizations into human-centric entities has become more pressing than ever before. How can we succeed in this task? I have found no better guide than Humanocracy—a book that every change-seeker and change-agent must read.”

—MUKESH AMBANI, Chairman and Managing Director, Reliance Industries Limited; named one of Time 100: The Most Influential People of 2019

“Hamel and Zanini argue that bureaucracy is soul-crushing, and they’re right. With only 15 percent of the world’s 1.4 billion full-time workers engaged at their jobs, we have to empower the individual or human beings will never bloom. Depending on you, this book can change the world a little or a lot.”

—JIM CLIFTON, Chairman, Gallup

“Humanocracy is a must-read to survive and prosper in the future. The book is a tour de force.”

—VIJAY GOVINDARAJAN, Coxe Distinguished Professor, Tuck School of Business at Dartmouth; author, The Three-Box Solution

“Innovation is as important to how we organize ourselves as it is to what we make. Humanocracy shows how it is possible to unlock the passion and creative potential within our organizations and give ourselves a fighting chance of successfully tackling the most important challenges of our time.”

—TIM BROWN, former Chair, IDEO; author, Change by Design

“Humanocracy is a book about unleashing human potential by replacing bureaucracy with passion and creativity. A must-read for anyone who wants to build efficient human-centric organizations.”

—JIM HAGEMANN SNABE, Chairman, Siemens AG; author, Dreams and Details

“Humanocracy thoughtfully outlines why the time has come for organizations to abandon their bureaucratic ways and bring humanity back into the workplace. I found myself nodding throughout the book and thinking ‘YES! This is it. This is the new management paradigm we’ve been needing for decades. Hamel and Zanini have done it!’ ”

—JIM WHITEHURST, Managing Director, Silver Lake; former President, IBM; author, The Open Organization

“Humanocracy is the most insightful, instructive book for this new, purpose-driven decade and should be mandatory reading for all organizations seeking to thrive, survive, and, more importantly, make the human impact their teams long for.”

—ANGELA AHRENDTS, former CEO, Burberry; former Senior Vice President, Apple

“Virtually all businesses are being disrupted by innovations from every direction. Bureaucratic hierarchy is simply too slow in making decisions and not innovative enough to be competitively successful in the third decade of the twenty-first century. Humanocracy shows us the path forward to creating less bureaucratic and more innovative and humane organizations.”

—JOHN MACKEY, cofounder and former CEO, Whole Foods Market; coauthor, Conscious Capitalism

“Hamel and Zanini insightfully diagnose the choking bureaucracy that makes many of today’s organizations far less collectively intelligent than they could be. Then they give fascinating examples and inspiring prescriptions for creating organizations that are vastly more innovative, adaptable, and fulfilling for the people in them.”

—THOMAS W. MALONE, Patrick J. McGovern Professor of Management, MIT Sloan School of Management; Director, MIT Center for Collective Intelligence

“For over a decade, Gary Hamel has called for us to hack how we lead and organize. In this book, Hamel and Michele Zanini offer specifics about how to dismantle our bureaucratic enterprises and rebuild them into agile organizations in which employee passion and talents are unleashed and harnessed to cocreate, with customers, products, and services that make a positive difference.”

—LINDA A. HILL, Wallace Brett Donham Professor of Business Administration, Harvard Business School; coauthor, Collective Genius

Humanocracy, Updated and Expanded: Creating Organizations as Amazing as the People Inside them by Gary Hamel and Michele Zanini, published by Harvard Business Review Press

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Library of Congress Cataloging-in-Publication Data

Names: Hamel, Gary, author. | Zanini, Michele, author.

Title: Humanocracy, updated and expanded : creating organizations as amazing as the people inside them / Gary Hamel and Michele Zanini.

Description: Boston, Massachusetts : Harvard Business Review Press, [2025] | “Humanocracy” previously published in 2020.

Identifiers: LCCN 2025000183 (print) | LCCN 2025000184 (ebook) | ISBN 9781647826376 (hardcover) | ISBN 9781647826383 (epub)

Subjects: LCSH: Bureaucracy. | Organizational effectiveness. | Organizational change. | Corporate culture.

Classification: LCC HM806 .H36 2025 (print) | LCC HM806 (ebook) | DDC 302.3/5—dc23/eng/20250210

LC record available at https://lccn.loc.gov/2025000183

LC ebook record available at https://lccn.loc.gov/2025000184

ISBN: 978-1-64782-637-6

eISBN: 978-1-64782-638-3

To Kelly Duhamel, for teaching me so much about life,

love, and what it means to be human.

—Gary

To Ludovica, Clara, and Luigi, whose love and example inspire me to be more, every day.

—Michele

Contents

Preface

PART ONE

The Case for Humanocracy

Why Poke the Bureaucratic Beehive?

1. Bureaucracy Must Die

2. Fully Human

3. The Indictment

4. Facing Facts

PART TWO

Humanocracy in Action

Can We Really Go Bureaucracy-Free?

5. Nucor

6. Haier

PART THREE

The Principles of Humanocracy

What’s the DNA of a Human-Centric Organization?

7. Principles over Practices

8. The Power of Ownership

9. The Power of Markets

10. The Power of Meritocracy

11. The Power of Community

12. The Power of Openness

13. The Power of Experimentation

14. Embracing Paradox

PART FOUR

The Path to Humanocracy

How Do You Make It Real?

15. Working to Cure Bureausclerosis

16. Start Here

17. Scale It Up

Appendix A: The Bureaucratic Mass Index Survey

Appendix B: Sizing Up the Bureaucratic Class

Notes

Index

Acknowledgments

About the Authors

Preface

We’re lucky. During our careers, we’ve had the opportunity to work with leaders from hundreds of organizations across the globe—local municipalities and central governments, family-owned companies and giant multinationals, agricultural processors and high-tech icons, health care providers and defense agencies, Swiss banks and Chinese appliance makers, Italian fashion houses and American retailers, German car companies and Brazilian media giants.

With few exceptions, the projects produced positive outcomes—game-changing strategies, breakthrough products, new businesses, and upgraded capabilities. The work was rewarding but also frustrating. We were interacting with smart and committed people—so why did they find it so difficult to look over the horizon, question old habits, reallocate budgets, make space for innovation, take prudent risks, engage their teams, and truly empower others?

Why did it seem everyone was walking around in lead boots? Why was it that no one was eager to make a decision? That every meeting required a premeeting? That people were spending more time polishing presentations than launching experiments? That doing anything—literally anything—required the consent of corporate HR, comms, and legal? That a small screwup was regarded as bigger risk than collective irrelevance? That hard truths had to be packaged in bubble wrap before being shared with superiors or subordinates? That it was better to hoard resources than to share them? That the illusion of consensus was preferable to tough conversations? That it was OK to entangle employees and customers in a jumble of petty rules? That diversity was great as long as it didn’t produce dissent? That alignment was a virtue, even if all the lemmings were running off a cliff? That something could be labeled as transformational even when it left 98 percent of the status quo intact? That “strategic planning” wasn’t, in fact, strategic? That people were called “leaders” whether or not they had willing followers? That no one seemed much interested in measuring the per-dollar effectiveness of corporate functions? That activity was regularly mistaken for impact? That only a tiny fraction of employees were directly accountable to end users? And that the opinions of those on the front lines were mostly ignored?

If this seems like a rant, that’s because it is. And if you’ve ever worked inside a midsize or large organization, you probably have your own rant. Odds are, your frustrations are justified, since most organizations are, to one degree or another, insular, inflexible, impersonal, infantilizing, and (often) inane—in other words, inept.

Permit us one example. We know a group of five doctors who recently sold their practice to a large hospital group. The physicians had run the practice for more than twenty years. It was well regarded by patients and consistently profitable. The terms of the sale stipulated that the practice would continue to operate as a self-managing entity. One year in, the doctors received a disconcerting memo from the hospital CFO. It seemed their practice was losing money. They were invited to attend a meeting where remedial measures would be discussed. Perplexed, the physicians showed up at the appointed time. A finance staffer threw a one-page summary of the clinic’s profit-and-loss statement up on a screen. Sure enough, the bottom line showed a $500,000 loss for the previous year. The physicians had long prided themselves on running a tight ship—after all, unnecessary expenses ate into their salaries. Now they were being ordered to cut their expenses by 10 percent.

The doctors asked for the meeting to be extended so they could review the income statement line by line. Reluctantly, the staffer agreed. Thirty minutes later, having looked through dozens of expense items, one of the doctors spotted something peculiar. “Wait a minute, what’s that?” he asked. “That,” said the accountant, “is a $500,000 charge for administrative support—you know, for corporate services.” “But we didn’t use any corporate services,” objected the physician. “It doesn’t matter,” said the staffer. “Every practice has to cover its share of hospital overhead.” The rest of the conversation was, um, heated, but the meeting ended as such meetings usually do. Whether you’re an MD or an orderly, an admiral or a deckhand, a VP or a janitor, head office policies are seldom amended in deference to issues of logic, fairness, and morale.

Those exasperated physicians belong to a vast throng of human beings who every day find themselves stymied by their own organization. Of course, no one (well, almost no one) purposely sets out to thwart their colleagues—but that’s nonetheless what happens, and on a massive scale. When you see countless organizations suffering from the same disabilities, you know the problem is not primarily one of strategy, leadership, or operations, much less ill-intent. The problem lies deeper—at the level of DNA. So what, we asked ourselves, does virtually every organization have in common? The answer is bureaucracy.

For 150 years, industrial bureaucracy has helped people to do together what they can’t do alone—whether that’s building a Model T or running an artificial intelligence (AI) data center. But, as we’ll argue in the pages that follow, our institutions need an upgrade. Actually, more than an upgrade—they need the organizational equivalent of gene replacement therapy.

This book, like the first edition that preceded it, is animated by two core beliefs. First, to meet humanity’s most pressing challenges, we need organizations that are fundamentally more capable than the ones we have at present. Second, replacing bureaucracy with something better is not a vain hope. Some of the world’s largest, most complex companies have made extraordinary progress, and they are reaping extraordinary rewards. Just as importantly, anyone—and that means you—can play a pivotal role in building the sort of future-fit organizations that humanity so desperately needs and deserves.

Since the first edition in 2020, the stakes have only grown higher. Whether it’s climate change, AI job displacement, income inequality, distrust of institutions, or stagnating productivity—among other critical issues—the world needs organizations that are more daring, resilient, creative, and inspiring. Sadly, most remain ossified and incapable of unleashing the latent capability of their members.

Many hoped that the lessons learned in battling Covid-19 would transform our organizations for the better. In the midst of the pandemic, American entrepreneur Mark Cuban declared that “the CEO is of no more importance than somebody cleaning the floors. I think this is a time for a reset.” Slack cofounder Stewart Butterfield proclaimed, “Work will never be the same.… The sudden shift to distributed work has provided a once-in-a-generation opportunity to reimagine everything about how we do our jobs and how we run our companies.”

But most of the changes turned out to be modest or fleeting. In 2020, at the height of the pandemic, 49 percent of American workers said they felt cared for by their organizations—a high-water mark. Yet by 2024, that number had fallen to 25 percent, below pre-pandemic levels. Currently, workplace engagement is at its lowest point in eleven years. The General Social Survey, a long-running poll tracking various aspects of American society, including workplace conditions, paints a similar picture. Job satisfaction fell by four percentage points between 2018 and 2022; both the share of workers who felt fairly treated by their supervisors and the number claiming they had significant workplace autonomy dropped by six points. This regression isn’t surprising.

In a minor crisis (like a public relations screwup, a safety issue, or environmental mishap), power shifts to the center as executives move quickly to repair the damage. In a major upheaval, the center is quickly overwhelmed, and power flows to the periphery. In the pandemic, organizations faced a vast array of problems that were novel, intertwined, dynamic, and only partially understood. The crisis demanded immediate action on multiple fronts. Speed and ingenuity were vital. Those at a distance from the problem—senior administrators—were often clueless. Policies crafted in peacetime were a hindrance not a help. There was no time to wait for direction from above. The cavalry wasn’t coming.

Individuals on the front lines had to take charge—and they did. They were “essential” workers with new and vastly expanded decision rights. The shackles were off. But as we argued at the time, bureaucrats are jealous of their prerogatives, so as the crisis receded, power moved back to the center. Newfound freedoms evaporated like dew on a summer day. Little wonder there was a backlash.

Remote working, another Covid artifact, is also on the wane, as more companies enforce “return to office” mandates. The much-touted work-from-home revolution has run out of steam. In the United States, only one in five American employees enjoys the flexibility of working from home at least some of the time, and a mere one in ten is fully virtual. The aggregate share of hours worked remotely stands at a modest 16 percent and hasn’t increased since the Bureau of Labor Statistics began tracking it in the fall of 2022. For most employees, work-from-home represents a welcome but minor shift in modality—not the paradigm shift many envisioned. It’s the digital equivalent of casual Fridays.

Diversity, equity, and inclusion (DEI) initiatives are another recent and much heralded development. A heightened commitment to more just and inclusive workplaces is laudable, but the impact has been mixed at best. In many cases, DEI has devolved into a top-down administrative exercise that prioritizes procedural compliance over substantive change. Such efforts sidestep deeper and more troubling realities, like the power and compensation imbalances that are baked into managerial hierarchies. From this perspective, DEI initiatives are no more than a small down payment on the larger goal of creating workplaces where all employees can flourish.

The rapid growth of AI tools represents a more substantive workplace shift. The launch of ChatGPT in November 2022 was a watershed moment. The technology’s ability to write code, analyze data, and generate humanlike content captured the imagination of millions. Since then, interest in AI has been staggering. Research firm IDC reports AI spending reached $142 billion in 2023 and is projected to reach $630 billion by 2028.

Few doubt that AI will reshape knowledge work. We believe it also has the potential to change the way our organizations are run. AI’s ability to process vast amounts of information could help decentralize decision-making and bring more voices into strategic decisions. AI has the potential to dynamically match skills and interests with tasks and opportunities, freeing employees from narrow job descriptions. This capability might also upend formal hierarchy—assigning decision rights to individuals who have the best situational awareness and relevant expertise at any moment, regardless of their position on the pyramid. By parsing massive amounts of internal data, it could identify those who are actual leaders—team members who, whatever their role or title, initiate action, champion new ideas, take risks, have devoted followers, and create value.

History, however, gives us pause. As we’ll see in chapter 1, organizations have poured trillions of dollars into information technology over the past decades, but these investments have barely dented the bureaucratic monolith. In the early 2000s, tech futurists were confident that the web and other digital technologies would democratize information flows and lead to flatter, more networked structures. Prediction markets, crowdsourcing, idea wikis, and open innovation were touted as tools to improve decision-making and boost creativity. Yet these practices remain rarities in most organizations—largely because they challenged managerial prerogatives.

The reality is that technology alone doesn’t make organizations or jobs better. Cutting-edge tools can reduce errors and speed up workflows, but they do little to enhance job quality or worker empowerment. They may make organizations more efficient but seldom make them more courageous, adaptable, or inventive.

The past few years have brought waves of hope and hype, but not much forward momentum. Our organizations are still stuck. They’re still ponderous, convention-bound, and often infuriating. Millions of us long for something better. Like capsized sailors dog-paddling in a vast ocean, we reach for anything that might buoy us up.

Yet despite the false starts and unrealized dreams, we remain deeply optimistic about the prospects for a genuine management revolution. That’s because a growing number of vanguard organizations—many featured in this book—have successfully dismantled bureaucracy and unleashed a torrent of initiative and ingenuity. But such examples are still rare. The costs of bureaucratic sloth and incompetence continue to mount and are rapidly becoming an untenable threat to economic vitality, social well-being, and individual prosperity.

Hence this new edition of Humanocracy. We wanted to make an even more powerful and irresistible case for ending the reign of bureaucracy. We wanted to inspire readers with new, compelling stories of management innovation—including a 100-year-old manufacturing business, a brick-and-mortar retailer, a globe-spanning drug company, a pioneer in streaming entertainment, and the world’s biggest infrastructure company. We wanted to bring in examples from the public sector, such as Operation Warp Speed, America’s successful quest to develop a Covid vaccine, and “vTaiwan,” a pioneering experiment in participative democracy. Finally, we wanted to update every data point and incorporate the latest findings from management researchers.

Whether you’re encountering these ideas for the first time or revisiting them, the goal remains unchanged: to equip you with the knowledge, tools, and inspiration to drive meaningful change in your organization.

The first task is to build an unimpeachable case for pulling bureaucracy up by the roots. This is the focus of part I, “The Case for Humanocracy.” In chapter 1, we’ll confront the toll of bureaucracy. Top-heavy and rule-choked organizations are black holes that swallow up trillions of dollars of potential productivity gains. They’re administrative caste systems that exacerbate social inequality. They are brakes on human flourishing. The evidence makes it clear that half-measures won’t suffice. In chapter 2, you’ll learn why the biggest liability for most organizations isn’t a clunky operating model or a busted business model but an archaic management model. While our organizations might once have been able to bear the costs of bureaucracy, this is no longer the case. In chapter 3, you’ll learn how the features of bureaucracy—stratification, specialization, formalization, and routinization—undermine resilience, innovation, and engagement. You’ll also get an initial glimpse into how some heretical organizations have been challenging bureaucratic norms. In chapter 4, we’ll show you how to calculate the hidden costs of bureaucracy in your own organization—a critical step in building commitment for a comprehensive management overhaul.

To move from diagnosis to action, you’ll need to believe there’s an alternative to the status quo—that the idea of a human-centric organization isn’t a utopian fantasy. In part II, “Humanocracy in Action,” we’ll go inside two mind-bending companies that have harnessed the power of humanocracy. Chapter 5 will give you a close-up view of Nucor, the world’s most innovative steel company. You’ll learn how Nucor’s super-lean management model unleashes creativity and encourages everyone to think and act like an owner. In chapter 6, we’ll expose the secrets of what is arguably the world’s most creatively run company—the global appliance maker Haier. Over the past decade, Haier has been on a quest to build a company with “zero distance” between employees and customers. To that end, it divided its seventy-two-thousand person organization into four thousand microenterprises, with just two levels separating frontline employees from the CEO. More a network than a hierarchy, Haier offers an astonishing yet practical model for achieving entrepreneurship at scale.

In part III, “The Principles of Humanocracy,” you’ll get introduced to the seven core tenets of a human-centric organization: ownership, markets, meritocracy, community, openness, experimentation, and paradox. In chapter 7, we’ll argue that reinventing management requires not only new tools and methods but entirely new principles. In chapters 8 through 14, we’ll provide detailed examples of how to operationalize each of the principles in ways that will make your organization more resilient, creative, and daring.

As you may suspect, bureaucracy won’t yield to new thinking alone. Bureaucracy is familiar, entrenched, and well defended. To prevail, you’ll need to route around old power structures, energize a pro-change constituency, and launch dozens of audacious organizational experiments. These are the challenges we’ll tackle in part IV, “The Path to Humanocracy.” In chapter 15, you’ll learn how Roche, one of the world’s biggest drug companies, shrank the bureaucratic tumor and gave everyone the authority to do amazing things for customers—despite operating in a heavily regulated environment. In chapter 16, we’ll give you a step-by-step guide for getting started with your own team. We’ll show you how to rid yourself of bureaucratic thinking, get your colleagues on board, and turn your unit into a laboratory for radical management innovation. Finally, in chapter 17, we’ll show you how to scale up. Drawing on lessons from management hackers and activists, we’ll outline what it takes to build a companywide campaign that gets everyone involved in the work of reinventing management. We’ll argue that installing humanocracy requires a bold new approach to large-scale transformation, one in which change rolls up, not out.

This book is a manifesto and a manual. It argues, persuasively we hope, that it’s time to free the human spirit from the shackles of bureaucracy—and that doing so will produce profound benefits for individuals, organizations, economies, and societies. It also gives management renegades practical strategies for advancing the cause of humanocracy within their own organizations. Over the last few years, we’ve been blessed with the opportunity to work with an amazing band of organizational buccaneers. They’ve taught us that with courage, compassion, and contrarian thinking, anyone can transform a large organization—whatever their title or position. So, if you’re ready to build an organization that’s fit for human beings and fit for the future, we invite you to start right here, right now.

Part One

The Case for Humanocracy

Why Poke the Bureaucratic Beehive?

— 1 —

Bureaucracy Must Die

It is time—past time—for a radical overhaul of the nineteenth-century bureaucratic management model that underpins nearly every organization across the world. Daunting as this task may seem, there are compelling economic and social reasons for reinventing management-as-we-know-it. Put simply, in a world of existential challenges and accelerating change, we can no longer afford organizations that are fainthearted, sclerotic, and dispiriting.

While in some ways our organizations exceed us—no single individual can erect a skyscraper or put a rocket into orbit—in other ways they are noticeably less capable than the average biped. Individually, or in small teams, we are daring, resilient, creative, and energetic. But when we’re herded by the thousands into bureaucratic pens, many of those admirable qualities get trampled underfoot.

In a bureaucratic setting, human beings who are otherwise courageous lose their moxie. The typical bureaucrat is cautious to a fault, moving forward only when the path is well lit. No “moonshots” for me, thank you very much.

Bureaucracies are inertial. That’s why America’s federal health care agencies were perpetually on the back foot during the Covid-19 pandemic. They dawdled while those on the front lines—nurses, doctors, and researchers—networked, invented, and improvised.

Bureaucracies are innovation-phobic. New ideas are inherently suspect. That’s why game-changing innovation usually comes from industry outsiders like OpenAI, SpaceX, and Anduril (a defense startup that’s working to dramatically shrink the cost of new weapons systems).

Worst of all, bureaucracies are soul crushing. By depriving employees of autonomy and upside, they forfeit vast quantities of ingenuity and initiative and thereby curtail the scope of human accomplishment.

Bureaucracies exemplify the sort of “soft despotism” Alexis de Tocqueville warned about in his 1831 masterpiece Democracy in America. The principal danger facing the young republic, he argued, wasn’t the threat of totalitarianism but the devitalizing impact of an invasive and ever-expanding central government that

covers the surface of society with a network of small, complicated rules, minute and uniform, through which the most original minds and the most energetic characters cannot penetrate to rise above the crowd. The will of man is not shattered, but softened, bent, and guided: men are seldom forced by it to act, but they are constantly restrained from acting: such a power does not destroy, but it prevents existence; it does not tyrannize, but it compresses, enervates, extinguishes, and stupefies.

De Tocqueville’s portrait of an overweening state was uncannily prescient; but today, it’s not just government agencies that anesthetize the human spirit but every large organization.

Obviously, no company starts out as a cumbrous bureaucracy, but most end up that way. As an organization grows, layers get added, staff groups swell, rules proliferate, and compliance costs mount. Once a company hits a certain threshold of complexity—around two to three hundred employees—bureaucracy starts growing faster than the organization itself. That’s why big companies have more bureaucracy per capita than small ones and suffer from managerial diseconomies of scale.

In a world of hyperkinetic change, resources matter less than resourcefulness. That’s where newcomers have an advantage. Contrary to the popular narrative, the principal advantage of most startups isn’t a pioneering business model but a dramatically more flexible management model. In a startup, there’s a shared passion for redefining customer expectations. Innovation is prized. There’s a notable lack of policies and rules. Teams are small, and everyone is mission-focused. Ambitious goals challenge employees to do more with less. There are few layers, and the preferred means of communication is an all-hands meeting. When circumstances change, everyone pivots. In other words, a startup is bold, simple, lean, flat, fast, and free. Large institutions, by contrast, tend to be timid, bloated, complex, insular, rigid, and politicized.

Perhaps the biggest difference between startups and incumbents is the ratio of makers to managers and the relative power they wield. In a startup, it’s the inventors, engineers, designers, and programmers who run the show. But as a business grows and bureaucracy expands, power shifts to the “suits”—the taskmasters, controllers, accountants, and analysts who are charged with maximizing control, alignment, and efficiency. Slowly but inexorably the organization becomes an administrative aristocracy as layer-by-layer and policy-by-policy, bureaucrats seize the high ground. The consequences for performance are often dire.

Victims of Bureaucracy

Consider Intel. Once the world’s foremost semiconductor producer, the company today is a shadow of its former self. Intel’s share price is down two-thirds from its turn-of-the-millennium peak, and for the first time since 1981, the stock is trading below book value. This is what happens when a company, hobbled by bureaucracy, fumbles the future for twenty consecutive years.

In 2005, Intel’s board turned down the opportunity to buy NVIDIA for $20 billion. A pioneer in graphics processing chips (which power most AI applications), NVIDIA is valued today at more than $2 trillion. Shortly after passing on NVIDIA, Intel declined an invitation from Steve Jobs to make chips for the soon-to-be-launched iPhone. Spurned, Apple turned to Samsung and later Taiwan Semiconductor Manufacturing Company (TSMC) to supply its chip needs. The insatiable demand for smartphones turned TSMC into the world’s largest chipmaker and helped it power past Intel in the race to develop ever smaller, more powerful semiconductors.

Intel’s mobile opt-out also undermined the company’s design leadership. Over the years, Intel’s venerable x86 architecture has steadily lost ground to new, more power-efficient chips built on designs licensed from UK-based ARM Holdings. These mobile-optimized chips now outsell x86 chips by a ratio of 10:1.

Intel’s reluctance to make chips for other companies was another epic bungle. In the early 2000s, as the industry bifurcated into “fabless” chip designers such as Qualcomm and “foundries” like TSMC, Intel continued to favor its integrated design-and-manufacture model. In 2021, the company committed itself to building a foundry business (after an earlier abortive effort), but the eye-watering cost (reportedly $50 billion in the first two years) and continuing losses forced CEO Pat Gelsinger to reconstitute the business as an independent entity that could attract capital from outside investors or be spun out.¹ It seems increasingly unlikely that Intel will ever catch its larger Taiwanese rival. Twiddle your thumbs, forfeit the future.

Another notable flub was Intel’s 2018 decision to forgo investing in OpenAI.² None of these individual decisions, however, explain the company’s slow descent into complacency and mediocrity. Instead, blame lies with the inexorable growth of bureaucracy and its corrosive effects on audacity, grit, and innovation.

Following the 2005 retirement of legendary CEO Andy Grove (“only the paranoid survive”), Intel was led by a series of nontechnical CEOs: Paul Otellini (a marketing manager), Brian Krzanich (a supply chain manager), and Bob Swan (a finance executive). Like heavy metals seeping into an aquifer, Intel’s commitment to world-beating engineering was befouled by creeping managerialism—by a culture that was increasingly myopic, risk-averse, and finance-centric.

Lip-Bu Tan, a frustrated Intel board member who resigned in 2024 only to become the company’s CEO in early 2025, groused that the company had been “overrun by bureaucratic layers of middle managers who impeded progress.”³ Others complained that some Intel teams were five times larger than those doing similar work at competitors.⁴ Insularity was another problem, with some insiders describing Intel as “the largest single-cell organism on the planet.”⁵ One mark of that self-absorption was the company’s penchant for buying back its own shares. Between 2001 and 2020, Intel spent $197 billion on dividends and share buybacks—99 percent of the company’s net income and substantially more than it spent on capital ($168 billion) or R&D ($171 billion).

While a sobering example of bureaucratic lassitude, Intel is hardly unique. Boeing’s recent travails have near-identical roots: bureaucratic bloat and complexity (which impeded the rapid resolution of safety issues); timidity when faced with critical decisions (like opting to retrofit the aging 737 rather than develop a new aircraft); an unhealthy obsession with share price (between 2013 and 2019, the company spent $43 billion on share buybacks); a culture eroded by unrealistic financial targets and naive cost-cutting (like spinning out fuselage production); and a habit of putting accountants rather than engineers in senior roles. Three hundred and forty-six passengers paid the ultimate price for these blunders when two 737 Max 8 aircraft plunged to the ground. Since the second crash in 2019, Boeing has steadily lost ground to Airbus, booking a total of 3,730 orders compared to 5,682 for Airbus.

Most companies aren’t as visible or strategically important as Intel and Boeing, but virtually every large organization is similarly afflicted. Take Meta—Facebook’s parent company. In 2023, frontline employees in Facebook’s technical organization were buried beneath ten management layers.⁶ Meta founder and CEO Mark Zuckerberg lamented the bloat during an all-hands meeting: “I don’t think you want a management structure that’s just managers managing managers, managing managers, managing managers, managing the people who are doing the work.” Too true—and a sentiment undoubtedly shared by thousands of Meta’s grossly overmanaged employees.

Pity, too, bureaucracy’s victims in the public sector, and all the taxpayers whose hard-earned money gets wasted on bureaucratic bloat. Within US federal agencies, there’s an average of one manager or administrator for every 1.3 nonsupervisory employees—up from a ratio of 1:2.2 in 1998. Wherever one looks, one sees well-intentioned government programs maimed by superfluous and unaccountable program managers, a deep-rooted aversion to experimentation, and the ascendancy of administrators over engineers. Examples include:

NASA’s slow and costly program to develop a heavy-lift rocket. The Space Launch System (SLS), developed in collaboration with Boeing and Lockheed Martin, took its first test flight in 2022, six years behind schedule—this despite astronomical development costs. The SLS is a single-use launch vehicle, and each mission has been projected to cost more than $4 billion. By comparison, SpaceX’s Falcon Heavy rocket is reusable and can haul nearly as much as the SLS for a mere $200 million.⁷
The failure of the Department of Defense to preempt Russia and China in the development of hypersonic missiles (despite America’s initial technology lead) and the doubling since the mid-1990s of the time it takes to develop and deploy new fixed-wing military aircraft.⁸
The bureaucratic millstones imposed on researchers by agencies such as the National Science Foundation and the National Institutes of Health, which distribute $200 billion in research grants each year. Grant recipients spend nearly half their time on administrative tasks.⁹ This compliance burden consumes millions of researcher days that would be better spent developing new technologies and cures.

Whether public or private, virtually every organization is benumbed by bureaucracy, and the problem is getting worse.

Growing Like a Weed

Between 1983 and 2024, the number of managers and administrators in the US workforce more than doubled, while employment in all other occupations grew by only 40 percent (see figure 1-1). With each passing year, there are more individuals in the workforce who devote their days to defending precedent, harassing nonconformists, enforcing noisome rules, triple-guessing decisions, and adding complexity to everything they touch. As we’ll see, the impact on productivity and business dynamism has been calamitous.

FIGURE 1-1

Percentage growth of bureaucratic jobs versus other employment categories

Line graph comparing percentage growth of manager and administrator jobs to other occupations from 1983 to 2023.

Notes: Data based on the Current Population Survey (CPS) encompassing management occupations (which exclude first-line supervisors) and all business and financial occupations. For further details on the CPS and occupational categories, see Appendix B.

Source: US Bureau of Labor Statistics, authors’ analysis.

Bureaucracy’s tumor-like growth has coincided with a notable slowdown in productivity growth. Over the past decade, US nonfarm productivity grew by just 1.7 percent a year and a meager 1.9 percent annually since 1970.¹⁰ This compares poorly with the 2.8 percent growth rate achieved between 1909 and 1969.¹¹ Most of the world’s major economies have experienced similar declines (see figure 1-2).

FIGURE 1-2

Average annual percentage change in labor productivity growth for G7 economies (three-year rolling average)

Line graph depicting average annual percentage change in labor productivity for the G7, which decreased from 1975 to 2022.

Source: OECD.

The falloff worries economists. When productivity growth stagnates, so do living standards, and the ensuing economic frustration opens the door to populism, protectionism, and social divisiveness.

The slump has occurred despite record-setting investments in technology. Between 2003 and 2023, global spending on information technology increased from $2.6 trillion to $3.8 trillion in constant dollars. R&D budgets are also up. Over the past twenty years, research spending across the OECD nearly doubled—again, in inflation-adjusted terms. Economists are divided on why this torrent of cash hasn’t bolstered productivity growth. Some argue that recent breakthroughs aren’t as consequential as the defining innovations of the twentieth century: indoor plumbing, electricity, the telephone, automobiles, and petrochemicals. Others believe traditional productivity measures understate the economic value of intangible assets and the consumer benefits of free digital services. Still others point the finger at the rapid expansion of the service sector, where productivity gains have been harder to come by. There’s also the undeniable fact that new technologies have productivity downsides, such as spam, cyberattacks, and splintered attention.

Given all this, it takes a lot of faith to believe that artificial intelligence will produce a productivity windfall. For that to happen, AI would have to generate a bigger payoff than all the digital technologies that have come before—including the mainframe computer, microprocessor, personal computer, World Wide Web, e-commerce, GPS, big data, broadband connectivity, smartphones, the internet of things, cloud computing, blockchain, and social media. Perhaps OpenAI’s Sam Altman is right when he promises that autonomous AI agents will usher in “massive prosperity,” but others are skeptical. MIT economist and Nobel laureate Daron Acemoglu conducted a bottom-up study of AI’s potential impact on hundreds of individual tasks. He calculated that in the best-case scenario, AI will add less than a percentage point to GDP growth over the next ten years. Even more bullish analysts, like those at the OECD and Goldman Sachs, doubt that the gains from AI will exceed the internet-fueled productivity boost of the late 1990s.¹²

Though typically ignored by economists, we believe the inexorable growth of bureaucracy has played a substantial role in attenuating the productivity gains from innovation. To create value, scientific breakthroughs must be deployed at scale—and this often depends on the willingness and ability of large, entrenched institutions to revamp legacy systems and business models. Incumbents, as a rule, are slow to adopt new technologies. Among a long list of examples, one could point to Walmart and e-commerce, Disney and streaming, and NASA and reusable rockets. Moreover, industry stalwarts tend to use new technologies in incremental rather than revolutionary ways—shoring up old business models rather than creating new ones. (An example would be Microsoft’s Copilot, an AI-powered assistant. It may help you speed through everyday tasks but is unlikely to transform your work experience.)

Bureaucracy would be less of a drag on productivity if large, bureaucratic companies didn’t dominate the global economy. Currently, the combined revenue of the world’s 500 largest companies accounts for 40 percent of global GDP; and despite the rise of the gig economy, a greater percentage of employees work for large companies than ever before. Between 1987 and 2021, the percentage of US employees working in companies with more than 5,000 employees grew from 28.8 percent to 36.4 percent. Perhaps more surprisingly, as many people now work for companies with 10,000 or more employees as in businesses with fewer than 100 employees.

Historically, large companies were more productive than small ones, but that’s no longer true. In their analysis of America’s “superstar” firms—defined as the top twenty firms by market value in a given year, plus the top four within each industry—Thomas Philippon and Germán Gutiérrez found that the contribution of America’s leading companies to overall productivity growth has declined by 40 percent since 2000. Having long delivered above average productivity growth, the superstars are now a drag on the overall economy.¹³

Put simply, bureaucracy is a tax on human initiative and, thereby, productivity—and it is many times more costly than any levy imposed by governments. Together, the United States and European Union collect around $1 trillion per year in corporate income taxes. The sums spent on excess bureaucracy are vastly higher.

The Bureaucratic Tax

In 2024, there were 150 million employees in the US workforce (excluding the self-employed, military personnel, and household workers). Of these, 22 million were managers and supervisors. In addition, there were 7.7 million individuals working in administrative support functions such as human resources, finance, accounting, and compliance (but excluding legal and IT). In total, the “bureaucratic class” comprised 29.7 million individuals, or 20 percent of the US workforce. This group claimed more than $3.4 trillion in compensation, or nearly a third of America’s total wage bill. (See appendix B for details on our approach to sizing the bureaucratic class.)

Added to this price tag is the time consumed by all the low-value chores bureaucrats foist on everyone else. A 2014 survey by Deloitte Economics on the costs of bureaucratic busywork in Australia found that nonmanagerial employees spent an average of 6.5 hours per week, or 16 percent of their time, complying with internal rules and regulations. (This jibes with the results of a survey we conducted with Harvard Business Review, where respondents reported spending 28 percent of their time on internal and external compliance.) If Deloitte’s data holds in the United States, America’s 120 million nonmanagerial employees are spending an average of 16 percent of their time on internal bureaucratic tasks, which equates to an additional 19 million full-time equivalent bureaucrats.

The question is, how much of this could be eliminated without sacrificing organizational performance? The answer: more than you think. The experience of the post-bureaucratic pioneers you’ll meet in subsequent chapters—Buurtzorg, Haier, Ingersoll Rand, Morning Star, Nucor, Roche, Svenska Handelsbanken, Vinci, and others—proves that it’s possible to run large, complex organizations with super-flat structures and few if any corporate staffers. On average, these organizations boast a span of control that is four or five times the US average, and in some cases, substantially more.

For the moment, let’s assume it would be possible to reduce the number of managers and administrators by half—from 29.7 million to 14.85 million. This would increase the number of employees per bureaucrat from four to nine. That’s a big jump, but based on the experience of the vanguard, it seems eminently doable. Could bureaucratic busy work be cut by 50 percent as well? Almost certainly.

Numerous polls cast doubt on the value of bureaucratic rituals. Many HR processes, like the annual performance review, are widely viewed as ineffective (see table 1-1).¹⁴ A scant 11 percent of executives believe that strategic planning creates value. Only 17 percent of managers regard the budgeting process as effective, and less than a third rate their company’s capital allocation process as “very” or “extremely” effective.¹⁵

TABLE 1-1

Underperforming performance management

Only 2% of HR leaders believe their performance management practices deliver exceptional value.

Only one in seven employees strongly agree that performance reviews inspire them to improve.

Fewer than a third of employees believe the performance review process is fair.

Less than a quarter of HR executives believe typical assessment methods accurately measure employee capabilities and contributions.

Fewer than one in five HR leaders consider performance management to be effective.

Less than half of executives believe their company’s performance management system has a positive impact on performance.

It thus seems reasonable to believe that half the compliance load in a typical organization could be eliminated without unleashing the forces of chaos. Doing so would yield annual savings of 9.6 million worker-years.

In total, then, there are 24.5 million employees in the US economy who are producing little or no value—14.85 million “excess” administrators plus 9.6 million bureaucratically burdened employees. Excising this deadweight would raise US GDP per employed person from $181,100 (the average for 2024) to $213,500. The goal, of course, isn’t to throw 24 million people out of work but to refocus their talents on productive activities. Most of those in bureaucratic jobs are smart and capable. If each of these individuals contributed $213,500 to the economy rather than zero, US GDP would increase by roughly $5.2 trillion. That gain, if achieved in equal increments over the next ten years, would add 1.7 percent to annual productivity growth, which would double the 1.7 percent rate achieved between 2014 and 2024. Achieving similar gains across the OECD would add $12.1 trillion to global output.

On top of these efficiency gains would be the large but difficult-to-quantify benefits of a workforce no longer infantilized by supercilious rules and immobilized by leaden processes. The benefits of a newly energized workforce would be substantial. Gallup estimates that doubling employee engagement would add $8.9 trillion to global output.¹⁶

Overall, the output gains from rolling back bureaucracy could be as much as $21 trillion ($12.1 trillion plus $8.9 trillion). By comparison, in 2024 the GDP of the European Union was $19.4 trillion. To our knowledge, no other policy proposal or nascent technology offers a productivity dividend on this scale.

Why, then, do public and private institutions keep paying the bureaucratic tax? Part of the answer is ignorance. Having never been inside an organization like Buurtzorg, the Dutch home health provider that employs 10,000 nurses and no middle managers, they believe bureaucracy is the only way of achieving control and discipline.

There’s also the sheer scale of the transformation challenge. Dismantling bureaucracy means changing everything—goal-setting, planning, resource allocation, task design, decision-making, performance assessment, and compensation.

Finally, there’s the issue of power. As you may have observed, people with power are often reluctant to give it up. This is a serious impediment to institutional renewal since there’s no way to build a fully capable, human-centric organization without flattening the pyramid.

Postponing the Inevitable

Not surprisingly, most companies have looked for easier ways to juice returns—like acquisitions. Between 2017 and 2023, the value of global mergers and acquisitions amounted to $26 trillion, or roughly the size of the entire New York Stock Exchange. Not only do acquisitions create the illusion of dynamism and growth, they can also be used to take competitors out of play. In recent decades, most industries (thirteen out of fifteen, according to US Census data) have become more concentrated and hence more oligopolistic.¹⁷

Less competition means higher prices and fatter profits. A comprehensive study of the US economy by Jan De Loecker, Jan Eeckhout, and Gabriel Unger found that “markups,” a proxy for market power that measures the difference between prices and marginal costs, have increased sharply over the last several decades.¹⁸ Between 1980 and 2016, the average markup for publicly traded US firms ballooned from 21 percent to 61 percent. Five years later, in 2021, markups topped 70 percent.¹⁹ Not surprisingly, a similar trend has been observed in other economies.²⁰ If the goal is fatter margins, consolidation can seem an easier route than de-bureaucratization.

Regulatory leverage is another way of offsetting the costs of bureaucracy. Though CEOs gripe about regulation, a study by Boston University’s James Bessen revealed a strong correlation between new industry-specific regulation and a subsequent rise in profits.²¹ Bessen calculates that between 2000 and 2014, regulatory rent-seeking added $2 trillion to corporate valuations and transferred $400 billion annually from consumers to businesses. On average, bigger companies have more political clout than smaller ones, which is another spur for consolidation. The London Business School’s Shikhar Singla estimates that between 1970 and 2018, roughly a third of the increase in industry concentration was driven by the quest for greater regulatory sway.²² Why bloody yourself on the playing field when you can use your political muscle to tilt the field in your favor?

An even faster way to pretty up the stock price is through share buybacks. By taking shares out of circulation, buybacks raise earnings per share and thereby the compensation of executives whose pay is tied to the share price. In recent years, S&P 500 firms have spent more than $900 billion annually on buybacks, up 80 percent in real terms from a decade earlier. As Intel and Boeing demonstrate, buybacks often come at the expense of capability-building.

Finally, CEOs have put their companies on Ozempic, metaphorically speaking. Be it downsizing (like Meta’s 25 percent head-count reduction in 2022 and 2023), offshoring (like Ford’s decision to import the Lincoln Nautilus from China), or substituting contractors for full-time employees, the goal is to skinny down with as little effort as possible.

Whatever their merits, none of these strategies is a substitute for excising bureaucracy and building more resilient and innovative institutions. On the other hand, they can be immensely useful in (temporarily) avoiding the need to address deep-seated incapacities.

The costs of bureaucratic bloat have also been countervailed by an unprecedented thirty-year stretch of economic growth. Between 1990 and 2024, the after-tax profits of US companies grew at a compounded rate of 4.9 percent per year. This was more than twice the growth rate between 1960 and 1990. Some of the upswing was due to the measures discussed above, but profits were also bolstered by record-low borrowing costs and steep cuts in the US corporate tax rate. That’s the conclusion Michael Smolyansky reached when he examined the roots of America’s recent and unprecedented profit boom. An economist at the US Federal Reserve, Smolyansky found that 40 percent of the growth in corporate profits between 1989 and 2019 was attributable to reductions in interest and tax rates. With less money going to debt holders and tax authorities, more was available for shareholders.²³

Debt-fueled spending by governments and households has been a further profit booster. Between 1990 and 2024, US government debt as a share of GDP rose from 54 percent to 121 percent. Consumer debt rose sharply as well—from $14 trillion in 2003 to $18 trillion in 2024 (in 2024 dollars). Globally, indebtedness has been growing at its fastest clip since the Second World War and now stands at more than $323 trillion.

Then there’s the impact of globalization. With China’s 2001 entry into the World Trade Organization, Western companies gained access to a colossal market and an ultra-low-cost manufacturing base. (It’s been estimated that Walmart sources 70 to 80 percent of its merchandise from Chinese suppliers and that half of Amazon’s sellers are based in China.) While wage arbitrage has decimated American and European manufacturing, it has kept costs low for consumers and fattened profit margins.

Despite all this, one might have hoped that activist investors would have lit a fire under corpulent incumbents, and they’ve certainly tried. Between 2018 and 2023, activist investors like Elliott Capital, Carl Icahn, and Starboard Value launched more than 1,300 campaigns and won more than 700 board seats. Targets have included Disney, Salesforce, Alphabet, and HSBC. On average, the return on assets of targeted companies doubles in the five years following the initial intervention—rising from 2.7 percent to 5.6 percent. That sounds impressive, but after five years, most target companies are still underperforming their peers.²⁴ Turns out there’s only so much that can be accomplished using private equity’s well-thumbed playbook for “unlocking value.” Divestitures, downsizing, and leadership changes can’t turn a warthog into a cheetah.

Likewise, it would be great if aggressive startups held industry veterans to account, and this occasionally happens, but here, too, the impact is modest. As of this writing, the world contains 433 “unicorns”—venture-backed companies that boast a market value of $1 billion or more. While these companies get a lot of press, they’re a relatively small part of their respective economies. In early 2024, US-based unicorns had a combined market value of $2.1 trillion. That’s a big number, but it amounts to just slightly more than 4 percent of the total market value of the S&P 500. Outside the United States, China’s unicorns, excluding ByteDance, were valued at less than 4 percent of the Shanghai and Shenzhen stock exchanges, while Europe’s unicorns were worth a scant 1.5 percent of the continent’s 350 most valuable companies.

Indeed, the forces of disruption have grown noticeably weaker in recent years, and the old guard seems increasingly invulnerable. Consider that in 2000, only 45 percent of the 100 largest US companies by revenue had been in the top 100 for each of the previous ten years. By 2023, that number had climbed to 72 percent (see figure 1-3). There’s little evidence industry veterans have become more nimble or inventive (more on this later), but they have become bigger, more oligopolistic, and more entrenched.

FIGURE 1-3

Annual count of firms continuously in the top 100 companies by revenue for 10 years

Bar graph showing the number of firms that made the top 100 by revenue each year from 2000 to 2023.

Source: Compustat data and authors’ analysis.

But—and you knew there had to be a “but”—things that can’t go on forever don’t. Mergers are getting more scrutiny from antitrust authorities. Borrowing costs are going up, debt loads are maxing out, and global trade barriers are rising. There’s little chance that the next thirty years will be as economically providential as the last thirty. So, to an extent that hasn’t been true in more than a generation, success must now be earned. It is, says Smolyansky, “the end of an era,” and as the tide rushes out, the only way to avoid running aground will be to jettison the ballast of bureaucracy.

Across the world, the gap between the haves and have-nots is getting wider. Thanks largely to a booming stock market, the net worth of American households increased by $134 trillion between 1989 and 2024. Sixty-eight percent of those gains went to the top decile of US households measured by wealth. Thirty percent went to the next four deciles, while the bottom 50 percent captured a scant 2 percent of the gains. While inequality in the United States is (in)famously high, there are significant wealth divides in most countries (see figure 1-4).

FIGURE 1-4

Percent share of national wealth owned by the richest 10 percent and the poorest 50 percent of households

Bar graph showing the share of national wealth owned by the richest 10 percent and the poorest 50 percent of households in various countries.

Black = richest 10%; light gray = poorest 50%

Not surprisingly, millions of working class individuals feel they’re getting left behind. Let’s dig deeper into the data.

FIGURE 1-5

Compensation ratio: Average CEO pay in America’s largest 350 companies versus average pay of nonsupervisory employees working in similar industries

Line graph showing the compensation ratio of CEO pay to average worker pay in America's 350 largest companies has increased dramatically, from less than 30:1 in 1965 to 300:1 in 2025.

Source: Economic Policy Institute.

FIGURE 1-6

Percentage growth in US labor productivity versus nonsupervisory private-sector wages (1948 = 100)

Line graph depicting the percentage growth in US labor productivity and nonsupervisory wages from 1948 to 2023. It shows a significant divergence since 1980, with productivity far outpacing wage growth.

Source: Economic Policy Institute.

Capitalism clearly works better for some than others. Young people know this. In a 2022 survey by Pew Research, more Americans aged 18 to 29 had a “very or somewhat positive” view of socialism (44 percent of respondents) than had a similarly positive view of capitalism (40 percent).²⁶ In a 2021 UK poll, two-thirds of Britons aged 16 to 34 said they’d like to live in a socialist economic system.²⁷ While the evidence that socialism produces better economic outcomes is, ahem, scant, there’s no doubt that millions across the world have lost hope in the promise of upward mobility.

Since the Second World War, each successive generation has found it harder to scramble into the middle class. For Americans born in 1940, the odds of outearning middle-class parents were better than 9 to 1. For those born in 1980, the odds were less than even and have continued to deteriorate in the decades since.²⁸

There’s widespread concern that growing income polarization is eroding social cohesion and political amity, and a slew of proposals have been offered in response, including higher taxes on the super-rich, mandatory worker representation on corporate boards, sector-level collective bargaining, better benefits for gig economy workers, tax breaks for investment in human capital, and a guaranteed minimum income for every citizen. While some of these ideas have merit, we believe the best way to increase wages is to ensure that every human being at work has the opportunity to enlarge their skills, contributions, and income.

For capitalism to work, it must work for everyone—including those often disparaged as “low skilled” or “uneducated.” Currently, 69 million Americans are in jobs that pay less than $25 an hour.²⁹ Yet, contrary to conventional wisdom, what makes a job low skilled isn’t the nature of the work or the credentials required but whether the people in those jobs are encouraged to acquire new skills and tackle new problems. One of the most important lessons to be gleaned from the post-bureaucratic pioneers is that every job can be upskilled. This workplace alchemy—turning dead-end jobs into get-ahead jobs—is achieved by:

Teaching all employees to think like businesspeople

Cross-training associates and organizing them into small, self-managing teams

Giving these teams accountability for a genuine P&L

Pairing new employees with experienced mentors

Encouraging employees to identify and tackle improvement opportunities

Granting team members the time and resources to run local experiments

Giving employees a financial upside that encourages them to do more than their job strictly requires

Treating every individual and role as indispensable to collective success

It’s tempting to believe that some jobs offer inherently more opportunities for creative problem-solving than others, but the evidence doesn’t bear this out. The OECD’s Survey on Adult Skills found that differences in occupation, industry, and training play a relatively small role in determining whether employees use their problem-solving skills at work. Much more important are the organization’s work practices. Do they give employees the time, support, and incentives to solve new problems? In most organizations, the answer is no.³⁰

It is similarly wrongheaded to believe that creativity is narrowly distributed within the human population. Think about the boundaryless expanse of creativity that can be found on YouTube, Instagram, Medium, Substack, and dozens of other platforms. Where did this immense outpouring of talent come from? Are today’s human beings inherently more gifted than their forebears? Of course not. What changed, thanks to digital technology, was their access to creative tools and peer-to-peer platforms. Lamentably, few people at work are similarly equipped and empowered.

A 2019 survey of more than 24,000 European HR managers and employee representatives found that in only one-fifth of the responding companies were 80 percent or more of the employees expected to solve new problems.³¹ Data from Gallup’s 2020 Great Jobs Survey shows that only one in five nonmanagerial employees in the United States believes strongly that their opinions matter at work. Only one in nine believes they can influence decisions that are important to their job, and only one in eleven employees feels empowered to take risks that could lead to new products, services, or solutions.

And it’s not just those in blue-collar jobs who feel disempowered and disenfranchised. Among US physicians, only a third say they have any meaningful input into decisions on practice management. Doctors say they spend an average of fifteen hours on administrative tasks, and bureaucratic overload is the most frequently cited cause of physician burnout, as it is for nurses. Only one in six drug chain pharmacists say they have a high degree of autonomy in managing their work, and half believe their limited autonomy increases patient risk.³²

Among schoolteachers, fewer than one in four report having any influence over curriculum decisions; only one in seven believes they can shape performance standards; and fewer than 6 percent say they can influence hiring and budgeting decisions.³³

The situation’s no better for PhD-level scientists and researchers. Only 14 percent are satisfied with their ability to influence decisions that affect them, and just one in eight indicates they are “very satisfied” with the management and leadership of their organization.³⁴

With humanity facing an unprecedented array of challenges—climate change, mass migration, social media addiction, disinformation, aging populations, unaffordable health care, and more—we can no longer afford to pour vast quantities of initiative and ingenuity down the bureaucratic drain hole. Instead, we must work to expand the problem-solving capacity of every institution.

In any society or organization, there’s a near infinite number of problems to solve. Think, for example, of the enormous number of constitutive problems that would need to be addressed to raise academic performance in a large urban school system like that of Baltimore, Maryland, where, in 2022, just 7 percent of elementary school students were performing at grade-level in math.³⁵ Or consider the thousands of interlinked problems that legacy automakers face as they struggle to intercept Tesla’s leadership in automotive software. In a bureaucracy, there’s often a lordly assumption that the thinkers are at the top and the doers at the bottom. This conceit limits the ability of frontline employees to add value. As we’ll see, in post-bureaucratic companies such as Ingersoll Rand, Nucor, and Haier, every employee has the skills, freedom, and upside to tackle high-value problems. This radical empowerment, and the value it creates, is good for productivity, employees, and stakeholders.

The vanguard companies are distinguished by a conviction that when given the chance to learn, grow, and contribute, employees of every sort will deliver extraordinary results. Over time, this conviction produces a workforce that’s deeply knowledgeable and endlessly inventive. The experience of these post-bureaucratic rebels testifies to a single luminous truth: an organization has little to fear from the future, or its competitors, or robotics and AI, when it’s brimming with self-managing “micropreneurs.”

It is our bureaucracy-encrusted organizations that are slow-witted, not the people inside them. This is not a conjecture; it is our lived experience. More than a decade ago, one of the authors led a large-scale training program in a US manufacturing company. Over the course of a year, more than thirty thousand employees, many of them blue-collar union members, were taught how to think like business innovators. Out of this effort came thousands of game-changing ideas. In one memorable though not unusual case, a long-tenured assembly-line worker hatched an idea that ultimately produced a multimillion-dollar payoff. For the first time in her career, she had been asked to think big. Sadly, many employees never get this opportunity. Rather than being seen as inventors and makers, they’re regarded as “meatware”—costly machine substitutes incapable of being upgraded.

Rather than deskilling work, we need to upskill employees. Rather than outsourcing low-value jobs, we need to increase the creative content of every role. Instead of assuming that millions of jobs must ultimately fall to automation and AI, we need to design work environments that elicit the everyday genius of every human being.

While bureaucratic organizations are particularly bad at harnessing the abilities of those on the front lines, employees at all levels are disengaged. Gallup defines employee engagement as the involvement and enthusiasm employees feel toward their work and workplace. In its research, Gallup has found a strong correlation between engagement and innovation, productivity, and quality. It’s deeply troubling, then, that only 23 percent of employees globally are fully engaged in their work—18 percent of individual contributors and 30 percent of managers. While there are regional differences, the results are dismal wherever you look (see figure 1-7). Looking at the data, it’s hard to avoid the conclusion that the average organization wastes more human capacity than it uses.

FIGURE 1-7

Percentage of employees who are engaged at work by region

Bar graph of rates of employee engagement in North America, Latin America, South Asia, Southeast Asia, and Europe. Overall, 30 percent or less of employees globally are fully engaged at work.

Source: Gallup, State of the Global Workplace: 2024 Report, June 2024, 25.

How can we be OK with this? Imagine the consternation that would envelope the medical profession if fewer than a third of patients improved after seeing a physician, or the teaching profession if only a third of all students learned anything during the school year. And yet, senior executives seem unperturbed with management practices that produce industrial-scale apathy.

But even if leaders are content with a spiritless and unenthusiastic workforce, you shouldn’t be. Imagine working in an organization where:

You had the right to design your own job.

Your team was free to set its own goals and define its own methods.

You were encouraged to grow your skills and take on new challenges.

Your workmates felt more like family than colleagues.

You never felt encumbered by pointless rules and red tape.

You felt trusted in every situation to use your best judgment.

You were accountable to your colleagues rather than a boss.

You didn’t have to waste time sucking up or playing political games.

You had the chance to help shape the strategy and direction of your organization.

Your influence and compensation depended on your abilities and not your rank.

You were never given a reason to feel inferior to the higher-ups.

How amazing would that be? Amazing enough, we reckon, that work would hardly feel like work. Unfortunately, as we’ve seen, this is not the reality for most employees. Decades into the twenty-first century, the average medium- or large-scale organization still infantilizes employees, enforces dull conformity, and discourages entrepreneurship. It wedges people into narrow roles, stymies personal growth, and treats human beings as mere resources.

Luckily, bureaucracy is not a cosmological constant. Nowhere is it written in the stars that our organizations must be clumsy, stifling, and callous. A century and a half ago, human beings invented industrial bureaucracy, and it’s now up to us to reinvent it.

Over the past twenty years, we’ve seen many inspiring examples of business model innovation, such as PayPal, Netflix, Tesla, Airbnb, Uber, OpenAI, and others. These companies have created billions of dollars in market value and changed our lives (mostly) for the better. In this chapter, we’ve argued that there’s an increasingly urgent need for radical innovation in management models (see figure 1-8).

FIGURE 1-8

The management model

Diagram of the management model highlights various systems (planning, finance, people, performance, innovation, compliance) and structures (architecture, networks, tasks, InfoTech) that underpin organizational operations.

To meet tomorrow’s challenges, we need organizations that are substantially more capable—more courageous, adaptable, inventive, and energizing—than is presently the case. It’s essential that we succeed in this endeavor. Our future depends on it. Our prosperity depends on it. The health of our societies depends on it. And most critically, our capacity to fully flourish as human beings depends on it. Only by creating organizations that are as fully capable as the people inside them will we succeed in building the sort of world we wish for ourselves and our children.

— 2 —

Fully Human

We are defined by the causes we serve. Our identity is discovered in the challenges we embrace. However modest our means and finite our capabilities, we can gift ourselves the exhilaration of a noble quest. Thankfully, there are plenty of deserving problems to go around—like cleaning up the world’s oceans, overcoming racial disharmony, combating drug-resistant superbugs, ending human trafficking, and building habitats on other planets.

At some deep level, we know life is too short to work on inconsequential problems. We know the sages were right when they commended “the road less traveled.” Solving new problems and forging new paths—this is what we were born to do. It’s tragic, then, that so many of us work in organizations that are timid and dispiriting. Suggest an unprecedented and audacious idea to your boss and you’re likely to get pummeled with objections: “That doesn’t fit our strategy.” “We don’t have the budget.” “You’ll never get it past legal.” “That’s not our culture.” “There’s a lot of downside.” The problem isn’t your manager, who’s just as hamstrung as you are. The problem is that your organization, like most, is inherently hidebound, repressive, and fainthearted.

Take a moment and score your organization on the following dimensions:

The chart depicts a scale for measuring the way a company rates as far as goals (gutsy to timid), risk-taking (embraced to shunned), speed (flat-out to plodding), creativity (unbridled to curtailed), autonomy (expansive to cramped), commitment (fervent to tepid), and handling noncomformity (encouraged to punished).

Unless your organization is pint-sized or truly exceptional, it probably tilts to the right side of the scale. That’s why you feel beleaguered. You’ve had the bold beaten out of you. “Epic quest,” you snort. “I’m just trying to make the quarter.”

Fair enough. But how did we end up with organizations so lacking in courage, creativity, and passion? And, as importantly, how did we become inured to this reality? The simple answer: it’s all we’ve ever known. To one degree or another, every organization is diffident and dogmatic. But legacy is not destiny. There was a time when most of the world was ruled by tyrants, but today, billions of human beings live in freedom. This shift from autocracy to democracy didn’t occur spontaneously, nor was it led from the top. Instead, it was the work of a sprawling confederation of philosophers, protesters, and patriots who were inspired by the promise of self-government.

We must be no less radical in rethinking the foundations of human organizations. Like our forebears, we must do our part to emancipate the human spirit. It is here we find a cause worth serving—to build organizations that give every human being the opportunity to thrive.

If you believe that human beings deserve more from their jobs, and that we’d be better served by more dynamic and inventive institutions, there’s a ton you can do to move the world forward. As we’ll see, there are compelling, workable alternatives to the bureaucratic status quo and a way to get from here to there—though it’ll take some bushwhacking. Have no doubt, if you start with the right principles and learn to think like an activist, you can make a decisive contribution to enriching the lives of your colleagues and helping your organization flourish in a world that, however unsettling, is awash in opportunity.

As we set off, we should remind ourselves that when we regard a problem as intractable, we conspire to perpetuate it. Think of the well-off urbanite who averts his eyes from the homeless rather than volunteering at a shelter, or the beachgoer who picks her way through a scattering of plastic waste but doesn’t stoop to pick it up. However daunting, even the most entrenched problems yield to courage and tenacity. We must not flinch or look away. Instead, we must confront what we have long known—our organizations are incapacitated by their inhumanity. We’ll document this reality in the remainder of chapter 2, diagnose root causes in chapter 3, and build the case for a management revolution in chapter 4. In subsequent chapters, we’ll lay out a blueprint for building organizations that are fully human and fully capable.

As human beings, we are inveterate risk-takers. We love a challenge and a thrill. The mother-in-law of one of the authors made her first skydiving jump on her eightieth birthday. One of us has a spouse, now in her seventies, who rides mountain bikes, scuba dives, and loves skiing double black runs. Undoubtedly you know people who are equally adventurous—perhaps it’s you.

Often the risks we take aren’t physical. It takes guts to leave your homeland for a better life elsewhere, to quit a well-paying job to start your own company, to confront a friend who’s caught in addiction, to commit to loving someone for a lifetime, or to bring a new human being into the world.

Of all human virtues, courage is, perhaps, the most celebrated in art and literature. We applaud the principled daring of Jean Valjean in LesMiserables, of Frodo Baggins in Lord of the Rings, of Celie in The Color Purple, and of Princess Leia in Star Wars—and wonder whether we’d be equally brave.

There is, of course, a difference between being courageous and being foolhardy—between committing yourself to a daunting challenge like cleaning up the world’s oceans and throwing yourself off a cliff like an adolescent kid amped up on Red Bull. That said, it’s impossible to be timid and live a rich life.

While still in college, Elon Musk—love him or loathe him—decided he “wanted to be involved in things that would change the world.” Turns out, those things included PayPal, SpaceX, Tesla, Neuralink, OpenAI, and Starlink—all companies Musk helped to found. It takes courage to throw yourself into something new and unformed that offers an uncertain payoff. Daring is the fuel that powers entrepreneurship, but all too often, the courage vanishes once the founder leaves the stage.

A case in point: In the early 1930s, Walt Disney’s animated shorts, especially those starring Mickey Mouse, captivated audiences. That success fueled Disney’s ambition to create feature-length animated films, a concept unprecedented in cinema. When Disney revealed his plans to produce “Snow White and the Seven Dwarfs,” he was widely mocked by the Hollywood elite. Critics labeled the movie “Disney’s folly,” and were certain that the 83-minute cartoon would bore audiences and bankrupt the studio.

The creative demands of animating “Snow White” spurred Disney’s team to invent the multiplane camera. This technology created the illusion of depth by layering up to four levels of artwork in a single frame. The multiplane camera helped make “Snow White” a runaway hit and launched a golden age of animated features. Over the following decades, Disney would keep pushing boundaries, pioneering breakthroughs such as Technicolor, character merchandising, and its iconic theme parks.

Walt Disney died in 1965, and the swashbuckling spirit of the company he founded is long gone. In recent decades, Disney has relied on deal-making to plug its chronic creativity gap, spending nearly $90 billion to acquire Pixar, Marvel, Lucasfilm, and 20th Century Fox. The result has been a procession of formulaic sequels, prequels, and remakes. As Ted Gioia, the respected media critic, observes, “The Disney business, previously built on creativity and bold new ideas, is now just an umbrella for the regurgitation of familiar brand franchises.” It’s clear this approach has lost its luster. Audiences are fatigued by endless movie retreads, and the company’s share price, which has hardly budged over the past decade, seems trapped in its own never-ending re-run.

Like Disney, most large companies seem instinctively timid. Through the years, we’ve often encouraged leaders to try new things—like making innovation a core competence, radically empowering frontline teams, or harnessing the power of open strategy. Invariably the first question is, “Who’s already done this?” That’s not a bad question, since there’s no reason to reinvent the wheel.

But the question is usually used to screen out initiatives that would require the company to venture off the beaten path. Many senior executives suffer from ADD—ambition deficit disorder. They are willing to inch forward only when someone has supplied them with a detailed road map and the destination can already be glimpsed on the horizon. Challenge them to break new ground, and they demure. As a result, their organizations are condemned to a perpetual game of catch-up.

A genuine leader has the courage to break new ground. In 2010, we first met Zhang Ruimin, then chairman of Haier, the Qingdao-based appliance company. Zhang wanted to talk about The Future of Management, Gary’s recently published book in which he’d argued that tomorrow’s organizations would need to be more like networks than hierarchies. Zhang asked whether any company had succeeded in making this transition. When Gary said, “Not to my knowledge,” Zhang replied, “Good. We want to be first.” You’ll read more about Haier’s amazing transformation in chapter 6, but thanks to Zhang’s courage, Haier has distinguished itself from its peers, made unprecedented performance gains, and has become a global management benchmark.

As a rule, no company outperforms its aspirations. That’s why it’s so critical to aim high. A daring goal is also a powerful spur for innovation. Young companies tend to be more innovative than old ones because in a startup, there’s often a yawning gap between aspirations and resources—and it’s in this gap that innovation is born. In creating SpaceX, Elon Musk’s goal was to help human beings “become a space-faring civilization, an inter-planetary species.” That’s the very definition of a “stretch” goal, and unsurprisingly, Musk faced a ton of skepticism.

That’s why most organizations are caught in a perpetual game of catch-up.

We live in a world of accelerating change, where the future is less and less an extrapolation of the past. Change is unrelenting, pitiless, and occasionally shocking. (Picture robots pole-dancing in Vegas. Yeah, that’s a real thing.) Welcome to the age of upheaval.

Some argue that change has been accelerating since the Big Bang.¹ Across the eons, the rate at which matter organizes itself into more complex structures and systems has been gradually, imperceptibly quickening. And now, after 14 billion years, the pace of change has gone hypercritical. Lucky us!

This sudden acceleration is the product of radical shifts in the growth of computational power and network capacity. In a single decade, the per-dollar performance of the fastest GPUs—the chips that power AI—has increased more than sevenfold. NVIDIA’s most powerful data center GPU performs up to 2 quadrillion operations a second and processes large language models thirty times faster than the chip it replaced. Since 2016, there’s also been a sevenfold increase in mobile network traffic, which now totals more than 140 exabytes per month.

The shockwaves of this explosion in computation and communication are reverberating all around us: synthetic biology, blockchain, augmented reality, robotics, neuromorphic computing, the internet of things, and machine learning. As these shocks dissipate, new ones will thunder across the landscape. As of 2023, there were 15 billion devices connected to the web, and that number is expected to double by the end of the decade.² Imagine a world in which every change of state—every movement, flow, transaction, and perturbation—produces data. The planet itself will finally be sentient.

In this maelstrom, the most important question for any organization is this: Are we changing as fast as the world around us? For most organizations, the answer is no.

Executives are inclined to blame this lack of adaptability on human nature. “People are against change,” they say. But that’s rubbish. Think about the people you know. Over the last three years, how many of them have done at least one of the following things:

Moved to a new city

Started a new job

Ended a romantic relationship or started a new one

Enrolled in a course

Adopted a new exercise regime

Taken up a new hobby

Lost ten pounds

Redecorated a room

Traveled to a new holiday destination

Formed a new friendship

Probably everyone you know has made a change in at least one of these areas. Fact is, we’re change addicts. We have an insatiable appetite for the new. All those changes that are roiling our world—they’re our doing. We are the agents of upheaval.

Unlike human beings, organizations are pretty much crap at change. That’s why incumbents so often find themselves on the back foot. Today, we expect the newcomers to beat the geezers. Instinctively, we know that in a fast-changing world, resources are no substitute for resourcefulness—and that even the smartest companies are vulnerable.

In the early 2000s, Microsoft, which has embraced AI with religious fervor, missed some of tech’s biggest trends, including smartphones. Ex-chairman and CEO Bill Gates bemoaned the fumble when he admitted that “the biggest mistake ever is whatever mismanagement I engaged in that caused Microsoft not to be what Android is.” Gates estimated the myopia cost Microsoft more than $400 billion in foregone market value. Ironically, Google, which owns the Android operating system, is now playing catch-up in AI. Despite pioneering much of the underlying technology, Google was beaten to the market by OpenAI’s ChatGPT, which was downloaded more than 100 million times in the two months following its November 2022 release. When Google’s own AI product, Gemini, launched a year later, it was so buggy and error-prone that Sundar Pichai, Google’s CEO, pronounced it “completely unacceptable.”

OpenAI found itself challenged in early 2025 when DeepSeek, a Chinese AI company with just 150 employees—most fresh from university—produced a world-class AI system that uses far less computing power than existing models. The breakthrough sent shockwaves through the entire industry and forced many AI firms to recalibrate their strategies and investments. If you believe the future is essentially unknowable, you might argue that today’s much-fêted insurgents were simply lucky. It was mere chance that they got the future right. But the future isn’t as opaque as is often assumed. If you pay attention to what’s changing—the nascent trends that are gathering speed—you can often see the future a long way off.

In 1998, an eon ago, one of the authors wrote a cover story for Fortune magazine titled “Internet or Bust.” At the time, as with AI today, many companies were just beginning to think about the new technology’s implications for their business. The article concluded with this prediction: “The Internet is not just another marketing channel; it’s not just another advertising medium. The Internet is the foundation for a new industrial order.” And so it turned out to be. Others, like MIT’s Nicholas Negroponte, were making similar predictions. At the time the article appeared, Amazon’s revenues were less than $1 billion per year; Walmart was 240 times bigger. Walmart’s then CEO David Glass, a twenty-two-year company veteran, seemed little interested in e-commerce. Although Walmart opened a rudimentary online store in 2000, it wasn’t until the 2016 acquisition of Jet.com that the company made online sales a priority. Since then, Walmart has continued to lag its Seattle-based rival. It was only in 2020 that Walmart launched a paid membership service to compete with Amazon Prime, which debuted in 2005. More than quarter century after that Fortune article, Amazon’s online revenues still outpace Walmart’s by a ratio of 6:1.

The auto industry’s belated response to Tesla reflects a similar lack of attention to the shifting winds of change. Tesla’s Model S, the first broadly capable electric vehicle, hit the market in 2012. By this point, the trends that would power the growth of EVs had been visible for years. These included growing CO₂ emissions, a steady decline in the price per kilowatt of battery power, and exponential growth in the power of GPUs—critical to enabling semiautonomous vehicles. In 2023, Tesla sold 650,000 EVs in the United States—more than four times the combined EV sales of Ford and GM.

These examples and others testify to a simple fact: the world is becoming more turbulent faster than most companies are becoming more adaptable.

In practice, organizational change tends to be either trivial or traumatic. Every day, companies refresh products and improve processes with little drama. Strategic pivots, by contrast, tend to be convulsive, not unlike the uprisings that occasionally concuss poorly governed dictatorships. In large companies, as in authoritarian states, regime change—replacing the top dog—is often the only way to rescind calamitous or superannuated policies.

Sadly, senescent companies can’t be euthanized. Instead, semi-comatose, they hang on, closing facilities, killing brands, throttling R&D, shedding staff, merging with lethargic rivals, and lobbying for regulatory help. These are “treadmill companies,” and there are more of them than ever.

Between 1993 and 2003, only 20 of America’s 100 largest companies (measured by revenue) failed to grow as fast as GDP. Over the last ten years, fifty-four companies failed to meet that mark. Flatliners include Walmart, Wells Fargo, Target, Lockheed Martin, and Merck. Remarkably, thirty companies saw a revenue decline in real terms—including blue-chip names like Cisco, AT&T, Verizon, Procter & Gamble, Intel, Coca-Cola, Boeing, IBM, GE, General Motors, JPMorgan Chase, Ford, Pfizer, Walmart, and most of the oil majors. Of the companies that grew faster than GDP, nearly 40 percent were in health care and retailing. These sectors have experienced rapid consolidation, but are perpetual productivity laggards. The situation in Europe is no better. Over the past 10 years, nearly six in ten of Europe’s 100 biggest firms—including Mercedes-Benz, Generali, Siemens, Nestlé, Novartis, Carrefour, Vodafone, and Unilever—failed to match the region’s anemic 1.9 percent GDP growth rate.

Just two decades ago, about 25 percent of the largest 100 US corporations failed to match GDP growth. At the time, the median top 100 company was growing 1.3 times faster than the average of all publicly listed firms. Over the past decade, the giants grew at only 0.87 times the average.

Many of these “treadmill” companies seem to have given up on organic growth. Anticipating trends, betting on new products, reallocating resources—that’s hard work. Deals, divestitures, downsizing, and buybacks are easier (table 2-1).

TABLE 2-1

Notable treadmill companies

Company	Total spent on acquisitions, dividends, and buybacks, 2014–2023 ($ billions)	Total spent on capex and R&D, 2014–2023 ($ billions)	Ratio of acquisitions, dividends, and buybacks to capex and R&D	Annual revenue growth rate, 2013–2023 (GDP = 5%)
AT&T	253	210	1.2	−0.5%
Pfizer	239	122	2.0	1.9%
Johnson & Johnson	230	157	1.5	1.8%
Cisco Systems	151	74	2.0	1.6%
Procter & Gamble	149	53	2.8	−0.3%
IBM	143	87	1.6	−4.7%
Walmart	142	119	1.2	3.1%
General Electric	97	92	1.1	−7.0%
Coca-Cola	89	18	4.9	−0.2%
RTX (Raytheon)	74	46	1.6	1.7%
Caterpillar	71	46	1.5	1.9%
Boeing	67	49	1.4	−1.1%

Organizations that are slow to change tie up talent and capital that would be better deployed elsewhere. This depresses wages and returns across the economy. Inertial organizations also postpone the future. Having been shamed by Tesla, every major vehicle manufacturer is now building out a full range of EVs. That’ll be great for the planet, but it would have been better if the incumbents had embarked on this quest years ago, rather than waiting for a newbie to rub their noses in the future.

What we need are organizations with an “evolutionary advantage”—a capacity to change as fast as change itself.

A truly resilient organization would …

Never take refuge in denial

Rush out to meet the future

Change before it had to

Continually redefine customer expectations

Capture more than its fair share of new opportunities

Never experience an unanticipated earnings shock

Grow faster than its rivals

Have an advantage in attracting the world’s most dynamic employees

One of our favorite New Yorker cartoons portrays a pair of dinosaurs. One is lounging against a boulder while the other is sitting bolt upright, stubby forelimbs punching the air. “All I’m saying,” says the reptile, “is now is the time to develop the technology to deflect an asteroid.” Unlike those doomed dinosaurs, human beings have a large prefrontal cortex and opposing thumbs and forefingers. We’re clever enough to see the future coming and dexterous enough to do something about it. We’re not dinosaurs, and there’s no reason our organizations should be.

Innovation is the fuel for renewal. CEOs get this. In a Boston Consulting Group poll, 79 percent of leaders rated innovation a top priority. They know that innovation is the only insurance against irrelevance. Yet in another survey, this one conducted by McKinsey & Company, 94 percent of executives expressed disappointment with their organization’s innovation performance.

Despite this, a capacity for innovation is the hallmark of our species. Each of us was born to create—whether it’s landscaping a garden, writing a blog, editing a video, inventing a recipe, developing an app, or starting a business.

Digital technology has democratized the tools of creativity and given creators a global audience. Every day …

700,000 hours of video are uploaded to YouTube.
2 million blogs are published with WordPress.
95 million new photos are posted on Instagram.
3,700 new apps are added to Google Play.
34 million images are generated daily using text-to-image algorithms such as ChatGPT and Midjourney.
Thousands of projects are launched on crowdfunding sites like Kickstarter, Wefunder, Indiegogo, and Crowdcube.

Scientific innovation is also advancing at a blistering pace. Since 1985, the number of patents granted each year by the US Patent and Trademark Office has grown by more than 400 percent. There is no shortage of ingenuity in our world, yet established organizations generally suck at game-changing innovation.

To address this failing, many companies have set up purpose-built “incubators” and “accelerators.” By one estimate, there are now 580 idea labs around the world, up from 300 just two years ago. Yet despite their popularity, there’s little evidence these creative outposts deliver significant returns. Even Alphabet, Google’s parent company, has reined in Google X, the company’s famed “Moonshot Factory” whose highly speculative and generously funded projects have contributed little to Alphabet’s top line. A few creative souls living large in their accelerator digs are no substitute for a deeply embedded capacity to continually reinvent the core business.

Buying small, fast-growing companies is another oft-used strategy for closing the innovation gap—but again, it is seldom a panacea. Unilever, for example, bought more than forty-five companies over the past decade, most of which were less than twenty years old at the time of acquisition. Yet despite bingeing on startups like the Dollar Shave Club, Unilever’s revenues have remained essentially flat since 2013, while its share price is up by a meager 30 percent—far less than the 135 percent growth of the Dow Jones Industrial Average.

As alternatives to rule-breaking innovation in the core, incubators and acquisitions suffer from the same limitations. First, it takes an unreasonably large number of new ventures, no matter how promising, to offset the falling fortunes of a much larger legacy business. Second, once a young business is absorbed by the bureaucratic mothership, it typically loses much of its entrepreneurial verve and its growth rate quickly decelerates.

Despite a torrent of books promising to unlock the secrets of innovation, large organizations seem as incapable as ever of unleashing the creative energy of their people. Some management pundits claim that large companies are constitutionally incapable of game-changing innovation. We understand their pessimism but are more hopeful. For millennia, human flight seemed an impossible dream. But at this very moment, roughly a million people are airborne around the world. If we aim high, there’s no reason our organizations can’t soar as well.

Undoubtedly, there’s something in your life that ignites your passion, captivating and energizing you. Maybe it’s your family, your faith, a social cause, a sports team, or a hobby. Passion can have a dark side, of course—like religious extremism, racial hatred, or sexual predation. These are passions misdirected and corrupted, but thankfully, most human passions are life-affirming.

When we’re in the thrall of a healthy passion, we experience a magical melding of effort and enjoyment. Formidable obstacles become intriguing puzzles, and minor wins, badges of accomplishment. We are most alive when we’re doing something that enchants us. Sadly, for most people, that something isn’t found at work.

As noted earlier, barely a third of US employees were fully engaged in their work. The majority of employees, 51 percent, are “not engaged,” while 16 percent—the maliciously compliant—are “actively disengaged.”³ Globally, 23 percent are engaged, 59 percent disengaged, and 18 percent actively disengaged.

Here’s why this matters. Picture for a moment a hierarchy of work-related capabilities, a bit like Maslow’s hierarchy of needs (see figure 2-1). At the bottom is obedience. Every organization needs employees who are capable of following basic rules around safety, cost control, and customer care. Next is diligence. An organization needs employees who are willing to work hard and take responsibility for results. The third level is expertise. To be effective in their jobs, team members need the requisite skills. While these foundational capabilities—obedience, diligence, and expertise—are essential, they’re table stakes. In the age of upheaval, an organization needs more from its people. It needs self-starters who are proactive, who don’t wait to be asked and aren’t bound by their job description. Equally critical is creativity—people who can reframe problems and generate novel solutions. Finally, at the top, is daring—a willingness to stretch oneself and take risks for a laudable cause.

FIGURE 2-1

Hierarchy of work-related capabilities

Hierarchical pyramid diagram of work-related capabilities. At the base are foundational skills such as obedience, diligence, and expertise. At the top are higher-order capabilities like initiative, creativity, and daring.

These higher-order capabilities are the products of passion, of a commitment to something that inspires us, something outside ourselves that needs and deserves the best of who we are. Initiative, creativity, and valor can’t be commanded. They are gifts. Every employee gets to decide, “Do I bring these gifts to work today or not?” And as the Gallup data suggests, the answer is usually “no” and, sometimes, “hell, no.”

Just as a company can’t build an evolutionary advantage without an innovation advantage, it can’t build an innovation advantage without an inspiration advantage. If the goal is to build a self-renewing organization that ventures boldly into the future, then everything hinges ultimately on willing, enthusiastic, joyful engagement.

There’s no secret about what drives engagement. From Douglas McGregor’s The Human Side of Enterprise to Dan Pink’s Drive and Theresa Amabile’s The Progress Principle, the formula hasn’t changed in sixty years: purpose, autonomy, collegiality, and the opportunity to make a difference. Unfortunately, engagement levels haven’t changed much, either.

You might argue that disengagement is inevitable. After all, a lot of jobs aren’t very appealing. Every day you meet people with jobs you wouldn’t want. Maybe it’s a retail clerk, a service center rep, a short-order cook, a delivery driver, or a gardener. You can hardly expect these people to be enthusiastic about their jobs, right? Actually, wrong. In a study conducted by the Pew Research Center, 89 percent of employees said they were either “very satisfied” or “somewhat satisfied” with their daily activities.

The engagement deficit isn’t about what people do at work but how they’re managed. In Gallup’s research, 70 percent of the variation in engagement scores was explained by differences in the attitudes and behaviors of the employee’s boss.⁴ For example, employees who felt they could approach their boss with any type of question were more engaged than those who couldn’t. “But wait,” you say, “if two-thirds of employees are disengaged, does this mean most managers are jerks?” Maybe, but here’s the thing: managers are no more engaged than their subordinates. Per Gallup, 51 percent of US managers are not engaged, and 14 percent are actively disengaged.⁵ In other words, your boss is probably just as fed up as you are. “Good lord!,” you may be thinking, “maybe it’s assholes all the way up.” Or maybe not.

What if the inhumanity of our organizations is symptomatic of something deeper—something that has nothing to do with any particular manager or organization? Doesn’t that seem likely? If virtually every organization on the planet, regardless of geography or industry, suffers from the same afflictions—inertia, incrementalism, and emotional anomie—maybe there are common underlying disease mechanisms. A mutation in the BRCA gene raises the risk of breast cancer whether a woman lives in China or France. A carb-heavy diet raises the risk of diabetes whether you’re Mexican or Australian.

Following this logic, we need to ask, in what ways are most organizations alike? What traits are common to Sony, Telefonica, UNICEF, the Catholic Church, Oracle, Volkswagen, HSBC, Britain’s National Health Service, Petromex, the University of California, Rio Tinto, Carrefour, Siemens, Pfizer, and millions of other, lesser-known organizations?

The answer: they are all bastions of bureaucracy. They were all built on the same bureaucratic blueprint:

There is a multilayer hierarchy.

Power is vested in positions.

Authority trickles down.

Big leaders appoint little leaders.

Strategies and budgets are set at the top.

Central staff groups make policy and ensure compliance.

Job roles are tightly defined.

Control is achieved through oversight, rules, and sanctions.

Managers assign tasks and assess performance.

Everyone competes for promotion.

Compensation correlates with rank.

These organizational features may seem innocuous, but as we’ll see, it’s here, in the unremarkable landscape of bureaucracy, that we find the roots of institutional incompetence. Our organizations are less than fully human because they were designed to be so. In the early twentieth century, the pioneering German sociologist Max Weber wrote: “Bureaucracy develops more perfectly the more it is ‘dehumanized,’ the more it succeeds in eliminating all purely personal, irrational, and emotional elements which escape calculation.”⁶ Then as now, the goal of bureaucracy was to turn human beings into semi-programmable robots.

The word bureaucratie was coined in the early eighteenth century by Jean-Claude Marie Vincent, a French government minister. Translated as “the rule of desks,” the label was not intended as a compliment. Vincent viewed France’s vast administrative apparatus as a threat to the spirit of enterprise. (Plus ça change, plus c’est la même chose.) A century later, in 1837, the British philosopher John Stuart Mill described bureaucracy as a vast tyrannical network.

This depiction seems as apt today as it did 180 years ago, so why haven’t we yet rebelled? Why have we remained mired in an abusive relationship with our organizations? Because, to put it simply, we’ve lacked for a better alternative—or so we’ve assumed.

When compared to the despotic, disorderly organizations that preceded it, bureaucracy was a blessing. In pre-bureaucratic organizations, leaders were capricious, and decision-making mostly guesswork. Planning was haphazard and work practices idiosyncratic. Oversight was spotty, compensation poorly correlated with effort, and employee turnover often more than 300 percent per year. Bureaucracy changed all this and, in so doing, turbocharged productivity growth.

Between 1890 and 2016, the value created by an hour of labor increased thirteenfold in the United States, sixteenfold in Germany, and eightfold in Great Britain. While other factors—such as capital accumulation, universal education, and scientific invention—contributed to this bonanza, the biggest boost came from advances in management including workflow optimization, production planning, variance reporting, pay-for-performance, and capital budgeting.

Though dehumanizing, bureaucracy was, as Weber noted, “superior to any other [organizational] form in precision, in stability, in the stringency of its discipline, and in its reliability,” and thus “capable of attaining the highest degree of efficiency.”⁷ It is thanks to large bureaucratic organizations that a billion people on the planet now own a car; that there are more mobile phones than people; that when inclined to travel, we can choose from more than a hundred thousand commercial flights each day; and that when we buy and sell, we can rely on a global financial system that processes more than a million transactions per minute. Whatever its faults, bureaucracy sits at the apex of human inventions.

Yet, as with other instruments of progress—firearms, fossil fuels, the combustion engine, large-scale agriculture, antibiotics, plastics, and social media—this triumph came at a price. Bureaucracy multiplied our purchasing power but shriveled our souls.

If our organizations suffer from systemic disabilities, the fault lies not with any particular manager but with a management regime that empowers the few at the expense of the many, that prizes conformance over originality, wedges human beings into narrow roles, robs them of agency, and treats them as meatware.

Like all technologies, bureaucracy is a product of its time. In the late nineteenth century, the average employee was poorly educated, if not illiterate, and needed close supervision. Administrative skills were rare and managerial competence highly valued. Information was expensive to gather, and a hierarchical reporting structure was the most efficient way of collecting and sharing data. Scale advantages were paramount and the pace of change, by current standards, glacial. Today’s realities are vastly different, and yet the foundations of management remain cemented in bureaucracy. This must change.

In recent decades, we’ve seen mind-flipping innovation in products and business models. Every time you snap a picture on your iPhone, you trigger more than a trillion calculations aimed at improving the final photo. That’s radical. SpaceX sends a reusable rocket into space every three days and has reduced the price per kilogram of space cargo by 90 percent. That’s radical. Recent AI breakthroughs make it possible to design functional proteins that can be synthesized and produced in living cells. That’s radical.

The thesis of this book is that we need to be equally radical in reimagining management structures and systems. Building organizations that are endlessly malleable, ridiculously creative, and brimming with passion requires entirely new approaches to mobilizing and coordinating human effort. We must try to imagine management models that are as radically different from the bureaucratic template as Zoom is different from a landline phone call or Apple Pay from a wad of banknotes.

We need to put human beings, not structures, processes, or methods, at the center of our organizations. Instead of a management model that seeks to maximize control for the sake of organizational efficiency, we need one that seeks to maximize contribution for the sake of impact. We need to replace bureaucracy with humanocracy. We’ll spend much of this book exploring the differences between these two models, but the essential distinction is this. In a bureaucracy, human beings are instruments, employed by an organization to create products and services. In a humanocracy, the organization is the instrument—it’s the vehicle human beings use to better their lives and the lives of those they serve (see figure 2-2). The question at the core of bureaucracy is, “How do we get human beings to better serve the organization?” The question at the heart of humanocracy is, “What sort of organization elicits and merits the best that human beings can give?” As we’ll see, the implications of this shift in perspective are profound.

FIGURE 2-2

Bureaucracy versus humanocracy

Diagram contrasting bureaucracy and humanocracy organizational models. In bureaucracy, everything flows from the institution: individuals serve the organization to produce output. In humanocracy, the individual is influential: institutions serve to maximize the impact of human contributions.

To move beyond the old model, we must understand the precise ways in which bureaucracy has disabled our organizations. We must face up to the costs of bureaucratic malaise. We must learn from the management vanguard—progressive organizations that have demonstrated the viability and value of post-bureaucratic management practices. We must embrace new human-centric principles and operationalize them within our organizations. We must rid ourselves of bureaucratic mindsets and rethink our core assumptions about “leadership” and “change management.” We’ll tackle all this in the chapters that follow.

As we argued in chapter 1, bureaucracy must die. As humankind’s most deeply entrenched social technology, it will be hard to uproot, but that’s OK. You were put on this earth to do something significant, heroic even, and what could be more heroic than creating, at long last, organizations that are fully human?

— 3 —

The Indictment

Dismantling bureaucracy is a formidable challenge. Before signing on, you need to be convinced that the organizational disabilities described in chapter 2 are, in fact, the fault of bureaucracy. In this chapter, we lay out the articles of impeachment. How, exactly, do the archetypical features of bureaucracy—stratified decision rights, formalized unit boundaries, specialized roles, and standardized practices—undermine adaptability, innovation, and engagement? Why must bureaucracy be deposed? Why is this a fight worth joining?

Ask just about anyone to draw a picture of their organization and you’ll get the familiar pyramid of lines and boxes. A fixed chain of command is one of humanity’s most durable social structures. It’s simple, scalable, and seemingly timeless.

It’s easy to believe that large-scale human action is impossible without a top-down power structure. Unity of command ensures clarity of direction. Clear lines of authority minimize ambiguity. Tiered decision rights align power and competence. Absent formal hierarchy, there’s anarchy, right? Well, maybe not.

Consider the ATLAS project, one of four research initiatives that make up the Large Hadron Collider. Encompassing more than 3,000 scientists from 180 institutions, ATLAS was launched in 1992 in a bid to uncover the deepest secrets of the universe. To that end, the ATLAS team built one of the most sophisticated machines ever constructed—a giant particle detector, 45 meters high and 25 meters long, with more than 10 million parts that had to be assembled deep beneath the soil of a bucolic Swiss village.

In the early stages of the project, the ATLAS consortium struggled to find the right organizational design. Given the novelty of the undertaking, design and development would need to be broken down into subprojects that could be tackled by small teams. On the other hand, all the subsystems (and there were hundreds of them) had to fuse seamlessly together. Therein lay the dilemma. While autonomous teams would excel at creative problem-solving, they’d struggle with high-level coordination. A centralized organization, by contrast, might be better at system integration, but it would be overwhelmed by the sheer number of new-to-the-world problems that needed to be addressed. A top-down structure would also provoke resistance from the fiercely independent scientists whose expertise was crucial for success.

In the end, the consortium opted for a bottom-up structure that relied on peer-to-peer coordination rather than a cadre of senior project managers. Every subsystem had its own board, which included all the scientists working on that aspect of the project. The deliberations within these boards were open and collegial, but they could also be heated. In the case of an impasse, opposing teams debated the issue in front of colleagues who then voted for what they believed was the best option. As cross-system issues arose, temporary working groups were convened to hammer out solutions. When, for example, the design of the primary detecting magnet turned out to require more space than originally envisioned, thus shrinking the room for other equipment, a task force was mustered to invent a workaround. Throughout the project, subsystem boards published real-time information on their progress, and relevant experts were encouraged to comment online. At the strategic level, a collaboration board handled major decisions. Every participating institution had a seat on the board, and a two-thirds majority was required to green-light a decision.

Bringing the ATLAS detector to life required tons of leadership and creativity. What it didn’t require was a pyramid. No one within the ATLAS consortium had the power to give an order. Everyone was a colleague, and no one was a boss. Despite this, the ATLAS detector was completed on time and within budget.¹

When an organization confronts a large number of novel problems, a top-down structure is likely to be a choke point. As issues get escalated, problems pile up on the doorstep of senior leaders who often lack the experience and bandwidth to make smart, speedy decisions. Over time, the backlog grows and the pace of decision-making decelerates. Stratification is the enemy of speed.

Proactive change is another casualty of centralization. In a formal hierarchy, the power to revector strategy tends to be concentrated at the top. CEOs are expected to be uniquely farsighted, bold, and creative. A. G. Lafley, twice chairman and CEO of Procter & Gamble, gave voice to this assumption in an article for Harvard Business Review: “The CEO can see opportunities that others don’t see and … make the judgments and the tough calls others are unable to make.”² Perhaps this was true at P&G, but it’s not true in most companies. When it comes to strategic change, CEOs are more likely to be impediments than catalysts. A couple of examples will suffice.

In 1995, Eric Yuan was one of the first twenty employees at a startup called Webex, then a leader in web conferencing. When Cisco acquired Webex in 2007, Yuan became the head of a hundred-person engineering group. Over the next few years, Yuan became increasingly frustrated that Webex was failing to keep up with evolving needs of users: “I knew customers were not happy … The solution was very old, the architecture was very old, and it didn’t support video very well.”

Yuan tried repeatedly to convince Cisco’s leadership to let him rebuild Webex for the cloud and mobile era. “Webex,” recalls Yuan, “was my baby and I had no control to impact the customer experience. I voiced my opinion and was always told I was wrong. Why should I even go to the office?”³ In 2013, Yuan left Cisco and founded Zoom, which rapidly became the world’s most popular videoconferencing app. Today, depending on the study, Zoom’s market share is estimated to be between seven and twenty times that of Webex.

The declining fortunes of cable TV operators provides an even starker example of management myopia. Between 2009 and 2023, the percentage of US households with a cable TV subscription dropped from 87 percent to 64 percent.⁴ Much of the decline was due to the relentless growth of video streaming.

This shift was entirely predictable. In the early 1990s, technologists at AT&T sketched out the implications of two accelerating trends: the growth of high-speed networks and ever more efficient video compression. They reckoned the trends would converge in 2005, making video streaming commercially viable. They were right. YouTube went live in 2005, Apple TV appeared in 2006, and Netflix launched its eponymous streaming service in 2007.

Once streaming became feasible, you might have expected the resource-rich incumbents to storm in—but that didn’t happen. The early signs of subscriber attrition in the late 2000s were dismissed as a temporary recession-related blip. As defections mounted, industry veterans disparaged their new rivals with then Time Warner CEO Jeff Bewkes comparing Netflix to the Albanian Army. “Is the Albanian army going to take over the world?” he asked. “I don’t think so.”⁵ Charter Communication CEO Thomas Rutledge claimed that when cash-strapped millennial cord-cutters started earning enough to afford a cable subscription, they’d return to the fold. Unfortunately, wishful thinking seldom alters reality. Today, 99 percent of American households subscribe to at least one streaming service.

There are several reasons those at the top of the pyramid often miss the future. First, senior executives are insulated—organizationally, culturally, and geographically—from the fringes where new trends take shape. This isolation is exacerbated by kowtowing underlings who’ve learned there’s little profit in delivering bad news. By the time a problem or opportunity is big enough to capture the CEO’s scarce attention, the organization is already playing catch-up.

Second, senior executives often have much of their emotional equity invested in the past. The average S&P 1500 firm CEO is currently fifty-eight and a half, up three years since 2003. Nearly half of CEOs in 2023 were age 60 or older, up from less than a third in 2003.⁶ While veteran leaders may have the benefit of experience, they’re freighted with legacy beliefs. Many of their assumptions about customers, technology, and the competitive environment were forged years earlier and reflect a world that no longer exists.

Third, rank and humility are often inversely correlated. Power, as the late Karl Deutsch observed, “is the ability to afford not to learn.” In this truth we find the single greatest threat to organizational resilience: the unwillingness or inability of senior leaders to write off their own depreciating intellectual capital. This failing would be less dangerous if subordinates felt empowered to challenge C-suite dogma, but most middle managers are disinclined to bite the hand that feeds them. Myopia, like authority, trickles down.

An organization’s capacity for renewal should never depend on the capacity of a few senior leaders to learn and unlearn, but in a bureaucracy, it often does. The United States is a counterexample.

America’s resilience has never depended overmuch on who occupies the Oval Office. Instead, the country’s dynamism is the product of principles enshrined in the nation’s founding documents: an aversion to autocracy, a belief in human agency, an openness to immigrants, a respect for religious and ethnic diversity, a commitment to unfettered speech, and an enthusiasm for commerce. America has continually reinvented itself because millions of its citizens have had the freedom to reinvent themselves.

Some wag once remarked that America is a country that was invented by geniuses to be run by idiots—an observation that at times seems worryingly close to the mark. Bureaucracies, by contrast, seem to have been designed by idiots to be run by geniuses. It would be great if every CEO had the innovation instincts of Steve Jobs, the political skills of Lee Kwan Yew, and the emotional intelligence of Desmond Tutu, but most don’t.

Though mere mortals, CEOs are often paid as if they were omniscient. At present, the average CEO compensation in America’s 350 largest companies is $25.2 million a year, or 344 times the pay of a typical frontline employee.⁷ It’s not clear what all those millions buy. Repeated studies have shown that the correlation between CEO pay and share performance is negligible or slightly negative.⁸ No amount of money can transform an executive into Iron Man or Wonder Woman.

In the age of upheaval, the quantities of foresight and ingenuity required to run a large organization exceed the abilities of any CEO or executive team—and the bar keeps going up. Simply put, bureaucratic structures ask more of leaders than they can deliver. It’s time to call off the search for superhuman leaders. What we need aren’t extraordinary leaders but organizations that mobilize and monetize the everyday genius of “ordinary” employees.

In a complex world, organizations need to flexibly match minds to problems. Unlike formal power, wisdom is partial; it waxes and wanes and is contingent on the issue at hand. Thus, instead of a single, fixed hierarchy, we need a multitude of dynamic hierarchies where who’s in charge depends on the problem being addressed. We need organizations where everyone’s views are contestable, where influence is the reciprocal of followership, and where incompetent leaders are voted off the island.

And what about alignment—getting all the noses pointed in the same direction? How can you have unity of purpose without unity of command? First, alignment is overrated. Yes, it’s important, but it’s not uniquely important. In a world filled with unexpected threats and opportunities, organizations need to experiment with dozens, if not hundreds, of strategic options. There’s always the risk of wasting effort on tangential initiatives, but the more dangerous risk is the myopia of power. Second, as we saw with the ATLAS project, human beings are quite capable of pursuing a common goal without a pharaoh to command them.

Enough about the lines. What about the boxes? A bureaucracy partitions activities into formally defined operating units, each with its own goals, team members, and budget. Where the aim of stratification is consistency, the goal of formalization is clarity. By precisely delineating roles and responsibilities, individuals know what they’re accountable for, what decisions they can make, and what resources they control. It’s hard to imagine how an institution could function without a formal organization, but perhaps we should try. For all their benefits, formal structures are parochial, byzantine, and inflexible. These costs, like the costs of stratification, are largely invisible yet increasingly untenable.

Organizing requires choices. While these choices may be right on average, they won’t be right in every circumstance. To wit, there will be times in a global product organization when the built-in preference for consistency blinds the company to opportunities and trends that aren’t visible from the center. This seems to be what happened to Germany’s leading carmakers. With their engineering teams concentrated in Europe and their US organizations little more than marketing arms, Daimler, BMW, and Volkswagen were slow to grasp the significance of Tesla’s efforts to reimagine the car as a battery-powered, software-defined mobility platform.

By giving preference to one organizational dimension over another, formalization presets critical trade-offs, whether that’s scale versus agility, consistency versus responsiveness, or efficiency versus innovation. Formalization is, by definition, suboptimal. That’s why when companies reorganize, they often trade one set of problems for another.

Though expensive and often belated, reorganizations are widely regarded as the only way to realign an organization with its environment. As a report by the Boston Consulting Group put it, “Rapid change requires companies to reorganize faster than ever before.”⁹ Good luck with that!

What’s needed are radically new organizational models that downplay formal structure. In a world of relentless change, trade-offs need to be made as close to the front lines as possible. Boundaries must be malleable. Resources must flow unhindered toward promising opportunities rather than being hoarded. Interunit coordination must be the product of nimble, self-organizing communities and market-like transactions rather than blanket policies or cumbersome councils. In short, we need organizations that, like the biosphere, the internet, or a vibrant city, are more emergent than engineered.

Transformations at Haier and Roche, in chapters 6 and 15, prove this is possible. But there’s another example, born in the pandemic, that’s also informative.

Operation Warp Speed

On December 11, 2020, the US Food and Drug Administration granted an Emergency Use Authorization for the first Covid-19 vaccine, jointly developed by Pfizer and BioNTech. Seven days later, a competing vaccine from Moderna won similar approval. At the time, three hundred thousand American lives had already been lost to the virus, and the global death toll was approaching 2 million.

The desperate search for a vaccine was orchestrated by Operation Warp Speed (OWS), a US government initiative involving six hundred civilians and a hundred military personnel. Developing and testing a new drug typically takes a decade or more, but OWS had accomplished the feat in a record-shattering eight months. The rollout was equally speedy: 63 million doses in three months and half a billion within a year. It’s estimated that the vaccines prevented 1.1 million deaths and over 10 million hospitalizations in the year following approval.¹⁰

A partnership between the Department of Health and Human Services (HHS) and the Department of Defense, OWS was led by Moncef Slaoui, a scientist and pharma executive, and Gustave Perna, a four-star general responsible for the US Army Materiel Command. Although they were operating under the explicit authority of the US president, Slaoui and Perna were well aware that bureaucrats are quite capable of thwarting executive power. Another obstacle was the sheer complexity of the task. To defeat the virus, they would need to coordinate a vast network of partners, including drug makers, logistics titans like FedEx and UPS, medical distributors such as McKesson, and a plethora of supermarket and pharmaceutical chains that would administer the vaccines—all against a backdrop of severe supply chain constraints, a domestic shortage of technical talent, and the need for social distancing.

Slaoui and Perna had the benefit of an $18 billion budget, which allowed them to fund large-scale trials and purchase millions of vaccine and therapeutic doses in advance. Yet an ample budget was little more than table stakes. They knew that hundreds of other government programs, equally focused and well-funded, had floundered. What, then, was different about OWS, and what does it teach us about overcoming the jigsaw-like complexity of large, compartmentalized organization?

As Paul Mango, the HHS deputy chief of staff at the time told us, “People understood they had a lot of latitude and were accountable. The absence of micromanagement was highly energizing.”

Particularly important were the Product Coordination Teams (PCTs). Each of the twelve PCTs was composed of a technical leader and a small team of program managers drawn from a cross-section of relevant organizations. The PCTs met daily to set priorities, identify roadblocks, and address issues that needed quick resolution. This included working with US Customs and Border Protection to expedite the import of critical equipment; liaising with the State Department to ensure rapid visa approval for essential talent; and coordinating with the US Army Corps of engineers to build factories.

Slaoui and Perna chaired weekly in-person meetings that involved the clinical trials team, representatives from each PCT, along with experts from the Centers for Disease Control and Prevention, National Institutes of Health, and others. The team ensured that tricky cross-department problems, such as ensuring the appropriate racial composition of clinical trial subjects, were speedily addressed.

The meetings were also essential in cultivating a sense of unity. If someone referred to themselves as a representative of their particular organization, Slaoui would promptly correct them: “You meant to say you are a member of the Operation Warp Speed Team.”¹¹

While not every problem facing a large organization is an existential threat to human health or can be solved in eight months, the success of OWS is a testament to what’s possible when people working in fractured and siloed organizations commit themselves to a shared goal. Boundaries don’t have to be barriers.

Adam Smith’s The Wealth of Nations opens with a tribute to specialization: “The greatest improvements in the productive powers of labor have been the effects of the division of labor.” Smith recounts visiting a pin factory where the manufacturing process had been slivered into eighteen distinct steps, with each employee responsible for only one or two tasks. Together, the ten-person team produced forty-eight thousand pins per day, roughly four hundred times the volume that had been achieved before subdividing the work.

Specialization is why a high-end iPhone costs $1,000 rather than $10,000. Assembling the device requires four hundred steps, one of which involves fastening a speaker to the case with a screw.¹² The employee responsible for this task is expected to attach eighteen hundred speakers during a twelve-hour shift.¹³ The only job requirement: dexterity.

However diverse their talents and interests, most human “pegs” have little chance to reshape the bureaucratic “holes” they fill. Consider the results from parallel workplace surveys conducted in Europe and the United States.¹⁴ (See table 3-1.) As you can see, only a minority of nonsupervisory employees are involved in setting objectives for their job, are able to weigh in on decisions that impact their work, and have a say in choosing their colleagues. In another survey, nonmanagerial employees in Britain were asked whether they had any influence over decisions that altered the nature of their work. Eighty-six percent answered no or “just a little.” Employees may not be as rigidly programmed as robots, but that’s not for lack of trying.

TABLE 3-1

Capacity to shape your job

While specialization yields economies, it curtails initiative and innovation. Those in overly specialized jobs have little scope to improvise or add more value. Whatever their capabilities, they can contribute only what the job engineer envisioned. This is like having a fat Swiss Army knife and using it only as a corkscrew. As our friend Anglican bishop Drew Williams put it, “Slot-shaped roles yield slot-shaped contributions.”

If you are unconvinced that overspecialization imposes real costs, consider a counterexample. Based north of Sacramento in California’s verdant San Joaquin Valley, Morning Star is America’s largest and most profitable tomato processor. In peak season, each of its three sprawling plants devours a thousand tons of tomatoes per hour. This is a complex, capital-intensive business where dozens of critical processes must be precisely calibrated. Despite that, Morning Star boasts one of the most radical organizational models on the planet. There are no managers and no job titles. Instead, its five hundred full-time “colleagues” are expected to act like “self-managing professionals.”¹⁵

Working in teams spanning more than twenty business units, colleagues write contracts with one another, enumerating their individual duties. One colleague may contract to unload and sort tomatoes, another to operate a boiler, and a third to provide accounting services. Every colleague is accountable to peers, but no one is accountable to a boss. Thanks to its superior efficiency, Morning Star has put many of its competitors out of business. The company’s cost advantage is the product of a work environment that encourages team members to think creatively and expansively about their roles and contributions.

Paul Green Jr., who was responsible for the company’s training and development efforts and is now a professor at the University of Texas’ McCombs School of Business, explains, “We believe you should do what you’re good at, so we don’t try to fit people into a job. As a colleague, you have the right to get involved anywhere you think your skills can add value. As a result, our people tend to have broader and more complicated roles than is typical elsewhere.”

Chris Rufer, Morning Star’s founder and president, has long operated on the following belief: “An organizational philosophy has to start with people, and the conditions that allow them to be more creative and passionate about their work, and freedom unleashes this. Everyone does better if they are free to pursue their own path. If they are free, they will be drawn to what they really like, versus being pushed towards what they have been told to like. So they will do better; they’ll be more enthused and charged up to do things.”

Rufer goes on: “There are a lot of personal nuances in how people work together, and the freer individuals are to explore those nuances and to tailor their relationships around their own particular competencies, the better all those contributions fit together. This is spontaneous order, and it gives you more fluidity. Relationships can change form more easily than if we tried to fix them from above.”

“What is it,” we inquired of a Morning Star plant mechanic, “that prompts team members to be proactive in offering help to colleagues?” His answer: “Our organization is driven by reputational capital. When you have something to add to another part of the company, some valuable piece of advice, that increases your reputational capital.” Not surprisingly, when roles are broadly defined and people get positive strokes for helping others, initiative flourishes.

There’s no cap on the number of problems that can be profitably addressed in a business. Nor is there a cap on the ingenuity of those at work. What’s capped in a bureaucracy is the opportunity for individuals to develop and apply their gifts. Remove this cap, and every job becomes a good job—full of challenge, opportunity, and accomplishment, and every team member becomes part of the creative economy.

Like Morning Star, we must expand the creative content of every job. Instead of deskilling, we must upskill. This is more than a matter of harvesting latent capability; it’s also a way of imbuing work with dignity.

We live in an age of fading faith and fractured communities. As a consequence, work has become even more central to human identity. While we may regard this as regrettable, we cannot shirk our responsibility. We must nurture the innate problem-solving skills of every human being at work and create elastic roles that expand as human capabilities grow. We must strive to better align vocation and avocation. Of course, routine work still needs to get done, and not every task is inherently edifying, yet we must find ways of matching talents and tasks that don’t slice the multitudinous and wonderfully unique shapes of human capability into dull, uniform lumps.

In 1911, Frederick Taylor, the patron saint of standardization, published his opus: The Principles of Scientific Management. In the introduction, he laid out the case for systemizing work:

We can see and feel the waste of material things. Awkward, inefficient, or ill-directed movements of men, however, leave nothing visible or tangible behind them. Their appreciation calls for an act of memory, an effort of the imagination. And for this reason, even though our daily loss from this source is greater than from our waste of material things, the one has stirred us deeply, while the other has moved us but little.

Taylor believed that through meticulous observation and measurement, it was possible to discover the “one best way” of performing any task. Working in the early decades of the twentieth century, Taylor’s goal was to make human beings as reliable and efficient as the machines they served. As he often told his clients, “In the past, the man has been first; in the future, the machine must be first.”¹⁶

Standardization was a triumph of production engineering and, even more so, of social engineering. The spread of Taylorism across the world’s industrializing economies turned millions of obstreperous and occasionally lackadaisical laborers into rule-following, clock-punching employees. Today, we are so habituated to thinking of ourselves as employees that we have little concept of how unnerving this revolution was to the farmers, traders, and artisans of the eighteenth century. To many, the idea of being economically dependent on a distant paymaster was abhorrent—it turned human beings into wage slaves. Yet, for a multitude of poor and semiliterate workers, a steady job, however menial, was an advance.

Taylorism also cemented the distinction between “workers” and “managers.” In scientific management, workers were no longer responsible for selecting tools, devising methods, setting schedules, or resolving disputes. In Taylor’s view, the average employee was too thick-headed for such work. In a particularly feculent passage, Taylor portrayed the typical steelworker as “so stupid that the term ‘percentage’ has no meaning to him.”¹⁷ (Taylor failed to mention that the worker he singled out as “mentally sluggish” had managed to build his own house!) Accordingly, it was necessary not only to standardize work but to strip it of anything requiring judgment. On this point, Taylor was adamant: “It is only through enforced standardization of methods, enforced adoption of the best implements and working conditions, and enforced cooperation that this faster work can be assured.”¹⁸ And who was to do the enforcing? Managers, of course.

In standardizing work, Taylor created both the demand function and the job description for a new class of workplace demi-czars. It was the manager’s job to ensure that rules were followed, variances were minimized, quotas were filled, and slackers were punished. And so it is today. Look up the verb form of the word “manage” in any thesaurus and the first synonym is likely to be “control.” You might be tempted to believe that twenty-first-century organizations have moved beyond this obsession with control, but you’d be wrong.

Near the end of his tenure as co-CEO of SAP, Jim Hagemann Snabe discovered that the German software giant had amassed more than five thousand key performance indicators (KPIs) covering every job across the company. Snabe was horrified. “We were trying to run the company by remote control,” he recalls. “We had all this amazing talent, but had asked them to put their brains on ice.”¹⁹

Snabe would readily admit that standards are important, yet there are limits to what can be routinized. To set standards, one must be able to specify the desired end state in advance as well as the steps necessary to achieve it. This assumes the target is unambiguous and stable. It further assumes that the tasks for hitting the target are not contingent on local conditions. Finally, one must know enough about the surrounding tasks to ensure the standards won’t inadvertently undermine the pursuit of other equally important ends. Standardization becomes toxic when arrogance and a control fetish—frequently co-occurring pathologies—lead bureaucrats to ignore these limits.

How is it that in their personal lives, employees can be trusted to buy houses and cars, but at work can’t requisition a $300 office chair without a manager’s approval? If we thought about it for a minute, we’d realize this is stupid. Autonomy correlates with initiative and innovation. Shrink an individual’s freedom, and you shrink their enthusiasm and creativity.

For a counterexample, consider the unexpected turn around of American bookseller Barnes & Noble.

Barnes & Noble

In 2019, the New York City–based retailer was grappling with plunging in-store sales, anemic online revenue, and a catastrophic 90 percent decline in sales of its Nook e-reader. Attempts to diversify into toys, games, DVDs, and even full-service restaurants had done little to stop the bleeding. Hemorrhaging cash and having shuttered over 150 stores since its 2008 apex, Barnes & Noble had cycled through four CEOs in as many years. To many, it seemed only a matter of time before the company joined Borders in the bookstore graveyard.

In a last-ditch attempt to right the ship, the board of Barnes & Noble voted to sell the business to Elliott Management, a private equity firm. Soon after the $683 million deal in August 2019, Elliott appointed James Daunt as the new Barnes & Noble CEO. Daunt, a British bookseller who had quit banking at age 26 to open his own shop in London, was no stranger to turnarounds. In 2011, he had revived the fortunes of Waterstones, a UK bookstore chain that had been teetering on the brink of bankruptcy.

In contrast to most industry observers, Daunt was disinclined to blame Amazon for the plight of traditional booksellers, arguing that most bookstores “simply weren’t good enough.” Daunt’s verdict on Barnes & Noble was equally blunt: the company had lost its way by hewing to the standard big-box playbook—prioritizing centralization, uniformity, and efficiency above all else. ”The trouble,” said Daunt, “is that if you do that with [bookselling], you end up with uniform bookstores that are inherently boring.”²⁰

Compounding the problem was Barnes & Noble’s practice of ceding control over book curation to publishers, who paid hefty sums for prime placement. As a result, Daunt lamented, “Your bookshop is defined by what publishers are prepared to pay for, not what is actually good or what your booksellers want to sell or what the readership of any individual bookshop wants to buy.”²¹

For Daunt, standardization was the antithesis of what brought people to a bookstore:

People come to bookstores to enjoy themselves. They come to meet other people, they come for the social experience, and they come to browse and look at books. It’s a very richly textured, actually emotional, engagement.… Independent booksellers do that brilliantly. They understand their customers; they curate for their customers. The big chains had simply stopped doing that—well, I don’t think they’d ever done it, in truth—and therefore the business was failing.²²

Daunt believed Barnes & Noble needed to rediscover its bookselling soul. A bookstore needed to serve its readers—not publishers, head-office merchandisers, or the CEO. For that to happen, Barnes & Noble would need to become less standardized and less centralized. Each of the chain’s more than six hundred locations needed to operate as a unique, community-focused shop that felt more like a beloved independent bookstore than a link in a giant retail chain.

As is often the case, the head office had overestimated the efficiency benefits of homogeneity and underestimated the consumer benefits of distinctiveness. The solution—de-standardizing—required five major changes to how Barnes & Noble was led, managed, and organized:

Daunt encouraged local teams to cultivate their own judgment. Rather than following “best practices,” he exhorted them to “think it through yourselves and [make decisions] on the basis of principles rather than on the basis of rules.”²³

This newfound discretion sparked a wave of creativity and experimentation across the chain. Rigid planograms gave way to innovative, locally tailored displays. Employees in an Upper West Side Manhattan store moved cash registers to the back, relocated magazines upstairs, and replaced algorithm-driven recommendations with hand-curated displays. One Florida store changed its name to “B. Dalton Bookseller” after the network of stores Barnes & Noble had acquired in the 1980s and later shuttered. Store teams began sourcing titles with their particular communities in mind. To spot local trends, younger team members scrolled through #BookTok—a vibrant TikTok community where users share book recommendations and extol their favorite reads.

Stores formed regional clusters to share ideas and talent. A visual merchandising whiz or events coordinator might work across multiple locations, while other associates would offer coaching to nearby stores on the finer points of book ordering. This voluntary, needs-driven collaboration ensured that the company reaped the benefits of coordination without stultifying effects of top-down mandates and arbitrary standards.

In contrast to many CEOs, Daunt was inclined to focus on the game, not the scoreboard, at one point telling a journalist that he had “no interest at all” in digging through reams of customer data since the task was “totally irrelevant” to creating value.²⁶

In this spirit, Daunt eliminated most of the company’s copious and detailed KPIs, believing that narrow, standardized targets were more of a hindrance than a help. No one should report to an algorithm. When store leaders were put squarely in charge of improving the bottom line, smart decisions followed.

Barnes & Noble’s grand experiment with de-standardization challenged employees at every level. Head-office staffers had to step back; store employees had to step up. Overcoming learned helplessness required patient, persistent encouragement from leaders. Says Daunt, “I’m constantly pushing stores to have complete freedom to do what they want.”²⁷ Employees aren’t always eager to take on more accountability, but once they’ve done so, few are eager to give it back. Reflecting on the change, Jason Byrnes, the manager of the Upper West Side store, said simply, “I didn’t realize how bored I was.”²⁸

Bored script-following employees are bad for business. That should be obvious, but often it’s not. But thanks to an empowered and invigorated workforce, Barnes & Noble has transformed from a once moribund business to one that is profitable, growing, and opening new stores for the first time in over a decade.

Why are examples like Barnes & Noble so rare? Partly because the premise that employees are incapable of exercising judgment tends to be self-validating. First, jobs stripped of interesting cognitive work are unlikely to attract individuals looking to exercise their problem-solving skills. Second, overly scripted jobs give employees little opportunity to disprove the bureaucratic hypothesis that acumen correlates with rank. And third, after living for a few months in a reign of rules, most employees mentally check out.

Though few would admit it, many of us still buy into the bureaucratic conceit that the thinkers are at the top and the doers at the bottom. The result is an intellectual caste system—a sort of intellectual apartheid.

If this seems like an exaggeration, consider the data. Using a scale of 0 to 100, the US Bureau of Labor Statistics rates hundreds of jobs by the degree of original thinking they require. The job of CEO earns a 70 rating. For marketing managers, the score is 66; for human resource managers, it is 60. By contrast, the originality required of a customer service rep is rated at 44; a medical technician, 38; and a bank teller, 31. Overall, two-thirds of US employees are in jobs that score below 50 on the originality index. That’s over 100 million individuals who aren’t expected to exercise their creativity at work. More than half of the workforce holds jobs where exercising judgment and decision-making and developing objectives are considered unimportant. What a waste.

If the goal is to deliver exceptional customer experience, solve new problems, or simply survive in a chaotic environment, control needs to be based less on rules than on principles, norms, and mutual accountability. It’s less about telling people what to do and more about equipping them to make smart decisions. To paraphrase the Nobel Prize acceptance speech of Austrian economist Friedrich Hayek:

If managers are to do more good than harm in improving organizational performance, they must learn that in a complex environment, they can’t acquire sufficient knowledge to orchestrate the desired outcomes. Instead, they must use whatever knowledge they have not to shape results as a craftsman shapes a piece of handiwork, but to cultivate growth by providing a proper environment, much as a gardener does for plants.

This is how control works in our personal lives. How would you react, for example, if your spouse or partner generated a detailed set of rules for achieving relationship bliss? The mandates might include:

Never leave your clothes on the floor.

Never leave the toilet seat in the “wrong” position.

Never forget to call if you’re going to be late.

Never brag about what a catch you are.

Never roll your eyes when my mother calls.

Never criticize my friends.

Never bring up something I did more than six months ago.

Never assume I’m “in the mood.”

Never eat food off my plate.

Never leave the car low on gas.

Never tell me to “calm down.”

Never offer unsolicited advice about what I’m wearing.

Never act like you’re not mad when it’s clear you are.

Never go to sleep without asking me how my day was.

Besides a long list of don’ts, there’d also be an exhaustive inventory of dos, involving flowers, date nights, housework, anniversaries, foot massages, compliments, and apologies. Trying to live up to all these rules would be exhausting and humiliating. Moreover, your significant other would never know if you were acting from the heart or just ticking boxes.

Imagine instead what would happen if a couple strove to honor a few simple principles, like those found in I Corinthians 13:

Love is patient and kind.

Love is not jealous, boastful, proud or rude.

Love does not demand its own way.

Love is not irritable and keeps no record of wrongs.

Love never gives up, never loses faith.

Love is always hopeful and endures through every difficulty.

Living out these values would be both more challenging and more empowering than following a set of rules. You’d be challenged to aim high but would have the headroom to improvise and grow. Standardization sets a floor on acceptable behavior, but it often sets a cap as well. Machines only do what they’re told. Our organizations will never be fully capable until we rid them of “controlitis.”

It’s no wonder that our organizations are inertial, incremental, and uninspiring. How could they be otherwise when bureaucracy …

Grants excessive credence to the views of precedent-bound leaders

Discourages rebellious thinking

Creates long lags between sense and respond

Calcifies organizational structures

Blinds silo-dwelling leaders to new opportunities

Suboptimizes trade-offs

Frustrates the rapid redeployment of resources

Discourages risk-taking

Politicizes decision-making

Creates long and tortuous approval pathways

Misaligns power and leadership capability

Caps opportunities for individual contribution

Undermines frontline accountability

Systematically devalues originality

Bureaucracy is dispiriting and debilitating, yet it persists. Instead of building human-shaped organizations, we’re still hammering out bureaucracy-shaped human beings. If we’re complicit and have resigned ourselves to the endemic inadequacies of our organizations, it’s because we’ve failed to do our sums. As we’ll see in chapter 4, the first step in defeating bureaucracy is to face the facts.

— 4 —

Facing Facts

Bureaucracy is like pornography: it’s hard to find anyone who’ll defend it, but there’s a lot of it about. Doug McMillon, CEO of Walmart, calls bureaucracy a “villain.” Jamie Dimon, chairman and CEO of JPMorgan Chase, labels it “a disease” and “the enemy within,” while the late Charles Munger, vice chairman of Berkshire Hathaway, said the tentacles of bureaucracy should be treated “like the cancers they so much resemble.”

With enemies like these, you’d think bureaucracy would be on the run, but that’s not the case. Over the last twenty years, growth in management and administrative roles accounted for a whopping 40 percent of US job gains. As an example, consider what happened at Yale between 2003 and 2021. While teaching faculty modestly increased from 610 to 650, administrative roles in development, finance, HR, legal, and the president’s office grew more than sixfold—from 151 to 964. The number of “vice presidents” increased from 5 to 31, and there were 168 staffers working on “strategic initiatives.” As the late James C. Scott, a longtime professor of political science at Yale put it, “It’s a pandemic [of administrators], and Yale may have a particularly severe case.”¹

This wasn’t supposed to happen. Writing in 1988, Peter Drucker predicted that within twenty years, the average organization would have slashed the number of management layers by half and shrunk its managerial ranks by two-thirds. He was wrong. Bureaucracy is in rude health and seems as unassailable as ever. To defeat it, we must understand what makes it so hardy.

First, and most obviously, bureaucracy is omnipresent. How do you kill something that is, quite literally, everywhere? Given its ubiquity, it’s easy to assume that bureaucracy is rooted in immutable laws—the organizational equivalent of Kepler’s laws of planetary motion or Bernoulli’s law of fluid dynamics.

Second, the structures and rituals of bureaucracy constitute a set of social norms that, like all norms, are difficult to challenge without looking like a buffoon. Suggest abolishing the trappings of bureaucracy—the multiple management layers and all-powerful staff groups—and your colleagues will scoff at your naivete. What’s next? Letting people design their own jobs, choose their colleagues, and approve their own expenses? Well, yes, actually, but if you go there, heads will explode.

Bureaucratic norms are powerful because they’re backed by a global confederacy. Every organization is embedded in a web of institutional relationships predicated on the belief that bureaucracy is essential. Consulting firms tell their clients that deep change is impossible without the CEO’s blessing, thus reinforcing the bureaucratic assumption that change starts at the top. Government agencies demand evidence of regulatory compliance and are satisfied only when presented with the artifacts of bureaucratic control—a chief compliance officer, compulsory training, and comprehensive reporting. In return for tuition dollars, business schools promise students a fast track up the corporate ladder. The cohesion of the bureaucratic coalition presents a formidable barrier to would-be management renegades. Their lot is not unlike that of an American tourist who rents a car in Britain. You can drive on the right-hand side of the road if you like, but the disincentives for doing so are manifold.

Third, like nuclear power plants and space rockets, bureaucracies are complex, integrated systems. Every process is connected to every other process. The lack of modularity makes it difficult to change one thing without changing everything. Where do you start? That’s the paradox of change in a bureaucracy: what seems doable isn’t transformational and what’s transformational doesn’t seem doable. The result: an endless succession of tweaks that never succeeds in making the organization fundamentally more capable.

Fourth, bureaucrats are inclined to defend the status quo. Bureaucracy is a massive, multiplayer game in which millions of human beings compete for positional power in zero-sum promotion tournaments. To advance, you must master the art of ducking blame, defending turf, embroidering data, managing up, hoarding resources, trading favors, negotiating targets, and escaping scrutiny. Anyone who’s spent years honing these skills is unlikely to be enthusiastic about a radical rule change. Asking an experienced bureaucrat to go from manager to mentor is like asking Lionel Messi, the platinum-footed Argentine soccer player, to take up volleyball.

Fifth, bureaucracy works—sort of. All those bureaucratic structures and systems serve a purpose, however poorly. To simply excise them would create bedlam. Imagine, for example, what would happen if an organization decimated the ranks of middle management without first equipping employees with the skills, incentives, and information to be self-managing. Bureaucracy is a bulwark against disorder. Dismantle it and you risk anarchy—or so most leaders believe.

Finally, like a mutant in a horror film, bureaucracy is self-replicating and relentless. The dynamics are familiar to anyone who has spent time in a large organization.

In a bureaucracy, your power and compensation are the product of head count and budget. No one ever downsizes their empire voluntarily.
Bigger titles means bigger pay, so high-level jobs proliferate.
Staff groups justify their existence by issuing rules and mandates, which seldom have a sunset clause. As a result, the clog of red tape grows ever bigger. Moreover, internal service providers can’t be fired by their so-called customers.
Every new challenge begets a new CxO or department. These soon become permanent fixtures.
As the organization grows, layers get added, and the ratio of managers to frontline employees creeps upward.
With every crisis, authority moves to the center and stays there.
Greater availability of detailed performance data leads to more interference.
And as bureaucracy grows stronger, those who might resist it grow weaker.

These forces can seem inescapable. Take Google. Despite its founders’ initial determination to create a flat, nonhierarchical organization that fostered creativity and innovation, the company has become increasingly bureaucratic (and therefore slower and more conservative). As one former executive put it,

[Google employees] are trapped in a maze of approvals, launch processes, legal reviews, performance reviews, exec reviews, documents, meetings, bug reports, triage, OKRs, H1 plans followed by H2 plans, all-hands summits, and inevitable reorgs. The mice are regularly fed their “cheese” (promotions, bonuses, fancy food, fancier perks) and despite many wanting to experience personal satisfaction and impact from their work, the system trains them to quell these inappropriate desires and learn what it actually means to be “Googley”—just don’t rock the boat.²

Let us not pretend, though, that bureaucracy advances independent of human intention. Two ignoble traits account for much of bureaucracy’s growth and persistence. The first is the quest for power. In a survey we conducted for Harvard Business Review, 63 percent of respondents listed the reluctance of leaders to surrender power as a significant barrier to reducing bureaucracy.

While having the power to direct your own life is essential, the desire for power can easily become pathological. That’s why philosophers and moral teachers so often warn us of its dangers (“blessed are the meek”) and why a sincere commitment to becoming a “servant leader” is both laudable and rare.

In a bureaucracy, positional power determines what you’re able to get done and what you get paid for doing it. Power is the coin of the kingdom. While most human beings aren’t particularly power hungry, there lurks in each of us a dozy little knave who seeks dominion over others. In a healthy psyche, the wee monster is kept on a short leash, but bureaucracy unchains and nourishes the beast, which once unbound and fed, resists recapture.

Bureaucracies toxify a second human hankering—the desire to be coddled and unaccountable. This can be charming in a toddler, but less so in an adult. If you’re a sole proprietor, there’s no place to hide—you either delight your customers and make enough money to pay your bills, or you don’t. In a large bureaucracy, by contrast, there are hundreds of internally facing roles where the customer is something of an abstraction and one’s personal value-added is difficult to measure. There’s also a multitude of rules, approvals, and conflicting priorities that makes it easy for employees—particularly at higher levels—to evade the consequences of their decisions. The nooks and crannies of a bureaucracy offer a refuge to those who are incompetent, indolent, or merely insecure. Bureaucrats draw comfort from the fact that the locus of accountability always resides elsewhere.

It’s not a human failing to seek safety, and it’s natural that individuals would migrate to roles that are, in relative terms, less demanding. Be honest: Would you rather have a sales job where your performance is easily and frequently judged or a corporate training role where it’s harder to calibrate your contribution to the bottom line? No shame if you opted for the training job, but it’s a problem when there are hundreds or thousands of roles in an organization that insulate employees from being directly accountable to customers. Is it a coincidence that the sort of jobs that are growing fastest in most companies, and in the economy at large, are those that offer their occupants the greatest protection from the merciless judgment of the marketplace? We suspect not.

There’s no way to build a more resilient and entrepreneurial organization without redistributing power and amping up accountability—moves that will discomfort the powerful and protected. This, more than anything, explains why bureaucracy has beat back every attempt to kill it.

In the 1960s, tens of thousands of managers from companies like IBM, GE, and Monsanto were sent off for sensitivity training. Employing a methodology developed by Kurt Lewin, facilitators divided participants into cohorts of five to ten individuals known as T-groups. Through role-playing and peer feedback, managers were challenged to become more authentic and human-centered leaders. T-group sessions, typically lasting several days, were emotionally charged encounters. Many participants found the experience to be transformative, but in most cases the metamorphosis was short-lived. Once back in the bureaucratic bun fight, managers relapsed. As Art Kleiner describes it in The Age of Heretics, “Bullying managers who had learned to listen openheartedly began bullying again. Managers who had finally learned how to speak up at meetings, and to care about their company’s future as a whole, reverted back to being passive-aggressive bureaucrats.”³ In other words, while T-group training built self-awareness, it didn’t equip managers for the gritty work of retooling bureaucratic structures and systems.

As enthusiasm for T-groups waned, progressive leaders searched for other solutions to the problem of mechanistic and dispiriting work environments. Sociotechnical systems (STS), developed by British psychologist Eric Trist, was one promising if clumsily named candidate. STS was based on the premise that the technical and human aspects of work could be jointly optimized. Achieving this fusion required employees to be organized into small, self-managing teams.

In the 1960s and 1970s, companies as diverse as Procter & Gamble, Shell, and Volvo launched STS-themed initiatives, but it was two plant managers at a dog food factory, Lyman Ketchum and Ed Dulworth, who pushed the idea the farthest. In 1969, the pair had been asked to help their employer, General Foods, set up a new plant in Topeka, Kansas. Veterans of a strife-ridden sister plant in Kankakee, Illinois, they were determined to build the new facility atop the principles of STS. Those tenets—which will be familiar to any advocate of “next generation” work practices—included:

Assigning goals to teams rather than individuals
Ensuring that all jobs encompassed both managerial and technical activities
Giving teams responsibility for hiring and compensation decisions
Rotating team members through different roles
Integrating support functions into the teams
Minimizing status differentials
Providing open access to financial information

Putting these precepts to work required patience and experimentation, but the Topeka plant was soon setting benchmarks in every area of performance.

Though much studied and admired by outsiders, the Topeka system never spread to the rest of General Foods. Through the years, as the plant changed hands (General Foods, H. J. Heinz, Del Monte, a private equity group, and finally J. M. Smucker), its distinctive work practices were steadily diluted—this despite unassailable evidence that its hierarchy-lite management model produced superior results.

Harvard Business School professor Richard Walton, an early adviser at Topeka, blamed the recidivism on antagonistic managers:

Topeka’s success … was threatening to other managers whose leadership style was built on opposing principles. Moreover, the plant management’s demands for autonomy in certain areas and its requests for exception from other corporate procedures were resented by staff groups. And many corporate executives simply did not understand the Topeka system.⁴

As one Topeka team member put it in a 1977 interview, “There were pressures almost from the beginning and not because the system didn’t work. The basic reason was power.”⁵

What about all those curious visitors who came to learn from Topeka? Most ended up frustrated. Unlike Ketchum and Dulworth, they didn’t have the luxury of starting with a greenfield facility. How, they wondered, do you lead a management revolution when you’re hip-deep in bureaucracy?

Since Eric Trist’s death in 1993, there’ve been other campaigns to reinvent the workplace, around ideas like job enrichment, total quality management, participative management, and high-performance work teams. Like STS, most of these initiatives were ultimately neutered, cloistered, or aborted. And what of more recent fads—mindfulness, lean startup, agile teams, psychological safety, and all the rest? Will they prove to be similarly inconsequential? Yes, unless we’re honest about why bureaucracy is so hard to defeat and adjust our tactics accordingly.

So, let’s face facts.

BUREAUCRACY IS FAMILIAR: You won’t have the courage to take on bureaucracy unless you believe it’s no longer tenable and there are workable alternatives. We must search out organizations that have successfully defied management orthodoxy.

BUREAUCRACY IS COMPLEX AND SYSTEMIC: Fragmented, half-hearted attempts won’t cut it. We need to replace the entire edifice of bureaucracy, albeit one stone at a time.

BUREAUCRACY IS WELL DEFENDED: There will be resistance, so management rebels need to join forces. You have to build a grassroots movement that can outmaneuver the defenders of the status quo.

BUREAUCRACY SERVES A PURPOSE, HOWEVER POORLY: The goal is to carefully dismantle bureaucracy, not simply blow it up—so you need a change strategy that is both audacious and prudent.

BUREAUCRACY IS SELF-REPLICATING: There will be no easy or permanent victories. To persevere, you’ll need a sense of purpose that’s as unshakable as the path is arduous.

Some hoped that collaborative tools like Slack, Zoom, and Microsoft Teams would turn hierarchies into networks. Who needs managers when teams can seamlessly coordinate their efforts? (During the pandemic, we heard one management guru claim that remote meetings were going to democratize work because the “CEO’s Zoom tile is as big as everyone else’s.” Hah!) Yet while messaging apps and groupware make it easy for employees to sync up, these technologies have done little to reduce management layers, roll back top-down mandates, cut compliance costs, or expand the decision-making rights of those on the front lines. They could be used—especially now enhanced with generative AI—to crowdsource strategy development, capital allocation, leadership selection, and change management, but this seldom happens. Thus far, these tools have mostly been used to expedite project work. They are to teams what Microsoft Office was to individual productivity a generation ago.

Rather than replace top-down structures, technology is more likely to reinforce them. Digital technology allows jobs to be sliced into ever-smaller segments and outsourced to the lowest bidder, further dumbing down work. Real-time analytics make it possible to assess job performance minute by minute—catnip to control-obsessed managers. Two academics, Brett Frischmann and Evan Selinger, call this “time cards on steroids.” They rightly note that “technical innovations have made it increasingly easy for managers to quickly and cheaply collect, process, evaluate and act upon massive amounts of information.”⁶ The Covid-19 pandemic only accelerated these trends. As remote work became the norm, digital surveillance increased among white-collar workers, with every keystroke logged and tracked. Not even highly skilled workers such as doctors and lawyers have been able to escape this digital micromanagement, which has been described as “demoralizing, humiliating, and toxic.”⁷

Let’s not kid ourselves. The spread of digital technology gives us more reasons, not fewer, to fear the relentless spread of bureaucracy and more reasons to fight it.

Beating bureaucracy won’t be easy, but there are reasons to be hopeful. Human beings have wrestled other complex problems to the ground. We’re not helpless. But the first step is to open our eyes and our hearts. Over the decades, many of us have become desensitized to the human and economic costs of bureaucracy. This needs to change.

A troubling reality can lurk for years in our peripheral vision without spurring action. Only when someone takes the trouble to dimensionalize a problem do we gain a sense of its size and significance.

In the late 1990s, the US Institute of Medicine conducted a comprehensive meta study of patient safety. The ensuing report, To Err Is Human, published in 1999, estimated that as many as ninety-eight thousand lives were being lost each year to medical mistakes. Within days of the report’s publication, President Bill Clinton signed the Healthcare Research and Quality Act, a bill that increased funding for safety-oriented research and mandated an annual report on progress in reducing medical errors. Since then, US health providers have been engaged in a Herculean effort to reduce deaths and complications due to preventable errors—with remarkable results. Between 2008 and 2014, for example, the number of infections associated with central line catheters dropped by half in US hospitals.

The lack of gender and racial diversity in the tech industry is another long-ignored problem that was brought to light by data-driven consciousness raising. In 2008, Mike Swift, a reporter for the San Jose Mercury News, set out to measure diversity in Silicon Valley’s fifteen largest companies. Swift’s analysis, which showed Blacks, Hispanics, and women losing ground even as staffing levels increased, prompted a rare instance of soul-searching among the tech elite.⁸ Google, which had initially refused Swift’s request for data, released its diversity statistics in 2014. The company confessed that only 17 percent of its tech employees were female, that 2 percent were Hispanic, and 1 percent African American.⁹ The disclosure came with an apology: “We’ve always been reluctant to publish numbers about the diversity of our workforce at Google. We now realize we were wrong.”¹⁰

In building the case against bureaucracy, we need more than theory and anecdotes. We need robust data on the prevalence and costs of bureaucratic drag. To that end, we built a simple instrument—the bureaucratic mass index, or BMI. It covers ten questions across seven categories of bureaucratic drag. (See the sidebar “Bureaucratic Mass Index Survey Questions.”)

WASTE: The number of organizational layers and time spent on low-value bureaucratic tasks

FRICTION: Bureaucratic impediments to speedy decision-making

INSULARITY: The percentage of time devoted to internal versus external issues

AUTOCRACY: Limits to frontline autonomy

CONFORMITY: The likelihood that unconventional ideas are greeted with skepticism or hostility

TIMIDITY: Constraints on experimentation and risk-taking

POLITICKING: The prevalence of political behaviors and the role they play in determining personal advancement

To establish a cross-industry baseline, we launched an online survey with the help of Harvard Business Review. As of this writing, more than twenty thousand individuals participated. (See table 4-1 for more information about the respondents.) Here’s what we learned.

TABLE 4-1

BMI survey: Respondent demographics

Size of organization (number of employees)	Percent of respondents	Role	Percent of respondents
< 100	14.3	CEO/SVP	10.8
100–1,000	29.6	Director	24.4
1,001–5,000	20.1	Manager	36.9
> 5,000	36.0	Frontline employee	27.9
	100.0		100.0

TABLE 4-2

BMI survey: Number of organizational levels by firm size

Size of organization (number of employees)	Average number of levels
< 100	4
100–1,000	5
1,001–5,000	6
> 5,000	8

In addition, respondents spend an average of 28 percent of their time on bureaucratic chores such as writing reports, documenting compliance, and interacting with staff functions. A significant portion of this work is deemed to be of little or no value. For example, barely a third of respondents judge budgeting, goal-setting, and performance reviews to be “very valuable.”

How many layers are there in your organization (from frontline employees up to the CEO, president, or managing director)?
What percentage of your time do you spend on “bureaucratic chores” (e.g., preparing reports, securing sign-offs, complying with staff requests, and participating in review meetings)?
How much does bureaucracy slow decision-making and action in your organization?
To what extent are your interactions with your manager and other leaders focused on internal issues (e.g., resolving disputes, securing resources, getting approvals)?
How much autonomy do frontline teams have to design their work, solve problems, and test new ideas?
How often are frontline team members involved in the design and development of change initiatives?
How do people in your organization react to unconventional ideas?
In general, how easy is it for an employee to launch a new project that requires a small team and a bit of seed funding?
How prevalent are political behaviors in your organization?
How often do political skills, as opposed to demonstrated competence, influence who gets ahead in your organization?

We scored each of the BMI questions on a scale of 0 to 10, where 0 denotes the complete absence of bureaucracy-related traits and 10 a high degree of bureaucratic drag. Adding these results together, we calculated an overall BMI score for each respondent, ranging from 0 to 100. The average score across the survey was 60 (figure 4-1 presents the distribution of BMI scores).

FIGURE 4-1

Distribution of scores from the BMI survey

Bar graph showing the distribution of scores from the bureaucratic mass index (BMI) survey of the costs of bureaucracy, with mean and standard deviation.

This simple survey starts to bring the costs of bureaucracy into focus. For too long, large organizations have ignored these costs, perhaps assuming they were unavoidable. Yet as we’ve already hinted, bureaucracy isn’t inevitable.

Just ask Benedetto Vigna. Trained as a physicist and with more than a hundred patents to his name, Vigna was appointed CEO of Ferrari in June 2021. Eager to understand the issues facing the iconic carmaker, Vigna met with more than three hundred employees during his first few weeks on the job. The company, he concluded, was being hobbled by bureaucracy. Using our language, Vigna told a Wall Street Journal reporter that Ferrari’s “bureaucratic mass index” was unacceptably high. As an example, he cited an internal meeting on cybersecurity that had included employees from nine organizational layers. Only the most junior person, in Vigna’s view, had added any value. Determined that the company should be as nimble as its race-winning sports car, Vigna moved boldly to flatten the hierarchy, increase transparency, empower those on the front lines, and engage every employee in tackling productivity and sustainability challenges. The changes, said Vigna, were aimed at building “a team that is able to adapt at high speed.”¹¹

The payoff has been substantial. Collapsing the pyramid put test drivers on an equal footing with senior engineers, increasing their clout in design decisions. Said Vigna, “When drivers can tell the engineers what they think, there is a clear improvement in the experience you are able to deliver to the client.” Another win was an accelerated pace of innovation. In a typical case, an employee suggested a better way of molding aluminum that saved the company 250 tons of metal in the first year. Between 2021 and 2024, Ferrari’s stock price doubled, and as we write this, the company is the most valuable automaker in Europe.

In many organizations, bureaucracy has become a kind of addiction. It is the drug of choice for leaders who are stressed and disoriented by perilous challenges and heaving change. Adding more layers, policies, and rules is an emotional salve—a way of perpetuating the illusion of control and postponing the hard work of building an organization that is as dynamic and ingenious as the times demand. But as any veteran of Alcoholics Anonymous will tell you, the first step in beating addiction is to admit you have a problem. So, if your organization is enslaved by bureaucracy, as most are, you may want to invite your colleagues to take the full BMI survey, which you’ll find in appendix A and online at www.humanocracy.com/BMI.

The bureaucratic fortress may seem impregnable, but three hundred years ago, the same could have been said of monarchical authority. Before the eighteenth century, most human beings were ruled by unaccountable leaders whose only qualification was their royal lineage. Two centuries ago, slavery was viewed as an unalterable fact. Some poor souls, it seemed, were fated to be property. A hundred years ago, patriarchy was regarded as preordained—at least by men. Women were systematically disadvantaged, both socially and economically. Today, we regard autocracy as indefensible, slavery as iniquitous, and patriarchy as injurious. While these evils still exist, they have been steadily, and sometimes impressively, rolled back. And yet these social cankers were once as deeply rooted as bureaucracy is today.

Are these analogies overdrawn? Perhaps. How can we possibly compare the life of a retail clerk at Tesco, a millwright at ArcelorMittal, or a service rep at the Department of Motor Vehicles with the lot of a serf or plantation slave? For most human beings, working conditions are immeasurably better than they were in centuries past. True enough. Yet buried in this objection is the assumption that at some point we should accept our gains and submit to the status quo—but at what point is that?

The subsistence farmers lured to the “satanic mills” of Victorian England were often better paid, fed, and housed than those who remained on the land. Despite that, they fought for safer working conditions, an end to child labor, and the right to collective bargaining. Thanks to their efforts, we have better jobs than they did. Is that enough, then? No. We have an obligation to pay it forward. A living wage, equal pay, respect for diversity, parental leave, flextime, health care coverage—these are worth fighting for. But should we aim still higher? We think so.

Aristotle argued that an individual cannot achieve happiness without self-direction. If we believe that a just society is one in which people have the opportunity and freedom to become their best selves, then we shouldn’t tolerate the soft tyranny that millions of employees face each day at work—what oral historian Studs Terkel called “a Monday through Friday kind of dying.”¹²

Rather than doubting our ability to eradicate bureaucracy, we should draw courage from the patriots, abolitionists, and suffragettes who championed the cause of human dignity in centuries past. Their successes teach us that a purely utilitarian argument is not enough to dislodge a deeply embedded social system that serves the interests of the few rather than the many. While data can crack the ice, real progress is possible only when hearts begin to melt.

Consider the case of Thomas Clarkson, one of the leading figures of the British abolitionist movement. Clarkson spent much of his life collecting eyewitness accounts of the slave trade. Traveling more than thirty-five thousand miles by horseback, he interviewed twenty thousand sailors who had worked on slaving ships. His unsparing essays mobilized antislavery groups across Britain, but Clarkson believed artifacts were more persuasive than words. When he was invited to speak, he displayed shackles and thumbscrews retrieved from slave ships. Alongside them, he laid out delicate carvings and beautiful fabrics produced by African artisans. This jarring juxtaposition of brutality and beauty drove his point home: the poor captives on the slave ships were no less human than those sitting in his audience. It was Clarkson’s tireless campaigning, along with that of activists like John Newton, the former slave trader who penned “Amazing Grace,” that compelled the young parliamentarian William Wilberforce to take on the challenge of eradicating slavery across the British empire, a feat that was accomplished in 1833.

Wrongs are wrong, whatever their magnitude. If we are not daily struck by the inhumanity of bureaucracy, it’s because our outrage has been dulled by time and familiarity. Yet what Thomas Paine said of monarchy in 1776 is equally true of bureaucracy today: “A long habit of not thinking a thing wrong gives it a superficial appearance of being right.”

Throughout the long history of social progress, the most powerful argument for change has been the assertion that every human being deserves the fullest possible opportunity to develop, apply, and benefit from their natural gifts, and that unnecessary human-made impediments to this quest are unjust. That is why we stand against bureaucracy: because human beings deserve better.

So collect all the data you can. But know that only a keenly felt and widely shared moral imperative has the power to break through the indifference, self-interest, and fear that have long guarded the bureaucratic citadel.

Part Two

Humanocracy in Action

Can We Really Go Bureaucracy-Free?

— 5 —

Nucor

Building People Not Products

It was a hardy breed of explorers who set sail for the New World in the fifteenth and sixteenth centuries. Most of us would have wanted a Tripadvisor report before leaving port. Many are similarly hesitant to embark on the journey to humanocracy. While data and moral courage may get your colleagues to the harbor, most will hesitate to step aboard until you can paint a picture of the destination. The problem is, conjuring up a plausible image of a super-flat, thoroughly decentralized organization isn’t easy. As human beings, we’re prisoners of the familiar—and there’s little that’s more familiar than bureaucracy.

Luckily, the post-bureaucratic future isn’t entirely terra incognita. A small but growing number of vanguard organizations have been mapping its contours, and there’s much to learn from their endeavors. In this chapter and the one that follows, we’ll delve into two pioneering organizations that have sailed far beyond shores of bureaucratic orthodoxy. Nucor, the world’s most innovative and consistently profitable steelmaker, is a case study in what happens when you invert the pyramid and unleash the capabilities of those on the front lines. Haier, the Qingdao-based home appliance maker, has built a culture that encourages everyone to think and act like an entrepreneur. While their approaches are different, both companies have upended canonical management beliefs. By doing so, they’ve built highly successful organizations that give us confidence in setting sail for humanocracy.

Have you ever been inside a steel mill? If so, you’ll know why the people there are considered the ultimate blue-collar workers. In the furnace, operators clad in heat-resistant jackets and face shields carefully manipulate a forty-foot cauldron of molten metal—what’s left of a few hundred tons of ferrous scrap after a thirty-minute, 175-megawatt electroshock treatment. In the nearby caster—a machine the size of a school bus that pours molten steel into different shapes—crew members gaze intently at the glowing orange stream of liquid metal, periodically adjusting and lubricating the nozzle to ensure a steady flow.

Watching steelworkers tend to these giant machines, you might conclude their work requires more brawn than brain, and data from the US Bureau of Labor Statistics supports that view. Physical strength and dexterity are considered to be far more important for steelworkers than creative and analytical skills (see table 5-1). While that may be true in some steel plants, it’s certainly not the case at Nucor, America’s largest steelmaker.

TABLE 5-1

Importance of specific skills in select metalworking occupations

0 = unimportant, 100 = very important
	Caster operators	Furnace operators
Handling and moving objects	86	71
Control precision	63	72
Manual dexterity	63	72
Analyzing data or information	37	36
Developing objectives and strategies	29	26
Originality	25	25
Customer service	19	29
Drafting and specifying technical devices	16	19
Management of financial resources	13	16
Source: US Bureau of Labor Statistics and authors’ analysis.

At Nucor, it’s the expertise and autonomy of frontline workers that drives progress. Consider the team running the furnace at Nucor’s Blytheville, Arkansas, facility, who turned out the giant I-beams that undergird New York’s One World Trade Center. It was crew members—not a finance or engineering executive—who conducted a detailed cost-benefit analysis and decided it was time to replace the aging furnace shell (the colossal bowl where scrap metal is turned into molten steel). Once the decision was made, it was the team—not the purchasing department—that solicited bids from suppliers. Unimpressed by the proposals they received, the crew decided to design the shell themselves. They chose the fabricator and, during the build-out, provided minute feedback at every step. The result? A highly efficient piece of equipment that cost Nucor $3 million—one-tenth the price of the original bids.

It is this sort of initiative and innovation that has made Nucor America’s steel leader. In 2023, Nucor’s 31,600 employees—called teammates—shipped 25.2 million tons of steel and generated $38 billion in sales. Nucor is also the most diversified steelmaker in North America, supplying beams, sheet, plate, reinforcing bar, and steel grating to a broad range of customers. According to CEO Leo Topalian, one out of four tons of steel made in the United States comes out of a Nucor facility.¹ The company runs its plants on scrap steel and is the largest recycler in the western hemisphere.

Steelmaking is a tough business. When compared to other industries, return on capital is meager and bankruptcies common. Nucor, though, isn’t an average steel company. Since 1969, it’s suffered only one unprofitable year, following the 2008 financial crisis, and has consistently delivered industry-leading returns. Not only does Nucor outperform its peers on profitability and return on capital, it also leads by a wide margin on growth in market value, revenue, income, and tons shipped per employee (see table 5-2). The company’s ratio of capital per employee is in line with the competition, but its output per capita is almost 50 percent higher than the industry average. These results are the product of a remarkable culture—one that values contribution over rank and innovation over compliance.

TABLE 5-2

Nucor performance versus peers, five-year average (2019–2023)

Profitability	Nucor	Peer group^a
Return on capital	17.4%	10.8%
Profit margin (EBIT)	17.0%	11.5%
	117%	91%
Productivity ($ thousands)	Nucor	Peer group^a
Market value per employee	$1,023	$654
Revenue per employee	$1,056	$825
Net income per employee	$148	$84
Net value of plant, production, and equipment per employee	$288	$354
Source: Capital IQ and authors’ analysis. ^a Simple averages include ArcelorMittal, Cleveland-Cliffs, Commercial Metals Company (CMC), Gerdau, Steel Dynamics, Nippon Steel, and United States Steel. For employee productivity metrics, CMC, Gerdau and Nippon Steel were not included due to a lack of data.

Nucor produces its steel in mini-mills, which are typically half the size of an integrated, blast furnace mill.² Mini-mills are more flexible than integrated mills and have lower capital costs. Historically, integrated plants had an advantage in producing thin, high-grade steel. Yet over the past thirty years, Nucor’s relentless innovation has erased much of this advantage. In 1989, Nucor pioneered a new technology that allowed it to produce slabs that were four times thinner than what had previously been possible (1.2 versus 4.8 millimeters). With thinner sheets, the time required to roll the steel into its final shape was cut from several days to a few hours. (It would be eight years before Nucor’s competitors matched this advance.) In 2002, Nucor introduced ultra-thin cast steel, which reduced thickness to less than a millimeter. Compared to an integrated facility, the ultra-thin cast process consumed 95 percent less energy. Over the past decade, this breakthrough, along with many others, has pushed Nucor’s share of North American crude steel production from 16 percent to nearly 25 percent.³

Nucor’s employees, who live in rural communities across the American Midwest and Southeast, are the soul of the company and share directly in its success. Since the Great Recession, Nucor has increased its payroll by nearly 50 percent, while industrywide employment shrank.⁴ Not surprisingly, employee turnover is significantly lower than the sector average.

Underpinning Nucor’s performance is a radical, bottom-up organizational model that reflects the convictions of the company’s former chairman and CEO, Ken Iverson. Foundational to Iverson’s worldview was a belief in the capacity of ordinary human beings to do extraordinary things. As he explained in his book, Plain Talk: Lessons from a Business Maverick:

Most of today’s corporations were conceived as command-and-control organizations. The founders of integrated steel mills, for example, clearly assumed that the “genius” of the organization resided almost completely in management.… In contrast, we built Nucor under the assumption that most of the “genius” in our organization would be found among the people doing the work. From the outset, we shaped our business to let employees show management the way to goals that once seemed unreachable.⁵

As you’d expect of a company built to encourage creative problem-solving, Nucor is highly decentralized. In essence, the company is a confederation of sixty-eight divisions that operate independently but compete collectively. The average division generates half a billion dollars in annual revenues and operates one or two plants. These units make their own decisions on procurement, products, and staffing. Each division is also responsible for creating the demand for its products by winning and retaining customers. Unlike other steel companies, Nucor’s plants aren’t mere manufacturing sites but end-to-end businesses. Accordingly, each division has its own P&L, which is entirely free of corporate cost allocations.

Thanks to this decentralization, the entrepreneurial spirit runs deep at Nucor. Attend a plant meeting, and you’ll undoubtedly hear teammates discussing new commercial opportunities. Consider, for example, the experience of the Hickman, Arkansas, sheet division. For years, the bulk of its revenue came from selling steel tubes to oil and gas companies. Riding the fracking boom of the early 2010s, Hickman became one of Nucor’s most profitable units. But in late 2014, oil prices collapsed and, with it, demand for Hickman’s tubes. In a matter of weeks, the division went from being maxed out to losing money. This triggered an urgent search for solutions. How can we diversify our product range and industry exposure? What can we produce that’s differentiated from competitors and other Nucor plants? A small ad hoc team fanned out to capture ideas from colleagues and customers. The brainstorming surfaced two promising opportunities: specialized steel for electric motors and high-strength steel for auto parts. Team members were soon on airplanes, traveling the world to locate the technology and equipment needed to make the new products. In parallel, other team members worked up a proposal for a $230 million mill expansion that would add 650,000 tons of capacity. MaryEmily Slate, who at the time was Hickman’s general manager, pitched the proposal to Nucor’s executive group in February 2016 and, within a few months, had secured the necessary funding.

Reflecting later on how her team had mobilized to right the ship, Slate said, “The greatest thing is you get it done without somebody from the top saying, ‘This is what you’re going to do.’ The idea came from the ground floor, based on a shared assessment of what we needed. We’re all responsible for the financial performance of our facility.”⁶

An oft-repeated mantra at Nucor is that decisions should be “pushed down to the lowest level.” It’s no surprise, then, that the company has a lean corporate center—a few hundred people occupying a nondescript office building on the outskirts of Charlotte, North Carolina. Head office acts as the corporate bank, reviewing major capital requests, and also sets a few basic rules such as base salary levels and minimum performance standards for the divisions.

Unlike most industrial companies, Nucor has chosen not to centralize functions like R&D, sales, marketing, strategy, safety, engineering, compliance, and purchasing.

Nucor’s lean management philosophy also applies at the divisional level. The thousand-strong Blytheville beam division, for example, has a scant seven full-time managers—including the plant manager. Across the company, full-time managers and executives, a population that doesn’t include team supervisors, account for only 2 percent of employment—four times less than the percentage in the overall economy. As a percentage of revenue, Nucor’s general and administrative expenses hover around 3 percent, or roughly half that of its competitors.

Nucor’s faith in its people has produced a management model that breaks the bureaucratic mold in five important ways.

1. Creativity: Paying for Breakout Thinking

Through its compensation system, Nucor focuses everyone’s attention on innovating in ways that maximize asset productivity and growth. While competitors may assume that investment is the fastest way to raise output, Nucor bets on the imagination of its people. Here’s how it works.

Critically, bonuses are paid to teams, not individuals. A typical team comprises twenty to thirty operators who work across multiple shifts and have joint accountability for a particular process. Team rewards encourage collaborative problem-solving, which is essential in a process industry where tasks are highly interdependent (see figure 5-1). The furnace, caster, and maintenance teams, for example, are all part of a continuous process, so they have a common production target. One caster crew member in the Hickman plant remarked, “If one area goes down, we all go down with it. My problem is their problem, and everyone will jump in to solve it.”

FIGURE 5-1

The steelmaking process at a mini-mill

Diagram illustrating the steps involved in the steelmaking process at a mini-mill, from scrap collection to finished product storage and shipment.

Within each plant, teams have access to real-time information on their performance and, hence, their compensation. The expectation is that a well-performing team will exceed its target and generate a substantial weekly bonus—which in most cases is exactly what happens. As you might expect, team members have little patience with slackers. A furnace operator in the Blytheville plant noted, “Peer pressure is a wonderful motivator.”

Highly variable compensation is unusual for frontline workers, but Nucor’s success demonstrates the value of giving everyone an incentive to innovate. With bonuses included, Nucor’s factory workers make about 25 percent more than their industry peers.

Nucor’s compensation model yields other benefits as well.

No one at Nucor is looking to the center for direction. Instead, strategy typically emerges from below, as dozens of teams and divisions scan the horizon for opportunities and take the initiative in courting customers, hiring teammates, and experimenting with new products and methods.

Taken together, the elements of Nucor’s compensation model send a strong message: everybody is essential to building a better business and will be rewarded for doing so.

2. Competence: Cultivating Expertise

It’s no accident that Nucor’s employees are more skilled—technically and commercially—than their industry peers. Team members understand that to become ever more efficient and generate ever more demand, they have to solve ever tougher problems—which in turn means getting progressively smarter, both individually and collectively. Nucor’s people practices, not surprisingly, are attuned to building deep knowledge.

What is something you are passionate about that helps to motivate you at work?
Have you ever fixed something?
Describe learning a new skill—how did you go about it?
Tell us about a time when you made a mistake at work. How did you correct it?
If a coworker really can’t stand you, what would you do?

As these questions imply, the focus is less on specific skills (which can be learned on the job) and more on the candidate’s resourcefulness and capacity to self-manage. Nucor’s highly selective approach also carries symbolic value: new hires understand they’re joining an exclusive organization that sets a high bar for performance and cares for its members.

The best way to advance your career at Nucor is to move across departments and even plants. It’s common to find former salespeople working in shipping or furnace operators working in maintenance. At the Blytheville beam mill, more than half the teammates with five or more years of tenure have made at least one departmental rotation. Rotations are facilitated by Nucor’s internal job market, which gives teammates visibility into every open position across the company.

Exposing people to multiple skills and functions is a win-win. For individuals, the change in pace, activity, and colleagues makes work more interesting. In return, Nucor gets a workforce that’s able to solve complex, multidisciplinary problems.

By bolstering business thinking deep in the organization, Nucor maximizes the quality of decision-making at all levels and reduces the perceived status gap between frontline employees and commercially savvy managers.

3. Collaboration: Building Social Networks

In most organizations, cross-unit coordination is the job of corporate staffers. They’re responsible for spotting opportunities to standardize practices, share resources, and jointly pursue new initiatives. At Nucor, coordination, like everything else, happens bottom up. A dense network of lateral connections helps stitch together far-flung divisions with little or no top-down direction.

Nucor also hosts regular cross-plant events. Plant managers get together every month and department managers every six months. In addition, there are annual gatherings of frontline teams. This represents a substantial investment in time and travel, but Nucor believes it’s the best way to transfer expertise and tackle new problems. A member of the Hickman caster team described the benefits: “You’re engaging and investing in people, building relationships, and generating opportunities to improve. During a visit, the ideas pile up. By the time you get back, you have a ton of energy to try something new. It’s never a question about whether it’s worth the time. You always bring something back.”

In each mill, cross-functional teams mapped out the skills and technologies that they would need to acquire. The teams hired metallurgists and partnered with local universities to explore new production methods. Through regular cross-team meetings and frequent best-marking visits, the automotive initiative took shape. The informal team of teams solved technical problems, developed marketing strategies, and divvied up product responsibilities. Today, Nucor ships more than 1.5 million tons of steel to car makers each year—an amazing testament to the power of grassroots coordination!

Nucor’s profligate transparency creates a healthy competition between divisions, prompting friendly contests to see which plant will be first to achieve a particular goal around safety or efficiency. It also makes it easy to spot plants and practices that deserve to be best-marked.

4. Commitment: Creating an Environment of Trust

Commitment flourishes in an environment of trust. To go all in, team members need to feel they work in an organization that values fairness, honesty, and loyalty. Sadly, trust is often a scarce commodity in large companies. A 2023 Gallup survey revealed that only about a quarter of US workers fully trust their company’s leaders.⁷

By contrast, Nucor teammates speak of the company as a “community” or “family.” According to John Ferriola, the company’s CEO from 2013 to 2019, “Nucor doesn’t have a chain of command; it has a chain of trust.”

Many of the practices we’ve described boost trust: the compensation process ensures that the fruits of innovation are equitably shared; investment in personal development creates reciprocal loyalty; and radical transparency brings people together around shared goals. Beyond this, there are other pillars that strengthen trust.

Ferriola says the company could have avoided its one and only loss-making year, 2008, by laying off a small number of people, but he and other executives never considered it. That was a good call. Nucor’s local teams have made the company a leader in process automation because nobody’s worried about being replaced by a smart machine.

Some benefits, such as Nucor’s profit-sharing scheme, scholarship program, employee stock purchase plan, and service awards program, are off-limits to senior officers. With few status differentiators, communication tends to be candid and forthright. At Nucor, executives don’t sit on pedestals.

Team members are directly involved in the selection of supervisors and managers. There’s also a formal process for giving upward feedback. A supervisor in Hickman said, “You get a bad score on the survey and you’re toast.” Head-office managers make frequent plant visits and host local town halls. During these dinner meetings, teammates can raise any issue that comes to mind. Said one plant manager, “These dinners aren’t done until the teammates are ready to call it a night. I often feel like I’m getting grilled, and I can’t BS my way out of their questions.”

5. Courage: The Confidence to Act

When compared to its competitors, Nucor’s production crews are ridiculously empowered. Shift teams are supported by a supervisor who’s more coach than boss, but it’s frontline team members who take the lead in setting production targets, allocating tasks, meeting safety and quality standards, and solving production snags. The financial impact of these decisions can run to tens or even hundreds of thousands of dollars.

Beyond controlling the production process, teams are also responsible for:

The team takes the lead in professional development. Teammates give each other feedback through an annual survey that focuses on performance, safety, reliability, and leadership skills. While the peer-review process doesn’t have a direct bearing on compensation, it gives employees a clear sense of their standing within the team and informs decisions on rotation, advancement, and special assignments. Being accountable to peers inspires individuals to give their best. As one teammate working in the Blytheville furnace put it, “Every day is an interview.”

The $230 million expansion at the Hickman division mentioned earlier was meant to give the mill access to rolling machines that could switch between different product specs in minutes rather than hours. The project team, led by Jay Wheeler, a former maintenance engineer, included both operators and managers. After visiting equipment suppliers in Europe and Asia, they arrived in Vienna for talks with a local vendor. During the meeting, engineers from the supplier probed the Nucor team members to better understand their needs and constraints. Wheeler recalls the Austrian engineers were confused when their questions were answered not by Nucor managers but by frontline team members.

The logic of relying on operators to source and deploy technology seems obvious to people at Nucor. After all, it’s the people at the sharp end of the business who have the best perspective on what they need to succeed.

Though it’s widely regarded as one of the world’s most innovative steelmakers, Nucor doesn’t have a central R&D function, nor does it boast a chief technology officer. Yet, as Ferriola notes, “It’s not quite right to say that Nucor lacks an R&D department. We do have one, and it’s 32,000-people strong.”

With empowerment comes a degree of personal risk—what happens to you if you screw up? In a rule-worshipping culture, that risk may not be worth taking, but at Nucor, the tolerance for “smart” failures runs deep. Said Ferriola: “We encourage our people not to fear failure. You cannot stretch the limits of your knowledge, your imagination, or your skills if you’re afraid to fail. It’s very typical to hear a manager or a supervisor coach a new teammate by saying something like: ‘If you’re not failing, you’re not pushing the limits of your abilities.’ ”

Nucor’s management model has been built to maximize creativity, competence, collaboration, commitment, and courage. Not coincidentally, it is these human attributes and behaviors that are most critical to producing extraordinary results. True to the spirit of humanocracy, Nucor’s model isn’t about pushing employees to do more, but giving them the opportunity to be more—more than blue-collar workers, more than order-takers, more than mere operators, more than employees. Nucor’s frontline team members are experts, innovators, risk-takers, and owners. Nucor proves unequivocally that every job can be a good job, whatever the industry.

In chapter 3, we laid bare the foundations of bureaucracy: stratification, standardization, formalization, and specialization. Nucor’s model challenges management orthodoxy in each of these areas.

In the end, no single system or practice explains Nucor’s success, but if you’re looking for an overarching lesson, it’s this: Whatever your organization makes or sells, its real business is growing human beings. As they say at Nucor, “We don’t build steel, we build people.”

— 6 —

Haier

Everyone an Entrepreneur

In recent years, startups have reimagined just about every industry on the planet, often at the expense of the incumbents.¹ To fight back, consultants advise their lumbering clients to sequester new ventures in purpose-built accelerators. What seldom occurs to the advisers or their clients is that it might be possible to turn the entire company into an entrepreneurial platform. To those trapped by bureaucratic dogma, it seems inconceivable that a large company could behave like a swarm of startups. That’s because they’ve never been inside Haier, the world’s largest appliance maker.

Based in Qingdao, China, Haier competes with household names such as Whirlpool, LG, and Electrolux. At present, Haier has over 110,000 employees, including 38,000 outside China. Haier’s international growth has been fueled by acquisition, the most notable of which was its 2016 purchase of General Electric’s appliance business. (Haier has rights to the GE Appliance brand name until 2056).

With $38 billion in revenues, Haier’s appliance business has consistently outperformed its peer group (see table 6-1). Between 2019 and 2023, Haier has steadily expanded its lead in the Chinese market, growing its share in refrigerators and washing machines from 37 to 45 percent and 36 to 48 percent, respectively. The company also created more than $2 billion in market value from new ventures.

TABLE 6-1

Haier performance versus peers, 2019–2023

	Haier	Peer group ^a
EBIT growth	17.4%	3.0%
Revenue growth	7.3%	4.9%
Total returns to shareholders	104%	13.9%
Market value per employee (thousands)	$261	$204
Source: Capital IQ and authors’ analysis. ^a Averages include Gree, Midea, Hisense, Electrolux, Whirlpool, LG, and Samsung. For market value per employee, LG and Samsung were not included due to a lack of employment data.

Haier’s success is the result of a root-and-branch overhaul of its once-traditional management model. Led by Zhang Ruimin, Haier’s renegade chairman and CEO (who retired in 2021), the radical makeover focused on three objectives:

Turning every employee into an entrepreneur
Creating “zero distance” between employees and users
Making the company a power node in an ever-expanding, web-centric ecosystem

Haier’s shorthand for these goals is rendanheyi, a mash-up of Chinese characters that connotes a tight coupling between the value created for customers and the value received by employees. The rendanheyi model departs from bureaucratic norms in six critical ways.

1. From Monolithic Businesses to Microenterprises

Large corporations often consist of a few dominant businesses, each with its own orthodoxies about strategy, customers, and technology. These monolithic entities and their monocultures make a company vulnerable to unconventional competitors and blind it to white space opportunities. To avoid these risks, Haier has divided itself into more than four thousand microenterprises (or MEs), each with ten to fifteen employees.

Microenterprises come in three varieties. First, there are the roughly two hundred MEs that have their roots in Haier’s legacy appliance business. These market-facing units are charged with reinventing themselves for today’s customer-centric, web-enabled world. Star Kitchen, which makes higher-end refrigerators for urbanites, is a typical example.

Second, there are one hundred “incubating” MEs. These are homegrown startups like ThunderRobot, a unit that makes superfast gaming computers, and Community Laundry, a business that installs and maintains over forty thousand internet-connected washing machines across a thousand Chinese college campuses.

Finally, there are roughly 3,700 “node” MEs. These include internal suppliers that sell components and services to Haier’s market-facing MEs and sales nodes that sell and market Haier products across China.

Microenterprises have been key to Haier’s quest to build the world’s first industrial company for the internet age. This entails more than developing web-enabled products; it means creating an organizational model that mimics the architecture of the internet. While incredibly diverse, the web is held together by common technical standards that make cyberspace navigable and allow sites to swap data. That’s the model for Haier’s modular structure. MEs are free to form and evolve with little central direction while sharing a common approach to target setting, internal contracting, and cross-unit coordination.

2. From Incremental Goals to Leading Targets

Audacity is the hallmark of every successful startup. In an entrepreneurial firm, aspiration outstrips resources, and innovation is the only way to bridge the gap. In established companies, by contrast, there’s little stretch. It’s enough to do a bit better than last year and keep pace with one’s peer group.

At Haier, every microenterprise pursues ambitious growth and transformation goals known as “leading targets.” Rather than taking last year’s performance as a starting point, growth objectives are set “outside in.” A dedicated research unit collects product-by-product statistics on market growth rates around the world and uses this data to establish ME growth goals. In the Chinese market, these goals are derived from a highly granular, bottom-up assessment of the size and expected growth of specific customer segments and product categories across thousands of territories.

A transforming ME is expected to grow revenue and profit four to ten times faster than the industry average, with the exact target depending on the competitive position of the ME. In product categories or geographies where Haier lags, the bar is set higher, since the ME has plenty of headroom to increase market share. In areas where Haier leads, the target is more modest but still a multiple of the market baseline.

An ME’s leading target also includes a transformation component. Every market-facing ME is expected to work hard to become an “ecosystem” business. The first step is mass customization. Haier has invested heavily in advanced manufacturing, and most factories can now build to order. The next step is to turn customers into users by offering services that yield a recurring revenue stream. An ME selling commercial heat pumps, for example, may decide to offer its customers a real-time monitoring service that helps them maximize the energy efficiency of their office buildings.

The ultimate goal is to build a platform that connects users with third-party service providers. A good example is Community Laundry. Having developed a popular smartphone app that allows students to schedule and pay for the use of dormitory laundry facilities, the ME team gave outside vendors access to the app’s more than 10 million users. Today, the Community Laundry platform hosts dozens of other businesses, such as food delivery and dorm room furniture, and takes a share of the revenues they generate. The Community Laundry team has inspired similar Haier microenterprises in Japan and India and is now expanding the model to budget hotels.

The focus on building platforms reflects Haier’s belief that the only way to match the valuation multiples of successful internet companies is to grow its user base while reducing marginal costs. The goal: capital-light businesses where variable costs are close to zero.

Haier tracks the transformation of every ME with a “win-win value-added” statement that captures detailed metrics such as the extent of user involvement in product development, the degree to which Haier’s products offer unique customer value, and the percentage of profits derived from ecosystem revenue.

Nodal MEs also have leading targets pegged to external benchmarks. A manufacturing node, for example, may be responsible for lowering costs, cutting delivery time, improving quality, and further automating its production facilities.

In most organizations, old habits get challenged only when a business hits the wall. Change is reactive, not proactive. At Haier, leading targets compel MEs to continually reexamine their core assumptions. As in a startup, everyone knows that more of the same won’t cut it.

3. From Internal Monopolies to Internal Contracting

In a startup, everyone reports to the customer. Most employees have a financial stake in the business and understand the only way to create value is to do amazing things for customers. In large organizations, by contrast, employees are often insulated from market forces. They work in functions like HR, R&D, manufacturing, finance, IT, and legal that are, in essence, internal monopolies. However inept or inefficient these providers may be, they can’t be fired. Internal relationships are governed by mandates, transfer prices, overhead allocations, and hierarchical relationships rather than by freely negotiated contracts. The result: mediocrity, inflexibility, and inefficiency.

Again, it’s different at Haier. Every ME is free to contract with other MEs. A typical user ME will have contracts with a dozen or more nodes. If it believes its needs could be better served by an external vendor, it can go outside. Whether internal or external, agreements are negotiated with virtually no interference from senior executives.

Critically, every internal contract has a performance bonus that’s tied to the success of the final product or service with customers. If a product doesn’t meet its sales goals, every contributing ME and node gets penalized. Chairman Zhang was only slightly exaggerating when he told us, “We no longer pay employees. Now they must earn their salary by creating value for customers.” Like a sole proprietor, everyone at Haier has a customer-facing role and a financial stake in serving customers well. That’s the essence of Zero Distance.

Consider how internal contracting helped the Star Kitchen ME bring a new refrigerator to market in record time. In early 2021, with the pandemic raging, Wang Bin, the leader of Haier’s sales node in Zhengzhou, a city of 10 million, noticed a curious trend. His team was fielding a growing number of requests from home-bound consumers for larger refrigerators with more freezer capacity. Wang Bin shared this insight with Star Kitchen’s leader Wang Jian and with other regional sales nodes. Everyone agreed that this was a significant opportunity that needed to be addressed quickly.

To better understand the problem, Wang and his ten-person team tapped into Haier’s online community of 1.8 million consumers to gather more insights. The placement of the freezer door emerged as a key pain point. Typically, in a two-door unit, the refrigerator is on the right, since it is opened more often (and most people are right-handed). But in the midst of the lockdown, the freezer was getting more use and was challenging to access.

This feedback gave Wang Jian and his team the confidence to develop a new fridge that increased the freezer space from 40 to 60 percent of the total volume and reverse the layout so the freezer would be on the right-hand side. Other requirements included maintaining the highest energy efficiency rating (a challenge given the larger freezer size) and having the product ready within five months. The ME set itself a leading target of five hundred thousand units per year.

The specifications were bid out on Haier’s resourcing platform, Smart Workbench, which connects all the Haier nodes. The posting included the revenue and profit-sharing that each contributing ME would receive—subject to meeting their targets and the product’s performance in the marketplace. Within a week, the team received multiple proposals. For instance, five of the twelve design nodes that specialize in refrigerators provided different technical approaches and timelines. A handful of the sixteen factories decided to compete for production, and regional sales nodes submitted plans for local sales and marketing support. The ensuing discussions provided an opportunity to test assumptions and brainstorm new approaches. The dialogue with the design and manufacturing nodes, for example, revealed that achieving the highest energy rating would increase unit cost by 550 yuan (or about $75).

Within a few weeks, the Star Kitchen ME had assembled a network of internal providers working toward a shared goal. The redesigned freezer-fridge entered production in the second half of 2021; by year-end, more than five hundred thousand units had been delivered.

While the internal contracting process may sound cumbersome, it’s facilitated by “presets,” predefined rules about minimum performance standards and margin splits that reduce friction during negotiations. Once negotiated, an app provides a real-time view of how each node is performing against its targets. Terms can be renegotiated over the course of a year if circumstances change.

One ME leader told us that he had replaced a dozen nodes in the previous eighteen months. Nodes that are unable to provide competitive service can and do go out of business.

4. From Top-Down Coordination to Voluntary Coordination

By now you may be asking, how does a company with nearly four thousand independent units synchronize investments in technology and facilities? How does it achieve coordination without trampling on the autonomy of its microenterprises?

In a startup, coordination happens spontaneously. When there’s a problem, people huddle and hash things out. As a company grows and as operating units become more siloed, it becomes increasingly difficult to manage the ever-expanding array of interdependencies. The responsibility for cross-unit coordination is typically assigned to central functions such as marketing, manufacturing, procurement, and logistics. Inevitably, this leads to greater centralization, higher overhead costs, and diminished responsiveness.

Haier’s approach is different. In pursuing economies of scale and scope, it emphasizes collaboration over compulsion, driven by shared accountability to customers. When, for example, several MEs began hearing that Haier’s smart products didn’t talk to one another, they got together and hammered out a grand bargain in which Xinchu, an ME focused on internet-connected refrigerators, would provide a common technology platform while other MEs contributed supporting technologies. This informal grouping was an early example of what Haier now calls an “ecosystem micro-community,” or EMC. Today, the company’s “Internet of Food” EMC includes MEs from multiple product platforms, including refrigeration, cooking, and small appliances. Externally, it encompasses millions of users and hundreds of partners, including online shopping sites, organic food suppliers, and famous chefs.

Every EMC, and there are hundreds of them, is a voluntary association of MEs that are focused on a common opportunity or challenge. For example, the Sanyiniao EMC is tasked with commercializing “smart home” solutions by integrating Haier’s appliances with third-party products and services.

Three thousand Sanyiniao-branded stores, run by regional sales nodes, function as one-stop destinations for home furnishing and renovation projects. The stores feature studios where customers can work with designers to create the specifications for their ideal kitchen. Nesting, a proprietary app that contains a database of 190 million residential floor plans and renderings of several thousand appliances and cabinets, helps facilitate the process. The EMC team works with member MEs and external partners to maintain consistent designs, color schemes, and pricing.

The Sanyiniao EMC records revenue only when a customer purchases two or more products from the stores, with at least one being a smart appliance. Sanyiniao’s sales totaled $785 million in 2023 and are on track to double to $1.5 billion by the end of 2024. Revenue is shared among Haier’s MEs and external partners—including twenty thousand interior designers and a thousand home furnishing companies—based on their contributions to each customer purchase.

Every ME is also a member of a platform, and it’s the job of the platform owner to identify opportunities for cross-ME coordination. Some platforms bring together MEs operating in similar product categories, like washing, refrigeration, or audiovisual products, while others focus on shared capabilities such as digital marketing and mass customization. A typical platform encompasses more than fifty MEs.

The responsibilities of the platform owner include:

Minimizing overlaps in ME product portfolios
Identifying opportunities for MEs to use common components
Coordinating major investments in technology and facilities
Coordinating ME interactions with outside business partners
Aiding the diffusion of best practices
Coordinating with other industry platforms

Critically, no one reports to the platform owner, nor does the platform owner have a staff group. So, how does the owner exert influence? Mostly by bringing ME teams together and helping them build strategies in areas of common interest, like getting smart about the internet of things or creating products that communicate with each other. The owner’s job is to facilitate, not force, coordination. Wu Yong, a former refrigerator platform owner, says, “My job is to open up channels and create incentives for the ME teams to collaborate. This is different from the old pyramid-based structure where I would give orders.”

A typical example of coordination involved the shift to frost-free refrigerators, a move that required an expensive upgrade of production facilities. As platform owner, Wu Yong worked with user MEs and manufacturing nodes to develop a joint strategy for making the necessary changes. Reflecting on the initiative, Wu Yong said, “I helped facilitate, but the microenterprise teams planned and executed the job together.”

Platform leaders are expected to grow the platform by developing new MEs. A decade ago, motivated by Haier’s goal to become the world leader in smart appliances, Wu Yong funded a networked refrigerator startup, the above-mentioned Xinchu. Beyond developing the product itself, Xinchu was charged with developing an ecosystem that would allow users to buy fresh food from a network of partners and arrange delivery within a thirty-minute window. At Haier, platform owners are entrepreneurs as well as connectors.

The work of the platform owner is supported by integration nodes that are found within every industry platform. These units help MEs import technology from other parts of Haier and identify internal partners to coinvest in new initiatives. Like platform owners, integration nodes encourage collaboration rather than enforce conformity.

MEs also rely on the expertise of competence-focused platforms. Two of the most important are COSMOPlat and marketing. Launched in 2012, COSMOPlat (Cloud of Smart Manufacturing Operation Platform) was designed to simplify routine transactions such as order placement, inventory management, and payments. Over time, it has evolved into a sophisticated industrial internet system that enables detailed modeling of production processes and products to support prototyping and facilitate coordination across firms in distribution and logistics.

One notable feature of COSMOPlat is its openness. Any vendor, regardless of its current relationship with Haier, can join the network and offer its services. For example, an appliance ME might use the platform to seek assistance on a specific design or production issue and receive a proposal from a firm that typically focuses on refrigeration. Like the rest of Haier, COSMOPlat’s workforce of 2,700 software developers and systems integrators is organized into microenterprises. Fewer than a third of these units serve Haier’s own manufacturing and supply chain needs; the majority provide software and consulting to external clients. At Haier, even “in-house” functions are expected to build an ecosystem of external customers.

The primary role of the marketing platform is supplying MEs with customer information. While every user ME collects copious amounts of information through its own social media channels, the marketing platform’s AI and analytics node integrates information from Haier’s corporate website and from other sources within the company and without. The idea is to unearth cross-business insights and models that help MEs intercept emerging customer needs.

While COSMOPlat and marketing do set standards—for brand visuals and factory automation software, for example—they issue few commands. And like other units at Haier, they have a financial stake in the success of their internal clients.

In most companies, coordination means centralization, but not at Haier. There’s a deep belief that trade-offs are best made by those closest to the customer—that is, by MEs that are free to choose when to collaborate and when to go it alone.

5. From Manufacturing Products to Manufacturing Startups

Large companies suck at building new businesses. Procter & Gamble, for example, has more than twenty brands with $1 billion or more in annual sales, but none of them were invented in this century. Thus far, P&G’s new brand incubator, founded in 2015, has produced only one substantial business—Zevo, a line of environmentally friendly insect sprays and traps. Unlike Haier, few companies have set out to turn their entire organization into an entrepreneurial platform.

Some of Haier’s new ventures remain inside Haier while others are spun out. At last count, more than 160 had received Series A funding from outside investors. Haier’s legion of nascent businesses run the gamut from Hairyongi, a fintech startup that securitizes loans to small businesses, to Express Cabinets, a network of storage lockers that allows farmers to deliver directly to consumers in some ten thousand communities. (For more on how Haier builds new ventures, see the sidebar “The Birth of a Microenterprise.”)

There are three ways to launch a new business at Haier. In the first and most common case, an internal entrepreneur posts an idea online and invites others to help flesh out the nascent business model. That’s how Zhang Yi, a field service manager, launched the idea of Express Cabinets. Second, a platform leader can ask for proposals around a potential white space opportunity. Third, Haier conducts monthly road shows across China where would-be entrepreneurs can pitch their ideas to platform leaders and members of Haier’s investment and innovation platform.

Every incubating ME is a separate legal entity, funded in part by the founding team. Recognizing that internal leaders may not be well placed to judge the merits of a new idea, Haier often requires a startup team to obtain venture funding before contributing internal resources. In a recent period, nine of fourteen newly hatched MEs received external investment before getting money from Haier. Despite this, Haier often ends up with a majority stake, as it typically secures the option of buying out its venture partners using a preset valuation formula.

Like other units within Haier, incubating MEs contract with nodes for development, distribution, and administrative support. Arm’s-length agreements allow fledgling MEs to leverage Haier’s size and bargaining power while avoiding the risk of bureaucratic meddling.

Haier understands the only way to find that next billion-dollar opportunity is to launch a slew of startups and give each one the freedom to chase its dream. As one of the company’s venture capital partners explained, “Microenterprises are like a reconnaissance unit—they scan the battlefield and identify the most promising opportunities. It’s like a giant search function.”

6. From Employees to Owners

In a startup, employees think and act like owners because most of them are. Team members have a large degree of autonomy, and no one to blame if things go south. It’s the combination of upside and autonomy that gives startups their edge. Not surprisingly, Haier has sought to capture these advantages in its own management model.

In May 2013, Lu Kailin, along with two of his colleagues at Haier, set out to build a powerful laptop computer that would excel at video gaming. The three had recently graduated from college, where they spent much of their free time playing computer games with friends. Captivated by the allure of video games, they wondered how they could turn their passion into a business. The upside seemed enormous. Rising incomes and ever cheaper technology were stoking demand for online games. On the other hand, the trio felt that most of the laptops on the market were poorly suited for the demands of hard-core gaming.

The team’s first step was to pore over thirty thousand online reviews of gaming PCs. Serious gamers like them were frustrated by the lack of power, uneven screen quality, and stodgy design of the business-oriented laptops offered by Haier and its competitors. Having distilled their research in thirteen customer pain points, Lu and his compatriots wrote a note to Zhou Zhaolin, head of the platform that included Haier’s laptop business, begging for a meeting. Zhou was skeptical at first: “These three young fellows brought a laptop into my office. It was a 15-inch laptop, and it was heavy—normally, we sell 11- or 13-inch machines that are highly portable. My first instinct was to kill the project.” But then Zhou realized this really wasn’t his call. “In making decisions,” he says, “we have to let users and entrepreneurs speak—not managers.” Zhou gave the team a modest amount of seed capital (RMB 1.8 million, or roughly $265,000), with the understanding that further funding from Haier would be conditional on a successful market test.

With this capital infusion, the team set out to design and manufacture Haier’s first gaming laptop. Much of the ThunderRobot’s early design and production work was conducted with the help of outside partners such as Quanta Computers, a Taiwanese manufacturer that produces computers for Dell, Hewlett-Packard, and others. By December 2013, only seven months after the venture was launched, the team was ready to introduce its first product. Launched on JD.com, a Chinese e-commerce site, the first batch of five hundred brightly colored and aggressively styled laptops sold out in less than a minute. A few weeks later, a second batch of three thousand units was gone within twenty minutes.

Jazzed by this early success, the team spent the first quarter of 2014 crafting a detailed business plan and in April received an additional RMB 1.2 million from Haier. Concurrently, the founding team invested RMB 400,000 of their own money for a 20 percent stake. Additional funding rounds would bring in a handful of venture capital firms. In September 2017, ThunderRobot debuted on China’s NEEQ market with an IPO valuation of 1.2 billion yuan (about $170 million). ThunderRobot has been selected as one of China’s 500 Most Valuable Brands by the World Brand Lab for four consecutive years, with a 2024 brand value of 18 billion yuan (about $2.5 billion).

With a staff of 380, ThunderRobot is the leading provider of gaming laptops in China, and has made significant inroads in other Asian markets. Taking a lesson from its corporate parent, ThunderRobot is creating its own incubating MEs, which include a network of physical stores, a business that organizes e-sports teams, and a chain of hotels catering to avid gamers.

At Haier, MEs operate as self-managing business units, and their freedoms are formally enshrined in three rights:

STRATEGY: The right to decide what opportunities to pursue, to set priorities, and to form both internal and external partnerships
PEOPLE: The right to make hiring decisions, align individuals and roles, and define working relationships
DISTRIBUTION: The right to set pay rates and distribute bonuses

These rights come with a commensurate degree of accountability. Leading targets are broken down into role-specific weekly, monthly, and quarterly goals. This makes it easy to see who’s performing and who’s not. As is true in most startups, base salaries are low. Opportunities for additional compensation are tied to three performance thresholds:

BASELINE: When an ME’s quarterly sales and earnings growth exceed a base target, team members get a bonus proportionate to the amount by which the target was exceeded.
VALUE-ADJUSTED MECHANISM (VAM): If the ME achieves a midpoint goal between the quarterly baseline and its leading target, known as the VAM target, the team’s bonus is doubled. At this point, employees also get the option of investing their own money, typically RMB 20,000 (about $2,200), in a special investment account. If the team hits the VAM target the subsequent quarter, that investment produces a 100 percent dividend.
VAM ANNUAL TARGET: When an ME team beats its VAM target for four consecutive quarters, it becomes eligible for profit-sharing. Twenty percent of the ME’s net profits in excess of the VAM goal is distributed to the team, though 30 percent of that amount will be set aside to fund bonuses in the following year. As an ME closes in on its leading target, the profit share increases proportionately, sometimes exceeding 40 percent.

This combination of bonuses, dividends, and profit-sharing gives employees the opportunity to multiply their base pay many times over. With so much at stake, it’s hardly surprising that ME team members have little tolerance for incompetent leaders. If an ME fails to hit its baseline targets for three months in a row, a leadership election is automatically triggered. If the ME is meeting its baseline targets but failing to reach its VAM targets, a two-thirds vote of ME members can oust the existing leader.

New leaders are chosen competitively. Typically, three or four candidates will present their plans to the ME team. Occasionally, the team rejects the entire slate of candidates, and the search process goes to round two.

Poorly performing leaders are also vulnerable to a hostile takeover. Anyone at Haier who believes they could better manage a struggling ME can make a pitch to the team. Since performance data for all MEs is transparent across the company, it’s easy to spot takeover opportunities. If an interloper’s plan is convincing, a leadership change will ensue. In principle, this is no different from what happens when an underperforming company gets taken over by a rival or a private equity firm, but unlike Haier, most companies don’t have an internal market for control.

Unlike Alibaba or Tencent, Haier isn’t one of China’s new-economy superstars. Thirty years ago, the company was a struggling, collectively owned enterprise turning out products of dubious quality. Today, it’s a case study in what can be accomplished when an established company uproots bureaucracy’s authoritarian structures and rule-choked processes. Who would have imagined that it’s possible to run a sprawling global business with just two layers of management between frontline employees and the CEO?

Haier may be the most radically managed organization of its size, and yet its revolutionary practices don’t make it invincible. Like every organization, it’s vulnerable to the geopolitical forces and human foibles that can put any company at risk. Nevertheless, its success suggests we should no longer conflate the idea of entrepreneurship with the notion of a particular piece of geography—be it Silicon Valley or a purpose-built incubator. Nor should we assume that entrepreneurship is the exclusive preserve of small, pubescent organizations. Inspired entrepreneurship shouldn’t be any more remarkable in a multinational giant than in a Palo Alto garage.

Yet as Zhang will tell you, the road from bureaucracy to humanocracy is twisty and boulder-strewn. Rendanheyi has been more than a decade in the making. The company began testing the concept of small entrepreneurial sales and marketing teams in 2010. A year later, it introduced self-managing teams in product units. Those early tests were instructive. At the outset, internal contracting proved problematic. Negotiations were protracted and adversarial as every unit sought to maximize its own success. The solution? Build in a clause that links compensation to marketplace results. That reduced friction and increased alignment, turning a zero-sum game into a quest to create value for customers.

Not all of the changes have been easy. In the move to rendanheyi, twelve thousand midlevel managers were redeployed or dismissed. Yet, at the same time, Haier has empowered thousands of new ME leaders and generated tens of thousands of new jobs in its rapidly expanding ecosystem.

Zhang often reminds his colleagues that it’s impossible to engineer a complex system from the top down. It has to emerge through an iterative process of experimentation and learning. When asked how Haier can accelerate its transformation, Zhang has a simple answer: run more trials and replicate the most successful ones faster.

Zhang knows that to evolve into something holistic and durable, those trials have to be guided by deep principles. The Chinese book of wisdom, the I Ching, which is nearly three thousand years old, provides one guidepost. Says Zhang,

According to this book, the highest level of human activity should be like “a host of dragons without a leader.” In Chinese culture, the dragon is the mightiest animal. Today, each and every microenterprise is a kind of dragon, very capable and competent. But they don’t have a leader. They start their own businesses on the market without the guidance of a leader. That is the highest level of human governance.

Zhang finds another beacon in the writings of Immanuel Kant, the eighteenth-century German philosopher whose “categorical imperative” holds that we must never regard human beings as mere tools. In a long-ago meeting with the authors, Zhang echoed this belief when he laid out his aspirations for Haier: “We want to encourage employees to become entrepreneurs because people are not a means to an end but an end in themselves. Our goal is to let everyone become their own CEO.” You won’t find many CEOs whose organizational philosophy gives preeminence to human dignity and agency, but if you want to build a humanocracy, that’s the only perspective you can take.

Part Three

The Principles of Humanocracy

What’s the DNA of a Human-Centric Organization?

— 7 —

Principles over Practices

Positive deviants like Nucor and Haier challenge the assumption that bureaucracy is indispensable to large-scale human enterprise, yet neither company would claim to be a perfectly developed specimen of humanocracy. Moreover, they would be the first to tell you that not all of their systems and processes are exportable. What makes these companies valuable as role models isn’t so much their unique practices as the distinctive beliefs that gave birth to those practices. Drawing lessons from these and other vanguard companies is a bit like trying to learn from a great athlete like Serena Williams or Mikaela Shiffrin. The challenge is less to deconstruct their technique than to learn something about the reserves of stamina and determination that propelled them to the top of their sports (tennis and skiing, respectively).

When benchmarking other organizations, the usual question is, What do they do differently? But if you’re trying to make sense of a company that is different in almost every respect, you need to ask, How does it think differently?

What beliefs or principles drove Ken Iverson to build a company that grants steelworkers unprecedented freedom to learn and grow? Why did Zhang Ruimin sign up for the seemingly impossible task of turning a mediocre manufacturing company into an entrepreneurial world-beater? Being a pioneer isn’t easy. There’s no trail map. The only thing that can guide you is your worldview about people, organizations, and success.

Zhang’s worldview was centered on the power of human agency. Like Chris Rufer at Morning Star, he believed the best organization is the one that gives human beings the maximum freedom to excel. Iverson’s worldview revolved around the idea of everyday genius. He believed that it’s employees, not managers, who drive a business forward. If you believe this heart and soul, bureaucracy isn’t something you whine about, it’s something you kill.

The extent to which someone regards a problem as important, or even acknowledges its existence, depends on their worldview—their paradigmatic beliefs. If, for example, you believe human beings have a sacred trust to be good stewards of the planet, you’re likely to take the threat of climate change very seriously. If, instead, you see the earth as a reservoir of resources to be exploited for short-term gain, environmentalism will make little sense to you. So it is with humanocracy. If your worldview places a premium on human freedom and growth, you’ll regard the inhumanity of bureaucracy as intolerable and feel compelled to act. If, on the other hand, you regard human beings as factors of production, you’ll make excuses for bureaucracy and be content with minor reforms.

Your worldview matters—a lot. It shapes, filters, and (often) distorts your perceptions of reality. Yet as a rule, executives and managers spend a lot more time thinking about practices than interrogating their foundational beliefs. That, as much as anything, explains why we’re stuck. You can’t solve a truly novel problem, like building an organization that is fully human, with a fossilized worldview. John Locke, the great Enlightenment thinker and a champion for human rights, understood this well. “New opinions,” he wrote, “are always suspect and usually opposed without any other reason but because they are not already common.”

In his Second Treatise on Government (1689), Locke argued that every human being has a fundamental right to “order their actions, and dispose of their possessions and persons, as they think fit, within the bounds of the law of nature.” In such a society, Locke went on, “all power and jurisdiction is reciprocal, no one having more than another.” More than three centuries later, it is hard to appreciate how radical this proposition would have appeared to Locke’s contemporaries. Locke was upending a worldview that had gone unquestioned for most of human history. Ultimate sovereignty rested not with the monarch or the state but with the individual.

This breathtaking inversion left philosophers with a practical problem: How, then, to construct society? If not ordered from the top down, then what? Was self-government actually possible? And if so, upon what principles should it be based? This problem would occupy political thinkers for the next century and ultimately spawn a matrix of pro-democracy principles:

Popular elections

Legislative assemblies

Equality before the law

Separation of powers

Independent judiciary

Freedom of the press

Religious liberty

Universal suffrage

The greatest discoveries in science have also required fundamental paradigm shifts. In their quest to map the subatomic world, physicists such as Niels Bohr and Werner Heisenberg were forced to abandon the comfortable certainties of Newtonian physics and unravel an entirely new set of principles like particle/wave duality, superposition, indeterminacy, and nonlocal correlation. Thus was born quantum mechanics.

The managerial obsession with processes is understandable. Corporate processes like planning, budgeting, and performance reviews are pivotal in determining whose ideas prevail, what projects get funded, and how rewards get distributed. Yet, if the goal is to build a humanocracy, a focus on processes is insufficient. Individual processes, like Haier’s approach to setting “leading targets,” are often context-specific. What works in one organization may not work in another. Additionally, each process is part of a larger whole. Bolting a single vanguard process onto a conventional management model is usually a fruitless exercise—like putting go-faster stripes on a clapped-out car.

Think again about the principles of self-government. While political systems in mature democracies differ in their particulars (Britain, unlike the United States, lacks a written constitution), they’re all grounded in the same corpus of pro-democracy principles. The strength of a democracy doesn’t hinge on any specific structure or process. A dictator can hold elections, but if he stuffs the ballot box and persecutes the opposition, the results won’t be democratic.

In any field of knowledge, whether politics, physics, or management, there’s a knowing/doing structure as follows:

A vertical flowchart depicting the generic knowing/doing structure in any field of knowledge. Paradigm leads to problem, then principles, processes, practices, and finally performance.

In any established field of human endeavor, there’s a high degree of congruence up and down this ladder. Within the relevant professional community, there will be a shared worldview, broad agreement on the core problems to be solved, and allegiance to a common set of principles. Over time, as those principles get operationalized, a body of supporting processes and practices will emerge. They, in turn, will determine the system’s performance.

Within the management profession, the ordering might look like this:

A vertical flowchart of the knowing/doing structure, from paradigm to performance, in the management profession. Management views workers as production factors, identifies efficiency as the business problem, and follows with principles (like specialization), processes (like goal-setting), and practices (like tracking progress) to reach improved profitability.

As a system matures—as managerial bureaucracy has over the past hundred-plus years—performance gains get harder and harder to come by. In the nineteenth and twentieth centuries, bureaucracy produced stunning advances in labor and capital efficiency, but in the last several decades, productivity growth has slowed. The rich seam of operational inefficiencies addressable by bureaucracy is largely tapped out. The point is this: over time, a system’s performance becomes limited less by processes and practices than by paradigms and principles.

As researchers and consultants, it took us many years to understand this simple truth. Over the decades, we’ve spent a lot of time helping large organizations innovate. In a typical project, we’ll spend weeks lining up the necessary sponsors, codesigning the initiative, and recruiting a project team. After that will come weeks of training, brainstorming, and coaching, then months spent building and testing new business concepts. When, at last, a slew of new products hits the market, there will be an uptick in revenue. But when we return, a year or two later, we invariably find the innovation pipeline has run dry. The bureaucrats are back in control and top-line growth has stalled out.

It finally hit us: We were working to achieve a category of results—rule-busting innovation—that was constitutionally incompatible with the system’s basic design. We were, to take an analogy, trying to teach a dog to walk on his hind legs. We’d get Fido’s attention, hold a treat above his head, and beam as he took a few shaky steps. We’d stroke his head and say, “Good boy.” But when we walked away, Fido reverted to type. Instead of going, “Wow, cool! Let me try that again,” he just stood there, bothering a bone, thinking, “What the hell was that all about? Doesn’t this idiot know I’m a quadruped?”

To be more innovative, adaptable, and inspiring, our organizations need new DNA. They need to be rebuilt on human-centric principles. Tweaks to existing systems and processes—a smidgen of mindfulness training, a dollop of agile teams, a spritz of digital transformation, or a fresh coat of analytics—will never produce nonlinear improvements in organizational effectiveness. For that to happen, we have to go back to first principles.

As a tightly integrated system, bureaucracy was designed to produce exactly what it does: compliance, discipline, and predictability. It’s a sausage-making machine that produces—wait for it—sausages! Maybe it can be upgraded to make fatter sausages or vegan sausages or more sausages per hour, but it’s never going to produce anything other than sausages until we go back to the drawing board.

If we’re going to build organizations that are as capable as the people within them, we need to start over. We need a new organizational paradigm—one in which human beings are no longer viewed as “resources” or “capital.” We must also reframe the problem—the goal is to maximize contribution, not compliance. And we need to embed new human-centric principles in every structure, system, process, and practice. If we’re serious about creating organizations that are fit for human beings and fit for the future, nothing less will do.

As David Graeber and David Wengrow argued in The Dawn of Everything, their magisterial survey of human history, “Complex systems don’t have to be organized top-down, either in the natural or social world. That we tend to assume otherwise probably tells us more about ourselves than the people or phenomena we’re studying.”¹

So let’s press forward. In the next seven chapters, we’ll explore the core principles of humanocracy. Gleaned from the management vanguard, they comprise a comprehensive and generalizable set of guidelines for building a post-bureaucratic organization. Together, they form the humanocracy genome.

— 8 —

The Power of Ownership

As a rule, it’s the insurgents who invent the future. As the late Harvard historian Arthur Cole wrote: “To study the entrepreneur is to study the central figure in economic history.”¹ The Industrial Revolution was powered by entrepreneurial energy. In the nineteenth century, as political and economic freedoms advanced, millions of human beings were at last free to make of themselves whatever their passions and energies allowed. Out of their ranks came entrepreneurs like Josiah Wedgwood, Richard Arkwright, William Lever, John Cadbury, John Wilkinson, and Matthew Boulton—individuals of extraordinary imagination and courage who set out to satisfy the world’s demand for housewares, fabrics, soaps, chocolate, iron, and locomotive power.

Entrepreneurship, or what Nobel Prize–winning economist Edmund Phelps calls “grassroots innovation,” is as central to economic dynamism today as it was in the nineteenth century.² Entrepreneurs unlock the value of new technologies, spur competition, satisfy unmet needs, and create new jobs.

Entrepreneurship is equally essential to human flourishing. Phelps is right when he argues that we’re most alive when we have “the experience of mental stimulation, the challenge of new problems to solve, … and the excitement of venturing into the unknown.”³

When entrepreneurship is stifled by bureaucratic or statist policies, economies and human beings suffer. This, Phelps argues, is precisely what happened over the last seventy years as giant corporations came to dominate the economic landscape. He notes that in earlier times, when economies were populated by small proprietorships,

even the lowest-paid employee, if he had an idea for doing something new or different, could expect a chance to get the ear of someone well up the ladder, if not at the top. So employees of the company were alert to new ideas crossing their minds and were, for that reason, more likely to have new ideas. There is no such prospect in giant companies larded with managerial hierarchies.⁴

On this point, Phelps echoes Cole, who, writing fifty years earlier, warned his readers that entrepreneurship was increasingly at risk from bureaucratic “dry rot.”⁵ Bureaucracies are run not by inventors but accountants, not by builders but administrators. In a large company, only a fraction of employees are active members of what Phelps evocatively calls the “imaginarium.”

It’s troubling that since the late 1970s, the number of companies formed each year has declined, adjusted for population growth. At the same time, the employment share of young companies has dropped from 4 percent to 2 percent of the workforce. There was a modest uptick in company formation in the wake of the pandemic, but not enough to reverse the long downward trend. At the same time, big companies have gotten bigger. Decades of consolidation, along with the winner-take-all dynamics of digital technology, have left us with an economy that is dominated by powerful, politically connected oligopolies.

The result, notes Chris Hughes, cofounder of Facebook, is “a decline in entrepreneurship, stalled productivity growth, and higher prices and fewer choices for consumers.”⁶ More robust antitrust enforcement is undoubtedly part of the answer, but we must also work to embed the spirit of entrepreneurship in every organization, whether large or small, public or private.

What percentage of the people working in your organization would agree with the following statements?

My work is my passion.

I get to make meaningful decisions.

I feel directly accountable to customers.

I intuitively think lean.

My team is small and super-flexible.

The success of this business depends critically on me.

I measure progress in days and weeks, not months and quarters.

Every day I have the chance to solve new and interesting problems.

I have a significant financial stake in the success of this business.

These are the sort of comments that you’d expect from a small business owner, but they’re rarely heard in large organizations.

The paradox is that in some ways, large companies are well equipped to be entrepreneurial hot spots. They have deep pockets, thousands of talented employees, terabytes of customer data, and powerful brands. What they lack, though, are employees who feel like owners.

At present, roughly 47 million Americans work for companies with five thousand or more employees. It’s a good bet that among them are tens of thousands of entrepreneurially minded souls who, for whatever reason, haven’t had the opportunity to strike out on their own. Unlike Larry Page and Sergey Brin, cofounders of Google, or Evan Spiegel, founder of Snap, they didn’t attend Stanford and get plugged into the school’s venture capital network. Unlike Mark Zuckerberg, they didn’t meet a well-off classmate at Harvard who was willing to invest thousands of dollars in a zero-revenue business. So their ideas remain untested and their entrepreneurial passions unrequited.

You’d think CEOs would recognize that the best way to fight off a battalion of hungry disruptors is to build an army of homegrown entrepreneurs. Today, no one is surprised when a twentysomething kid launches a startup. Patrick and John Collison were just nineteen and twenty-one years old when they founded Stripe, the online payment processing unicorn currently valued at $70 billion. Yet few CEOs seem to believe there are inspired moppets within their organization who could pull off a similar feat. So, while companies spend millions of dollars on “leadership development,” they invest next to nothing supporting bottom-up entrepreneurship. This must change. Unleashing the problem-solving, business-building energies of every team member is essential to revivifying economies and organizations.

The bedrock of entrepreneurship is ownership. Yale law professor Henry Hansman argues that every business owner has two formal rights: “the right to control the firm and the right to appropriate the firm’s residual earnings”—in other words, the freedom to make decisions and to have a shot at the brass ring.⁷ In most organizations, team members have little chance of achieving either. No wonder most employees would rather be working for themselves. A 2024 Gallup survey found that just under two-thirds of Americans (62 percent) would rather be their own boss than an employee, and 52 percent would be willing to accept a “great deal” or “fair amount” of risk to make that happen.

All those would-be entrepreneurs aren’t naive. They understand that as owners, they’d be putting in more hours than they do now—and with no guarantee of success. But then again, large employers don’t offer as much job security as they used to. Nearly 7 million Americans lost their jobs in 2023, and those who didn’t most likely have family members who’ve fallen victim to downsizing or friends caught in dead-end “gig economy” roles.

While image-savvy employers may try to put a gloss on their “employer brand” or dress up the “employee value proposition,” few established companies offer recruits what they crave most: autonomy and upside.

More than a hundred studies have explored the impact of autonomy and gainsharing on firm performance, and most have found a positive correlation.⁸ Dutch researchers Dirk van Dierendonck and Inge Nuijten conducted a particularly revealing study.⁹ They started by building an eight-factor model of servant leadership. Critical behaviors included:

EMPOWERMENT: Increasing the decision-making autonomy of one’s subordinates

ACCOUNTABILITY: Holding individuals accountable for the consequences of their decisions

SELFLESSNESS: Giving priority to the needs of others

HUMILITY: Openly acknowledging one’s limitations and mistakes

AUTHENTICITY: Relating honestly and openly with others

COURAGE: Challenging institutional norms in the interest of supporting others

FORGIVENESS: Demonstrating empathy and a willingness to forgive

STEWARDSHIP: Taking responsibility for the success and integrity of the institution as a whole

Next, the researchers asked more than fifteen hundred employees in the Netherlands and the United Kingdom to rate their managers on these attributes and to then score themselves on various job-related factors. As you can see in table 8-1, of the eight leadership behaviors, empowerment was the most highly correlated with employee engagement, job satisfaction, and organizational commitment, while accountability had the strongest impact on job performance.

TABLE 8-1

Correlation between leadership attributes and job-related factors (R-squares)

Leadership behavior	Engagement	Job satisfaction	Organizational commitment	Job performance
Empowerment	.43	.62	.62	.21
Accountability	.41	.33	.14	.32
Selflessness	.18	.32	.54	.16
Humility	.33	.48	.54	.09
Authenticity	.29	.35	.36	.08
Courage	.32	.31	.39	.07
Forgiveness	.08	.20	.36	.14
Stewardship	-	-	.60	.17

In another study, Joseph Blasi, Richard Freeman, and Douglas Kruse explored the relationship between autonomy, upside, and employee turnover.¹⁰ Looking at figure 8-1, you’ll notice that differences in upside and autonomy, taken individually, have little impact on attrition rates. However, in combination, they reduce turnover by more than half. This interaction shouldn’t be surprising. Asking someone to take on more responsibility without giving them a bigger piece of the pie is likely to be perceived as unfair. Conversely, offering someone the chance for a bigger payout while denying them the right to make the necessary decisions will produce frustration and resentment. It is the combination of autonomy and upside that fuels entrepreneurial fervor.

FIGURE 8-1

Impact of financial upside and autonomy on employee retention rate (annual voluntary separation rates)

A 2x2 grid illustrates the relationship between financial upside, autonomy, and employee retention rates. Voluntary separation is reduced significantly (6.3 percent) when both upside and autonomy are substantial compared to when there is minimal upside/minimal autonomy (15.3 percent).

Given this, it’s regrettable that most employees are locked into rigid wage scales that give them little incentive to do more than is required. Consider:

Nonproduction-based bonuses, which include profit-sharing schemes, accounted for just 2.5 percent of total compensation costs for US employees in December 2024.
A 2021 review of the incentive programs of US public companies found that only 12 percent of plans offered team-based rewards, and only 16 percent included project-based incentives. For nonmanagerial employees, the top end of the incentive structure typically amounts to less than 10 percent of base pay.¹¹
Less than one in ten private-sector employees in the United States have access to employee stock ownership plans (ESOPs). The combined value of these plan assets accounts for a mere 3 percent of the market value of US public companies. In Europe, the employee ownership share of publicly listed companies has remained stagnant at around 3 percent for the past fifteen years.¹²

It’s patently stupid to starve employees of autonomy and upside, yet this is the norm. What gives? The most plausible explanation is that senior leaders believe frontline staff have little to contribute. In their view, employees are commodity resources doing commodity work. A former managing partner at McKinsey & Company expressed this view when he advised executives to focus their attention on the “2 percent [of employees] who are really going to drive [results].” He argued, “It’s a very small proportion of people who drive a lot of value.” When pressed, he admitted this assertion had “no regression analysis or analytics behind it.”¹³ It was, in other words, an untested assumption or, to be more accurate, a prejudice.

This sort of disdain for the average employee mirrors the hauteur of eighteenth-century aristocrats—and it has the same stifling effect on creativity and initiative. Stunted freedom and upside yield stunted commitment and performance.

You probably wouldn’t expect a profit-obsessed private equity giant to be a champion for distributed ownership. The popular and mostly accurate image of private equity ownership is one of radical cost-cutting, where lower-level employees are unmourned collateral damage. If that’s your view of private equity, you haven’t met Pete Stavros, at KKR, one of the industry’s most savvy operators.

The story starts in 2013 when KKR acquired Milwaukee-based Gardner Denver, a maker of pumps, compressors, and other industrial products. Tracing its origins to 1859, the company had grown stagnant. It was facing a series of operational challenges and slumping demand from its oil and gas clients. In 2017, Stavros, who had orchestrated the $3.9 billion deal, became Gardner Denver’s board chair. Three years later, in a bid for greater scale, Stavros organized a merger with the industrial products division of Ingersoll Rand. As part of the deal, the new entity, with $4 billion in annual revenue, took the Ingersoll Rand name.¹⁴

From the outset, Stavros had viewed Gardner Denver as more than just another investment. Stavros had begun experimenting with a new ownership model after assuming leadership of KKR’s Industrials industry group in 2011. For him, Gardner Denver represented the next frontier for testing his long-held belief that creating a culture of shared ownership was the surest way to build enduring value.

This conviction was born from personal experience. Growing up, Stavros has heard his father, a highway construction worker, inveigh against a system where the interests of management and hourly laborers were constantly in conflict. As Pete put it, “My dad was on an hourly contract for forty-five years, and he was frustrated that there was no incentive to be more productive, to care about quality, cost, or do the right thing for customers. He thought it was an insane system.” Pete shared his dad’s assessment, and now, as chair of a global manufacturing firm, had the chance to build the sort of empowered, collaborative culture that would have heartened his dad.

Sharing the Wealth

In private equity deals, the management team is usually given a slug of stock options as an incentive to work hard and grow the business. Having witnessed the power of these incentives, Stavros believed that extending ownership to every employee would be similarly potent. Vicente Reynal, who was appointed CEO of Gardner Denver in 2016, shared that view. Growing up in a small Puerto Rican village, Reynal had been inspired by the ingenuity and resilience of local business owners. Like Stavros, he believed ownership was the key to building a successful business.

The pair agreed that when Gardner Denver relaunched as a public company, 3 percent of the equity would go to nonmanagerial employees. Initially, Stavros and Reynal kept the plan under wraps. They were confident in their plan but wanted the shares to have real value before making their move. That moment arrived on May 12, 2017, when Gardner Denver rejoined the New York Stock Exchange. Employees had gathered across thirty sites to watch Reynal and Stavros ring the opening bell, but no one expected what followed. In videos played at each location, Reynal announced that the firm’s 6,100 nonmanagement employees would receive shares amounting to 40 percent of their salary—a $100 million stock grant. Aside from the requirement that employees keep at least half their shares for the first year, there was no fine print. The stock was theirs, effective immediately.

The jaw-dropper move provoked deep emotion. Stavros recalls employees in India announcing to their family that they were now owners of a US multinational. “They were shocked,” he says. “Many were moved to tears.” Says Reynal, “People went from thinking, ‘This is the company I work for,’ to ‘This is my company and my factory. These are my machines and my tools. I’m going to take care of them because I’m an owner.’ ” In one notable case, a quality manager in China moved his family nearer the plant so that he could quickly address any troublesome issues.

When the Ingersoll Rand deal closed in March 2020, an additional ten thousand employees received share grants totalling $150 million. Since then, Ingersoll Rand has continued to issue equity to new associates, including those of the forty companies that have been acquired since 2020. Cumulatively, these are among the largest equity grants in corporate history.

Embedding the Ethos of Ownership

Issuing equity represented a major milestone, but it was only the first step in transforming employees into owners. “Our goal,” says Stavros, “was to encourage everyone to adopt an owner’s mindset, and we were dedicated to giving them the tools and skills necessary to act in that capacity.”

Stavros is quick to credit the evolution at Ingersoll Rand to Reynal’s leadership. “It all comes down to leadership. To really do this and make it part of the culture, you need someone at the top with deep empathy for frontline workers. Vicente intuitively understood that all the other things the company was trying to achieve would be easier if employees were empowered to feel and act like owners.”

The result was a 30 percent reduction in managerial roles and a much-accelerated pace of decision-making. The moves also increased the ability of Gardner Denver to attract top talent. Post-merger, Ingersoll Rand received the same treatment.

In town hall meetings, Reynal explained the company’s performance objectives in detail and challenged employees to reduce the ratio of net working capital to revenue by 30 percent within three years. The first step was to train every associate in the intricacies of the cash conversion cycle (figure 8-2). The training, broken into digestible thirty-minute sessions, translated new financial concepts into simple, everyday terms. Managing revenues and expenses was like overseeing the household budget, while inventory management was akin to stocking the pantry.

FIGURE 8-2

The cash conversion cycle

Diagram explains the cash conversion cycle formula: Days Inventory Outstanding, plus Days Sales Outstanding, minus Days Payable Outstanding. These three components measure how efficiently a company manages its cash flow.

The training outlined specific tactics for every role. Says Reynal, “We went function by function to show how every single person touched cash.” Frontline workers learned about the impact of supply chains, usage rates, and spares. Sales teams were equipped with strategies to improve on-time payment, and engineers were encouraged to strip out seldom-used product features.

With new tools in hand, employees were mobilized to hunt down improvement opportunities. Progress was tracked monthly, and major achievements were widely celebrated. After a member of the UK finance team successfully collected a five-year-old, million-dollar receivable, Reynal paid a personal visit and hosted an online celebration. Within twelve months, working capital had declined 6 percent as a percentage of sales. The 30 percent target was achieved ahead of schedule, and further savings have been made since.

Having built a solid foundation of financial literacy, Reynal launched a second round of training—the Economic Growth Engine—that focused on what frontline teams could do to harness trends like sustainability and digitization. As with the cash training, there was an emphasis on what each employee could do to create value and how even small improvements could compound into significant gains down the line.

Says Reynal, “We called the teams ‘boards’ to communicate that they’re in charge of driving results.” Currently, there are four hundred boards involving seven thousand Ingersoll Rand associates. (An employee will often serve on four or five boards concurrently.) One board, comprising members from sales, marketing, and operations, worked to increase the “close ratio” for compressor leads generated online, while another was charged with reducing the company’s effective tax rate.

Boards operate with a lean-startup rhythm. Hundred-day sprints are divided into weekly goals, with teams convening for forty-five minutes each week to review progress, tackle obstacles, and reconfirm targets. “The boards aren’t responding to a set of KPIs,” says Reynal. “They’re thinking and acting like entrepreneurs.” A group of Ingersoll Rand engineers in Buffalo, New York, for example, developed a plan to manufacture a new product, centrifugal compressors, in a mothballed plant. The proposal, which forecast revenues of $20 million per year on a $3 million investment, was quickly funded. Seven months later, the plant was maxed out and had a $50 million order book.

It is not just boards that are empowered to solve problems; so too are the roughly one thousand production teams spread across a hundred factories. Frontline operators are responsible for safety, quality, delivery, cost, productivity, and inventory. They identify and address problems and decide when they need help from outside the team.

Thanks to distributed ownership, Ingersoll Rand is able to operate with a clock speed rarely seen in large companies. Employees don’t wait for orders from above, neither are they burdened with requests from meddlesome staff groups. Ingersoll Rand’s corporate center comprises only twenty people, working on a single floor of a modest building in Davidson, North Carolina—not bad for a company that has grown to close to twenty thousand employees.

Transparency is also central to Ingersoll Rand’s improvement efforts. Every board shares its goals and results on the company intranet. The agenda and timing of team meetings is also posted, and any employee is welcome to join. Monthly online events showcase local innovations and breakthrough practices—whether it’s a speedy way of converting a traditional metering pump into a connected device or a methodology for identifying superfluous product features. Openness accelerates the diffusion of new practices and creates healthy competition as units vie to capture the innovation spotlight.

The human impact of shared ownership has been equally remarkable. Ingersoll Rand has vaulted from the 19th to the 90th percentile in Gallup’s engagement rankings. Big gains have also been made in workplace safety, with Ingersoll Rand now boasting an incident rate that’s far below the industry average.

Finally, there is Stavros’s dream of spreading the wealth. Not only was the investment a tremendous success for KKR’s investors, it’s also created meaningful wealth for all of Ingersoll Rand’s nonmanagerial employees whose shares are now worth more than three times the original grants.

A logistics team leader spoke for many when he said, “The company has given me the control to create more wealth for them and for me. It makes me feel great. It makes me hungry.”

Many at Ingersoll Rand view their company as a 175-year-old newbie, melding the speed and flexibility of a startup with the resources of a large corporation. The idea of “entrepreneurship at scale” may seem like an oxymoron, but Ingersoll Rand has proven it’s an attainable goal—when you stop treating employees as “resources” and start treating them as owners. Says Reynal, “There’s nothing more energizing than the sense that you’re building your own wealth when you make smart decisions. And when you couple that with the competence and authority to change the business for the better, the potential is almost limitless.”

Going Big

For Stavros, the case of Ingersoll Rand was an important catalyst for spreading the model for shared ownership more broadly. In 2022, the year after KKR sold its final stake in Ingersoll Rand, the firm committed to deploying the broad-based ownership model across all the companies it purchases through its private equity platform in the Americas. To date, KKR portfolio companies in the United States, Europe, and Asia Pacific have awarded billions of dollars in equity to over sixty thousand nonmanagement employees across more than forty portfolio companies. Also in 2022, Stavros and his wife launched a nonprofit, Ownership Works, with a mission to increase prosperity through shared ownership at work by helping companies to develop and implement broad-based employee ownership programs. The nonprofit has grown to over ninety founding member organizations and set an initial goal of creating hundreds of thousands of new employee-owners and generate at least $20 billion of wealth for working families by 2030.

The $75 billion French construction and concession giant, Vinci SA, is another A-list example of distributed ownership. Employing 280,000 people in more than 120 countries, Vinci operates toll roads, airports, high-speed rail lines, and sports venues. Its construction business takes on hundreds of thousands of projects each year. One of the most challenging was a 36,000-ton, dome-shaped structure designed to entomb the radioactive remains of Chernobyl nuclear reactor number 4.

Many of the industries in which Vinci operates could be described as “mature,” but there’s nothing mature about the company’s performance. Over the past decade, Vinci’s stock price has grown 20 percentage points faster than its European peers. The company’s success reflects, in part, the dynamism of its business portfolio. Between 2008 and 2023, revenue from Vinci Energies, the group responsible for energy and communication projects, surged from $5 billion to $20.5 billion. Vinci’s airport concessions business has grown even faster—from $430 million in 2013 to $4.3 billion in 2023. Much of this growth came from outside Vinci’s home market.

CEO Xavier Huillard attributes the company’s performance to its unique management model, which is designed to minimize bureaucracy and maximize entrepreneurship. Like Haier’s Zhang Ruimin, Huillard believes that for a company to get bigger on the outside, it must often get smaller on the inside. That’s why Vinci is divided into over 3,500 compact business units, two-thirds of which have fewer than a hundred employees. “We have a simple benchmark to determine if a unit has grown too large,” says Reinhard Schlemmer, an executive at Vinci Energies. “Can the leader still greet every colleague by name? Keeping units at a human scale,” he adds, “is essential.”

The average microbusiness has just over forty team members and revenues of $8 million. Typical is a business based in Nantes that makes manufacturing equipment for animal feed producers. The swarm of hyperspecialized units maximizes both focus and agility. In a typical year, Schlemmer estimates that around 15 percent of Vinci Energies’ two thousand units undergo some form of reorganization—through splits as units expand, occasional mergers, and wind-downs when performance falters.

To capture synergies, individual businesses are aggregated into divisions and divisions into groups. The leaders of these clusters are responsible for finding and exploiting cross-unit opportunities. In a typical example, the Building Solutions division of Vinci Energies in France orchestrated a joint effort to develop generative AI tools for optimizing engineering designs. In addition, there are hundreds of self-organizing “clubs” that bring operating units together around specific domains or opportunities. One, a robotics club convened by French units with expertise in this area, has helped businesses in Germany and the Netherlands advance their automation capabilities and avoid common pitfalls. Participation in the clubs is voluntary, and those that don’t deliver value get dissolved or redirected.

Vinci’s management model recognizes the inseparability of autonomy and accountability. As Huillard notes, “One cannot give responsibility to someone without having given the relevant authority. When a dysfunction takes place in a unit, it is always because of a separation between these two.”¹⁵

Each operating unit has its own P&L and is responsible for developing a business plan and acquiring the resources to execute it. While Vinci’s corporate center functions as a bank and grants approval for major projects or acquisitions, the impetus for new initiatives originates from within the business units themselves. “At Vinci Energies, we have two thousand units charting two thousand distinct strategies,” notes Schlemmer. Cost allocations from headquarters are minimal—no more than 10 percent of expenses, primarily for shared services like finance, HR, and IT.

Within Vinci Energies, a key mechanism for maintaining discipline is Quartz, Vinci’s proprietary accounting and operating system. Quartz captures granular performance data on every project and business and makes this visible to both peers and senior leaders. This radical transparency fuels a healthy competitive dynamic. “Nobody,” says Schlemmer, “wants to be below average.”

One advantage of a disaggregated and empowered organization is that it multiplies the opportunities for leadership and impact. Notes Huillard, “It is not unusual for us to entrust a business unit making 10 million euros to an employee who is less than thirty years old.”

Vinci’s buccaneering spirit is illustrated by its entry into the airport business. A decade ago, the company was about to sell off two Cambodian airports it had acquired as part of a larger deal. Nicolas Notebaert, then a business development director working in France, thought the airports could be the nucleus of a new business. After lobbying successfully to keep the airports, he moved to Asia to run them. The experiment validated the opportunity, and today Vinci employs 12,500 airport staff who support 267 million passengers a year. At Vinci, ambitious young leaders can become entrepreneurs without having to set up in a garage.

Vinci encourages employee ownership with a compensation plan that discounts shares by 5 percent and matches employee stock purchases up to 10 percent of the average salary. Nearly three-quarters of employees participate in the plan—roughly four times the average for large European companies. With a combined 10 percent stake in the company, employees are Vinci’s largest shareholder block. As with Ingersoll Rand, personal prosperity is tightly coupled to the company’s continued growth.

Employees who think and act like owners don’t need a lot of oversight. Accordingly, Vinci’s Paris headquarters is home to just 250 staffers—about 0.1 percent of total head count. Says Huillard, “It is useless having armies of auditors who just get in the way.” This lean ethos extends to the four operating divisions. Between 2013 and 2023, Vinci Energies added 57,000 employees, while its divisional staff ranks increased by a mere 58 people. The managerial ranks are also thin. Within Vinci Energies, the typical span-of-control is roughly five times bigger than the average in most large companies.

Again, like Haier’s Zhang Ruimin, Xavier Huillard believes even the largest companies can be entrepreneurial at their core—but only if they are vigilant in resisting the impulse to centralize and homogenize. Says Huillard, “Consultants regularly advise us to pool our support functions. I am convinced that the savings would be negligible compared to the value created when each business unit manager acts as an entrepreneur.” Given Vinci’s peer-beating performance, it’s hard to escape the conclusion that if more CEOs shared Huillard’s conviction, more companies would consistently exceed expectations.

Ingersoll Rand, Vinci, Nucor, and Haier—each is, at its core, a confederation of owners. Their experience demonstrates conclusively that distributed ownership yields extraordinary dividends. Specifically, it …

Reduces turnover and creates a smarter, more experienced workforce
Unlocks reserves of discretionary effort
Increases the incentives for innovation
Creates more cohesion and camaraderie
Strengthens the connection with customers
Produces faster, better-informed decisions
Leads to a flatter, leaner organization
Yields above-average returns

Think again of the 62 percent of Americans who dream of being their own boss. Why shouldn’t they be able to do this inside a large organization? The two most frequently mentioned barriers to starting a business—access to capital and lack of expertise—are problems large companies are uniquely able to solve. Vinci Energies’ two thousand business units delivered 230,000 projects in 2023 alone. No self-funded, bricks-and-mortar startup could have matched that pace. Big companies also have vast reservoirs of knowledge. It often takes years, and lots of mistakes, for a small business owner to develop sound financial judgment. An established company, by contrast, can rapidly upskill employees—as Ingersoll Rand did. Employees shouldn’t have to choose between the freedom to run their own business and the ability to leverage the resources of a large company—and if they work for Nucor, Haier, or Vinci, they don’t have to.

So how might you increase the sense of ownership in your own organization? Here are a few suggestions:

Start by redistributing a chunk of your own authority. Step back from critical decisions and let your team decide. (We’ll say more about this in chapter 16.)
If your company doesn’t have a profit-sharing plan, lobby for one and make sure it’s available to every employee. In a good year, profit- sharing should raise average compensation by 10 percent or more.
Wherever possible, disaggregate big units into small ones. In general, keep operating units to fewer than fifty people.
Give every unit a full-fledged P&L. Minimize corporate overhead allocations and avoid building targets around detailed KPIs.
Expand the decision-making prerogatives of frontline operating teams. Give them responsibility for decisions around unit strategy, operations, and people.
Invest in building the business skills of frontline employees, even if this means diverting budget dollars from top-level training programs. Every employee needs the equivalent of a mini-MBA.
Once every unit has a genuine P&L, significantly increase the proportion of individual or team compensation that’s at risk. Ensure that above-average performance brings above-average rewards.

There was a time when the idea of an “employee” was novel. In the nineteenth century, America was a “republic of the self-employed,” as Roy Jacques so aptly puts it.¹⁶ Those who worked for someone else—in a tanning shed, a blacksmith yard, or a general store—dreamed about striking out on their own, and many did. One can only imagine the distress they would have felt if they had known that their progeny, two centuries later, would be working as hirelings.

We can’t go back to the nineteenth century, but every organization can become a confederation of owners and thereby catalyze the pride, passion, proficiency, and performance that are the hallmarks of humanocracy.

— 9 —

The Power of Markets

You probably wouldn’t want to live in a centrally planned economy where a distant authority decides what should be produced and in what quantities. You wouldn’t want prices to be set by fiat or be forced to buy from state monopolies. You prefer choice to compulsion.

Over time, centralized control creates profound distortions—unbalanced sectoral growth (typically favoring capital-intensive industries), bloated state enterprises, chronic under- or overcapacity, and epic waste. China’s state-owned enterprises, for example, generate about a quarter of Chinese output but account for more than three-quarters of all corporate borrowing.¹ Of the 136 Chinese companies that ranked among the five hundred largest in the world in 2022 (measured by revenue), 71 percent were state-owned enterprises. This, observers say, is the primary reason Chinese companies are less productive than their global peers—with an average return on assets of just 2.2 percent, less than a third the level achieved by America’s global giants.²

Investment decisions are smarter when they’re driven by commercial rather than political logic. Businesses are more efficient when they’re not buoyed up by state subsidies, and consumers get a better deal when markets are open to all comers. These are the bounties of Adam Smith’s invisible hand.

While most CEOs acknowledge the virtues of free markets, the companies they run are typically structured like command economies. As in the former Soviet Union, decision-making power is highly concentrated at the top. Changing this is essential to making our organizations more resilient, innovative, and human. To see how this might be done, we need to understand the conditions under which markets outperform hierarchies and then try to imagine how these advantages might be replicated within our organizations.

Would you buy a stock if a single individual—the company’s CFO, let’s say—had set the price? Probably not. You know that one person’s opinion is an unreliable guide to the value of an asset—be it a stock, a painting, or a vintage car. Before parting with your money, you’d want to be sure you were paying a fair—that is, market-based—price.

Markets aggregate a vast array of information into a single estimate of value. The price of a share in NVIDIA, for example, reflects everything investors currently know about the factors that may bear on NVIDIA’s future profitability.

If you wouldn’t trust a small group of experts to determine the price of a share, why would you trust a small group of executives to evaluate a major strategic opportunity—be it an acquisition, product-line extension, or new technology? No single mind or small group of minds can encompass the full gamut of information that is relevant to a major strategic decision. It’s worrying, then, that bureaucratic authority structures are heavily top-weighted.

All too often, the opinions of a few senior executives are granted an immense and unwarranted credibility premium. In a bureaucracy, the bigger the decision, the smaller the number of people who can challenge the decision-maker. That’s dumb.

The costs of unquestioned authority can be substantial. During his tenure as Intel’s CEO, Paul Otellini passed on the opportunity to build chips for the original iPhone. Justifying the decision a decade later, Otellini said that the iPhone turned out to be “100x more successful than anyone thought.”³ Really? Than anyone thought? If you take the most ubiquitous electronic device in the world, the mobile phone, and make it remarkably better, why wouldn’t you expect a home run? One wonders just how many young Intel engineers were consulted before Otellini made his fateful decision.

The irony is that Intel was the subject of one of the longest-running experiments on the advantages of collective intelligence.⁴ Over eight years, professors from Caltech compared sales projections made by Intel’s expert forecasters with wisdom-of-the-crowd estimates culled from a cross-section of employees. Each month, members of the crowd were asked to make product-line revenue forecasts for the next four quarters. Participants used a virtual currency called “francs” to buy tickets tied to a specific range of revenue outcomes. One ticket, for example, might cover a revenue spread of $15 million to $15.2 million for a particular product family, while another ticket would cover $15.2 million to $15.4 million in expected sales. Every ticket carried the same price. Participants could buy several tickets for one revenue band or spread their bets across several bands. Critically, the market was open for just one hour each month. This reduced the ability of participants to free ride on the wisdom of their peers.

Once the actual sales numbers came in, everyone who’d purchased a winning ticket got a payout. Between 2006 and 2013, Intel ran 959 prediction experiments, and in nearly two-thirds of the cases, the crowd beat the experts. Intel’s experience echoes that of Ford, Google, and other companies that have run internal prediction markets.⁵

In recent years, opinion markets have demonstrated their value in predicting elections, scientific breakthroughs, the spread of infectious diseases, movie ticket sales, and the replicability of academic studies.⁶ Polymarket, a prediction market that processed billions of dollars in trading volume during the 2024 US presidential election cycle, consistently showed Donald Trump as the clear favorite in the campaign’s final month, while traditional polls either favored Kamala Harris or called the race too close to call. Research has shown that markets outperform experts even when markets are thin—that is, when there are dozens, rather than hundreds or thousands, of participants.⁷

All this suggests that organizations are likely to incur an “ignorance tax” when senior leaders fail to consult the crowd before making important decisions. Consider CNN+, a $5.99/month streaming service that debuted in March 2022 and was championed by then-CNN president Jeff Zucker. CNN+ was predicted to win 2 million subscribers in the first year and 15 to 18 million users by year four. David Morse, CNN’s chief digital officer, claimed it would be the “single biggest launch” since the network went live in June 1980.⁸

Despite being backed by a multimillion-dollar ad campaign, CNN+ survived less than a month before being pulled from the market. The service struggled to attract viewers, with fewer than ten thousand watching at any given time. An executive from CNN’s parent company, Warner Bros. Discovery, described the failure as “a combination of the wrong strategy and wrong capital allocation.” In fact, plenty of insiders had expressed concerns about the lackluster CNN+ offering even before its launch. A particular worry was that the service didn’t carry live programming from CNN TV—an omission designed to protect CNN’s lucrative distribution deals with cable TV companies. Had CNN’s executives conducted an internal prelaunch poll on the prospects of its “Plus” service, it’s likely the company would have saved itself a $300 million embarrassment.⁹

Collective intelligence can be an invaluable asset in assessing the potential returns of a new product launch, a pricing shift, a major reorganization, or a new marketing campaign. Building an internal opinion market takes work, but it’s cheaper than a major business blunder.

Over the past fifty years, the New York Stock Exchange has outperformed every one of its long-lived constituent companies. Why? Because investors in their millions make smarter investment decisions than CEOs. When it comes to allocating resources, markets are better than hierarchies.

In a market, funding decisions are distributed, dispassionate, and dynamic. Investors are free to put their money where they like, tend to be unemotional about selling off underperforming securities, and can transact with little friction. In a bureaucracy, by contrast, major funding decisions are made by a small number of senior executives in what is usually a highly politicized budget brawl. Researchers have identified a cluster of pathologies that corrupt this process and lead to suboptimal decisions.¹⁰ Among the most pernicious are the following:

DEFEND WHAT’S YOURS: Leaders tend to be territorial about the resources they control and are typically reluctant to share money and talent with other units, even when the returns might be higher.¹¹

THE RICH GET RICHER: In a multibusiness company, the biggest units tend to get more than their fair share of capital, not because they offer better returns, but because the leaders of these businesses have more political clout.¹²

GOOD MONEY AFTER BAD: Executives tend to overinvest in struggling businesses in hopes of turning them around. Research shows that in most cases, returns would have been higher if the money had been invested in less troubled units.¹³

SHARE THE PAIN: When cash is short, executives tend to cut spending across the board rather than protect high-priority areas.¹⁴

IT’S WHO YOU KNOW: Senior leaders with strong internal networks typically win more resources than leaders who are less well connected, irrespective of the merits of the investment case.¹⁵

HOME IS WHERE THE HEART IS: Senior executives are less likely to defund or divest a business in which they worked earlier in their career.¹⁶

PRETTY IT UP: In competing for funds, business unit leaders have an incentive to inflate the merits of their investment proposals. These distortions are often difficult for corporate-level executives to ferret out.¹⁷

MORE OF THE SAME: Funding decisions are often made relative to last year’s budget. Every business or product line gets pretty much what it got the year before, plus or minus a few percentage points.¹⁸

On this last point, a McKinsey & Company study of sixteen hundred US companies found that over a fifteen-year period, the year-to-year correlation in the funding received by individual business units was 0.92.¹⁹ This allocational inertia creates a systematic bias for investing in “what is” instead of “what could be.” No wonder startups usually get to the future first.

In recent decades, no place on earth has created more wealth per capita than the ten-mile-long strip of land that runs from San Francisco to San Jose. Between 2020 and 2023, $189 billion of venture capital (VC) flowed into Bay Area startups, or roughly 20 percent of total US VC investment. Overall, California attracts more VC funding than the next eight states combined and is home to half of America’s 655 “unicorns”—private, venture-backed companies worth at least $1 billion.

There’s no CEO of Silicon Valley, Inc. There’s no central authority that decides how much to invest in artificial intelligence, cloud services, pharmacogenomics, virtual reality, fintech, or cybersecurity. Instead, thousands of angel investors and venture capitalists compete to create value at the intersection of three markets—the market for new business ideas, for world-class talent, and for risk-tolerant capital. These markets are vibrant and restless. Everyone in Silicon Valley, it seems, is chasing the next deal, looking for the next round of funding or trying to sign on with the next OpenAI, Databricks, or Chime. Resources shape-shift into whatever forms seem most likely to generate value. In large organizations, by contrast, resources are indolent. They don’t move until some executive vice president orders them to move—which is often too late.

In a bureaucracy, there’s only one place to sell an idea—up the chain of command. Any idea that doesn’t sync with near-term priorities or executive dogma gets spiked. In Silicon Valley, by contrast, it’s not unusual for a would-be entrepreneur to get turned down a dozen times before finding a willing backer, but in most organizations, a single nyet is enough to kill a new idea.

It doesn’t have to be this way. Take the case of IBM. The 114-year-old IT services company has been working to internalize the ethos of Silicon Valley by opening up its resource-allocation process. In an early experiment, the company launched its first enterprisewide funding platform, ifundIT in 2013. Francoise LeGoues, then head of IBM’s CIO Lab, explained the goal: “How do we make sure everyone with a great idea gets a chance to have it seen and heard?”²⁰ Each of the company’s twenty thousand IT employees was given a maximum of $2,000 to invest. Once an investment proposal attracted $25,000 in peer funding, it moved forward as an officially sanctioned project. In the first year, more than a thousand employees from thirty countries participated.

One winning idea, submitted by software engineer Ryan Hutton, was the Tap-o-Meter, an online tool designed to give internal developers real-time data on how their apps were being used across the company. Thanks to ifundIT, the project went from idea to approval in a month—a blistering pace by the standards of most large companies. Hutton, who joined IBM out of college and was just twenty-four when his app launched, was understandably elated: “It’s great to see such fast results, and it’s kind of amazing to have this kind of impact so early in my career.”²¹

We believe every company needs to build an army of angel investors. The benefits—more ideas, more passion, fewer blind spots, and faster development—are critical to building an evolutionary advantage. And from a human perspective, no creative soul should ever be stymied by a resource-allocation process that gives more weight to political connections than the quality of an idea.

Beyond funding new ideas, internal markets can also help to maximize a company’s “strategic efficiency.” While operational efficiency focuses on minimizing the resources used to produce a given product or service, strategic efficiency involves maximizing the marginal return on money and talent by ensuring they’re being put to their highest and best use. That can only happen when resources are free to flow across organizational boundaries in response to changes in the locus of opportunity. We observe this sort of dynamism in Silicon Valley, where in the space of a year, from 2022 to 2023, venture capitalists increased their funding for generative AI fivefold.²² Over the same time frame, investments in fintech startups declined by more than 40 percent.²³

Unfortunately, shifts like these seldom happens in large organizations—and never without a fight. Having battled for scarce resources in the annual budgeting brawl, operating units generally resist pleas to divert funds elsewhere, even when doing so would raise overall returns. Bureaucrats are hoarders.

To see what dynamic allocation might look like in practice, consider the recent experience of Genentech, the biotech pioneer that since 2009 has been fully owned by Roche, the Swiss pharma giant.²⁴ Since 2017, Roche Pharmaceuticals has been working hard to excise bureaucracy. (We’ll take an in-depth look at their amazing progress in chapter 15.) One of the most significant advances has been a radical change to Genentech’s budgeting process, which we’ll describe briefly here.

As part of its transformation, Genentech, which is responsible for Roche’s pharma business in North America, replaced its functional silos with integrated business teams or “squads.” Each of the division’s twelve squads is responsible for between two and four medicines and includes representatives from sales, medical affairs, digital platforms, patient support, analytics, and other key functions. Genentech’s traditional budgeting process had divvied up funds between the various functions, each of which had a strong incentive to spend everything it had been allocated: use-it-or-lose-it. And though the commercial environment often changed dramatically over the year, there was no easy way of redirecting resources.

That changed when Genentech adopted a radical but simple new budgeting model labeled Signals and Sources. In the new process, squad leaders meet once a month to share detailed business updates, market intelligence, and near-term projections: Where is demand growing fast, and where is it waning? Which new drugs are gaining traction and which stalwarts are facing fierce competition? These are the “signals.” Based on this input, the squad leaders update a rolling list of Genentech’s top priorities. While there can be differences of opinion over the ranking, the conversations remain amicable because everyone has access to the same team-level performance data and shares the same sense of mission. Once the priorities are settled, it’s relatively easy to see which teams have surplus riches—the “sources”—and which are underfunded. Every squad leader is expected to support high-growth opportunities, and anyone caching resources gets called out. It helps that bonuses are tied to the results of the entire portfolio rather than the success of a particular drug.

Jennifer Kim, squad leader for Ocrevus, a pioneering multiple sclerosis therapy, explains the process:

No one has a slush fund. All our head count and dollars are in Signals and Sources. There’s total clarity on priorities, and no one sits on a surplus. Let’s say I requested $1 million to fund a high-priority project but, in the end, spent only 50 percent. I will highlight the $500,000 surplus, and it will move to the next most important priority. Because we’re managing our budgets on a monthly basis, there’s never a deficit or an overrun at the end of the year.

Signals and Sources allows Genentech to respond to changing circumstances in a way that would be impossible with the typical top-down approach to resource allocation. The process rewards candor and frugality rather than politicking and overspending. It ensures everyone is focused on maximizing the success of the firm rather than a particular product area and encourages collaboration. “Signals and Sources,” says another insider, “changed the incentive from ‘how much can I get’ to ‘how prudently can I spend?’ Previously, instead of being rewarded for underspending, you got punished.”

Ed Harrington, Genentech’s CFO, credits the new process with creating a leap in accountability and trust, adding that “before Signals and Sources, there was no visibility to any budget but your own.” Jonathan Witt, who leads support functions across the company, adds, “We now have a pretty effective mechanism for doing less of my thing so you can do more of your thing.” Put like that, the change sounds obvious and simple, but few organizations can claim to have done anything remotely similar.

Markets are capable of extraordinary feats of coordination. Imagine that you live in London and are putting together a menu for a dinner party. When you go online to shop, everything is magically there: beef from Scotland, asparagus from France, potatoes from Jersey, butter from Denmark, strawberries from Kent, a lovely Brie from France, chocolate from Guatemala, wine from New Zealand, and coffee from Kenya. Two hours after placing your order, everything’s on your doorstep.

This wizardry is facilitated by a globe-spanning web of contracts that defies comprehension. Somehow, dozens of farmers, packers, shippers, wholesalers, and retailers all conspired to help you prepare a culinary tour de force. That’s the miracle of the market.

It costs money to write and enforce contracts, yet market-based coordination is often more efficient and flexible than the bureaucratic alternatives—top-down directives, meddling staffers, and a glut of committees.

Given the superiority of markets in synchronizing activities, why do hierarchies exist at all? The answer given by most economists is that hierarchies emerge when the cost of market-based coordination using contracts exceeds the cost of bureaucratic coordination using administrative fiat. Contracting becomes expensive when the skills and resources to be acquired are difficult to value, are scarce (thus putting the buyer at risk of being held hostage), or need to be integrated with other activities in complex ways that can’t be specified in advance. It’s hard to imagine, for example, how Apple could have created the iPhone—a multiyear effort that fused together a mind-boggling array of skills and technologies—using a gaggle of independent contractors.

Economists like Ronald Coase and Oliver Williamson were right to argue that it is sometimes more efficient for firms to “internalize” activities than to acquire them through arm’s-length contracts. They were wrong, though, to assume that once internalized, those activities couldn’t be coordinated through market-like mechanisms. Economists divide the world into markets and firms. Markets are decentralized and firms are not—by definition.

Yet, as Haier so clearly demonstrates, hybrids are possible. Haier’s microenterprises are bound together by a web of contracts that yield the coordination advantages typical of a hierarchical organization while also delivering the blessings of the market—freedom, accountability to customers, and incentives for innovation. Haier is best described not as a pyramid of power relationships but as an ecosystem of fraternal contracts.

The same is true for Morning Star, the tomato processor profiled in chapter 3. Despite running a complex, vertically integrated business, Morning Star has no managers. Instead, the choreography required to turn farm-fresh tomatoes into shelf-stable products is the product of internal contracting.

Every year, each of Morning Star’s five hundred full-time employees negotiates a personal performance contract with their teammates. The Colleague Letter of Understanding (CLOU) is a detailed catalog of responsibilities and metrics. The CLOU for someone working in a warehouse will include duties such as procuring packing materials, loading trucks and railcars, maintaining and repairing forklifts, evaluating new warehouse technology, developing capital proposals for new equipment, and training colleagues. Performance metrics will cover the average time taken to load a truck, the percentage of loads shipped on time, the number of customer complaints received, and warehouse costs per ton shipped. All CLOU agreements are filed online and can be viewed by any team member.

Of the eight to ten signatories on a typical CLOU agreement, roughly half will come from the employee’s immediate team, with the others working in adjacent areas. Critically, every team member has the freedom to choose their own counterparties. If two team members can’t agree on the terms of a CLOU, they can request a disinterested colleague to serve as a mediator. Should that fail, the dispute goes to a panel of peers who settle the matter through binding arbitration. At the end of the year, locally elected compensation councils review the performance of team members against their CLOUs and distribute bonuses accordingly.

From the outside, it might appear that negotiating and enforcing a sprawling web of contracts would be contentious and time-consuming. For several reasons, this isn’t the case. First, every colleague is committed to the same goal—ensuring that Morning Star remains the world’s premier tomato processor. Team members know that their industry-beating compensation is possible only as long as Morning Star outperforms its competitors. This awareness puts upward pressure on performance standards and creates intolerance for sandbagging. Second, because Morning Star is a great place to work, colleagues tend to stay in their jobs for a long time. As a team member, you know that if you take advantage of a colleague or fail to deliver on a promise, the repercussions will catch up with you. This encourages colleagues to think in terms of relationships rather than transactions. CLOU negotiations are tough but friendly, with none of the zero-sum thinking that often afflicts external contracting. Third, since every CLOU is open to inspection and has multiple signatories, there’s little risk of a team member or unit exploiting personal relationships to negotiate a uniquely advantageous CLOU. Fourth, because most folks at Morning Star have been in the tomato business for years, they are well placed to assess the skills and contributions of their colleagues. Fifth, because everyone at Morning Star has access to all of the company’s financial data, there are no information asymmetries that might give one party an advantage over another. Finally, since roles and responsibilities are reasonably stable, not every element of every CLOU needs to be renegotiated each year.

In short, Morning Star’s internal market works because it’s socially dense. The contracting parties are bound together by common aspirations, intersecting roles, widely available information, and shared industry context. These connections reduce the ambiguity, uncertainty, and opportunism that inflate transaction costs in cases where the buyers and sellers are socially detached.

As Haier and Morning Star demonstrate, you don’t need a posse of managers to coordinate individuals and teams. If it were conventionally organized, a business the size of Morning Star would have four management layers (assuming a 1:10 span of control). Instead, it has two—Chris Rufer, the president, and everyone else. Haier has only four levels. That’s the efficiency dividend of well-functioning internal markets.

In a market economy, customers are sovereign. A company that misses the chance to reinvent its business model, upgrade its products, or give customers a better deal will soon find itself at a disadvantage. That’s a lesson General Motors has been learning in China, where the automaker has been slow to adapt to soaring demand for electric vehicles (which in some months now account for half of all cars sold) and a spate of homegrown, fast-moving competitors such as BYD. From a high of 15 percent in 2015, GM’s market share in China, including its joint venture, had tumbled to 5.7 percent by the end of 2024.

Competition is the engine of progress, and most CEOs claim to welcome it even when they’re getting spanked by newcomers. Why, then, do they tolerate monopolies within their own organizations? Internal functions like HR, planning, procurement, manufacturing, marketing, finance, IT, and legal affairs are usually sole providers. Even when components of these functions are outsourced, internal customers are forced to do business with a single, headquarters-approved vendor.

With rare exceptions, those who work in internal functions aren’t exposed to market forces. Staffers may be individually competent and compassionate, but collectively, they’re the corporate equivalent of the administrative state. They wield immense power but are subject to few checks and balances.

The argument for centrally run functions is that they ensure consistency, promote best practices, and mitigate risk. The problem is, few leaders stop to ask whether these benefits could be acquired more cheaply or with fewer side effects.

Ask the head of an operating unit about the downside of internal monopolies and you’ll get an earful. Here are some typical grumbles:

It takes months or years for the IT function to deliver critical system upgrades.

Byzantine procurement rules make it hard to bring on new suppliers.

Inflexible HR policies make it difficult to reward and retain top talent.

Overzealous lawyers seem to delight in throwing up roadblocks.

Cost-obsessed finance executives seem clueless about what really drives customer value.

The plans produced in the annual budgeting marathon are forgotten almost as soon as they’re written.

Staffers seem more interested in ticking boxes than solving business problems.

These aren’t mere gripes. They are evidence of a fundamental disconnect in incentives. Employees in market-facing roles know that if they fail to satisfy user needs, they’ll get fired by their customers. Corporate staffers, by contrast, can only be fired by their overlords, so that’s where their loyalties lie. Internal administrators suffer little or no penalty when they inflate costs, offer substandard services, or insist on compliance at any cost.

If you think we’re overstating matters, reflect on your own experience. On average, when you’re forced to interact with central staffers, does it feel as if they’re doing something for you or to you? Our bet is that it’s the latter. This is how it feels when you run up against a monopoly—be it your internet provider, the Internal Revenue Service, the Department of Motor Vehicles, or your company’s HR department.

A few years ago, Harvard Business Review declared on its cover that “it’s time to blow up HR and build something new.” Yet in the two feature articles, one by a Wharton professor and the other by a team of experienced consultants, the words “customer” or “user” never appeared—not even once.²⁵ We found this a striking omission, evidence of the extent to which HR professionals take their monopoly status for granted.

What can you do to put some competitive pressure on internal service units? Start by digging into the costs that get allocated to your unit for corporate services. Ask your finance colleagues to deconstruct these allocations into their constituent elements. How much are you paying for HR, IT, legal, and other services? Next, ask each function to prepare a document that details how it’s going to add value to your unit over the next year and how this maps against its allocated costs. Then try to benchmark these costs against market alternatives. Finally, go back to internal functions and challenge them to meet the external benchmarks if they’re falling short on service or cost. If you want to be treated like a customer by internal staff groups, start acting like one.

The logic for tearing down internal monopolies is unimpeachable. A company can’t expect to win in hypercompetitive markets if operating units are forced to buy uncompetitive services from internal providers. Haier gets this. That’s why it turned its central functions into microenterprises and made them compete with outside vendors.

In an open market, internal units should have a leg up in supplying services. Presumably, they understand the business better than outsiders and have a privileged position with internal buyers. Given these advantages, if in-house functions fail to offer competitive services, they should go out of business. As is true at Haier, every internal staff group should have a genuine P&L and be responsible for earning its keep.

Collective intelligence, allocational agility, dynamic coordination, and competitive discipline—these are the blessings of the market, and they are as essential to organizational resilience as they are to the vitality of an entire economy.

Not every relationship in an organization can be mediated by a market, but many can and should be. So what’s it going to take to embed marketplace principles in your organization? Here are a few essential steps:

Challenge leaders to publicly acknowledge the limits to centralized, top-down decision-making in a complex and uncertain world.
Test the merits of major strategic initiatives with an internal opinion market. See how the crowd ranks competing projects or how it rates the probability that a major new initiative hits its milestones.
Be alert to the factors that distort resource allocation, and challenge decision-makers to take positive steps to eliminate those distortions.
Make sure internal innovators have access to multiple sources of funding and use the crowd to identify the most promising projects.
Wherever possible, use arm’s-length contracts to direct the internal flow of goods and services. Avoid mandates, overhead allocations, and centrally determined transfer prices.
Break administrative functions into smaller units and make them compete with outside providers.
Over time, slowly expand the jurisdiction of the crowd. Let it define company values, rank the promotability of senior leaders, suggest acquisition targets, and identify low-value bureaucratic rituals.

While markets can’t function in the absence of appropriate regulatory structures and are prone to occasional bouts of euphoria and dysphoria, they’re unmatched in their capacity to harness human wisdom and initiative. They unshackle human creativity from the yoke of top-down control and are thus essential to building a humanocracy.

— 10 —

The Power of Meritocracy

The triumph of meritocracy as a social ideal was a turning point in human history. Before the Enlightenment, most societies were elaborately stratified—be it England’s hierarchy of king, duke, earl, viscount, and baron, or China’s imperial order of emperor, heshuo qinwang, duoluo junwang, duoluo beile, and gushan beizi. In these regimes, the vast majority of human beings—peasants, servants, and slaves—had little hope of bettering their station.

Philosophers like John Locke, Charles Montesquieu, and Jean-Jacques Rousseau questioned the idea of an unelected elite. Writing on the eve of the American Revolution, Thomas Paine boldly proclaimed that “of more worth is one honest man to society and in the sight of God than all the crowned ruffians that ever lived.”

Few today would question the morality or utility of meritocracy. Instead, the debate is about how to make our societies more meritocratic still. Prejudice and poverty still prevent millions of individuals from achieving their potential. But unlike our pre-Enlightenment forebears, we see this as a failing rather than the hand of fate.

Even as we work for equality of opportunity, we acknowledge the indisputable value of meritocracy. We’re glad that the licensing of physicians depends on exams rather than the socioeconomic status of medical students. We celebrate athletic accomplishments because we know the winners didn’t buy their way onto the podium. We trust the findings of science because studies are subject to peer review. We welcome the fact that you don’t need to be Hollywood royalty to win a million hits on YouTube.

Meritocracy raises the returns on talent by ensuring that individuals are free to contribute and succeed whatever their social rank or personal connections. It’s troubling, then, that bureaucracy—the world’s most ubiquitous social structure—systematically undermines meritocracy. In our survey with Harvard Business Review, 65 percent of big-company respondents said that political behaviors highly influence who gets ahead in their organization. It wasn’t supposed to be this way. Bureaucracy was designed to overcome the nepotism, elder worship, and class-consciousness that hobbled preindustrial organizations. One of the great breakthroughs in organizational design occurred in the early nineteenth century when the Prussian army, after its defeat by Napoleon, adopted a competitive selection process for would-be officers. Previously, military commanders had been drawn from the nobility, but titles, not surprisingly, were a poor proxy for military genius.

In theory, a bureaucracy is a ranking of merit where those with exceptional capabilities get promoted over those who are less accomplished. In practice, organizations seldom come remotely close to achieving this ideal.

In this chapter, we’ll review the ways in which bureaucracy threatens meritocracy and suggest some fixes.

As human beings, we tend to overestimate our abilities and underestimate our faults. In one survey, 84 percent of middle managers and 97 percent of executives claimed to be among the top 10 percent of performers in their organization.¹ So common is the habit of overrating one’s abilities that it has a name: the better-than-average effect. One oft-cited meta study found that the correlation between self-assessed and actual performance was just 0.29 and, in the case of managers, a paltry 0.04.²

While the inclination to self-aggrandizement is universal, it’s particularly pronounced at the top. Here’s why.

First, highly confident people tend to have an advantage in competing for power. Research shows that in judging the competence of others, we’re heavily influenced by bluster. The more confident someone appears, the more likely we are to believe they’re genuinely capable, whether or not that’s true. Genuine competence is often hard to assess, so instead we gauge an individual’s self-confidence. Working with colleagues at the University of California, Professor Cameron Anderson conducted six studies on overconfidence and social status. The research strongly confirmed the proposition that “overconfident individuals [are] perceived as more competent by others.”³ A recent study of Italian executives reached the same conclusion: higher levels of narcissism—including self-confidence and grandiosity—are associated with faster promotion to the CEO role.⁴

The implication: it’s often the most confident people, not the most competent, who get to the top. Stated more bluntly, the gap between self-perception and reality is likely to be greatest where the air is thinnest. In case you had any doubt, it really is possible to bullshit your way to the top.

Second, in a formal hierarchy, power relationships are highly asymmetric. Managers have a lot more control over their subordinates than the reverse. This makes it risky to question a superior’s competence. Stick a pin in your boss’s overinflated ego and it’s your career that will go “pop!” Power differentials encourage acquiescence, which leaders often mistake for agreement. It’s easier to believe that a sea of nodding heads betokens assent than that one’s subordinates are merely buying career insurance. In the presence of the powerful, discomforting facts get ignored, contrary opinions go unexpressed, and doubts about executive competence are raised only in hallway whispers. This dynamic was in full display at Exxon. According to a Bloomberg BusinessWeek investigation, many insiders and former employees blamed the company’s conservatism on a general fear of speaking out against executives and company strategy. That fear, they say, made Exxon slow to invest in some of the industry’s biggest recent breakthroughs, including shale oil and low-carbon technologies. Summing up the problem, one former executive said bluntly, “Agreeability to senior leadership has become more important than capability.”⁵

There’s a third reason hierarchy promulgates unrealistic assumptions about executive competence. Among those who subscribe to a top-down view of authority, there’s a common belief that “big” issues are the sole preserve of “big” leaders. While it’s true that senior leaders are ultimately accountable for strategy, it doesn’t follow that they’re the best ones to create it. There’s only so much wisdom and experience within the executive team—and it’s often not enough. Despite that, senior leaders are often reluctant to crowdsource strategy. After all, how can they justify their generous pay packets if they’re not the ones plotting the future and making the “big calls”?

That’s the problem with formal hierarchy: leaders are expected to make crucially important decisions on precisely the sort of complex and ambiguous issues that exceed the cognitive limits of any small group of individuals. As we argued in chapter 3, hierarchy asks too much of too few. Unfortunately, executives often believe they’re up to the task.

Assumptions of exaggerated executive competence are endemic to bureaucracy—a fact that undermines the quality of decisions and, over time, erodes the confidence of employees in their leaders.

However much we may struggle to be objective about our own capabilities, we score even worse when it comes to judging the abilities of others. Research shows our assessments usually say more about us than those we’re evaluating. Again, this phenomenon has its own name—idiosyncratic rater bias. Three factors in particular sabotage our ability to reliably assess others.

First, some of us grade tough, while others are generous. In three studies conducted between 1998 and 2010, managers, peers, and subordinates were asked to rank the performance of their colleagues. On average, more than 60 percent of the variation in ratings could be traced to the rating style of the evaluator.⁶ These differences make individual assessments highly unreliable.

Another distortion comes from the fact that we tend to rate most highly those who are most like us. Much as we might wish it were otherwise, we tend to divide the world into “us” and “them”—native-born versus immigrant, conservative versus liberal, believer versus nonbeliever, and attractive versus plain. Psychologists call this “in-group bias.” Despite our enthusiasm for diversity, in-group biases are deeply rooted and are observed even in preverbal children. In one study, eleven-month-old babies were given the chance to choose between two snacks, graham crackers or Cheerios. They were then offered two puppets, one expressing a preference for the child’s favorite snack and one choosing the alternative. By a four-to-one margin, the babies opted to play with the puppet that shared their culinary preference.⁷

As woke adults, we’re more conscious of our biases, but it’s still hard to disentangle the question of “who’s competent?” from the question of “who makes me feel comfortable?” In her book, Brotopia, Emily Chang notes that while Wall Street banks employ roughly the same number of men and women, women hold only 25 percent of tech industry jobs.⁸ Worse, women attract a minuscule 2 percent of venture funding. While most tech leaders claim to be all in on meritocracy, the evidence suggests that excellence counts most for those who’ve already passed the “bro-hood” test. This sort of insidious in-group bias produces what software pioneer Mitch Kapor calls a “mirror-tocracy.”⁹

There’s another cognitive quirk that leads to misjudgments—the halo or horns effect. As human beings, we’re prone to judge others hastily, often on the basis of first impressions. These initial opinions are resistant to change, even in the face of new data. Researcher David Schoorman found that the biggest factor affecting someone’s performance review was whether or not that employee had been hired by the person doing the evaluation.¹⁰ Thanks to the halo bias, a favored deputy may underperform for years before getting the boot.

The corrosive effects of these biases are compounded by the fact that judgments about competence often depend on the views of a single assessor—the employee’s boss. In a poll conducted by consultant John Gardner, more than three hundred executives were asked about the prevalence of favoritism in promotional decisions.¹¹ For the purposes of the study, favoritism was defined as “preferential treatment based on factors unrelated to a person’s abilities, such as background, ideology or gut instincts.” Gardner’s study revealed that:

Seventy-five percent of the executives had witnessed favoritism in hiring decisions.
Ninety-four percent believed policies aimed at preventing favoritism were ineffective.
Eighty-three percent said favoritism produced poor-quality promotion decisions.

Put simply, the “data” used in hiring and promotion decisions is riddled with bias—and everyone knows it. In a study conducted by the Corporate Executive Board (CEB), 77 percent of HR executives conceded that typical assessment methods don’t accurately measure employee capabilities and contributions. A separate CEB study found zero correlation between individual performance ratings and actual business results.¹² That’s about as uncorrelated as you can get.

While many HR professionals recognize the need to overhaul performance management, the usual fixes—abandoning forced rankings, moving the process online, assessing performance more frequently—do little to counter systematic bias.

Among the panoply of skills that are critical to an organization’s success, bureaucracy elevates one above all others: administrative expertise. What distinguishes managers from nonmanagers is not their creativity, foresight, or technical expertise but their mastery of administrative protocols—developing plans, building budgets, doling out tasks, and preparing reports.

Admittedly, there are certain administrative tasks that must be performed in any organization, but as a rule, these chores are peripheral to value creation. It’s not administrative competence that generates a patent or spawns a new product. We’re not saying that managerial work is unimportant, merely that administrative competence is unlikely to lift a company above its peers. It is to organizations what breathing, eating, and sleeping are to human beings—vitally necessary, but no more than that.

There was a time, several generations past, when administrative skill was rare, but as we’ll argue in chapter 17, that is no longer the case. Nevertheless, in the United States, managers and administrators take home 31 percent of all wages and salaries, despite making up only 20 percent of the workforce.

In a bureaucracy, compensation correlates with rank. In a Fortune 500 company, an executive vice president may make $5 million a year, while a vice president, two rungs down, earns a comparatively measly $500,000. In theory, this multiple reflects differences in the difficulty and impact of the work performed. In practice, such differences are often more imagined than real. While an executive vice president (EVP) is likely to oversee a bigger organization than a VP two levels down, this doesn’t make the EVP’s job more difficult. To take a hypothetical case, it’s not obvious that the work of overseeing a thousand employees spread across dozens of regional sales teams is intellectually more taxing than leading a one-hundred-person R&D team. As a rule, EVPs aren’t solving partial differential equations while their subordinates are struggling with long division—and yet, senior executives are often paid as if they are.

You might argue that the decisions of an EVP are likely to be more momentous than those of a lowly VP, but even if that’s the case, a yawning salary differential would be justified only if the senior executive was demonstrably more sagacious than subordinates. Unfortunately, there’s little evidence that wisdom correlates with rank. Indeed, a growing body of research suggests the opposite—that positional power increases the odds of boneheaded decisions. Dacher Keltner, professor of psychology at the University of California, Berkeley, has spent more than two decades studying the effects of power. His conclusion: “Power makes individuals more impulsive [and] less risk-aware.”¹³ In other words, while an EVP’s decisions may be more consequential than those made by lower-level managers, they’re no more likely to be right, and when they’re wrong, they’re really wrong. That’s why we argued earlier that whenever possible, big decisions should be vetted by the crowd.

In short, administrators enjoy a disproportionate share of power and emoluments not because their work creates a disproportionate amount of value, is more challenging, or is more likely to be “on the money,” but because bureaucracies tend to overvalue administrative competence and to pay managers based on the size of their budget or head count rather than on their net value-added.

Again, it doesn’t have to be this way. Vanguard organizations like Haier, Nucor, Vinci, Morning Star, and others distribute a substantial share of administrative work to frontline employees. You’ll recall that Haier shed twelve thousand middle management jobs when it moved to its microenterprise model—a shift that enhanced rather than impaired organizational effectiveness.

Hard as it may be to admit it, in a meritocracy, management competence is one skill among many, rather than one skill to rule them all.

In chapter 4, we described bureaucracy as a massive multiplayer game in which employees compete for the prize of promotion. In these tournaments, there’s a single winner—a lone contestant who gets bumped up to become a manager, department head, or VP. Ideally, promotion testifies to an individual’s superior leadership skills or technical expertise. In practice, promotion often rewards those who’ve mastered the dark arts of bureaucratic combat: hoarding talent, ducking tough decisions, deflecting blame, undermining rivals, and brownnosing the boss.

In a bureaucracy, megawatts of emotional energy get wasted on petty battles, data gets weaponized against adversaries, collegiality gets shredded by zero-sum promotion tournaments, and decisions get corrupted by artfully concealed self-interest. As we’ve noted before and will again, bureaucracy doesn’t bring out the best in people, nor does it reliably get the best people to the top.

To change all this, to replace bureaucracy with meritocracy, we must do four things: decontaminate judgments about merit, better align wisdom and authority, match compensation to contribution, and build natural, dynamic hierarchies. Let’s take each in turn.

Netflix, the $33-billion-a-year streaming giant, has long embraced the twin values of freedom and responsibility. Founder and executive chairman Reed Hastings realized early on that traditional performance reviews would be of no help in this regard: “The first problem is that the feedback goes only one way—downward. The second difficulty is that with a performance review you get feedback from only one person—your boss.”¹⁴

Over the years, Netflix experimented with ways of giving its thirteen thousand employees the opportunity to give and receive unvarnished feedback. Over time, two approaches proved particularly effective. The first is an annual cycle of written 360-degree reviews. This began as a traditional process, where employees selected a handful of people to provide anonymous feedback and highlight what each person should “Start, Stop, and Continue.” Some participants were unhappy with the anonymity and chose to sign their comments. Former chief marketing officer Leslie Kilgore was one of the first to do so. “It just seemed backward,” she said, “to tell our employees all year long to give feedback directly to one another and then [during the annual review] to pretend the comments were coming from a secret source.” In the next review cycle, more than half of employees voluntarily signed their feedback, and the following year, everyone did. Doing away with anonymity improved feedback quality, as people were more likely to provide specific, actionable comments. It also sparked more follow-up discussions between colleagues.

Managers and executives now make it a habit of sharing their 360 feedback.¹⁵ That’s true for Hastings as well, who, after one round of reviews, shared one particularly piquant comment he had received:

You can be overly confident—even aggressive—in advocating for a position, and dismissive of differing perspectives.… It is hugely valuable that you ask the question and are open to making radical shifts, but throughout the due diligence process, it seems you are predetermined to get to a certain outcome and dismissive of counterarguments.

For Hastings, the rationale for this sort of self-deprecating candor is simple: “This not only strengthens the sense of transparency but also creates ‘reverse accountability,’ whereby the team feels encouraged to call the boss out for recurrent bad behavior.”

“Live 360s” are a second feedback tool. Participants take turns receiving face-to-face feedback from other team members using the “Start, Stop, Continue” format of the written reviews. Team leaders role-model vulnerability by being the first to be critiqued. Live 360s are a voluntary practice, typically held over dinner, but virtually every team hosts at least one session each year. While many employees feel nervous before their Live 360s, the collegial setting encourages thoughtful and supportive candor. As VP Larry Tanz put it, “Because everyone is watching, people are careful to be generous and supportive in the way they give the feedback—with the intention of helping you succeed.”

Beyond periodic reviews, Netflix expects managers to solicit honest input during every one-on-one meeting with team members. As Hastings notes, “The higher you get in an organization, the less feedback you receive, and the more likely you are to ‘come to work naked’ or make another error that’s obvious to everyone but you. This is not just dysfunctional but dangerous.”

In an ideal world, influence would stem from expertise rather than hierarchical power. Netflix pursues this goal by giving employees the opportunity to challenge executive decisions and by pushing authority down to those who are closest to the issue at hand.

To ensure top-level ideas are properly vetted, Netflix has developed a robust system called “farming for dissent.” The practice emerged from hard lessons learned during the Qwikster debacle in 2011, arguably the company’s biggest mistake. At the time, Netflix offered a $10 subscription that combined DVD-by-mail and streaming. With streaming clearly poised to supplant DVDs, Hastings proposed splitting the company in two: Netflix for streaming and a new company called Qwikster for DVDs. Under the new model, customers would be charged separately for each service.

The announcement proved to be deeply unpopular with Netflix subscribers, with millions abandoning the platform over the next few quarters. Shareholders were equally unimpressed, and the company’s market value nosedived. Reflecting on the pummeling, Hastings realized that many Netflix managers had been doubtful about the plan. As one senior colleague said later, “I knew it was going to be a disaster, but I thought, ‘Reed is always right,’ so I kept quiet.” Another executive said, “I should have laid down on the tracks screaming that I thought it would fail. But I didn’t.”

Even though Hastings frequently extolled the virtues of candor, the Qwikster fiasco made him realize that power differentials can make dissent feel dangerous. In response, Netflix embraced a new cultural mantra: it’s disloyal to the company to stay silent when you have misgivings about a new idea.

This principle has been operationalized in several ways. When managers want to propose a significant change, they write a memo and invite dozens of colleagues to provide input through online comments. In some cases, people are asked to rate the idea from −10 to +10, with explanations for their rating. These simple steps help bring contrary viewpoints to the surface.

Hastings used this approach when considering a couple of significant changes to the company’s plans. Dozens of managers weighed in with ratings from −4 (“Making two changes at once is a bad idea”) to +8 (“The timing is perfect”). “It’s not a vote or a democracy,” says Hastings, “but it provides invaluable insights before making any major decision.”

For smaller projects, employees are encouraged to “socialize the idea,” setting up meetings to outline the proposal, stress-test their thinking, and gather opinions. Hastings himself changed his long-held stance against producing original kids’ content after getting input on the idea at a 2016 strategy off-site. At the event, hundreds of participants huddled in groups of seven to debate whether they should spend more, less, or no money on children’s programming. The support for increased investment was overwhelming. Parents on staff noted that they subscribed to Netflix primarily or exclusively for their children, and highly valued the commercial-free, trustworthy content. Within six months, Netflix had hired a VP of kids programming and tripled its kids’ development slate. Netflix would go on to win over a dozen Daytime Emmys in children’s programming.

The goal in publicly examining strategic options isn’t consensus but better decisions. The ultimate call is made by “informed captains”—individuals who are empowered to act because they have the most relevant knowledge and context. By coupling rigorous systems for dissent with empowerment, Netflix creates a work environment that guards against executive myopia and maximizes good decisions, regardless of where in the hierarchy those decisions originate.

If wisdom doesn’t correlate with rank, neither should compensation. That’s the reality at W. L. Gore, the maker of Gore-Tex and more than a thousand other advanced products. Once a year, every associate is asked to compile a list of five to twenty colleagues who have firsthand knowledge of their work. These nominations are then used in a peer-rating process based on pairwise comparisons. By way of example, assume that Tom and Rebecca both list Jennifer as a potential reviewer. In this case, an algorithm will identify the match, and Jennifer will be asked to indicate which of her associates, Tom or Rebecca, contributed more to Gore’s success over the preceding year. (Contribution is defined as the extent and nature of impact on business results.) Tens of thousands of such comparisons are collected across the company and aggregated to create a contribution ranking for every associate. Once the ratings are compiled, local contribution committees review the results and, when appropriate, fine-tune the rankings. For example, when associates receive substantially higher rankings from top performers than their overall ranking indicates, their position might be nudged upward. Each local committee includes an “equity champion” who’s responsible for alerting the committee to potential biases.

Armed with the rankings, the committees then review compensation data. The goal is to ensure that an individual’s pay reflects their peer-derived rating and stays in sync with the pay of similarly rated peers. If the average pay raise in a given year is 4 percent, a highly ranked associate might get a 15 percent boost, while a poorly ranked associate would get no raise at all. Global and regional compensation committees focus on specific functions such as engineering, production, and finance, and review the results to ensure they’re appropriately calibrated across the enterprise and with external benchmarks.

Gore’s peer-based compensation system pushes everyone to think about how they could add more value. The system also encourages collaboration. At Gore, associates understand they report to their peers, not a boss, and are thus more inclined to go the extra mile for colleagues.

The idea of a 360-degree compensation system may seem a bit unnerving, but if it’s constructed well, it’s the best way of ensuring performance and pay are, in fact, correlated.

The idea of meritocracy doesn’t negate the value of hierarchy. As noted earlier, depending on the topic, some individuals deserve to have more authority than others. Not everyone is equally competent and/or credible. Thus, the problem with bureaucracy isn’t hierarchy per se but the dominance of a single, formal hierarchy. In the traditional pyramid, power is vested in positions—it’s binary and allocated top-down, which creates perilous pathologies.

At senior levels, positional power is often more expansive than the abilities of the person in the role. This wouldn’t be a problem if every leader was a model of humility, but bureaucracy works against this. As a senior leader, you’re expected to have the answers—that’s how you validate your vaunted organizational status. It’s hard to resist the temptation to pontificate on issues, even when you’re ill-equipped to address them.

Most of us follow lots of people online. When someone goes stale, our attention shifts elsewhere. It seems to us that power in organizations should be similarly dispersed and mutable. An organization needs multiple hierarchies corresponding to the range of problems and issues that it confronts. In addition, power should be fluid—flowing toward those who are adding value and away from those who aren’t.

This is how power works at Morning Star, the managerless tomato processor. Ask a cross-section of Morning Star’s associates to name their most valuable colleagues, and you’ll find the same names popping up again and again. There’s little doubt about who’s indispensable and who’s not. Morning Star’s organization isn’t flat—some associates add more value and get paid more than others—but authority is the product of value-added, not positional power, and varies from issue to issue.

In a meritocracy, hierarchies are natural rather than magisterial. Power is dynamic. Authority ebbs and flows, depending on an individual’s track record. Earlier, we described Gore’s peer-based compensation model. As you might expect, Gore places great credence in the sovereignty of followers. You won’t find an org chart at Gore or a formal hierarchy. Instead, the company describes itself as a lattice. Gore’s eleven thousand employees are organized into small teams. Each team has a leader who’s likely to be a member, in turn, of a boundary-spanning super-team. Gore’s billion-dollar medical materials business, for example, has a global sales and marketing team whose members head up regional teams. Gore eschews titles, so while you’ll occasionally see the word “leader” on someone’s business card, you’ll struggle in vain to find a VP, SVP, or EVP.

Critically, Gore’s leaders serve at the pleasure of the led. Team members have the biggest share of voice in selecting leaders, and their support is essential to a leader’s ongoing effectiveness. Like everyone else, leaders get ranked each year by their peers—principally by those they serve. While leaders usually rank in the top quartile, a particular leader may not be the highest-rated or the best-paid individual on the team. Nevertheless, leaders who tumble down the rankings know they’re at risk of being replaced. Not surprisingly, they’re highly attentive to the quality of their “followership.”

One of Gore’s core tenets is that “commitment is voluntary.” No one has the power to give an order. If you want people to follow you, you have to give them a reason for doing so. Persuasion, data, and competence carry the day—not raw power. As one associate told us, “If you call a meeting and no one shows up, you’re probably not a leader, because around here, no one has to go to meetings.”

Everyone at Gore has a financial stake in the company, and for most associates, this constitutes their single largest financial asset. Given that, there’s little tolerance for mediocre leaders. Underperform and your followers will find someone better to lead them.

The same is true at Haier. As we noted in chapter 6, the failure of a microenterprise to meet its baseline targets for three months running prompts an automatic leadership reselection, and at any time, a no-confidence vote by two-thirds of the members on a team will force a leader out. In both cases, it’s up to the team to choose a new leader.

Consider how this process played out within a Haier microenterprise (ME) responsible for washing machines. Having voted out its leader, the ME advertised for a new one. Among the applicants were three members of the ME team. Once the candidate list was complete, the remaining team members assembled in a conference room. One by one, the candidates came in and made their pitch. Each was asked, “What’s your vision?” “What makes your plan better?” “Why should we believe your targets are achievable?” “How will things change under your leadership?” After the presentations, the ME members exchanged views on what they had heard. Finally, with all the candidates back in the room, the team voted by a show of hands.

Whether Morning Star, Gore, or Haier, the point is the same: you can’t build a robust meritocracy until the formal hierarchy gives way to natural hierarchies that are less imperious and rigid.

Here’s a short menu for building a genuine meritocracy in your organization:

As a start, ask your peers to rate your expertise across a range of categories, as well as your value-added. Share your ratings with those in your network and ask them for advice on how you can improve. Invite others to follow your lead.
More generally, ensure that competence and performance ratings are peer-based, with at least five assessors for every individual. Make these ratings transparent to all.
Give significant weight to peer assessments in all hiring and promotion decisions.
Wherever possible, divorce compensation from rank and tie it more closely to peer-based ratings.
Redesign decision processes to give a greater share of voice to those with relevant, peer-attested competence. Downgrade the influence of positional power in decision-making.
Give teams the right to “fire” incompetent or tyrannical leaders.
Create more opportunities for individuals to become meritorious. Rotate team members across roles, challenge people with stretching assignments, open up management training to frontline team members, and take time to mentor others.

The goal of humanocracy is to create an environment in which everyone is inspired to give their best. That won’t happen if a significant share of individuals in an organization believe it’s the blowhards who get ahead, that their own capabilities and contributions are often underrated, that the suits get an excessive share of the spoils, and that many of their leaders aren’t actually worth following. The antidote to these poisonous realities is meritocracy—a principle that is central to the work of creating human-centric organizations.

— 11 —

The Power of Community

Think of a time when you accomplished something worthwhile with people you cared about, a time you felt inspired and supported, when you gave your best and felt deeply appreciated, when the emotional rewards far outstripped any monetary payoff. Maybe you were volunteering at an animal shelter, helping out at your kid’s school, organizing a fundraiser for a political candidate, or working with a “tiger team” to launch a new product. Whatever the experience, you probably felt you were part of something that wasn’t merely a team but a genuine community.

As human beings, we’re programmed for community. While primates and other animals form groups, no other species demonstrates the sort of intentional, intimate collaboration that is central to human life. Some researchers have argued that conscious thought, the distinguishing trait of human beings, emerged primarily as a tool for social interaction.¹ Our brains, it seems, are wired for community.

Abraham Maslow ranked the need for belonging just above the need for sustenance and safety, and innumerable studies have confirmed the link between social connection and well-being. A 2015 meta study found that loneliness is as dangerous to one’s health as obesity, inactivity, smoking, excessive alcohol consumption, or heart disease. Overall, those with strong social relationships have half the risk of premature death as those with insufficient connections.² It’s a problem, therefore, that a 2024 Gallup survey found that one in five employees feels lonely.³

In our hyperbusy, digitally mediated world, the sort of human connections that buoy us up—those that are stable, frequent, and caring—are getting harder to come by. This is an issue not only for our emotional health but for our capacity to solve problems big and small.

One of the quintessential acts of community on the American frontier was constructing a barn. When new settlers joined a rural community, neighbors would often unite to build a barn for them. Barn raising fortified norms of reciprocity and increased social cohesion. That paid dividends later when a community was confronted with a crisis that required a coordinated response. Today, businesses and governments have absorbed many of the functions of community. Despite this, communities remain indispensable to individual well-being and collective accomplishment. To underline this point, let’s look briefly at two examples of community in action.

Each week, more than 2 million people around the world meet in small groups to encourage one another in their sobriety. As members of Alcoholics Anonymous (AA), they form a vast network of ad hoc communities. There is only one criterion for joining—a desire to stop drinking. Each AA meeting—in a church basement, recreation center, or public hall—is self-organizing and self-supporting. Volunteers secure meeting rooms, arrange coffee, collect donations, hand out literature, and compile phone lists. In every meeting, there will be “sponsors”—regular attendees who are eager to offer time and advice to those new to recovery.

AA’s effectiveness is the product of the relationships that get forged during meetings. Self-acknowledged drunks encourage one another and serve as emotional ballast in the stormy seas of recovery.⁴ AA’s model stands in stark contrast to the credentialed and hierarchical structures of formal treatment programs. In AA, there’s no certification, supervision, or monitoring. Therapists and physicians aren’t allowed to participate in AA meetings unless they too suffer from alcoholism (though half of AA members in North America are referred by health professionals).⁵ Yet despite the lack of professionalism, AA’s twelve-step communities have helped countless individuals overcome addiction.⁶

Equally remarkable is the fact that AA delivers its service without a formal organization. AA’s 123,000 groups operate autonomously. Guidelines known as the “Twelve Traditions”—such as the tenet that every AA group should be self-supporting and nonprofessional—provide a framework, but there are no formal rules. Groups form whenever two or three alcoholics decide to establish one. Groups in nearby locations can choose to share resources like a meeting space or telephone helpline, but coordination is always voluntary. Despite AA’s global reach, its central organization comprises fewer than ninety people. These individuals are responsible for distributing AA materials and running an annual meeting for local coordinators.

As the former editor of the American Journal of Public Health observed in a piece summing up AA’s first seventy-five years: “From what looks like anarchy—traditions rather than rules, maximum local autonomy and independence, and absence of centralized or layered tiers of authority—emerges consistency and stability.”⁷ That’s the power of community.

Here’s a tough question: What would you do to achieve dramatic improvements in the quality of public education? Over many decades, this has proved to be one of the thorniest problems facing educators, parents, and taxpayers. Despite countless efforts at reform, the performance of US public secondary schools has been on a long, downhill slide. Once ranked first in graduation rates, the United States now comes eighteenth out of twenty-four industrialized countries.⁸

The causes of this decline are so varied and complex that it’s tempting to regard the problem as intractable. No single fix—lower student–teacher ratios, higher teacher salaries, greater parental involvement, or curriculum reform—has proved capable of turning things around. Yet in 2006, a window on real progress opened when KnowledgeWorks, an education-focused think tank, launched its “StrivePartnership” in Cincinnati, Ohio. What made this effort unique was the size and scope of the community that came together to tackle the problem of poor academic performance. More than three hundred institutions participated, including school districts, private foundations, city agencies, area employers, local universities, and dozens of advocacy groups.

Recognizing the systemic nature of the problem, members of the Strive community set themselves the goal of improving education “from cradle to career.” To ensure cohesion, the partners adopted a single set of overarching goals. Fifteen subcommunities, deemed Student Success Networks, self-organized to focus on specific issues such as early childhood education and tutoring. Each network agreed on common metrics to evaluate progress and committed itself to being scrupulously evidence-based in recommending and evaluating actions. Many also elected to use common problem-solving methodologies such as Six Sigma. This helped forge a common language and a shared understanding of root causes.

Network members met in person for two hours every two weeks to refine goals, craft plans, and calibrate progress. Between meetings, their conversations moved forward on social platforms like Google Groups. As networks became more cohesive, parochial concerns receded into the background. For example, when data showed that private preschools often did a better job of preparing children for kindergarten than public ones, the city school system redirected resources into private programs.⁹

The Success Networks often spawned subsidiary networks within member institutions. Many local schools established “data war rooms” with performance charts plastered on the walls. Teachers would meet every two weeks to review data on academic performance, absenteeism, and behavioral problems. By carefully tracking these trends, teachers became better at connecting at-risk students with outside help and identifying the sort of interventions that could make the biggest difference.¹⁰

Within four years of its launch in Cincinnati, the StrivePartnership had produced gains in thirty-four of fifty-three key performance areas. Kindergarten readiness advanced by 9 percent, fourth-grade math skills went up by 14 percent, and high school graduation rates jumped 11 percent.¹¹ These results attracted national attention, and today there are seventy Strive communities across the United States.

The challenge of scaling up forced Strive’s coordinating body to articulate its “Theory of Action”—the core steps required to build strong, problem-focused communities:

Clarify shared, measurable results important to community partners.
Identify audiences that need to be involved in working to achieve the result.
Determine the skills different partners need to take effective action.
Design teams of leaders and practitioners and support them in ongoing, experiential learning.

As different as they are, AA and Strive are both committed to solving complex, nonroutine problems. Every recovering alcoholic is a unique bundle of predispositions, traumas, and traits and needs to be uniquely supported in recovery. Every underperforming school faces a unique mix of circumstances—demographic, cultural, pedagogical, and institutional—and must develop a similarly distinctive set of responses. In both cases, success depends on local improvisation. That’s why these organizations are communities, not hierarchies. They are driven forward not by executive fiat but by unity, selflessness, determination, and accountability.

Bureaucracies excel at solving routine problems—like processing millions of credit card transactions or churning out a zillion computer chips. They’re also good at integrating diverse inputs, if the coordination tasks can be clearly specified in advance. Bureaucracies struggle, though, when confronted with novel problems that require new and unscripted patterns of collaboration. As Strive’s founder, Jeff Edmondson, rightly notes, “Under conditions of complexity, predetermined solutions can neither be reliably ascertained nor implemented.”¹²

Markets are similarly powerless to solve cutting-edge problems. Markets can reveal preferences, like establishing how many people are willing to part with $50,000 to buy a Tesla Model Y, but they can’t solve novel problems like designing a car that drives itself. That takes a community, not merely a clutch of contracts.

To solve knotty problems, individuals must surmount unforeseen obstacles and apply their ingenuity and initiative in ways that fit the particular context. That’s best accomplished by a community—a band of physically proximate compatriots who trust one another, are mutually accountable, and knit together by a common cause. This is the reality one experiences in a startup, on a winning football team, or in a platoon of US Navy Seals.

The rich, moist loam of community yields a harvest of commitment, capability, and creativity that can’t be extracted from the desiccated soil of bureaucracy. That’s why “performance-focused communities” are the backbone of a humanocracy.

Before going any further, let’s spend a moment defining what we mean by “community.” A community is more than a work group—a collection of individuals who report to the same boss or perform similar work. Instead, it’s a network of trust relationships among people who are breaking new ground and have a shared passion for making a difference.

“OK,” you say, “but can you actually build a pervasive sense of community in a large, commercial organization?” Luckily, the answer is yes.

With ten thousand nurses caring for over sixty thousand patients a year, Buurtzorg is the largest home health provider in the Netherlands. Services include eldercare, rehabilitation, chronic conditions, and end-of-life assistance. An additional five thousand staff members work in Buurtzorg- owned organizations that provide complementary services such as domestic help (Buurtdiesten) and at-home mental health care (BuurtzorgT).

Established as a nonprofit foundation in 2006, Buurtzorg has reset the benchmarks for home health care. Clients experience faster recovery times, report higher satisfaction levels, and receive more efficient care compared to other providers. Employees are also happier, with turnover and absentee rates significantly below the industry average (figure 11-1). A study by the global accountancy firm EY estimated Buurtzorg’s model would yield an additional $2 billion in savings if it were adopted by all of the Netherlands home health providers.¹³ Additionally, Buurtzorg has been ranked several times as the country’s best employer.

FIGURE 11-1

Buurtzorg versus its competitors

Bar chart shows Buurtzorg's percent difference in performance versus competitors across several metrics, including client satisfaction, staff utilization, weekly hours per client, days in hospital care, staff turnover, and overhead.

Source: Stefan C´irkovic´, “Buurtzorg: Revolutionizing Home Care in the Netherlands,” Center for Public Impact Case Study, November 15, 2018.

These impressive results aren’t the result of a brilliant top-down strategy, slavishly applied operating rules, or data-munching algorithms. Quite the opposite, in fact. Despite having fifteen thousand employees, Buurtzorg has no management layers and a super-lean back office. Fifty people work in support functions such as billing, reporting, contracting, and IT, and the finance department includes just eight staffers, most of whom are part-time. Not bad for an organization with over half a billion dollars in annual revenues.

Rather than being structured as a pyramid, Buurtzorg operates as a network of nine hundred teams. Each is responsible for delivering care within a particular geographic area. The building blocks of this radical management model include …

A Mission Worth Caring About

A community often comes together around a noble purpose—whether the goal is getting sober or helping high schoolers go to college. For Buurtzorg’s founders—Jos de Blok, Gonnie Kronenberg, and Ard Leferink—the mission was to transform health care by elevating “humanity over bureaucracy.” As in most countries, the Dutch health care system had become clogged with excessive management and administration.

Cost-obsessed policy makers had industrialized the care process, deconstructing the work of nurses and other professionals into standardized “care products” designed to be delivered by the lowest-cost provider. Bathing and dressing patients became the domain of low-skilled aides, while more complex procedures like wound care were reserved for higher-paid nurses. The theory was that this division of labor, coordinated by a team of managers, would deliver care more efficiently.

The reality was different. With care scattered across multiple providers, there was no one with an integrated view of client needs—a myopia that often produced gaps in care. Under pressure to meet top-down productivity targets, nurses rushed from one appointment to another with little time to build meaningful relationships. Rigid protocols reduced the scope for professional judgment, and wearisome reporting requirements squandered both time and goodwill. De Blok, a nurse-turned-administrator, was dismayed by what he saw—a care system, supposedly designed by experts, that was fractured, ungainly, and rigid. A maddening anecdote, all too typical, concerned a patient who had been visited by 150 different caregivers over the course of a year. The situation might have been less lamentable had the system curbed costs, but instead, costs surged, adding pressure to what was already one of the world’s most expensive health care systems.¹⁴

The passion of Buurtzorg’s founders for reinventing the care model was driven by a conviction that every individual deserves to be treated as a whole person rather than a bundle of ailments. (Notably, Buurtzorg refers to those it serves as “clients,” not “patients.”) Equally important was the founders’ deep respect for the professional ethics, judgment, and intrinsic motivation of nurses. Nurses wanted to exercise their craft with compassion and creativity—they wanted to be carers, not cogs. That’s what made the rallying cry of “humanity over bureaucracy” so potent, and it helped Buurtzorg grow from a single team in Almelo, a midsize town ninety miles east of Amsterdam, to nearly one thousand squads across the Netherlands.

Nurses saw Buurtzorg as a “freedom movement,”¹⁵ and they were inspired by its pioneering role in health care reform. De Blok had lobbied for a shift from piecemeal, task-based billing to flat-rate reimbursement for holistic nursing care, and the resulting policy change paved the way for other organizations to adopt Buurtzorg’s person-centered care model. Today, 50 percent of Dutch home care services are provided by small, integrated teams.

The Freedom to Self-Manage

The members of a community, unlike employees in a pyramid, tend to be self-managing. Communities have members, not overlords. What is perhaps most amazing about Buurtzorg is that it delivers professional services in a highly regulated environment with no formal hierarchy. As managing director, Jos de Blok had only a single deputy. That implies a span of control of one formally titled manager for every five thousand employees—which of course is wacky. Jos de Blok doesn’t “control” anyone.

Without managers, it’s impossible to micromanage—and that leaves Buurtzorg’s teams free to do whatever it takes to help their clients heal, thrive, and live with dignity. Each team is responsible for fifty to sixty clients in a specific neighborhood (“buurt”) of about ten thousand residents. When teams grow beyond twelve members, they split in two; when they shrink below six, they merge with another team. The goal is a team that’s large enough to encompass a diversity of skills and small enough to foster strong relationships.

Working with their clients, nurses develop personalized care plans and liaise with hospitals, physicians, and other local health care providers to ensure seamless care. To enlarge the circle of carers, nurses will often enlist a client’s family members, friends, and neighbors as informal partners in a client’s health journey.

Teams have the flexibility to develop innovative care strategies. One team organized a walker race for clients with mobility challenges. The event was a resounding success and inspired other teams to launch similar competitions. The “Walker Olympics” are now an annual affair across Buurtzorg teams and clients. Local finalists advance to a national championship held in the famed Olympic Stadium Amsterdam.

Each nursing team operates as a small business and is responsible for

Acquiring new clients, primarily through referrals from local physicians, hospitals, and other providers
Ensuring an appropriate mix of clients, such as having a balance between those needing long- and short-term care
Securing office space
Coordinating schedules to ensure 24/7 coverage
Recruiting and training staff
Continuously improving the quality and efficiency of the care they provide

Nurses are fully accountable for the financial performance of their teams. They bill a standard hourly fee and aim for a utilization rate of 62 percent. Dipping below this rate imperils the team’s financial health, and higher utilization rates can impair business and team development. Every team’s performance is visible across Buurtzorg, so there’s no place for poor performance to hide and significant peer pressure to meet Buurtzorg’s standards for efficiency and client care.

Room to Grow

In traditional organizations, frontline jobs are narrowly defined. In a community, roles are broad and flexible; there are no slots. At Buurtzorg, every nurse is responsible for the entire spectrum of home services, from assessing client needs and crafting care plans to providing hands-on help and coordinating with medical professionals. To ensure full coverage, three to four nurses are typically assigned to each client, covering different shifts.

To excel, Buurtzorg nurses must be highly capable generalists. Over 70 percent of nurses possess advanced qualifications equivalent to a four-year nursing degree in the United States. All are adept at forging deep, personal connections with clients while maintaining professional boundaries. They’re equally skilled at navigating the unique social context of each client, mobilizing formal and informal support networks to promote recovery and independence.

In contrast to most health care organizations, nurses at Buurtzorg don’t report to a supervisor. Instead, each team encompasses a range of administrative roles including “reporter,” “planner,” “developer,” “mentor,” “office caretaker,” and “vitality monitor” (see figure 11-2). Each role is filled by a nurse whose time is mostly spent working directly with clients while also helping to comanage the team.

FIGURE 11-2

Managerial roles in a Buurtzorg team

Diagram showing six managerial roles in a Buurtzorg team: reporter, mentor, planner, developer, office caretaker, and vitality monitor. Roles are arranged in a circular layout with connecting lines, emphasizing a distributed leadership model. Responsibilities of each role are explained.

Roles are divvied up based on personal interests and strengths. The mentor position, for example, naturally falls to an experienced nurse who can guide and support newer colleagues. Roles rotate every year or two, giving everyone the opportunity to learn and grow.

Because the work of managing is embedded within the teams, no one at Buurtzorg has a boss. “Every nurse,” says Jos de Blok, “is a leader.” When compared to the managerial caste system found in most large organizations, Buurtzorg’s model of distributed leadership yields more satisfying jobs, greater business literacy, and lower overhead costs. It also avoids the disgruntlement and passivity that typify hierarchical power relationships.

In a flat organization like Buurtzorg, career progression is about expanding your mastery and impact rather than climbing a ladder. As an experienced nurse in Amsterdam put it: “I see my career as horizontal, not vertical. I’m learning new things, building new relationships. It gets better every day, and I think it will continue to get better until I retire.”

Transparency and Trust

Honest, heart-to-heart conversations are the tendons that hold a community together. Forthright conversations can be difficult in any circumstance but are particularly challenging in hierarchical settings. In a bureaucracy, censorious managers often deter individuals from asking questions or admitting mistakes. Functional silos bottle up information, factionalism sabotages teamwork, and an atmosphere of distrust discourages people from sharing information. These pathologies cripple coordination.

To foster a culture of collaboration, Buurtzorg trains its nurses in group decision-making, active listening, conflict resolution, and peer-to-peer coaching. Teams typically meet weekly or biweekly to discuss performance, workloads, training needs, schedules, and other matters. Rather than looking to policies and protocols for answers, the teams address thorny problems using a well-honed methodology designed to quickly surface the most promising solutions.

In a typical case, a nurse might bring a challenging case to the table, such as a client with advanced dementia who has become increasingly agitated and resistant to care. Based on experience, team members would share their ideas for creating a calmer, more comforting environment. They might, for example, suggest adjusting the client’s daily routine to minimize distressing stimuli, using music and gentle touch to soothe the client, or creating a “memory book” with photos and stories that help the client feel connected to familiar people and places.

Teams apply this same collaborative approach to management challenges. If, for example, utilization dipped repeatedly below the 62 percent threshold, the team might consider steps like reaching out to more doctors for referrals, taking on clients with more extensive needs, or adjusting the balance of billable and nonbillable activities.

Not everyone needs to be in full agreement with a proposed course of action; as long as there are no explicit vetoes and some team members are willing to take responsibility for implementing the decision, the team will move forward.

If a team gets stuck, it can turn to one of Buurtzorg’s twenty-five regional coaches for advice. These highly experienced nurses, each with an advanced degree, help facilitate discussions on contentious or difficult issues. They’re also experts on team dynamics and can provide advice on how to improve team performance. Each coach supports around forty teams and, with this breadth of experience, is able to identify best practices and problems. Coaches are not managers in disguise; their role is support, not oversight. They report to the teams rather than the other way around.

Trust requires open books. While many companies default to secrecy, Buurtzorg defaults to openness. Nurses record granular data on each client visit using a tablet, and this information is available to all team members via the Buurtzorg Information System (BIS). Team members also have access to dashboards showing the performance of every squad on key metrics like utilization rates, client loads, care hours per client, client satisfaction scores, and staff engagement levels. This transparency encourages peer-to-peer learning and friendly competition. Every nurse can also review Buurtzorg’s systemwide financial data, including investments in new initiatives. Unlike most organizations, where IT systems funnel information to top-level decision-makers, Buurtzorg’s information system has been built to help frontline staff make smarter, faster decisions.

Connected Communities

Without vigilance, even the most vibrant communities can become insular and cliquish. They may develop an “us versus them” mentality, viewing outsiders with suspicion and resisting fresh perspectives.

Buurtzorg nurses are acutely aware of this risk. As one nurse put it, “If your self-managing team stays too long in its own bubble, there’s a chance that you lag behind or are out of sync with Buurtzorg’s vision.”

In many organizations, senior staffers are responsible for stitching together teams and mitigating the risks of fragmentation and provincialism. Functional leaders convene meetings, identify best practices, develop standards, and run training programs. There are several problems with this approach. First and most importantly, relying on central staff groups can tempt teams into taking a passive approach to sharing and learning. Second, experts in the head office can become a chokepoint on progress, as ideas have to flow up the pyramid before being validated and shared. Third, top-down edicts are often ill-suited to local realities, and thus accepted grudgingly or not all. Recognizing these pitfalls, Buurtzorg has opted for lateral rather than vertical coordination.

While Buurtzorg isn’t centralized, it has a central nervous system—BuurtzorgWeb (BW). BW has three elements designed to foster knowledge-sharing, collaboration, and collective improvement. The first is Community Square, a bustling virtual space where nurses post questions, share tips, and engage in lively discussions on a wide range of topics. This feature, available since Buurtzorg’s early days, was expressly requested by nurses who wanted a forum to exchange practical insights that went beyond official protocols and guidelines. Notes Jos de Blok: “One hallmark of a strong community is the ability to share the kind of tacit, hard-to-codify knowledge that is often most valuable for frontline staff. It’s remarkable how much wisdom-sharing happens organically on Community Square. If a nurse discovers something that benefits her clients, she naturally wants to share it with her peers.”

Community Square is also an important feedback channel for organizational decision-making. During his eighteen-year tenure as Buurtzorg’s managing director, Jos de Blok would gauge nurse sentiment on potential policy changes by posting his thoughts on Community Square. The posts, which typically generated hundreds of replies, gave everyone the opportunity to shape groupwide policy.

The second pillar of BuurtzorgWeb is a searchable network of experts. While all Buurtzorg nurses are equipped to handle a wide variety of health situations, many develop specialized expertise in areas like dementia or wound care. On BW, these experts appear in an interactive directory that allows nurses to locate and connect with colleagues who have relevant knowledge for a particular client situation. A nurse in Amsterdam, for example, can reach out to a nearby associate who specializes in caring for seniors with advanced Parkinson’s disease. These connections are not only virtual; experts will often show up to provide hands-on help during a client visit.

The third component of BuurtzorgWeb is a suite of on-demand learning resources that range from topics such as telehealth to practical tips for running effective team meetings. Aside from a few government-mandated programs, all of the online training is optional and driven by the needs and interests of frontline nurses. As Jos de Blok explains, “Perhaps only 30 percent of people need to learn how to conduct better hiring interviews, so we put out the resource for that 30 percent to access. It’s a pull, not push, model of learning and improvement.”

Some of the most useful learning assets are created by frontline nurses themselves. A prime example is the “Care Paths” series, a collection of structured guides that help nurses navigate complex cases. The idea originated with Mirjam de Leede, a seasoned nurse who recognized the need to codify and share practical knowledge during the early days of the pandemic. de Leede’s initial Care Path, which included assessment frameworks, treatment options, and monitoring strategies for managing Covid-19 patients at home, quickly gained traction when shared on BuurtzorgWeb and social media sites. Since then, de Leede and a group of interested peers have developed thirteen additional care pathways for a range of conditions—from post-stroke recovery to dementia care to substance abuse treatment.

Buurtzorg’s community ethos has also spawned local peer-to-peer networks. In Amsterdam, for example, a group of nurses eager to improve complex wound care established a citywide working group that meets regularly to share knowledge and troubleshoot challenging cases. These local networks often expand to include specialists from local clinics and hospitals. There are frequent internal conferences to discuss common issues, such as the challenges of recruiting nurses in large, expensive cities. Collaboration can also be more ad hoc. Buurtzorg’s nursing teams in Amsterdam freed up two nurses to educate hospitals and physicians about Buurtzorg’s expertise in handling complex care cases.

The average bureaucrat would regard the idea of coordination without centralization as an oxymoron—but, thanks to its consistent, multipronged investment in lateral connectivity, this is precisely what Buurtzorg has achieved. Moreover, it is dynamic, needs-based coordination, rather than ponderous rules- or structure-based coordination. Nowhere in Buurtzorg do you find top-down protocols that may or may not be appropriate to local circumstances; nowhere do you find staff groups enforcing sameness for its own sake; nowhere do you find managers struggling to integrate fragmented and parochial operating units. Instead, you see a dense lattice of peer-to-peer connections and a shared commitment to improving care that helps the entire system level-up at a rate that would be impossible to achieve in a hierarchical organization. To be clear, coordination, however achieved, is expensive. But when it’s demand-driven, as at Buurtzorg, it occurs only when and where it adds value.

Granted, coordinating the delivery of one-on-one patient care isn’t as difficult as synchronizing drug trials across twenty countries—a challenge that faces every major pharmaceutical company. But as we’ll see in chapter 15 when we dig into the story of Roche, communities still beat hierarchies when it comes to optimizing the trade-offs between independence and interdependence and capturing the advantages of autonomy and scale.

Mutual Respect

As human beings, we’re inclined to rank one another—by wealth, education, competence, physical attractiveness, fashion sense, athletic prowess, or the number of likes garnered on social media. At times, these rankings are useful, but they’re often the product of egoism. To feel better about ourselves, we down-rank others. In a community, status differentiators are muted. Absent a formal pecking order, people tend to treat one another as equals, without deference or condescension. Everyone feels as if they matter. That’s the culture at Buurtzorg.

All nurses are deemed equally essential to delivering exceptional care. While expertise is recognized and valued, there are no supervisors or regional managers. No team member has more decision rights than another. This egalitarian spirit is reflected in Buurtzorg’s compensation system, which offers the highest pay rates in the industry but bases salaries on tenure and education rather than individual productivity metrics. As Françoise Wijnbergen, one of Buurtzorg’s regional coaches, explains, “Our work is based on equality. We don’t have managers or a hierarchy. That changes the way you act: you have full ownership of what you do, but you’re not above anyone else. You rely on others’ professionalism, and they rely on yours.” At Buurtzorg, as at Morning Star, everyone competes to make a difference, and no one competes for a title. Personal growth is indexed by your accomplishments, not your rank.

A Sense of Family

Family is the most intimate community most of us experience, followed closely by the fellowship we have with close friends. What distinguishes these relationships is love—the sense that you have inherent worth whatever your faults. Love is food for the soul, yet most of us don’t get much of it at work. In Gallup’s State of the American Workplace survey, which polled more than 195,000 employees, only two out of ten respondents said they had a close friend at work.¹⁶ (Gallup estimates that if this number was tripled, to six out of ten, the average company would increase its profitability by 12 percent.)

At Buurtzorg, an ethic of caring for others is woven into the fabric of the organization. It shapes not just how nurses interact with clients but how they relate to one another. In one poignant example, a team asked to meet with their coach after one of their colleagues was diagnosed with a potentially terminal illness. Reaching out as a band of compatriots, they needed help in processing a shared calamity.¹⁷

Buurtzorg team members are able to navigate conflicts and challenges without acrimony because the bonds of affection are strong. As one nurse put it, “There are conflicts in every team; the difference is that they are solved in the sphere of a family, like brothers and sisters. Within such an atmosphere, you express things directly, but it also creates a bond. If there is an issue, even with the directors, you can express it. Your vulnerability will not be misused; there is a safe environment for conflicts.”¹⁸

Teams hold regular parties to celebrate their life together, with family members joining in. The family spirit is most vividly on display at the annual Buurtzorg Festival. Held each May, this much-anticipated event brings thousands of nurses together from across the country. The vibe, as you might expect, is like a large-scale family reunion.

Most of us have two distinct selves. There’s the professional self that shows up at work each day and the private self that sticks its head out in the company of family and friends. The professional self is stiff, on guard, and emotionally cautious. Our colleagues catch only glimpses of our inner selves. They are generally uninformed about our hobbies, family dynamics, health issues, emotional wounds, and dreams. We tell ourselves, or are told by others, that these things aren’t relevant at work. That’s rubbish.

If you are going through a divorce, have a child struggling with addiction, have recently lost a parent, are facing surgery, or find yourself in the middle of some other life crisis, you need people to talk to—people who care. If you’re obligated to spend a succession of eight- or ten-hour workdays alone with your anxieties and fears, then you, your colleagues, and your organization will be the worse for it. In chapter 1, we cited a Gallup’s finding that less than a quarter of employees around the world are engaged in their work. Loneliness and isolation no doubt contribute to the dismal reality. You can hardly expect employees to be engaged in their work if they’re not engaged with each other.

In recent years, we’ve heard plenty of chatter about work–life balance but much less about work–soul integration. Work should neither deny the personal nor overwhelm it. Instead, it should acknowledge and integrate it. In a performance-focused community, the professional and personal are neither disconnected nor fused; instead, they are intertwined. At work, as in life, we spend most of our time simply getting things done. But when it matters, we need to know we can depend on the people around us. We need more than coworkers; we need advocates, allies, and mates—workplace friends who are sympathetic and stalwart.

What can you do to strengthen the bonds of community in your organization? Here are seven suggestions, based on what we’ve learned from Buurtzorg.

Recraft the mission statement for your unit or, if possible, the entire organization, in a way that makes it emotionally resonant for every team member and gives people a common cause.
Do whatever you can to provide team members with the skills and information they need to exercise their collective judgment. Help employees become less reliant on managers and more reliant on one another.
Make teams, not individuals, accountable for results.
In interpersonal encounters, look for opportunities to reveal something of yourself, and encourage others to do the same. Have a tender heart for those who are struggling with issues outside work.
Ask your team to identify areas where greater autonomy would help them deliver a better customer experience or improve operations, and then carefully expand their decision-making prerogatives.
Build platforms where employees can share ideas laterally, and collaborate on shared challenges.
Hire for compassion, follow the golden rule, and celebrate acts of kindness.

In all of this, take the long view—strong communities don’t get built in a month or even a year.

You’ll know you’re succeeding when the people on your team, in your unit, or across the company can say, “We are more of a family than a company.”

— 12 —

The Power of Openness

Institutions and societies thrive when they’re open and stagnate when they’re not. The resilience of cities like New York and London is the product of openness and diversity. Residents of New York’s five boroughs speak over seven hundred different languages, making the city the most linguistically diverse in the world.¹ On the other side of the Atlantic, nearly a quarter of London’s residents hold a non-British passport.²

In a vibrant city, one encounters a multitude of differences in how individuals think, dress, worship, work, love, and play. This diversity creates an immense combinatorial space—a near-limitless number of opportunities for mashing up ideas, talents, and resources in new ways.

Openness is also the secret to the resilience of the world’s leading universities. Oxford, Cambridge, the Sorbonne, and the University of Bologna have been attracting scholars for more than eight hundred years. Like cities, great universities benefit from positive feedback effects. If you’re a brilliant young physicist, you’re going to covet a position in a university that boasts a clutch of Nobel Prize winners. Clever people attract clever people—that’s why elite universities tend to stay that way.

Not surprisingly, cities and universities are wellsprings of innovation. Together, San Francisco, San Jose, New York, Boston, and Los Angeles accounted for 67 percent of US venture capital funding between 2019 and 2023.³ Between 1990 and 2020, US universities claimed more than a hundred and twenty-six thousand patents and spawned more than seventeen thousand startups, contributing $1 trillion to gross domestic product.⁴

In recent years, companies eager to reap the fruits of openness have launched an array of open innovation initiatives. Crowdsourcing has been one of the most popular variants. In a typical case, Zillow, the online real estate listing service, offered a $1 million prize for an algorithm that improved its ability to estimate property values. The tournament attracted thirty-eight hundred entries from ninety-one countries, and the winning team included innovators from Canada, Morocco, and the United States.

Companies have also reached out to customers. Lego, the Danish toy maker, supports co-creation through a website where ardent fans can submit ideas for future products. Proposals that attract more than ten thousand endorsements get reviewed by Lego experts, and those that go into production, like the DeLorean car from Back to the Future, generate a 1 percent royalty for the originator. In operation for over a decade, Lego Ideas has garnered more than twenty-six thousand submissions.

Yet despite its popularity, there’s little evidence that open innovation has made large companies more inventive or adaptable. In practice, external crowdsourcing and co-creation often yield only marginal gains. Zillow’s innovation tournament produced a scant 13 percent improvement in the accuracy of the company’s “Zestimate” algorithm—enough perhaps to justify the million-dollar prize money but unlikely to be a game changer. The impact of Lego Ideas has been equally modest. In the course of ten years, only twenty-three customer-proposed kits have made it to market—a tiny fraction of the seven thousand internally sourced products that were launched over the same time period.

Henry Chesbrough, whose 2003 book Open Innovation brought the idea to prominence, notes that open innovation programs typically lose steam when a supportive CEO moves on, a fact that suggests these initiatives often fail to produce the sort of results that would ensure they get institutionalized.⁵ Karim Lakhani, a researcher at Harvard’s Laboratory for Innovation Science, concurs: “Open innovation processes promise to enhance creative output, yet we have heard little about successful launches of new technologies, products or services arising from these approaches.”⁶

The irony, of course, is that large organizations are open. Employees interact with thousands or millions of customers each day. Executives and managers talk constantly with suppliers, consultants, regulators, and other stakeholders. Why, then, hasn’t open innovation made a bigger difference? Why isn’t the typical corporation as resilient and innovative as a city or a university? Because, to put it bluntly, they’re often run by people whose minds are hermetically sealed against unconventional ideas.

As Thomas Kuhn argued more than a half-century ago, we are prisoners of our paradigms. Even scientists, a guild whose members loudly profess their allegiance to open inquiry, are often reluctant to jettison familiar theories in the face of new evidence. As Kuhn observed, “All significant breakthroughs are break-withs old ways of thinking.”

There are several reasons we get stuck in our thinking, but denial tops the list. As human beings, we tend to discount discomforting facts. In late 2015, for example, the former chair of Mercedes-Benz called Elon Musk a “pretender” and said Tesla was “a joke that can’t be taken seriously compared to the great car companies of Germany.”⁷

Second, even when we’re not in denial, we’re often oblivious to data that doesn’t fit our existing mental categories. Before C. K. Prahalad’s pioneering work on the “bottom of the pyramid,” most businesses ignored the 3.7 billion human beings who live on subsistence incomes.

Finally, most of us are consumed by the urgent. Eyes down, we scurry along the furrows of ritual and routine, mistaking the edge of our rut for the horizon.

There’s a reason we remind each other to keep an open mind. We know that denial, conventional thinking, and busyness shrink our peripheral vision. Bureaucracy makes this worse: top-down power structures penalize heretical thought; short-term pressures leave little time for discovery; silos limit cross-boundary learning; the obsession with alignment truncates the search for new opportunities; and a penchant for secrecy bottles up valuable information. The net result: bureaucratically induced blindness.

Open innovation is a capital idea. By all means, raise the windows, open the doors, blow the dust out. But don’t expect to see a great flourishing of imagination or an organization reborn until you and your colleagues open your minds to a world of near-limitless possibilities.

Why do some people see dazzling new possibilities where others see only the flat, gray tones of the familiar? Are some minds endowed with a unique creativity gene? Perhaps, but in most cases, enlightenment is less the product of a remarkable brain than of uncommon experiences.

Consider what Steve Jobs said in 2005 about his personal odyssey:

Because I had dropped out [of college] and didn’t have to take the normal classes, I decided to take a calligraphy class to learn how to do this. I learned about serif and sans-serif typefaces, about varying the amount of space between different letter combinations, about what makes great typography great. It was beautiful, historical, artistically subtle in a way that science can’t capture, and I found it fascinating. None of this had even a hope of any practical application in my life. But ten years later, when we were designing the first Macintosh computer, it all came back to me.⁸

Who would have thought that an unexpected experience in a calligraphy class could change how human beings interact with computers? But that’s how innovation works. Epiphanies can’t be programmed in advance. Lightning doesn’t strike on cue. You can, however, build a lightning rod. If you’re intentional about opening your mind to new possibilities, you can dramatically raise the odds of a creative flash.

Over years of research with some of the world’s most storied innovators, we’ve learned that four perceptual habits are particularly powerful in illuminating new opportunities.

Habit 1: Challenge Unexamined Assumptions

Let’s go back to Kuhn’s classic study of scientific innovation. Having reviewed decades of scientific progress, he concluded that:

Individuals who break through by inventing a new paradigm are almost always either very young … or very new to the field whose paradigm they change. These are [individuals] who, being little committed by prior practice to the traditional rules of normal science, are particularly likely to see that those rules no longer define a playable game and conceive another set that can replace them.⁹

Maybe you’re no longer young, but you can still cultivate what Buddhist priest Shunryū Suzuki famously called “a beginner’s mind.”¹⁰ Conventional beliefs yield conventional results. That’s why newcomers have an innovation advantage—their thinking isn’t constrained by years of industry experience. There’s a danger, though: conventional wisdom is often right. In the golf industry, it would be foolish to challenge the belief that golfers relish the chance to play the game and are eager to get better, but that doesn’t mean golf has to be played on grass. Golfzon, the world’s leading producer of golf simulators, was founded in 2000 in golf-mad South Korea. Focused on the goal of making the game more accessible, Golfzon’s technology is now used in more than half of South Korea’s 9,000–plus indoor golf locations. Operating in more than 60 countries, Golfzon hosted 95 million rounds of golf in 2023.

The challenge is to distinguish between the laws of physics (you need golf clubs to propel the ball forward) and mere dogma (golf must be played outside). This is a subtle task, so how do you get started?

First, look for instances of unthinking mimicry. Over time, the strategies of industry leaders tend to converge. A useful exercise is to overlay the business models of incumbents and then look for areas of overlap. Wherever you see competitors doing the same thing, ask, “What’s the shared assumption behind this policy or practice?” and then, “What would happen if we challenged that belief?” For centuries, innkeepers assumed you had to own rooms to offer guests a bed for the night. Airbnb challenged this belief and now has nearly 8 million listings across the world.

Second, focus on what hasn’t changed. What aspects of your strategy have remained stagnant for years or decades? Over time, legacy practices, like wallpaper, become invisible. Your job is to question whether those taken-for-granted practices still make sense. For example, though it endured a lot of pushback from traditional carmakers, Tesla challenged the long-held practice of selling cars through independent dealers. The company’s sleek stores, often located in luxury shopping venues, offer customers a hassle-free buying process. As a rule, the best orthodoxies to challenge are those that degrade the customer experience.

Third, go to extremes. Pick some parameter of performance—price, choice, availability, speed—and ask what would happen if we aimed for a 10x improvement? Fifty years ago, a retired physician, Dr. Govindappa Venkataswamy, committed himself to eradicating unnecessary blindness in India. Millions of his compatriots had cataracts but couldn’t afford corrective surgery. How, Dr. V wondered, could he reduce the cost of surgery by 90 percent or more? For inspiration, he looked at the fast-food industry. “If McDonald’s can sell millions of burgers,” he thought, “why can’t [we] sell millions of sight-restoring operations?”¹¹ Today, Dr. V’s network of specialty hospitals, the Aravind Eye Care System, performs half a million cataract surgeries per year. Each ophthalmic surgeon carries out 2,000 operations per year compared with an average of 125 for their American counterparts. These and other economies have reduced the price per surgery to roughly 5 percent of what is typical in advanced economies—and yet Aravind has complication rates that are often less than those found in the West.

For much of life, you simply go along with the conventional wisdom—there’s no shame in that. But every once in a while, you need to step back and examine what you believe. Develop the habit of treating your assumptions as hypotheses that are forever open to disconfirmation.

Habit 2: Be Alert to What’s Changing

Having an open mind means being open to what’s changing. Successful innovators pay attention to things that are peeking over the horizon—nascent trends that seem ripe with revolutionary potential.

Large companies often seem incurious about new trends. Why was it Lululemon, for example, and not Nike or Under Armour that capitalized on the growing passion of women for fitness in general and yoga in particular? Orthodox thinking was partly to blame. Traditional athletic-wear companies didn’t regard yoga as a sport. Yoga has no professional league and no superstar endorsements. Yet, if a sport is something that requires athletic prowess, yoga qualifies. (If you doubt this, open your browser and search “side crow pose.”)

Nike and others also failed to notice two accelerating trends. The first was the growing number of time-starved women who took fitness seriously and wanted great-fitting clothes that could go from the street to the gym and back. The second was a change in the definition of fitness. Being healthy was no longer just about dropping a few pounds; it was about achieving better mind-body balance—hence Lululemon’s ubiquitous sloganeering: “Your outlook on life is a direct reflection of how much you like yourself.” As we’re writing this, Lululemon has a market value of $43 billion. For Nike and its peers, that’s the price of myopia.

So how do you open your mind to the future?

First, give yourself the chance to be surprised. That means hanging out in new places and talking to people with whom you don’t normally interact. It means expanding your news sources and following people online who work in fields that may be unfamiliar to you. As the novelist William Gibson observed, “The future is already here—it’s just not evenly distributed.” In other words, you may not be able to see it from where you’re sitting now, but if you go looking for it, you can find it.

If you want to glimpse the digital future, for example, you may be better off visiting China than Silicon Valley. China currently accounts for nearly 60 percent of global e-commerce sales.¹² It boasts the world’s largest digital payments systems, is a leader in the internet of things, and is running a trade surplus in digital services.¹³

So take a moment to reflect. What have you seen lately that’s new, surprising, and gathering speed? Maybe it’s …

New and unexpected use cases for generative AI

The mainstreaming of cryptocurrencies

The growing preference to “subscribe” rather than “own”

The increasing use of augmented reality (AR) to bridge the digital and physical worlds

The increasing appetite for local brands

The rapid growth in the use of virtual agents (e.g., chatbots)

The commoditization of knowledge

The deceleration of Chinese economic growth

A growing voter backlash to environmental mandates

A potential tipping point in global indebtedness

The ever-shrinking center ground in European and American politics

The negative effects of social media on mental health

The de-integration of global supply chains

The emerging habits and preferences of Gen Alpha

The declining trust in large institutions

Or perhaps something entirely different

Having zeroed in on an intriguing trend, ask yourself: Where might this lead? What are the possible consequences? How can it be harnessed? It’s not enough to spot a trend; you must work hard to conjure up the potential implications. If, like the authors, you’re business educators and consultants, you might ask whether AI will democratize access to real-time, context-specific management expertise? Is there an opportunity to parse the entire MBA curriculum into configurable, bite-sized pieces of knowledge that are accessible on demand to everyone in the workplace? Remember, what distinguishes those who create the future from those that don’t isn’t their ability to predict what will be, but their capacity to imagine what could be—and to then build it.

Habit 3: Repurpose Skills and Assets

An open mind means rethinking the identity of your organization. You’re probably used to defining your business by what it makes or sells, but to see new opportunities, you have to look deeper. You need to ask, “What are the unique skills or core competencies that underpin our success?” And, “How might we use those skills to create new products and services?”

Time Out, founded in 1968 as publisher of city entertainment guides (first in London and then elsewhere), is a great example of competence-based innovation. In the early 2010s, Time Out moved its food and entertainment recommendations online, and like many publishers, struggled to make up lost subscription revenue with digital advertising. But unlike many of its compatriots, Time Out didn’t define itself as a publisher, identifying instead as a “global brand dedicated to the best of city life.” This was no idle boast. For decades, Time Out’s principal asset had been its network of dedicated culture hounds. With noses on the ground in more than forty cities, it was adept at sniffing out the best restaurants, clubs, and events.

In 2014, recognizing that the legacy business was under pressure, Time Out’s Lisbon team came up with an ingenious new way of exploiting the company’s talent for cultural curation.

Rather than merely reporting on the best new venues for food and drink, the team members asked themselves how they could make it easier for visitors and locals to enjoy the best fare the city had to offer. The answer: invite Lisbon’s coolest restaurants, bars, and food vendors to set up outposts in a single, fun-to-visit venue. That was the dream, and in less than a year it went from concept to reality. The Time Out Market in Lisbon covers 75,000 square feet and boasts twenty-four restaurants, three Michelin-starred chefs, eight food kiosks, eight bars, four food shops, and a nightclub. In addition, there’s a cooking school, coworking spaces, and a nine-hundred-seat music venue. Time Out takes a 30 percent cut of the revenues and handles alcohol and soft-drinks sales. As we write this, Time Out Market Lisbon has attracted more than 35 million visitors, making it one of Portugal’s most popular destinations. Since 2014, Time Out Markets have opened in Chicago, Miami, Boston, New York, Cape Town, Montreal, and Bahrain, with six more sites on the drawing board.¹⁴

Unlike most legacy publishers, Time Out has achieved robust growth, with Time Out Markets now accounting for two-thirds of total revenue. The company’s success demonstrates the value of defining an organization not by its products or services but by its intrinsic capabilities. So look around your own organization and ask: What foundational skills or assets could be creatively repurposed? You won’t know until you look.

Habit 4: Unearth Unmet Needs

Sometimes you have to open your heart to open your mind. You have to get close enough to customers to feel what they feel. Only then will you see opportunities to transform the customer experience in ways that lift the human spirit.

Bureaucracies value thinking over feeling. That’s why most businesses are astoundingly bad at reading customer sentiments. Every day, they irritate their customers in countless ways. You’ll know this if you’ve ever struggled to get through to a flesh-and-blood customer service agent. As the minutes tick by, you’re confronted with one hurdle after another that seems to have been expressly designed to thwart your quest: “You may find what you’re looking for on our website.” “Have you downloaded our app?” “Please enter your sixteen-digit account number.” The whole experience seems to have designed to increase your production of cortisol.

Luckily, there are examples of companies that get it—that upsize rather than downsize the customer experience, and do so profitably. When it set up its Prime subscription service, which offers unlimited two-day delivery on all orders, Amazon relieved its customers of the need to think about shipping costs each time they placed an order. The company has gone even further, making millions of items available for free same-day delivery when the order totals $25 or more.

Customer-pleasing innovation doesn’t have to be high-tech or even expensive. Have you ever experienced the small nightmare of leaving your phone in a public bathroom? If not, lucky you, but it happens more often than you think. A Japanese company that manages motorway service stations found their employees were spending as much as thirty hours a month trying to reunite customers with their phones. Its creative solution? A latch on the stall door that, when closed, is wide enough to hold a smartphone or a key ring—a simple hack that makes it pretty much impossible to leave your stuff behind. As Steve Jobs once said, “Things don’t have to change the world to be important.”

The key is to tune in to the emotional states that are produced at each stage of the customer journey. Look for the emotional cues—a pinched brow, pursed lips, confused look, clenched jaw—and then ask, “What’s generating that emotion? How have we let this person down?”

With training and practice, anyone can learn to open their mind to new possibilities, yet few organizations have helped their employees master these skills; few have invested in the creative capital of every team member. That’s a giant fail, but it’s not impossible to remedy. The starting point is to acknowledge that everyone, whatever their role or title, deserves the opportunity to cultivate their creative gifts.

It’s not enough to have an organization awash in fresh thinking. Equally important is a process that forges all those insights into a coherent, cross-company strategy.

To have any chance of outcompeting a mob of startups, large companies must harness the advantages of scale and scope. This often requires tentpole strategies that engage multiple operating units. Nucor’s multiplant campaign to grow its automotive business is an example, as was Haier’s companywide initiative to develop COSMOPlat, its industrial internet platform.

There’s also a need for multiyear strategies that ensure consistency over time. More than a decade ago, Apple committed itself to becoming a world-class chip designer. By learning to develop its own computer chips, the company hoped to better differentiate its products and control its own destiny. With that goal in mind, Apple made a string of acquisitions and poached dozens of top-flight designers—all aimed at bulking up its expertise in low-power chips. The quest has paid big dividends. Today, proprietary silicon powers all of Apple’s hardware products and are critical to delivering advanced features such as machine learning and console-level gaming experiences. Moreover, Apple silicon consistently exceeds the performance benchmarks of chips designed by other companies. Indeed, if Apple’s chip design business were a standalone entity, it would rank fifth among the world’s largest “fabless” semiconductor companies—alongside such giants as NVIDIA and Qualcomm.¹⁵

In the pursuit of leadership, there’s no substitute for perseverance; but creativity matters as well. Arguably, the most important thing about any strategy is how it’s different from every other strategy. Put simply, if your organization doesn’t have a unique point of view about the future, it doesn’t have a strategy.

Some might argue that it’s impossible to create long-lasting strategies in an age of unprecedented turbulence. We disagree. A strategy has to be robust enough to survive the unexpected, but without foresight, an organization is rudderless and will find itself continually playing defense. Any organization that hopes to stay relevant needs a point of view about the future that transcends internal silos, ensures consistency, spurs creativity, and inspires bravery.

The most important question for a senior team is this: “Over the next few years, how are we going to reinvent our organization and the world around us?” Or put another way, “What are we becoming?” It’s useful to have each executive compose a short answer to this question in the form of “from-to” statements. The top team should then ask itself:

Is there a consensus on key priorities? Do we have a shared point of view?

Would our transformation goals surprise competitors? Are they differentiated?

Does the strategy imply significant stretch? Are we being sufficiently ambitious?

In our experience, the answer to these questions is usually “no.” If the company has a strategy at all, it’s muddled and unexceptional.

In a 2018 PwC survey, only 37 percent of the six thousand executives polled said their company had a well-defined strategy. Seventy-three percent doubted their company’s strategy was innovative, and a scant 13 percent felt their organization had a road map for building future-focused capabilities.¹⁶ None of this should be surprising. In most companies, the planning process is elitist, formulaic, and extrapolative. It’s a top-down, budget-focused ritual that harnesses only a tiny fraction of the organization’s collective imagination—in other words, pretty much the opposite of an exciting, participative quest to define a shared destiny. Until this changes, most companies will keep whiffing the future.

Ask a CEO, “Who’s responsible for setting strategy?” and she’ll likely tell you, “I am,” or “the executive committee.” That’s a problem—because even if the top team were all brilliant seers (and they’re not), the sum of their creativity would be insufficient for the job at hand. Since game-changing business ideas are rare, the probability of coming up with a breakthrough strategy depends on an organization’s capacity to generate a sufficiently large number of strategic options. The problem with a top-down process is that there aren’t enough brains at the top. What’s required is an approach that generates thousands, not tens, of novel ideas and uses the wisdom of the crowd to distill them into a path-breaking strategy.

In creating strategy, you have to diverge—a lot—before you converge. This requires a process that encourages radical thinking and includes new voices. Strategy making needs to be a companywide conversation that’s open to employees, customers, and external partners.

The goal, though, isn’t simply to generate a mountain of ideas. As we’ve argued, coherence is also important. When you look across all those options, you need to ask: What are the themes? Where can we capture the advantages of scale and scope? What are the meta opportunities that could reshape our very identity? What’s the capstone aspiration that encapsulates our boldest dreams?

An open strategy process is messier and more time-consuming than the top-down alternative, but the benefits are worth the effort. In our experience, these include:

There are many ways an organization can involve its constituents—employees, customers, and citizens—in co-creating the future. In this section, we’ll use case studies from four pioneering organizations to illustrate the power of collective imagination.

Nokia: Open to Employees

The first story begins a generation ago, in 1994, on a bitterly cold January morning. Gary had flown to Espoo, Finland’s second largest city, at the request of Pekka Ala-Pietila, the rail-thin, sandy-haired executive who had been charged with creating a world-beating telecoms strategy at Nokia. Two months earlier, Gary had never heard of Nokia, but now, here he was, walking into the company’s spartan head office located 700 kilometers south of the Arctic Circle. He had brought along a longtime consulting partner, Dr. Jim Scholes, an expert in systems thinking and change management. In that first meeting, both of them were struck by the vaunting ambition of Nokia’s young team. The goal, they declared, was to supplant Motorola as the world’s leading mobile phone company.

In the 1980s, Nokia had helped deploy the Nordic Mobile Telephone network, one of the world’s first mobile phone systems, and in 1984, had built its first mobile device, a car phone weighing 4.7 kilograms (10.30 pounds). A year earlier, Motorola had launched the world’s first handheld mobile phone. The brick-size DynaTac proved to be an instant success with executives and others who could justify the eye-watering $4,000 price tag. Six years later, Motorola would introduce the MicroTac—the first phone small enough to fit in a shirt pocket. At $3,000, it was still out of reach for most consumers, but its slim design solidified Motorola’s position as the world’s top phone maker.

By 1993, Nokia was a solid number two in the fast-growing industry. That year it sold roughly 3 million phones compared with 4 million for Motorola. Vaulting over the market leader wouldn’t be easy. Nokia would need a game-changing strategy and a goal that was more audacious than anything envisioned by its competitor. Standing in front of Ala-Pietila and his team, Gary wrote the number “1,000,000,000” on a flipchart. That’s what Nokia should be aiming for, he argued—to sell 1 billion phones in a single year. That was an enormous stretch, since at the time there were only 35 million mobile subscribers in the entire world. There was a long silence, but no one objected. The Nokia team knew the human desire for unfettered communication was universal. Of course, a billion people would want a mobile phone. The question was whether Nokia could take the lead in slaking that demand.

To answer in the affirmative, the company would need strategy for radically expanding the market and leapfrogging the industry leader. Like most companies, Nokia had a well-disciplined process for hammering out budget priorities. But building a breakthrough strategy would require a process that focused less on numbers and more on innovation.

As keen students of entrepreneurship, Gary and Jim knew that creating breakthrough strategies was a numbers game. A venture capitalist looking for the “next big thing” would review hundreds of business plans before investing in a handful of promising startups. Breakthrough ideas are rare, and to find them, Nokia would need to generate hundreds or even thousands of unconventional strategic options—which could then be evaluated for impact and “doability.” That meant opening the company’s strategy process to a wide cross-section of employees—because as clever as they were, Nokia’s senior team didn’t have the imagination or bandwidth to generate an expansive portfolio of radical ideas.

Over the next few weeks, dozens of employees were recruited to help build a cache of new insights—the raw material for strategic innovation. Roughly a hundred employees were divided into four teams. One was assigned the task of identifying industry orthodoxies: What assumptions was Motorola making about consumers, technology, products, pricing, and market size, and how could this conventional thinking be challenged? A second team was charged with identifying discontinuities: What were the emerging trends in business, lifestyle, technology, and regulation that weren’t yet on Motorola’s radar? A third team reviewed Nokia’s core competencies. What unique technologies or skills did the firm possess, and what new capabilities would be required to leapfrog Motorola?

The fourth team focused on the most critical task of all—uncovering unmet needs and unserved customers. Team members were particularly eager to connect with the “Walkman generation.” The year before, Sony had sold 100 million portable music players—mostly to young people. Soon, Nokia engineers and marketers were hanging out in Tokyo clubs and walking along LA beaches—noting the behaviors and preferences of teens and twentysomethings.

Back in Espoo, the insights generated by the discovery teams were used as fodder in marathon brainstorming sessions. Hundreds of employees were given the chance to mull over what had been learned. Each insight was printed on a card, and employees were invited to shuffle them around and note any opportunities that popped into their heads. The effort spawned more than two thousand nascent ideas for reimagining the mobile phone business.

Next, it was time to converge. Scanning the universe of newly generated ideas, the senior team looked for overarching themes that could give focus and consistency to Nokia’s strategy.

A slew of ideas focused on adding new functions to the mobile phone—using the device to take pictures, make payments, send messages, and keep track of appointments. A second set of ideas focused on turning mobile phones into lifestyle products—indispensable devices that would be affordable and appealing. This bucket contained ideas for radically reducing manufacturing costs, making the phone in multiple colors, letting users customize their phones, and focusing marketing budgets on young consumers. A third set of ideas focused on the needs of network operators. Getting the big telcos on board was critical to growing the market and generating the volume that would allow Nokia to slash manufacturing costs. Operators needed turnkey solutions—network equipment and software, billing systems, and financing solutions—that would make it easy for them to build infrastructure and roll out new services.

There were other themes, but these three—going beyond voice, creating lifestyle products, and building network solutions—seemed the most potent and would become the pillars of Nokia’s strategy. Over the next decade, that strategy would propel Nokia to industry leadership and generate billions of dollars in market value.

At the outset, some had questioned the wisdom of inviting so many people into the strategy conversation. It took time and effort to train hundreds of people to think like innovators, and freeing up people to work on strategy meant downgrading other priorities. There was also a worry that the teams might come up with the “wrong” answers. What if their ideas were pedestrian or, worse, flights of fancy? Then there was the matter of privacy. How do you keep a strategy confidential when hundreds of people have had a hand in creating it?

Despite the doubters, Nokia’s bet on open strategy paid off big. First, the process produced a strategy that was truly novel. In many companies, the planning process is dominated by a small band of long-serving leaders who finish each other’s sentences. Nokia’s executive team knew that if they wanted new ideas, they’d need to engage new voices. It wasn’t an accident that the discovery teams were overweighted with individuals who were young, had worked in other industries, and weren’t based at the head office.

Second, the process produced a strategy that was well grounded. Before asking employees to generate ideas, they had been sent out to gather data. A strategy, however bold, needs to be fact-based. The trick is to search for facts that have gone unnoticed by competitors or are too discomforting for them to acknowledge.

Third, because the process was transparent and participatory, it produced a strategy that was credible and widely understood. By the end of the project, employees knew exactly where the business was headed. Everyone was committed to making the mobile phone “the remote control for life.”

Finally, Nokia’s all-hands process produced a strategy that was granular and therefore immediately actionable. Each of the three major imperatives—the “strategic architecture”—incorporated dozens of shovel-ready ideas that could be quickly operationalized. By the time the strategy gelled, employees were primed to act.

A decade later, in 2005, Nokia sold more than a billion phones in a single year and seemed unbeatable. But you know how the story ends. As often happens, success turned pirates into aristocrats. Those thirtysomething rebels Gary and Jim had worked with in the early 1990s were now, a dozen years later, wealthy titans of tech. Sitting atop the pinnacle of success, they had little incentive to mess with a winning formula. Never again would Nokia engage thousands of employees in an open strategy initiative.

On January 9, 2007, Steve Jobs, Apple’s founder and CEO, stepped onto a stage in San Francisco to unveil the iPhone. Eleven months later, Google announced it would license Android, its newly hatched mobile operating system, to any manufacturer in the world. Today, 99 percent of all smartphones run on iOS or Android.

Some might argue that collective genius is no match for a savant like Steve Jobs. That may be true. But it’s also true that visionaries like Jobs and Elon Musk are extraordinarily rare, and that when it comes to creating future-focused strategies, the more ideas the better.

Now let’s consider a more recent example.

In 2024, the International Olympic Committee (IOC) announced that the first Olympic Esports Games would be held in Saudi Arabia in 2025. If you haven’t been paying attention to the rise of esports, the IOC’s embrace of online gaming might seem surprising, but the move is, in fact, rather belated.

A decade earlier we had run an open strategy project for a global athletic brand. The effort spawned nearly a thousand business ideas that were winnowed and prioritized through multiple rounds of peer review.

Some of the most highly rated ideas sought to leverage the growing popularity of esports, where professional players compete in games like League of Legends and Fortnite. In the early 2010s, thousands of spectators in Korea and China were jamming sports arenas to watch warring teams battle it out on giant screens. Competitions were also scoring millions of views on platforms like YouTube and Twitch. (In 2014, a League of Legends final had drawn a crowd of 40,000 to a Seoul stadium, with 27 million watching the match online.)

At the time, the idea of making clothing for esports combatants or sponsoring teams and events was entirely novel. Initially, it was a tough sell. Veterans of the sportswear industry saw gamers as couch-bound adolescents kids, rather than athletic superstars like Serena Williams and Cristiano Ronaldo. On the other hand, the proposals for a preemptive move into esports were backed by solid evidence. Esports pros were genuine athletes who experienced significant stress and surges in heart rate. They also possessed extraordinary skills, with reaction speeds under 200 milliseconds (faster than most football players) and the ability to perform about 500 discrete actions per minute. These gamers needed performance wear, and their passionate fans would be eager to buy the same gear.

Despite their reservations, the executive team endorsed the crowd’s recommendations. How could they not when the move into esports had been enthusiastically endorsed by hundreds of the firm’s young employees? The company became the first major athletic apparel brand to strike sponsorship deals for top teams and introduce esports merchandise. Since then, esports has experienced exponential growth. As of 2022, there were 260 million regular viewers globally, with top players earning seven-figure incomes.¹⁷ Though other apparel makers are now competing for online gaming fans, our client remains the most prominent brand in esports.

With the world far more volatile and complex than it was in 1994 or even 2015, open strategy is more necessary than ever—but still all too rare. Foresight and creativity don’t correlate with rank, and any organization that fails to exploit the imagination of the crowd will soon find itself on the back foot.

Haier: Open to Partners

Haier has long adhered to the adage that most of the world’s smartest people work somewhere else. With that in mind, the company launched the Haier Open Partnership Ecosystem (HOPE) in 2014. The platform connects the company’s internal entrepreneurs with skills and resources from across the world and plays an essential role in helping Haier develop and pursue new opportunities.¹⁸

The HOPE platform encompasses more than four hundred thousand “solvers”—individual experts and partner institutions that cover more than a thousand technical domains. The HOPE database includes profiles of each solver, their areas of expertise, research interests, and published works. Natural language processing technology allows Haier employees to search for experts based on keyword or specific technical domains.

More than three hundred problems get posted on HOPE each year. One team, for example, asked solvers for help in designing the blades for a new, highly efficient air conditioner. The winning design, mimicking a jet turbofan, came from research at the China Aerodynamics Research and Development Center. In all, thirty outside partners contributed to the development of the air conditioner, which was an immediate hit when launched.

HOPE is also home to Haier’s Micro Insights Platform, a panel of over a hundred thousand users who often play a role in new product development. In one typical case focused on surfacing unmet needs, an R&D team asked panel members to post pictures of their refrigerators. Many of the images showed refrigerators installed in spaces so narrow that the doors couldn’t be fully opened.

Solving the problem called for radical rethink of the door hinges, but the team found itself struggling to come up with a viable design. At a dead end, they posted the challenge on HOPE with details on the hinge’s desired functions, expected lifespan, and maximum cost (50 yuan or about $8). The challenge garnered over a hundred responses from academics and research centers in China and beyond. It soon became evident that the biggest hurdle would be meeting the desired price point. Haier’s engineers pored over the potential designs and scheduled meetings with solvers from the auto and furniture industries. In the end, the most useful input came from professors in mechanical design and material science, with the final design incorporating ideas from a dozen solvers.

In this case, as in others, Haier compensated successful solvers for their work and acquired the rights to their designs. Unused designs remained the property of the solvers who had proposed them.

When it was launched in 2018, Haier’s rehinged, “seamless” refrigerator handily beat its sales projections. In the years since, the design has continued to evolve, and the latest model has doors that can be opened fully with just a centimeter gap between the appliance and surrounding cabinets.

Open innovation also helps Haier to defray development costs and thus explore more strategic options. Notably, the company has a “zero fund” policy in which new offerings are refused significant resources until they’ve been validated by users. Take the Air Cube, a groundbreaking combination of humidifier and air purifier. During its gestation, more than eight hundred thousand online fans offered comments. Once a prototype was ready, it was made available on a popular crowdfunding site, where more than seventy-five hundred individuals opted to buy a preproduction model. Their feedback helped Haier further refine the Air Cube before its formal launch.

Tan Lixia, Haier’s former chief financial officer, sums up the company’s mindset toward open innovation this way: “The border of the company is not important. If you can help create value for users, it shouldn’t matter whether you’re an employee or not.”

vTaiwan: Open to Citizens

One can debate whether governments have “strategies” or merely programs and interest groups, but there’s little doubt government policies profoundly affect the lives of citizens. There’s also little doubt that citizens have become more skeptical of government’s ability to improve their lives. In 2020, Edelman put a simple question to thirty-four thousand individuals in twenty-eight countries: “Does [your] government serve the interests of the many or the few?” Only 30 percent of respondents answered “the many.”

Given the centralizing proclivities of government agencies and their vulnerability to being hijacked by special interests, it’s not surprising that citizens often view public institutions as imperious, corrupt, and ineffective. This skepticism is an immense problem for politicians and policy makers, as it undermines the legitimacy of public institutions and opens the door to unscrupulous actors eager to capitalize on public frustration.

For disenfranchised citizens, it may seem that the only options are acquiescence or upheaval. There is, though, another way. It’s being pioneered in Taiwan, and it leverages the power of open innovation in setting government priorities.

The catalyst was the Sunflower Student Movement in 2014, a mass protest against a proposed trade agreement with China. The students, supported by “g0v,” a civic hacktivist group, were troubled by the deal’s substance and opaque ratification process. Their protest culminated in a three-week occupation of the parliament building in Taipei. The protesters live-streamed their own debate on the trade agreement, turning the occupation into a public forum.

Amid the chorus of protesters, one distinct voice stood out—that of Audrey Tang, a programming prodigy and declared “conservative anarchist.” After the demonstration, a government minister, Jaclyn Tsai, approached Tang and her g0v allies and asked them to help her build a more transparent and inclusive government. The collaboration spawned a novel engagement project known as vTaiwan, where the “v” denotes the ideas of vision, voice, vote, and virtual.

Tang’s team worked with government officials to articulate the issue as clearly and simply as possible. Two weeks of fact-gathering and synthesis produced two framing questions: How should we regulate car transportation services provided by nonprofessional drivers? How should these services be priced?

With the challenge crisply defined, the vTaiwan team launched the deliberation phase. Thousands of individuals, including taxi companies, unions, Uber drivers, and riders, received text messages inviting them to partake in a monthlong online discussion. The invitation contained a short backgrounder and a link to a collaborative platform called Pol.is. Most importantly, the message conveyed a clear promise: the inputs received from participants would directly shape the government’s agenda for a forthcoming policy-setting session with Uber and the taxi industry.

Forty-five hundred people signed up to share their perspectives, with contributions limited to a Twitter-like 140 characters. Participants were encouraged to begin their statements with “I think” or “I feel”—for instance, “I think passenger insurance is crucial,” or “I feel car services should provide fair pricing.” Every comment was texted to a random group of fellow participants for review, with the option to agree, disagree, or pass. Pol.is used machine learning algorithms to group participants based on their responses, forming clusters of like-minded individuals. These clusters were visually represented on a map, illustrating the various factions within the conversation.

Unlike traditional social media, Pol.is doesn’t amplify divisive statements. Instead, it promotes contributions that garner cross-faction support. This encourages convergence, and as differences get reconciled, the avatars on the map converge, creating a visual record of burgeoning consensus. As Tang put it to Michele when they met in Boston in 2024, Pol.is is “prosocial social media.”

In the ride-sharing deliberations, participants initially split into four distinct groups: taxi drivers, Uber drivers, taxi passengers, and Uber passengers. In a matter of days, these four factions merged into two main camps—about 60 percent were pro-Uber and 40 percent were regulation hawks. The Uber fans praised Uber’s superior service and safe driving habits, and they felt it was already sufficiently regulated. Meanwhile, the Uber skeptics were worried about public safety, lax rules, unfair competition, and a lack of transparency. At this point, Tang threw a curveball: “We said we’d only add to the agenda statements that had at least 80 percent agreement from everyone”—in other words, all of the majority plus half of the minority.

With this prompt, each faction quickly developed more moderate statements designed to win cross-group consensus. Within two weeks, the first consensus statements began to emerge. Initially, these were broad, anodyne comments, such as “the sharing economy can reduce resource waste,” but they soon evolved into more specific proposals, like “passenger safety trumps all other concerns.”

By week three, participants started proposing concrete solutions to win over the other side. For instance: “Uber should provide passenger insurance.” There was near-unanimity (95 percent) around the need for the taxi industry to up its game so that drivers and riders would enjoy the Uber-like quality and convenience. By the end of the final week, a whirlwind of 30,000 ratings on nearly 150 unique contributions led to six policy statements that met the 80 percent threshold.¹⁹

A few weeks later, Tang presented the crowdsourced agenda at a live-streamed meeting of Uber executives, taxi companies, driver unions, and government officials. Confronted with a strong stakeholder consensus, Uber and the taxi operators expressed support for nearly all the recommendations. In response, the government crafted new regulations based on vTaiwan’s proposals.²⁰

The vTaiwan platform has been used to engineer consensus solutions on dozens of thorny issues, such as strategies to combat revenge porn, regulations for online alcohol sales, and rules for the platform economy. Thus far, more than two hundred thousand people have participated in these deliberations, and the success rate has been impressive. Eight times out of ten, vTaiwan has led to decisive government action. The highly collaborative process has yielded creative and widely supported policies that are superior in every way to what would have emerged from backroom deal-making.²¹

To this end, Tang commissioned a new platform, called Join, that allows citizens to submit, discuss, and vote on a wide array of policy and budget proposals. A standout feature of Join is its petition system. Any citizen aged 16 or older can submit a proposal and kickstart deliberations. If a petition racks up five thousand signatures, the government agency responsible for the matter has to respond within sixty days. Since its launch, the platform has engaged roughly half of Taiwan’s 23 million citizens, and sixteen thousand petitions have been posted on Join. More than three hundred have crossed the five-thousand signature threshold.²²

One successful petition, launched by sixteen-year-old Wang Hsuan-ju, called for a ban on disposable utensils. The proposal sparked discussions among government departments, restaurants, environmental groups, and manufacturers and led to a ban on the use of plastic straws.

Join has empowered change-makers and elevated the conversation between citizens and officials. Says Tang, “Public servants see five thousand people signing an online petition not as a mob but as co-creators.”

The Presidential Hackathons, launched in 2018, further enhanced Taiwan’s open government toolkit. While vTaiwan and Join were designed as forums for dialogue and policy-making, the Presidential Hackathons are a platform where technologists, civil servants, and citizens work together to address knotty social problems. Each annual cycle zeros in on a small number of challenges, such as preventing youth violence, promoting sustainable development, or improving emergency preparedness. In the first round of the multistage process, hundreds of submissions get whittled down to twenty proposals through a rigorous peer-review process that assesses a plan’s novelty, impact, and feasibility (extra points are awarded to ideas that involve cross-sectoral and international collaboration).

In the second stage, submitting teams refine their proposals based on feedback from an international jury of tech luminaries, business leaders, and government officials. Half of the twenty teams make it to the third and final round of review, and of those, five receive a “Presidential Promise”—a government commitment to act on the proposal within a year. The entire six-month process is open to the public. When a hackathon process is launched, citizens are invited to post their needs or improvement ideas to an online “wishing well.”²³ Proposals that incorporate these submissions earn extra credit during the first-round review. The public also has the opportunity to vote for their favorite proposals, and their preferences help inform the review process.

One standout success from the inaugural Presidential Hackathon was a proposal for using telemedicine to provide health care to remote areas. Under the plan, rural patients would be able to schedule a virtual consultation with a local physician and a specialist from a leading hospital. While the idea was straightforward, the implementation hurdles were significant—developing a new platform for health data exchange, amending health care laws, and developing a clutch of new regulatory provisions. But thanks to the momentum generated, the service launched within twelve months.

Presidential Hackathons are open to international participants, and in 2021, one of the victors was an Anglo-American team, A/B Street. Their idea: a traffic simulation tool that allows planners to estimate the impact of road changes on cyclists, transit users, pedestrians, and drivers.

For government leaders and CEOs alike, the lessons from Taiwan’s experiment with open policy creation are clear. First, embrace transparency. Whether it’s the corporate strategy process or trade negotiations, open it up to scrutiny, dialogue, and unconventional ideas. Second, trust the crowd to help evaluate and elevate the best contributions. This helps ensure that new ideas aren’t rejected by parochial interests. Third, fast-track the best ideas. Without action, participation shrivels and cynicism deepens. Finally, adopt a “perpetual beta” ethos—keep working to find better ways of engaging the crowd. As President Tsai Ing-wen exhorted her government colleagues at the end of the 2019 Presidential Hackathon, “Do it bravely, and dare to make mistakes.”²⁴

There is every reason to be skeptical of strategies and policies that are created behind closed doors, in secreto—where the favored solutions are invariably those that preserve the status quo and/or reward special interests. There can be no trust without transparency, and no legitimacy without engagement. That’s why we must move from an environment in which “consultation” (with employees, customers, or citizens) is a feeble ritual to one in which it is impossible for leaders to push through any significant change without first engaging their constituents in a robust, open, and solution-oriented conversation.

As Taoist philosopher Lao Tzu noted, “If you want to lead the people, you must learn how to follow them.” If that was true twenty-five hundred years ago, it is even more true now.

While these examples of open strategy are laudable, they don’t go far enough. We believe every organization should open the conversation about purpose, strategy, and policy to all comers. There’s no shortage of original thinking in the world, but most companies aren’t harnessing it. They haven’t published an online catalog of skills and assets and asked outsiders, “What would you do with our capabilities?” They haven’t built an always-on platform where anyone—customers, suppliers, partners, entrepreneurs, industry experts, amateur inventors—can post their ideas. They haven’t devised clever solutions for safeguarding intellectual property and rewarding contributors for their work. They haven’t invited external innovators to work alongside internal teams. They haven’t thought about how to build a giant magnet that attracts breakout ideas from the world’s most radical thinkers and doers.

Does this sound fanciful to you—the idea of building a hub for an open, always-on, real-time conversation about strategy and direction? If so, think about the extraordinary effort Apple has put into nurturing its vast community of developers. Anyone wanting to build an app has access to a dedicated development platform, dozens of training programs, a host of development tools, mentors, and global events. The payoff for Apple? More than 2 million apps running on iOS. The payoff for the innovators? Roughly $500 billion in compensation from Apple over the past decade. If an organization can build a global developer network, why not a global opportunity discovery network?

So how do you embrace the advantages of openness? How do you go from a few disjointed, open innovation initiatives to an organization that is open where it matters most—in how it thinks and how it plots its future?

Tackle the climate of fear. In most organizations, there are penalties for disagreeing with your boss. The result is an echo chamber. You need to make it safe to dissent. That means taking every opportunity to ask your team, “Where is my thinking stuck? What other options do you see? What would you do differently?”
Invest in building creative skills. Companies are often frustrated when they ask employees or customers for ideas. Much of what comes back is either small beer or undoable. To increase the signal-to-noise ratio, you have to train people to think differently.
Crack open the strategy process in simple, low-cost ways. If the idea of a high-profile strategy hackathon seems daunting, start small. Make sure every future-focused meeting includes a disproportionate number of young people, newcomers, and individuals who’ve worked in other industries. In one company we know, managers present their plans before hundreds of young employees who live-tweet criticisms and suggestions. The point is, there are lots of ways of getting new people into the strategy conversation.
Make it social. The power of open strategy isn’t merely the number of ideas that get generated but the combinational magic that happens when ideas collide and curious people interact. On an online strategy platform, this means making it easy for innovators to find colleagues who are working on similar ideas and then collaborate, if they choose to.
Link ideas to action. Most organizations have some sort of online suggestion box, but submissions often disappear into the ether. Employees want to know, “Who is going to review my idea? When? Against what criteria? If it has merit, how will it get resourced? Will I get time to work on it?” If the answers to these questions aren’t clear, many contributors will opt out.
Make outsiders feel like insiders. Wherever your role, you can build an open discovery network of your own. Invite in customers, suppliers, and industry experts and host a conversation about the future. Consider it a live demo of what happens when you bring in new voices and ask new questions.
Stop looking to the CEO or agency heads for strategy. Senior leaders need to surrender the conceit that they’re uniquely prescient strategists, and everyone else needs to stop pretending that they are.

Every organization must become open by default. The thick dark line between insiders and outsiders must fade away, and the belief that strategy starts at the top must be forever banished. Only then will the organization have the chance to become as resilient as a great city or celebrated university.

— 13 —

The Power of Experimentation

You are the product of four billion years of experimentation. Over the eons, sexual reproduction, genetic mutation, and gene drift (population migration) have repeatedly revised the language of life, and natural selection—competition for resources and mates—has ensured that the best prose gets copied and shared with the next generation. Like every other human being, you’re an evolutionary laboratory. Your genome contains about 150 mutations that weren’t inherited from your parents.

Your life has also been a laboratory. As a child, you experimented with different behaviors to see what got your parent’s attention and later what got you liked at school. You experimented with hairstyles and clothes. Perhaps there was a time when you dated experimentally. In college, you may have experimented with different courses before deciding on a major. Later, you experimented with different jobs, hobbies, libations, friends, and political views. And you’re still trying new things—because to stop experimenting is to stop growing.

What’s true for you is equally true for institutions. The pace at which any organization evolves is determined in large part by the number of experiments it runs. Despite this, most employers provide little encouragement to workers who are eager to “learn by doing.”

Typically, the ability to design and run trials is the province of a small band of specialists in R&D or product development. Even in those functions, anything more than a narrow A/B test usually requires management approval. In our survey of more than twenty thousand Harvard Business Review readers, 61 percent of large-company respondents said it’s “very difficult” for frontline employees to try something new. Corroborating this, Gallup’s 2020 Great Jobs Survey revealed that in the United States, only 9 percent of nonmanagerial employees strongly agreed that they are free to take risks to improve products and services or solutions.¹

Managers also feel hemmed in. In the Boston Consulting Group’s long-running annual poll of senior managers, a “risk averse culture” and “overly lengthy development times” consistently rank as the biggest barriers to innovation.²

Bureaucracies are set up to produce maximally reliable products, not barely working prototypes. In a bureaucracy, deviations from standard practice are to be eliminated, not celebrated. Ask a bureaucrat to run an experiment, and his palms begin to sweat. An experiment is a risky bet on the unknown, a banana skin likely to land you on your ass. What reward is there in running something that is more likely to fail than succeed? Better collective paralysis than personal humiliation.

The allergy to risk is aggravated by investment screens that filter out high-risk projects—where high risk means anything that doesn’t have a 90 percent probability of paying off. While that sort of prudence may make sense for a major capital project, it’s idiotic for a scrappy experiment. The math is so simple as to be embarrassing. The downside risk of a $100 million project with a 10 percent chance of failure is $10 million. The risk of a $5,000 experiment with a 90 percent chance of failing is $4,500. Yet, despite the trivial sums involved, we haven’t come across many organizations where you could get funding for an experiment with one-in-ten odds of success. It’s crazy that in most organizations, a CEO has an easier time getting a multibillion-dollar project through the board than a frontline operator has in getting a few thousand bucks to run an experiment.

Perversely, the desire to avoid risk often magnifies it. Dumping money into big me-too projects with modest upside is a lot more perilous than seeding lots of early-stage ideas that are further out on the fringe. In the age of upheaval, incrementalism is the riskiest bet of all. What’s needed is a radical shift in how we think about experimentation. The goal isn’t simply to reduce the uncertainty around new products or get them to market faster but to build an organization where everyone is working to extend the boundaries of what’s possible. That’s how an organization buys insurance against irrelevance.

In 1956, British-born cybernetics pioneer Ross Ashby formulated the “law of requisite variety,” an axiom that would become one of the seminal ideas in systems theory. The law states that for a system to remain viable, it must be capable of generating a range of responses as diverse as the challenges posed by its environment. As Ashby put it, “Only variety can absorb variety.” Restated in our terms, only a relentless pace of experimentation can protect an organization from a relentless pace of change.

Every autumn, an oak tree drops thousands of acorns, but only a handful ultimately germinate. In sexual reproduction, millions of sperm will fail to find the egg. Innovation is similarly a numbers game.

A venture capital firm will review thousands of business plans and interview hundreds of would-be entrepreneurs before investing in a handful of startups. Even then, most of the newbies will go bust. A study of 1,098 startups that got their first round of funding between 2008 and 2010 revealed that 70 percent had gone out of business or were barely self-sustaining by 2017. Only one business in twenty had been acquired or gone public with a valuation of $100 million or more, and just five businesses, or less than half of a percent, had achieved a valuation of more than a $1 billion.³ Even in the superheated investment climate of the early 2020s, only 10 percent of startups produced positive returns for investors, and just one in forty achieved unicorn status.⁴

Venture capitalists understand that you have to kiss a lot of frogs to find your prince or princess. While most of their bets will return nothing, occasionally they’ll stumble upon the next Square or Airbnb. Thus, while the modal return in a venture fund is likely to be zero, the average return can be hugely positive. Yet in our experience, few companies appreciate the distinction between project risk and portfolio risk. Each potential experiment gets evaluated on its own merits and is expected to clear a high bar of feasibility. That pretty much ensures the company will never invest in the sort of crazy-ass idea that might actually deliver a thousandfold return.

Learning to be OK with failure is a problem not just for bureaucrats but for individual team members. It’s dispiriting when an idea doesn’t pan out, but here, too, you have to take a portfolio approach. Consider the experience of Matt Diffee, a cartoonist whose work often appears in the New Yorker. Each week, the magazine’s cartoon editor receives around a thousand submissions from freelancers like Diffee, each of whom is allowed to submit up to ten sketches. To improve the odds of getting selected, Diffee typically generates 150 concepts before choosing a handful to submit. The secret to success, as any creative pro will tell you, is to be prolific.

The most important freedom an organization can grant its employees is the freedom to fail. You may remember our story of a frontline team member in Nucor’s Blytheville plant who spent several years experimenting with new materials for a giant ladle and eventually achieved a 2x improvement in cost and durability. His experiments occasionally led to dead ends. Yet, thanks to a culture that honors the power of learning by experimenting, he persevered.

Few organizations have embraced experimentation as wholeheartedly as Amazon, arguably the world’s most innovative company. Amazon’s breakthroughs include Amazon Marketplace, the company’s platform for third-party sellers; Kindle, the world’s most popular e-reader; Amazon Web Services, the runaway leader in cloud computing; Alexa, Amazon’s voice assistant; and Amazon Prime Air, a drone delivery service. Behind these headline-grabbing innovations are hundreds of less-noticed breakthroughs—like “frustration-free packaging,” an initiative that has eliminated 215,000 tons of excess packing materials and saved 360 million shipping boxes.

Amazon’s relentless growth isn’t the product of a few brilliantly conceived top-down initiatives but a culture that encourages relentless bottom-up experimentation. “Our success,” says Jeff Bezos, “is a function of how many experiments we do per year, per month, per week, per day.”⁵ Bezos frequently reminds his colleagues that if you know in advance something is going to work, it’s not an experiment.

One of Amazon’s most notable experiments was employee Greg Linden’s early attempt at building an e-commerce recommendation engine. Not long after joining the company in 1997, Linden wondered whether it might be possible to entice customers into making the sort of impulse buys that supermarkets encourage when they locate candy and other small items near checkout counters. Linden reckoned Amazon could use its vast trove of data to offer every customer an assortment of items uniquely tailored to their preferences. Soon Linden had mocked up a page that included a cluster of customized recommendations. Linden’s colleagues were generally enthusiastic about the idea, but an influential vice president objected. Worried that the proposed feature would complicate the checkout process, he ordered Linden to shelve the plan. Usually, the story would end there, but Linden knew decision-making at Amazon was more about data than opinions, so he pressed on. When the test launched, the results were immediately positive. Customers loved the personalized suggestions, and the revenue bump was substantial. Today, roughly 35 percent of Amazon’s retail sales are generated by site recommendations. Linden’s breakthrough earned him the company’s revered “Just Do It” award—a used Nike sneaker presented by Bezos.

The experience taught Linden a critical lesson. As he would later write, “Everyone must be able to experiment, learn, and iterate. Position, obedience, and tradition should hold no power. For innovation to flourish, measurement must rule.”⁶ Can you imagine your CEO endorsing this proposition? If not, there’s little chance your organization will win the race to the future.

Experimentation requires patience, a virtue conspicuously absent in most bureaucracies. The culprit is often a lack of ambition. Absent a noble aspiration, project teams may be tempted to give up when early experiments fail to produce a breakthrough. It took Apple four years and countless experiments to perfect the technology behind the iPhone’s touch-sensitive screen. Apple’s engineers persevered because they saw an opportunity to redefine the way human beings interact with technology. The point: when you believe you’re on an epic quest, failed experiments don’t crush your spirit.

Few organizations have embraced experimentation as wholeheartedly as SpaceX, the aerospace company founded by Elon Musk in 2002. In contrast to NASA and traditional aerospace, SpaceX has an agile, iterative strategy of continuous learning and improvement through rapid testing and a willingness to fail fast and often.

Nowhere is this approach clearer than in SpaceX’s development of reusable rockets. The Space Shuttle was partially reusable but required costly refurbishment between flights. SpaceX’s goal was to produce fully reusable rockets that could be launched within a few days. To achieve this ambitious goal, SpaceX didn’t attempt to perfect the design through years of cautious analysis and ground testing. Instead, they built and flew a series of experimental prototypes, each pushing the boundaries of what they’d previously achieved. The Grasshopper test vehicle in 2012, for example, began with small hops of a few feet off the ground, but within a year it was soaring to half a mile into the air and returning to land back on its pad.

This was followed by the Falcon 9 Reusable Development Vehicle (F9R Dev) prototype, which was 50 percent bigger and had a more advanced landing system. Many of the early attempts to land the rocket back on the pad produced spectacular explosions—which SpaceX jokingly called a “rapid unscheduled disassembly.” But each failure yielded troves of data that informed the next experiment. And in December 2015, less than three years after Grasshopper’s first timid jump, a Falcon 9 first stage successfully landed back at Cape Canaveral after putting its payload into orbit.

SpaceX has now successfully landed boosters over 420 times with a 99.29 percent success rate. One booster alone has flown twenty-six missions.⁷ Reusability has dramatically lowered launch costs. Falcon 9 delivers payloads to orbit for around $1,500 per kilogram (kg), far less than the $8,000 per kg for an Atlas V rocket, or $10,000 for Europe’s Ariane 5.⁸ SpaceX is now launching a rocket every three days. In 2024, it accounted for 95 percent of all US launches and put more rockets into space than all other countries combined.⁹

As the Falcon 9 was establishing itself as the world’s favorite rocket, SpaceX was aiming even higher. The company’s most ambitious project to date is Starship. Standing nearly 400 feet tall and with a payload roughly ten times that of a Falcon 9, Starship is the largest and heaviest spacecraft ever built. Designed to transport human beings to Mars, Starship’s novel stainless steel design and complex landing procedures have been refined through multiple prototypes. Early vehicles like the Starhopper and SN5 made short trial flights of a few hundred meters, but each successive vehicle flew higher, faster, and with more complex touchdown maneuvers. When one exploded on the pad or crashed into the ground, SpaceX searched the wreckage for clues, improved the next prototype, and launched again, often within weeks. In June 2024, six years after the program’s launch, a Starship—build number 29—finally nailed a landing. Four months later, a Starship achieved an even more impressive feat. After a successful launch, Starship’s 230-foot high Super Heavy booster, powered by thirty-three engines, returned to earth and slowly lowered itself into the embrace of the launch tower’s “chopstick arms.”

A willingness to experiment and fail is at the core of SpaceX’s culture and unmatched success and has allowed the company to leapfrog other launch providers. As Elon Musk once put it, “Failure is an option here … if things are not failing, you are not innovating enough.”

Perhaps no company has worked harder to create a culture of experimentation than Intuit, the financial software provider that serves 100 million customers around the world. Launched in 1983, Intuit’s first product, Quicken, was a small business accounting program packaged on 5.25-inch floppy disks. Today, Intuit offers a suite of cloud-based products covering tax preparation (TurboTax and ProConnect), bookkeeping (QuickBooks), mobile money management (via the Mint app), credit scores and financial advice (Credit Karma), and marketing automation (Mailchimp). It also makes money by marketing third-party financial products to its ever-expanding user base. Over the last ten years, Intuit’s sales more than tripled to $14 billion, and its share price grew 1.6 times as fast as the S&P 500 software index.

Intuit’s commitment to experimentation is a legacy of its founder, Scott Cook. Before starting Intuit, Cook had worked at Procter & Gamble. Frustrated by what he perceived to be a risk-phobic culture, Cook reckoned that starting his own company would be a liberating experience.

Yet as Intuit grew, Cook realized his company was equally vulnerable to bureaucratic torpor. Intuit had hired dozens of managers with razor-sharp analytic skills, but few were inclined to stick their necks out. Every management opinion was backed up by a fifty-page slide deck. In the midst of yet one more mind-numbing planning session, Cook snapped. There would be no more “decision by bureaucracy,” he declared, and “no more decision by PowerPoint, persuasion, position, [or] power.” Henceforth it would be “decision by experiment.”¹⁰ Cook told his colleagues to get out in the field, identify latent needs, develop hypotheses about how to address them, build prototypes, and then test them with real customers.

Most team members, like Carol Howe, a product manager at TurboTax, were energized by Intuit’s newfound enthusiasm for experimentation. Having been impressed by the way the iPhone simplified a myriad of tasks, Howe wondered whether a smartphone could simplify tax preparation—an experience that’s about as frictionless as rug burn. What if customers could use their smartphones to help prepare their tax forms? Soon, Howe and a few colleagues were out talking to customers. What did they think of Intuit’s current PC-based tools? How were they using their smartphones? Could they imagine doing their taxes on a mobile device? Young customers, in particular, were excited by the idea.

The next step was to put together a storyboard that diagrammed how the app would work. Armed with this low-fi demo, Howe and her team fanned out to gather more feedback. Six weeks later, they had their first rough-built app. The next two months entailed weekly sprints of test, review, brainstorm, code, and test again. The original idea had been for customers to transfer data from their smartphone to a computer before submitting their tax forms online. Howe recalls that as the team “tested more and more, our eyes were opened. Customers were asking ‘why do I have to go back to my computer?’ ”¹¹ In early 2010, less than six months after the project kicked off, Intuit launched SnapTax in California. A year later, the app was launched nationally. Within the first few weeks, SnapTax was downloaded over 350,000 times and surpassed Angry Birds as the number-one app in the iTunes store.¹²

SnapTax’s success generated a flurry of experimentation across the company. According to Brad Smith, who served as CEO during that period, the company ran 1,800 experiments in the following three years. The innovations spawned from these experiments generated half a billion dollars in additional revenue. All the insights and ideas “came from employees [and] were never decided by the CEO staff,” says Smith.¹³

This spirit of experimentation continues to thrive at Intuit today. A prime example is Intuit Assist, an AI-powered financial helper, introduced in late 2023 to provide personalized guidance and recommendations on tax preparation, cash flow management, marketing, and financial planning. Intuit Assist was developed over five years as hundreds of customer-facing teams tested and iterated potential product features.

Like Ken Iverson at Nucor and Zhang Ruimin at Haier, Cook’s ultimate goal was to infuse his company with entrepreneurial zeal. “Each and every employee,” he said, “is expected to think like an entrepreneur, and it’s everyone’s job to create, to invent, and to look for new and better ways to improve our customers’ lives.” Such exhortations, Cook knew, wouldn’t change much. To back up the rhetoric, he challenged his colleagues to create “the systems and culture” that would “make it easy and fast and cheap for [everyone] to run an experiment.”¹⁴

Cook’s challenge would inspire a multiyear effort to make experimentation a companywide capability. Today, Intuit nurtures experimentation in five key ways.

New hires are expected to complete the course within their first three months. Further training is offered through a weeklong “Lean StartIn” workshop, where participants use the D4D methodology to address customer pain points. Over the course of five days, teams develop three or four prototypes and run multiple tests.¹⁵ Several thousand employees have participated in a Lean StartIn since the program’s launch in 2012.

“Follow Me Home” is another well-honed device for building innovation competence. Teams from across Intuit regularly visit customers in their homes or offices to observe how they interact with Intuit’s products. Everyone, from new hires to executives, is expected to make Follow Me Home visits. During his tenure as CEO, Brad Smith dedicated sixty hours a year to this practice.

Staff functions are also expected to experiment with their own services. A few years ago, an HR project manager prototyped a program that put job applicants on a live Intuit project team before the final hiring decision. The results were so impressive that this is now a key part of Intuit’s recruitment process.¹⁹

Experimentation isn’t just for e-commerce giants and software companies. Toyota’s employees contribute more than a million improvement suggestions each year. Most of these suggestions are more than mere ideas; they’re reports on experiments that have already produced results. This widespread experimentation generates hundreds of millions of dollars a year in increased productivity.

Amazon, Intuit, and Toyota show what’s possible when you view the entire organization as a laboratory. From top to bottom, the ethos is “show, don’t tell.” Build a Styrofoam model, sketch something on a napkin, lay out a storyboard, shoot a video. These companies know that the simple act of translating a concept into a thing often reveals hidden flaws and opportunities to make an idea better. In a humanocracy, everyone needs to be a maker—to roll up their sleeves, get their hands dirty, and build something.

While the sheer profligacy of experimentation—look at all those wasted acorns!—may irk the bureaucratic mind, it’s the only way to get to the future first.

If you’re ready to turn your organization into an exploratorium, here’s an initial to-do list.

Build a shared commitment to increasing the number of experiments your organization runs each year by tenfold or a hundredfold. Set provisional targets for the number of experiments that should be run by every team, department, and business unit. A goal of one experiment per employee per year is a good place to start.
Equip everyone with the skills they need to design and run their own experiments. There’s plenty of courseware out there on design thinking and rapid prototyping that you can share with colleagues.
Encourage people to build experiments rather than craft elaborate plans, and make this a prerequisite for getting seed money. If someone doesn’t care enough about an idea to build something, don’t invest.
Remove barriers that make it hard for team members to fund and launch experiments. Starting with your own team, create a small budget for experimentation. Encourage those who work for you to set aside a few hours each week as unstructured time.
Require all staff groups to report monthly on how they’re supporting local experiments and what they’re doing to make it easier for frontline teams to try new things.
De-risk the personal consequences of experiments gone wrong. Remind people that most experiments will fail. Make sure team members get credit for launching experiments, whatever the outcome.
Hold every leader at every level responsible for mentoring experiments. Ask employees to rate their managers on the extent to which they create a conducive environment for risk-taking and experimentation.

Nature is eternally restless. It doesn’t sit still, it doesn’t wait for a catastrophe, it doesn’t ask permission, it doesn’t plan—it just tries stuff. The same needs to be true of your organization. That means letting people be as experimental at work as they are in the rest of their lives. In the words of the great management thinker Elvis Presley, it’s time for “a little less conversation and a little more action.” So just go try something.

— 14 —

Embracing Paradox

Wouldn’t it be great if life were simple? If there were never any trade-offs? If you never had to choose? If you could have your cake and eat it, too? Wouldn’t that make everything easier? Perhaps, but it would also make life intolerably boring. Honestly, do you really want to be relieved from the need to exercise your mind? Sure, there are times when we wish the alternatives weren’t so stark or that we had more data, but most of us are probably not eager for a world in which every decision is so easily described and modeled that the work of choice-making can be delegated to an algorithm. Conundrums are what make life interesting.

Some trade-offs are simple. Do I go out for a run and clear my head, or buckle down and finish the task at hand? Such trade-offs are often the product of limited time. There’s only so much you can do in a day.

The toughest trade-offs involve goals that are, or seem to be, contradictory. Do I protect my teenager from a poor decision she’s made (compassion), or do I let her suffer the consequences (accountability)? Do I invest conservatively to protect my nest egg (financial security), or do I take bigger risks in hopes of having a cushier retirement (financial gain)? Do I spend the weekend helping a friend move (loving others), or do I go to the mountains to recharge my emotional batteries (self-care)? These decisions, like most of the important ones we face, involve a paradox.

As human beings, thinking is what we do—it’s our party trick—but nothing challenges us to think harder than a paradox. As we’re using the word here, a paradox involves not merely a choice, but one where the alternatives are mutually desirable and, at least partly, mutually exclusive. In some cases, the alternatives will reflect deep but apparently irreconcilable truths. Our brains get pulled and stretched when they’re confronted with important choices that embody seemingly conflicting ideals. In a world without paradox, there’d be little hard thinking to do and scant opportunity to become more discerning. It wouldn’t matter if we had free will or not, since the stakes would be so low. Søren Kierkegaard, the Danish philosopher, had it right when he argued that paradox is “the pathos of intellectual life.” Lucky for us, paradox seems to be baked into the universe. Let’s consider a few examples.

Science is the search for regularities in nature. The laws of physics and chemistry allow us to make highly accurate predictions of physical phenomena. Until the early twentieth century, many scientists believed that if it were possible to precisely specify the state of the universe at a point in time, we’d be able to predict all future states. Today, most physicists believe this to be untrue. While we can make predictions about certain things with a high degree of reliability—planetary orbits and the behavior of fluids when heated, for example—this predictability breaks down at the subatomic level.

Quantum particles, the smallest structures known to science, can exist in multiple states simultaneously—a phenomenon known as “superposition.” A particle assumes a specific state only once observed. The problem is, it’s impossible to know in advance what that state will be. That doesn’t mean one can’t predict a range of outcomes for a quantum particle, but it does mean there’s an inherent limit to our capacity to predict the behavior of physical systems. The discovery of this apparent randomness was so unsettling that even Albert Einstein struggled with its implications. “God,” he famously quipped, “doesn’t play dice with the universe.” Maybe not, but it’s unarguable that our universe is at once highly predictable and unpredictable.

There’s a reason political parties tend to array themselves on a left-right spectrum. Left and right are shorthand for starkly different assumptions about the nature of human beings, the role of the state, and the merits of change. Conservatism, said British philosopher Roger Scruton, “is about conserving things: not everything of course, but the good things that we admire and cherish, and which, if we don’t look after them, we might lose.”¹ Conservatives are wary of abrupt change and its unintended consequences. Progressives, by contrast, believe social progress must be energetically pursued. “Good enough” never is, so the grand project of bettering society must be pushed ever forward. Table 14-1 summarizes some of the key differences in how conservatives and progressives see the world.

TABLE 14-1

Left versus right

Progressive worldview	Conservative worldview
Traditions and institutions perpetuate existing power structures that are often barriers to social justice.	Rejecting the hard-won knowledge that’s embedded in our institutions and traditions opens the door to social chaos.
The state is the ultimate guarantor of individual rights, and its power can be used to improve the human condition.	The state is the greatest threat to human freedom, and its power must be tightly circumscribed.
Whether individuals flourish or not is primarily a matter of the opportunities afforded them by society.	Whether individuals flourish or not is primarily a matter of their character and their choices.
Given the reality of prejudice, poverty, and other social ills, reformist policies can do much to reduce systemic inequality.	Given innate differences in human abilities and preferences, no policy can be expected to produce equality of outcomes.
The vast challenges we face in creating a more just society requires us to be bold in our approach to change.	Human imperfections and the law of unintended consequences mean we should be wary of bold change programs.

Whether on the right or left, partisans have blind spots. A conservative is likely to claim that personal success is the product of hard work while ignoring the role of gender, race, and class. By contrast, a progressive is likely to blame individual hardships on a rigged system while downplaying the importance of self-discipline and tenacity. Each viewpoint, unalloyed, is dangerous. Conservatism without progressivism idolizes the past. Progressivism without conservatism vandalizes the past. Speaking of right and left, Ralph Waldo Emerson aptly said, “Each is a good half but an impossible whole.”²

Many faith systems are paradoxical at their core. Read the Old Testament, and you’ll find wildly conflicting accounts of God’s character. Psalm 7:11 states that “God is a righteous judge, a God who expresses his wrath every day.” Yikes! Luckily, the Almighty has a softer side. Further on, the psalmist declares that “the Lord is plentiful and gracious, slow to anger and plenteous in his mercy” (Psalm 103:8). Whew! But wait, is God bipolar? Theologians will tell you no. God’s character simply reflects the inherent paradox between mercy and justice.

When we transgress, we plead for mercy—“Sorry I was speeding, officer, but I’m late to pick up my daughter.” When others commit an offense we demand justice—“Look at the way that idiot is driving. I wish a cop would pull him over.” Though we want the scales tipped in our favor, we recognize that mercy and justice are both indispensable.

Most of us wouldn’t want to live in a society where every infraction was immediately punished, where there was no forgiveness and no do-overs. That would be life under the Taliban. And if we’re honest, we’d also be unhappy with an excess of grace. Imagine a world in which no one was held accountable for their actions, where there were no legal or moral boundaries, and where malefactors could get away with just about anything. That’s Las Vegas, and after about three days, it just seems tacky.

Every toddler has firsthand experience with mercy and justice. “I know my mom loves me,” thinks a four-year-old, “but when I throw my toys, she gets all mean and growly. Next thing you know, I’m sitting toyless in a hard-backed chair. She calls it a ‘time-out’; I call it a waste of time. Strange thing, though, after ten minutes, she comes back and gives me a hug and everything’s chill. Confusing as hell, if you ask me, but I guess that’s the paradox of love and discipline.” Indeed it is, munchkin. Charles Simeon, the nineteenth-century cleric and fellow at King’s College, Cambridge, put it well when he said of mercy and justice: “Truth is not in the middle and not in one extreme; it is in both extremes.”³ G. K. Chesterton, the English essayist, expressed a similar idea when he defined paradox as “two opposite cords of truth [that have] become entangled in an inextricable knot.”⁴

A paradox is vexing. It’s not easy to hold two opposing views in your head. But when we struggle with paradox, we are facing the world as it is, filled with complexity and ambiguity. Individuals who resist either-or thinking and deal constructively with paradox are at an advantage. Their responses are nuanced and sophisticated and represent a better fit with the reality of the world around them.

Scientists who embrace the conflict between opposing theoretical frameworks have the chance to discover new and deeper truths. Jurists (and parents) that navigate adroitly between mercy and justice are more humane and effective. Political systems that resist ideological fractures are better at generating effective policies. Mastering paradox is equally vital for our organizations.

What are the competing priorities in your organization? Perhaps it’s scale versus flexibility, discipline versus creativity, diligence versus speed, or prudence versus risk-taking. Each of these trade-offs reflects a deeper paradox, the tension between exploit and explore. Decades ago, James March, the esteemed organizational theorist, argued that the most basic problem for any organization is to “engage in sufficient exploitation to ensure its current viability and, at the same time, devote enough energy to exploration to ensure its future viability.”⁵

The evidence suggests that few organizations get this right. As we noted in earlier chapters, incumbents seldom invent the future. As a rule, they’re not the ones that create new business models or reset customer expectations. They’re not the first to exploit new technologies or harness emerging trends. Instead, they reap efficiencies by doing the same things over and over again.

Consider big pharma. In 2023, the world’s fifteen largest drug companies invested a record $161 billion in R&D, an average of more than $10 billion per firm. Yet in recent years, small biopharma companies—those with less than $500 million in revenue and $200 million in R&D—have accounted for more than half of new drug approvals and two-thirds of drugs in development.⁶

Pedro Cuatrecasas, an industry veteran who brought more than forty medicines to market, blames bureaucracy for big pharma’s malaise:

[Drug companies felt] confident that they could manage and mandate results with discipline, order, formality, and efficiency. Unfortunately, many of these qualities are ones that suffocate creativity and innovation. Freedom, spontaneity, flexibility, nimbleness, tolerance, compassion, humor, and diversity were replaced by bulky and inflexible organizational structures characterized by regimentation, control, conformity, and excessive bureaucracy.⁷

Innovation is the lifeblood of every organization, and nowhere is that more true than in the drug industry. Yet even here, the defenders of innovation are often overrun by the massed forces of centralizing, compliance-focused administrators.

In most organizations, what should be an evenly matched contest between exploit and explore is a one-sided thrashing. Consider your own organization. Where does it come down on the trade-offs shown in figure 14-1? What do leaders regard as essential versus optional? What gets top management’s attention, and what gets ignored?

FIGURE 14-1

Explore versus exploit

Survey tool that contrasts explore versus exploit priorities in organizations. It lists seven pairs of priorities, such as growth versus profitability and innovation versus execution, with a scale for rating the relative importance of each in driving the organization’s focus and decisions.

It’s not that bureaucrats are oblivious to these trade-offs; it’s just that they systematically favor the goals on the right. That’s partly a matter of temperament. Large organizations are filled with accountants, lawyers, and professional managers. By inclination and training, they tend to value stability and security over dynamism and daring. This frame of mind is reinforced by heavyweight processes—goal-setting, budgeting, project management, performance measurement, and promotion—that favor constancy over change.

Information asymmetries further skew the trade-offs. Corporate information systems collect masses of data on operational efficiency but typically fail to capture the cost of untapped creativity, squandered initiative, forgone opportunities, strategic inertia, and an exaggerated fear of failure. You can’t be smart about a trade-off if your data gives you only half the picture.

There’s a final threat to subtlety: bureaucrats abhor ambiguity. Their sense of order is offended by the idea that not every trade-off can be resolved once and for all. Uniformity is a virtue. Never mind that any universally applied policy will be wrong a significant percentage of the time—as when an across-the-board hiring freeze unfairly punishes a small but fast-growing unit, or a zealously enforced policy inconveniences a high-value customer. The alternative would be to grant those on the front lines the freedom to optimize trade-offs locally, as circumstances dictate. To a bureaucrat, this is anathema, since it erodes “order.” How can you manage a large organization if people on the ground are free to do their own damn thing? We need to know what’s going on, and that’s possible only when everyone’s following the same script. This, as much as anything, explains why senior leaders favor uniform structures and uniformly applied policies—yes, they may be suboptimal, but they reduce the cognitive load on executives. They make the world seem understandable to those at the top and thereby help to preserve the illusion of control.

The bureaucratic aversion to ambiguity leads to black-and-white thinking—it’s either centralization or decentralization, autonomy or compliance, size or agility. Admittedly, some trade-offs are zero-sum. A dollar used to buy back shares can’t be spent on R&D. But not every trade-off is indissoluble. Fifty years ago, manufacturing executives believed cost and quality were mutually exclusive. You could buy a meticulously crafted Mercedes-Benz that would run for two hundred thousand miles or a bucket of bolts—a Ford Pinto, maybe—that would spend a good deal of its life in the shop. Then, in the 1970s, Japanese carmakers shocked their competitors by reimagining this trade-off. They reckoned that by taking a systematic approach to improving quality—through statistical process control, extensive training, process redesign, improved teamwork, and ambitious quality goals—they could produce cars that were inexpensive to build and reliable. By transcending what had long been regarded as an either-or trade-off, Japanese carmakers gained a competitive advantage that would last for a generation.

Ultimately, of course, one reaches a frontier. Quality improvements pay for themselves, but only up to a point. If you want car seats made of hand-matched hides, be prepared to pay a premium. Yet, when it comes to exploit versus explore, many managers believe they’ve reached the frontier when it’s still a continent away. They’re at point A in figure 14-2 and assume it’s impossible to get another unit of “explore” (moving up on the vertical axis) without giving up a unit of “exploit” (moving left on the horizontal axis). They can see how to get to point B but can’t imagine how to get to point C.

FIGURE 14-2

Reimagining the exploit-explore trade-off

Line graph illustrating the balance between exploit and explore strategies. Two diagonal lines are labeled Frontier 1 and Frontier 2 on axes of Explore (vertical) and Exploit (horizontal). Point B on Frontier 1 has a higher Explore value than point A. Point C on Frontier 2 has higher values than A on both axes.

In many organizations, the search for higher-order trade-offs is frustrated by what is, in essence, religious zealotry. If you’ve grown up in the church of “lean,” you may reflexively discount the merits of other belief systems. You’re convinced that rigor and regimentation are the surest routes to value creation. Conversely, if you’ve been sprinkled with water from the font of “design thinking,” you likely believe that empathy and lateral thinking are the keys to success. These deeply held beliefs can turn debates about trade-offs into holy wars. The bean counters view the creative types as dangerously irrational, while the dreamers see the accountants as uninspired pedants. As long as each side is hunkered down in an ideological bunker, there’s little opportunity to shift the frontier.

Sooner or later, lopsided trade-offs spark a counterreaction: “Oh my gosh, we haven’t delivered any top-line growth in years. We need to rev up our innovation.” A new CEO may get hired to reverse course but is likely to overshoot the target. The pendulum, long pegged at one extreme, gets pushed to the opposite pole.

Let’s take a moment to recap. Thus far, we’ve argued that …

Bureaucracies are replication machines. They’re designed for exploit, not explore.
Bureaucracies tend to be monocultures. They’re run by individuals temperamentally inclined to favor the status quo.
Bureaucratic information systems fail to capture the hidden costs of one-sided trade-offs. As a result, many decisions are underinformed and therefore suboptimal.
Bureaucracies tend to enforce uniform trade-offs across the entire organization. Though unsophisticated, this preserves the center’s power and sense of order.
The bureaucratic aversion to ambiguity leads to either-or thinking. Rather than maintaining a creative tension, organizations tend to whipsaw between opposing priorities.

Fifty years ago, the penalties for clumsily managed trade-offs might have been tolerable, but no longer. Today, a business must be a paragon of penny-pinching efficiency, on one hand, and a champion of rule-busting innovation, on the other. In a world of hypercompetition and hyperchange, the winners will be organizations that are capable of making subtle, perfectly timed trade-offs, and over time, radically redefining the frontier of exploit versus explore.

How can you achieve this in practice? How do you avoid artless, top-down trade-offs? Much of the answer can be found by digging into the experience of Svenska Handelsbanken—Europe’s most consistently profitable bank.

Based in Stockholm, Handelsbanken’s twelve thousand employees operate more than 340 branches. While the bank has an international presence, it regards Sweden, Norway, Great Britain, and the Netherlands as its home markets. For more than fifty consecutive years, Handelsbanken has handily outperformed its European peer group. It sailed through the 2008 financial crisis unscathed and, in the years since, has beat its rivals on virtually every performance metric. (See table 14-2.) Among the world’s banks, it also boasts the world’s highest credit rating.

TABLE 14-2

Handelsbanken financial performance versus European peers^a (2009–2023)

	Cost-income ratio^b	SG&A as % of revenue	Annual revenue growth	Annual deposit growth	Problem loans as a % of total loans	Return on equity	Total returns to shareholders
Svenska Handelsbanken	46.6	36.8	1.6	4.3	0.3	12.2	459
European peer group average^c	62.7	59.1	0.4	2.6	3.1	6.9	151
Source: Capital IQ and authors’ analysis. ^a Includes major European banks with an emphasis on those competing in Svenska Handelsbanken’s main markets (Scandinavia, UK, Netherlands): ABN Amro, BBVA, Barclays, Commerzbank, Danske Bank, Deutsche Bank, DNB Bank, HSBC, KBC, Lloyds, NatWest, Nordea, SEB, Standard Chartered, and Swedbank. ^b Operating expenses as a percentage of net interest revenues and noninterest revenues. ^c Simple, unweighted average.

Over the decades, Handelsbanken has demonstrated an ability to master two of the most difficult trade-offs in banking. First, it has delivered strong growth without blowing up its balance sheet; second, it’s kept a tight lid on costs without depersonalizing customer service.

Growth in financial services often comes at the expense of prudence. In the run-up to the Great Recession, for example, banks gorged themselves on subprime mortgages and made foolhardy bets on complex derivatives. Not Handelsbanken. A tortoise among hares, it avoided risky bets and still managed to outgrow its rivals. Though the epitome of prudence, the bank has handsomely rewarded its shareholders, delivering three times the returns of its peer group between 2009 and 2023. The superior performance came despite Handelsbanken’s comparatively tardy decision to embrace digital banking and cut the number of physical branches.

Handelsbanken’s customer service is equally stellar. In a 2023 UK banking survey, Handelsbanken outscored its peers in customer satisfaction by over 7 points for personal banking and 15 points for corporate banking (on a 100-point scale).⁸ If you’re wondering whether this is the product of a gold-plated cost structure, it’s not. Over the past fifteen years, Handelsbanken’s cost-income ratio (cost as a percentage of revenue) has averaged 46.6 percent, a whopping 16.1 points lower than the average of its European peers.

The key to Handelsbanken’s unrivaled performance is its highly unorthodox management model. In 1970, Jan Wallander, an economist working at a regional bank in northern Sweden, was appointed as Handelsbanken’s CEO. At the time, the bank was losing money and was embroiled in a dispute with regulators. As Wallander analyzed the bank’s underperformance, he became convinced that overcentralization was the culprit. The bank’s bloated head office and rigid planning process made it unresponsive to shifts in economic conditions and customer needs. (At the time, loan approvals took two months to complete.) Moreover, senior bankers had made a spate of poor credit decisions that had imperiled the balance sheet.

Wallander would later write, “All companies suffer from powerful forces that pull in a centralizing direction. It is like water that easily and irresistibly trickles in unless you take special care to keep it out.”⁹ Though difficult to quantify, Wallander pressed his colleagues to be honest about the costs of centralization. “It is easy,” he argued, “to construct attractive-looking mathematical arguments showing the advantages of large-scale operations, but it is more difficult to illustrate the disadvantages. They are symbolized by words like rigidity, slowness, bureaucracy, lack of transparency and so on. Vague, yet just as real in their effects.”¹⁰

Wallander believed that senior executives often lacked the context to make smart decisions—they were too far removed from customers and market trends. Not surprisingly, the staffers at the bank’s head office disagreed. Unmoved by their objections, Wallander first froze the work of more than a hundred head-office committees and established a moratorium on “blue memos,” the bank’s top-down policy directives that were being generated at the rate of ten per day. With no work to do, head-office functions started to contract. The corporate marketing department, for example, shrank from forty employees to a single individual. The line organization was also pared back to three levels: headquarters, regional offices (which have recently been removed), and local branches. Wallander described these moves as “stopping the train.”

As the center shriveled, Wallander localized critical trade-offs by increasing the autonomy of local branches. Employees across the bank received training in credit underwriting and business development. New information systems were developed to feed essential data to frontline staff. Branches were given the authority to make most credit decisions, to price loans and deposits, and to set marketing priorities (eventually, they were also put in charge of staffing decisions). In another departure from industry practice, branches were given the responsibility for serving corporate clients based in their catchment area. Local managers could call on head-office teams for specialized support, but the client relationship remained with the branch.

Every branch got a dashboard that provided readouts on cost-income ratio, customer defections, profit per employee, loan performance, and per-customer profitability. The goal was to turn every branch into something close to a stand-alone business—a goal expressed in Wallander’s oft-repeated mantra that “the branch is the bank.” Where other banks saw branches as mere stores, charged with selling products and handling transactions, Handelsbanken saw branches as full-fledged businesses charged with building long-term relationships.

Like Haier’s Zhang Ruimin, Wallander believed value was created at the geographical “edges” of the organization. Since local employees had the best information and were closest to customers, they were best placed to make the nuanced, real-time trade-offs that could help Handelsbanken reconcile the irreconcilable.

To see the power of the edge in action, consider the bank’s approach to optimizing the trade-off between growth and risk. Between 2009 and 2023 Handelsbanken’s loan portfolio grew faster than nearly all of its European rivals, yet this growth didn’t come at the expense of lending standards. Handelsbanken’s ratio of nonperforming loans remained the lowest in the industry. (See figure 14-3.) How did Handelsbanken pull off this trick?

FIGURE 14-3

Loan growth and share of nonperforming loans for Svenska Handelsbanken and select European banks (2009–2023)

Scatter graph comparing loan portfolio growth and nonperforming loan ratios for Svenska Handelsbanken and its rival European banks from 2009 to 2023.

Source: Capital IQ and authors’ analysis.

The secret is localization. All lending at Handelsbanken—whether it’s a $50,000 loan for a customer’s Volvo XC60 or a $500 million revolving credit line for the Volvo Group—originates with branch employees, half of whom have the authority to make loans. Every loan applicant is interviewed before a decision is made. In the case of a large loan or a new customer, there may be several face-to-face meetings. While credit-scoring algorithms inform these decisions, they aren’t a substitute for judgment. For example, a mortgage applicant with an erratic employment history may look like an unattractive prospect until a bit of probing reveals that a wealthy uncle may be willing to cosign the loan. Another applicant may have a well-paying job but is employed at a business that’s struggling to stay afloat. By capturing and integrating nonstandard information into the lending process, Handelsbanken makes smarter credit decisions than its more centralized competitors.

Localization also helps the bank anticipate defaults. Once a loan has been made, branch employees meet periodically with the borrower and will take action if there’s a risk of a default. Handelsbanken chairman Pär Boman reckons that 70 percent of write-offs stem from “insufficient intervention after a borrower’s creditworthiness had started to deteriorate.”¹¹ Local monitoring increases the odds that potential defaults are spotted early and avoided or abated. “Our local bankers are still the risk managers,” recently retired CEO Carina Åkerström told us.

Finally, decentralization reduces systemic risk. In a typical bank, credit decisions are made by a comparatively small number of risk managers whose decisions are bound by lending rules based on credit scores, loan-to-value limits, and other factors. Centralized credit decisions also get skewed by corporate priorities, like gaining market share with small business borrowers or reducing exposure to a particular industry. In practice, this centralized, rule-driven approach lacks nuance and tends to concentrate rather than diversify risk.

As Black Swan author Nassim Taleb and professor Gregory Treverton have observed: “Although centralization reduces deviations from the norm, making things appear to run more smoothly, it magnifies the consequences of those deviations that do occur. It concentrates turmoil in fewer but more severe episodes, which are disproportionately more harmful than cumulative small variations.”¹² By decentralizing credit decisions and resisting the urge to set top-down priorities, Handelsbanken has inoculated itself against the risk of big, dumb mistakes.

Localization is also the key to building robust customer relationships. If you do business with a big bank, you know how impersonal the experience can be. Often, you find yourself on hold with a call center halfway around the world. Digital services seem to have made things worse. A 2023 Accenture survey found that while most consumers use digital channels for simple transactions, only a quarter felt their bank did an excellent job at staying attuned to important changes in their financial and personal situations.¹³

It’s different at Handelsbanken. Every customer gets the name and number of the branch manager and is assigned to a personal representative who works within the branch. The bank’s digital channels offer customers the convenience of self-service, round-the-clock accessibility, but local staff are readily available, both online and in person, to address more complex needs. In fact, in recent years Handelsbanken has cut central support staff and moved more private bankers and corporate credit specialists into local branches.

Writing in the bank’s 2023 annual report, current CEO Michael Green described Handelsbanken’s approach to integrating human and digital services: “At Handelsbanken, customers don’t talk to machines. On the contrary, our personal meetings are our principal competitive advantage. Our customers shouldn’t have to deal with chatbots or endless touch-tone choices. Our approach is that new technology should instead be used to unlock resources so that we can provide better service, advice and support. In other words, more time to do business.… Our local connection and the fact that we give our employees significant scope to make decisions creates decisive advantages.”

Unlike most large banks, Handelsbanken feels like a local business where the owner knows your name and is delighted to see you. In one typical case, the branch manager in Portsmouth, England, drove to Heathrow Airport to meet a customer heading off on a last-minute business trip who needed to complete a mortgage.¹⁴ It’s that sort of service that has earned Handelsbanken its peerless customer rating.

How can Handelsbanken deliver Ritz-Carlton service and still be cost-competitive with its rivals? Look again at table 14-2. You’ll notice that the bank’s SG&A expenses (selling, general, and administrative costs) average less than 37 percent of revenue versus an average of 59 percent for its rivals. This massive efficiency advantage, thanks to a skinny head office and the absence of middle managers, gives Handelsbanken the ability to resolve the high-touch/low-cost paradox. When compared to competitors, Handelsbanken underinvests in bureaucracy and overinvests in customer service. (See figure 14-4 for a stylized rendering of Handelsbanken’s cost advantage.)

FIGURE 14-4

Svenska Handelsbanken’s cost advantage versus conventional banks

Bar chart comparing the cost structure of Svenska Handelsbanken to conventional banks. Handelsbanken's streamlined structure means lower costs for central units and branches, enabling higher efficiency and better customer service.

Source: Svenska Handelsbanken Investor Presentation, October 6, 2014.

The most fundamental trade-off for Handelsbanken and every other organization is between freedom and control. This tension lies at the very heart of the explore-exploit dilemma. To build an adaptable, innovative, and inspiring organization, people need freedom to take risks, ignore policy, go outside established channels, pursue passions, and occasionally fail. Conversely, to build an organization that delivers Six Sigma quality and consistent returns, you need lots of rigor, alignment, and discipline. How could any organization be good at both? It’s like trying to find a human being who could win Olympic medals in weightlifting and rhythmic gymnastics. Try to imagine that body type!

As impossible as it seems, there may be a way to square the circle. In our experience, many managers regard freedom and control as mutually exclusive. Expressed mathematically, they believe that freedom multiplied by control equals a constant—freedom can only go up if control goes down. Given that, any plea to enlarge the decision rights of first-level employees is likely to provoke a barrage of objections: “People will slack off.” “Standards will slip.” “Employees will abuse their freedom.” “We’ll lose focus.” “Everyone will be reinventing the wheel.”

This anxiety is understandable. In any organization, a degree of control is essential, and in the bureaucratic model, this is achieved through narrow rules, close supervision, tight spending limits, and little self-directed time. These measures protect the organization from all manner of ills, but at the cost of resilience, innovation, and initiative. The question, then, is whether there are ways of securing control that avoid the costs of “bureausclerosis.” Thankfully, the answer is yes.

Let’s go back to Handelsbanken, where frontline employees enjoy an unprecedented degree of autonomy. Why doesn’t all that freedom lead to irresponsible behavior? How can the bank be radically decentralized and operationally disciplined? The trick is to distinguish between “what” and “how”—to separate ends from means. Innovation in whatever form is often about delivering familiar benefits in new ways—with the goal of overcoming long-tolerated downsides. There was a time, before the Kindle, when book lovers on the move faced a trade-off: endure the hassle of lugging around a load of books or run the risk of not having a favorite volume at hand. Just as Amazon reinvented the how of reading, Handelsbanken has reinvented the how of control.

No Excuses

Every Handelsbanken branch has its own P&L. On the revenue side, branches are credited with the net interest they generate from loans and the fees that come from selling investment products such as mutual funds.¹⁵ Once made, a loan remains on the balance sheet of the originating branch until it matures. If a mortgage is in arrears, the branch is on the hook to make sure it gets back on track. If a loan gets written off, the loss is recorded as an expense on the branch’s P&L. The branches are accountable for all their direct operating costs—they set staffing levels, sign leases, decide on compensation, approve marketing budgets, and more. Centralized services like IT and HR are charged to local branches based on actual usage, and rates are negotiated every year by a committee of branch managers who drive a hard bargain with staff functions.

In other banks, branches are accountable for a ragbag of KPIs—top-down targets for customer acquisition, cross-selling, staff costs, and other performance parameters. There’s an assumption, manifestly wrong, that this jumble of goals will maximize branch performance. As much as bureaucrats might wish it were otherwise, there’s simply no way to construct a set of proxy goals that can adequately capture all the things that drive profitability. Centrally defined targets, no matter how numerous, can never substitute for the wisdom of well-trained, on-the-ground decision-makers. Contrary to what is often assumed, highly prescriptive policies and top-down targets erode rather than encourage accountability. When frontline employees are compelled to focus on a small set of proxy metrics, they’re able to delegate failure upward. “After all,” they’ll say, “we were only doing what you asked us to do.” By contrast, when they’re responsible for a genuine P&L and have control over the variables that drive profitability, there’s no one to blame when performance falls short.

The idea that autonomy and accountability are mutually exclusive is a fiction, based on the dubious assumption that employees are looking for an excuse to be irresponsible. That’s not the assumption, or the reality, at Handelsbanken. Here’s one branch manager’s take on the bank’s culture of accountability:

We actually take pride in getting things cheaper. So if we book a ticket, we take great pride in the fact that we’ve bought a cheap ticket. If every employee in Handelsbanken thinks like that, no wonder we’ve got the lowest cost-income ratio of any other bank because you’re kind of making everybody responsible for their own costs. It’s part of human nature that loves achieving that sort of thing. We all like it at home, don’t we? I’ve got a bargain! And we love doing it for the organization. I think it’s a very subtle, clever way of incentivizing people.¹⁶

Being autonomous doesn’t mean being free from performance pressure. Every Handelsbanken branch is expected to win new customers and achieve a cost-income ratio of 40 percent or lower. In cases of persistent underperformance, branch managers get replaced. No one at the bank is free to snooze; they are, though, free to succeed.

Transparency

The pressure to succeed can come from within, or above, but often the most effective incentives come from one’s peers. At Handelsbanken, autonomy is balanced by transparency. Monthly reports rank every branch on metrics like cost-income ratio, loan quality, total profit, and profit per employee. Former president Arne Mårtensson notes that “radical decentralization can only work with fast and open information systems” so that problems “are not hidden within the nooks and crannies of management layers and allowed to fester.”¹⁷

Transparency also spurs friendly competition. “There’s no doubt that we compete with our nearest branch,” explained a UK branch manager. “In the back of your mind you’re thinking, ‘Well, I’ve got to beat them because we know them.’ ”¹⁸

At Handelsbanken, there’s no place for mediocrity to hide. As Wallander once explained:

We just communicate [an] average ranking that shows which branches are above and which are below. Senior executives don’t need to push people, they just advise. Managers know what is acceptable performance—you can’t linger in the depths of the league table for long! Peer pressure plays an important part in this process.¹⁹

Skin in the Game

People who have a significant stake in the business tend to do the right thing. That’s why Handelsbanken, like Haier, Nucor, Ingersoll Rand, and Vinci, shares the rewards of its success with those on the front lines. In any year the bank’s return on equity exceeds the average of its peer group, one-third of the difference is paid into a foundation that invests on behalf of employees, mostly in Handelsbanken shares. The proceeds are distributed equally among all employees, regardless of rank. In one recent year, the contribution was $90 million, or approximately $7,500 per employee—a significant sum for a frontline staff member. Withdrawals can be made once an employee turns sixty. The stake for a long-tenured associate can be worth over $1 million. Together, Handelsbanken’s employees own about 8 percent of the bank.

As with other vanguard companies, the combination of autonomy and upside keeps employee turnover low. Owners, as a rule, are in it for the long term.

For years, management theorists have told us that big companies are crap at making trade-offs—and that there’s little we can do about it. The standard advice is to take a cleaver and split the organization in two. In The Ambidextrous Organization, respected academics Charles O’Reilly and Michael Tushman argue that companies can be big and agile only if “they separate their new exploratory units from their traditional, exploitative ones, allowing for different processes, structures, and cultures.”²⁰ In other words, put the future-focused, risk-taking, fast-moving folks in an incubator or accelerator that’s walled off from those who are working in the cost-obsessed, rule-shackled core. With all respect, this is a cop-out. Imagine telling parents who are struggling to balance love and discipline in child-rearing that they should put one of their kids in a permanent time-out while lavishing the other with unceasing praise. That would be ridiculous. Both kids would end up in therapy.

We can do better. As we’ve seen in this chapter, there are three positive strategies for coping with paradox. First, like Wallander, we must be honest about the hidden costs of perpetually one-sided trade-offs. We need the equivalent of an echocardiogram that reveals the buildup of bureaucratic plaque in our organizations.

Second, we need to train and equip frontline employees to make smart, real-time trade-offs. This is key to the performance advantage of all the vanguard companies. They recognize that no amount of big data can capture the local, context-specific knowledge that can turn a mediocre decision into a savvy one.

Finally, we must reinvent the “how” of control. Human freedom will never be absolute, but we have a choice in how that control is achieved. In a bureaucracy, human beings are shackled by precedent, narrow role definitions, petty rules, and constant oversight. In a humanocracy, control comes from a shared commitment to excellence, from accountability to peers and customers, from skin in the game, and from loyalty to an organization that treats you with dignity. In the first case, you end up with Max Weber’s “iron cage”; in the second, an energized workplace where high autonomy and high accountability are mutually reinforcing.

Recognize, localize, depolarize—these are the secrets to building an organization that can walk and chew gum at the same time.

So where do you start in helping your organization become a master of paradox? Here are some suggestions:

Be honest about the implicit biases in your organization that skew important trade-offs. Go out of your way to include individuals with countervailing views in important conversations.
Challenge yourself and others to get better data on the hidden costs of default trade-offs. Don’t assume that no data equals no downside.
If you’re a manager, resist the urge to standardize trade-offs across the organization. Be willing to sacrifice a bit of uniformity for more locally appropriate decisions.
Never accept an either-or. Think creatively about how you could achieve your goals without sacrificing other equally vital goals.
Work systematically to equip people with the information and skills they need to make smart trade-offs, and then push those trade-offs down.
Give frontline teams a genuine P&L, radically reduce the number of KPIs, and hold people accountable for results.
Even if you’re not the CEO, search for ways to “stop the train.” Question every click of the ratchet that moves power and decision-making toward the center.

When you and everyone else in your organization learn to love paradox, work will become a lot more interesting and your organization a lot more capable.

In the chapters in part III, we’ve laid out the principles of humanocracy: ownership, markets, meritocracy, community, openness, experimentation, and paradox. At the moment, there’s no single organization that fully encompasses all these human-centric ideas. Yet when we look across the humanocracy vanguard—at Ingersoll Rand, Nucor, Haier, Handelsbanken, Intuit, Morning Star, Netflix, Vinci, W. L. Gore, and others of their ilk—we get a glimpse of the sort of organization that emerges when these principles are translated into policies and practices, when everything in the organization is focused on maximizing human achievement (see table 14-3.)

TABLE 14-3

Bureaucracy versus humanocracy

Bureaucracy	Humanocracy
Power is vested in positions	Influence is earned from one’s peers
Strategy is set at the top	Strategy is an open, firmwide conversation
Resources are allocated by fiat	Resources are allocated via market mechanisms
Innovation is a specialized activity	Innovation is everyone’s job
Mandates and policy force coordination	Coordination is the product of collaboration
People are slotted into roles	Roles are built around individual skills
Managers assign tasks	Teams divide up work
Control comes from oversight and rules	Control comes from transparency and peers
Staff groups are monopoly service providers	Staff groups compete against external vendors
Individuals compete for promotion	Individuals compete to add value
Units are judged against top-down targets	Units are responsible for local P&Ls
Compensation correlates with rank	Compensation correlates with impact
Employees have little financial upside	Employees have significant financial upside
There are ranks of managers	Teams and individuals are self-managing
Critical trade-offs are made at the top	Critical trade-offs are optimized locally

While this framework isn’t in any sense complete, it points us toward a model that can, at long last, help our organizations overcome their “core incompetencies”—timidity, inertia, incrementalism, and indifference. No longer must we resign ourselves to organizations that are less capable than the people within them.

But getting from here to there won’t be easy. Some may even doubt it’s possible—particularly for large, complex organizations that are deeply steeped in bureaucracy. Yet there’s reason to be hopeful. In chapter 15, we’ll dig deep in the remarkable transformation of a world-leading pharmaceutical company, and in chapters 16 and 17, we’ll show you how to get started, whatever your role or title.

Part Four

The Path to Humanocracy

How Do You Make It Real?

— 15 —

Working to Cure Bureausclerosis

With bureaucracy deeply rooted in most organizations, the task of eradicating it can seem impossibly daunting. The hierarchy must be flattened and inverted. Time-sucking processes must be stripped out and petty policies rescinded. Power must move to the periphery and everyone made accountable to customers. And—most critically—leaders must become willing advocates for radical change. We’ve often been asked whether all this is possible. The answer, as we’ll see, is “yes.” So—spoiler alert—there are no excuses.

Founded in 1896, F. Hoffman-La Roche & Company (hereafter Roche) is one of the world’s leading health care companies. In 2023, its two core businesses—prescription pharmaceuticals and medical diagnostics—generated $66 billion of revenue, with pharmaceuticals accounting for 75 percent of the total.¹

Roche purchased a controlling stake in California-based Genentech in 1990 and acquired the remaining shares of the biotech pioneer in 2009. In the deal, Roche agreed Genentech would continue to operate as an independent company with its own R&D facilities and would assume responsibility for distributing Roche’s drugs in North America.

The story of Roche’s metamorphosis begins in 2017. Though performing strongly, the company faced a clutch of nerve-jangling challenges. The most serious was a potentially devastating “patent cliff,” with Roche’s three bestselling drugs, generating $23 billion in annual revenue, about to come off patent. The executive team had high hopes for Ocrevus, an approved treatment for multiple sclerosis, but there were challenges here as well. Historically a powerhouse in cancer drugs, Roche would now be supporting patients with a chronic disease—a shift that would require significant changes in marketing, pricing, and communications.

Then there was the growing swarm of biotech startups. Between 2001 and 2017, the share of new molecules developed by small biopharma companies had grown from 33 percent to 57 percent (and would reach 65 percent by 2022). After years of industry consolidation, big pharma was learning that scale, and the bureaucracy that comes with it, was inimical to innovation.

Roche’s then-CEO, Severin Schwan, believed the only way to meet these challenges was to build an organization of unprecedented speed and dexterity. While Roche’s top team was alert to the issues facing the company, Schwan worried that not all of them believed deep change was essential. He also realized that since most of the company’s executives had spent their entire careers at Roche or in other large, bureaucratic organizations, they’d struggle to imagine new ways of leading, managing, and organizing.

Hoping to amp up the urgency and seed new thinking, Schwan asked Tammy Lowry, Roche’s chief talent officer, to put together a consciousness-raising session for the company’s senior leaders. Recalls Lowry, “We knew we couldn’t change the way the company worked without changing the way leaders led.”² The four-day program, christened Kinesis, proved to be more catalytic than anyone expected.

Prior to the event, the participants were asked to complete detailed assessments for themselves and seven or eight peers. The instrument included twenty-nine leadership traits organized in eight categories (see table 15-1). These traits were mapped onto two dimensions: reactive versus creative and task versus relationship (see figure 15-1).

TABLE 15-1

Leadership behaviors and attributes

Controlling	Perfect Driven Ambition Autocratic	Self- awareness	Selfless leader Balance Composure Personal learner
Protecting	Arrogance Critical Distance	Authenticity	Integrity Courageous authenticity
Complying	Passive Belonging Pleasing Conservative	Systems awareness	Community concern Sustainable productivity Systems thinker
Relating	Caring connections Fosters team play Collaborator Mentoring/developing Interpersonal intelligence	Achieving	Strategic focus Purposeful/visionary Achieves results Decisiveness
Source: The Leadership Circle.

FIGURE 15-1

The leadership circle

Circular diagram mapping eight leadership traits onto reactive versus creative and task versus relationship dimensions. Within the larger circle, radial bars extend from the center to indicate one’s perception of these traits: “How I see myself” (solid line) and “How others see me” (dotted line).

During the first day of the session, Paul Byrne, the consultant leading the session, placed a twenty-five-foot rendering of the “leadership circle” on the floor and asked each leader to stand on the spot that corresponded to their dominant leadership trait—which had been identified in the peer assessment. Not surprisingly, most of the leaders huddled in the reactive/task quadrant. Though the point was largely self-evident, Byrne explained that to be maximally effective, Roche’s leaders would need to get a lot better enabling others and shaping the future. “We were,” recalls one Kinesis participant, “rocked to our core.”

Rather than chide his clients, Byrne asked them to reflect on a few questions: What sort of behaviors made them feel safe? What did others expect of them? And what had gotten them promoted in the past? Their observed behaviors, said Byrne, were exactly what you’d expect in a bureaucratic organization where compliance and predictability are valued above all else.

Being task- and control-oriented was a virtue, Byrne went on, but there’s always a danger of overdoing what you do well. Most executives learn early in their careers that there’s a payoff to immersing yourself in data, attending to every detail, and triple-checking the work of those around you. Problem is, this doesn’t scale. In a sprawling global business, it’s impossible for those at the top to be “in control.” Leaders who fail to acknowledge this are perpetually anxious and exhausted, while those below them are dispirited and sycophantic.

Byrne likened the problem to a car going 120 miles per hour on the autobahn stuck in third gear. Sooner or later, the transmission’s going to burn out. Roche’s leaders were working sixty hours a week but still felt overwhelmed. They needed to find another gear—a way of achieving more impact per unit of time and effort. The solution, said Byrne, was to move from the lower left quadrant to the upper right—to shift from command and control to envision and enable. After all, there were plenty of people at Roche who could run the business; the job of senior leaders was to build a better business. Roche didn’t need more planners and operators; it needed more architects and coaches.

Byrne asked the leaders to reposition themselves on the circle and imagine how that might change the way they tackled tricky problems or issues. Together, the executives role-played what it would mean to be a creative, relationship-focused leader, and then, with the help of coaches, identified some “first moves” that could help them move in that direction—like attending fewer review meetings, intervening less often, asking more questions, delegating more decisions, and building time in their calendar for mentoring.

On day two, the participants were introduced to the principles of “agile”—including the primacy of customer needs, the advantages of small cross-functional teams, and the benefits of tackling big problems via high-tempo sprints. They also learned about management renegades such as Haier, Morning Star, and Buurtzorg.

The exposure to new ways of organizing and managing opened a lot of minds. No one could miss the point. Despite what we might have been told, bureaucracy is a choice, not a cosmological constant. There’s no law that says a big company must be laggardly, hidebound, and disempowering. This is on us. The second takeaway was equally inescapable: we can’t be architects of the future if our first instinct is to defend the status quo.

As day three kicked off, each leader was asked to nominate a system or process that seemed ripe for an overhaul, like product development, resource allocation, or forecasting. Teams self-organized and spent the remainder of the day brainstorming potential fixes.

On the fourth and final day, a member of Roche’s executive committee joined the participants for a frank discussion about the challenges of root-and-branch transformation. What could Roche do to accelerate the pace of change? How could it harness the learning and energy generated by Kinesis? What could be done to ensure bold ideas weren’t watered down?

For many of the participants, the four days were the most emotional, liberating, and impactful of their career. Like the mythical Atlas, they’d been struggling under a heavy burden—weighed down by formidable problems, a balky and unwieldy organization, and a self-imposed need to appear invincible. Now, like Archimedes, they had a lever—a way of getting more leverage by empowering others, removing bureaucratic roadblocks, and using agile tools to experiment with new ways of working, organizing, and managing.

Luckily, Roche’s top team was alert to the perils of trying to engineer change top down. They understood that a centralized approach, if deficient in any of its particulars, risked creating operational chaos on a colossal scale. Far better for new approaches to emerge through local experiments. With this in mind, Kinesis alumni were urged to go back and “do something,” but there was no mandate. Says Lowry, “We encouraged leaders to apply the new skills to whatever problem they were facing.”

Luckily, two of the most ardent Kinesis converts were Bill Anderson and Padraic Ward. Anderson, a chemical engineer who had joined Genentech in 2006, had been appointed Genentech CEO in 2017. Ward, a former consultant, joined Roche in 2008 and a year later was chosen to head Roche’s pharma business outside North America. Anderson and Ward would play catalytic roles in rolling back bureaucracy, flipping the pyramid, and putting patients first. Two deputies, Jonathan Witt and Walt Renfree, chosen to lead the transformation work at Genentech and Pharma International, respectively, would prove to be equally indispensable.

In May 2017, Anderson convened a two-day meeting of his leadership team. In a departure from past off-sites, the focus wasn’t on near-term performance but on how to build a radically more capable organization. Not everyone was convinced that deep change was necessary. Recalls Witt, “Some were happy to address pain points, but their mindset was, let’s agree on the three things we want to do, find a consultant, and then we’re done.” Anderson, though, insisted on aiming higher.

Genentech, he argued, didn’t need another reorg; instead, it needed to be rebuilt atop new principles, and much of the meeting was spent speculating on what those tenets might be. Unusually, the meeting ended without agreement on next steps.

Laying the Foundations

Despite the reservations, there was a growing sense, says Witt, “that we’d need to tear things down to the studs.” But before working on the organization, the senior team believed they would need to work on themselves. After all, they couldn’t expect others to change if they were unwilling to do so. Thus, in the spring of 2017, Genentech’s top executives began meeting for a full day every fortnight, and they would continue to do so for the remainder of the year. Never had they spent so much time together or focused so relentlessly on their own roles and value-added. The goal, said Anderson, was to move from a team of leaders to a truly integrated leadership team.

The sessions were deeply personal and went to the core of what it meant to be a “leader.” In the past, being a leader had meant being in control, having all the answers, and never screwing up. Though unintentional, that mindset often made executives appear arrogant, hypercautious, and autocratic. To succeed at radical transformation, the team knew they’d have to attract willing followers—and that would require a substantial reset in leadership attitudes and behaviors. At one point, the executives were asked to imagine a future in which their roles no longer existed. The response, recalls Witt, was sanguine. Everyone seemed eager to do whatever was best for patients and employees, even if this meant a downgrade in power and prestige.

Aided by outside coaches, Genentech’s senior team began running experiments on themselves. In an exercise aimed at practicing vulnerability, executives joined employees for lunch in the cafeteria and invited their fellow diners to critique recent top-level decisions.

The work of personal and collective transformation was now absorbing a quarter of the top team’s time. Initially, there was a concern that with the shift in attention, operational issues would be neglected. But, as Anderson reminded them, Roche had plenty of capable employees who could keep things running while the senior team laid the groundwork for a management overhaul.

Embracing New Principles

Much of the team’s early work involved developing a set of precepts that would guide the work of reinvention. The executive team initially proposed four tenets, focusing on the relationship between employees and their work. The goal was an organization in which every team member could honestly say …

I think and act like an owner.
I’m relentlessly patient focused.
I’m collegial and partner well with colleagues.
I’m empowered and act decisively.

Together, the senior team was determined to cleanse Genentech of anything that impeded achievement. Culprits included a highly layered organization that undermined speed and accountability, a surfeit of onerous processes that contributed little to patient outcomes, fiefdoms and silos that frustrated collaboration and flexibility, and a culture of perfectionism that made those on the front lines reluctant to take action. Said Witt, “We needed to strip away the bureaucracy and layers that were hindering us. We wanted a system that served patients and employees, not senior managers.”

Informed by extensive consultation across the business, three key changes would be introduced over the next few years that would unleash a torrent of initiative and innovation.

Cross-Functional Squads

Historically, Genentech, like most pharma companies, had been functionally organized. Each of the company’s fifteen or so major drugs had a marketing team of a dozen or more individuals and a dedicated sales group that could include as many as 150 reps. In addition, roughly 1,500 people worked in support functions such as analytics, digital platforms, pricing and contracting, distribution, patient support (including call centers), and medical (which had responsibility for running stage IV clinical trials and communicating with doctors).

While great for building competence, a functional organization had significant downsides. First were the myopia and suboptimization that come when people work in silos. Second were the inevitable inefficiencies that result when no one save the CEO is responsible for an actual P&L. Third was the ever-present risk of investing in activities with marginal patient impact—a near certainty when only a fraction of employees had customer-facing roles.

In response to these concerns, Genentech reorganized itself into nine product-focused “squads.” Each squad included representatives from every function. While the functional experts would continue to liaise closely with their family groups, henceforth their primary role would be to support the product-focused squads. To affirm the shift in identify, Witt encouraged functional specialists to add the name of their squad to their email signature.

Collectively, squad members would be accountable for strategy and a full-fledged P&L. At the time, in early 2018, there were seven layers in the pharma organization: product manager, group manager, marketing director, franchise head, business unit head, Genentech CEO, and Roche Pharma CEO.

The shift to the squad model threw up a ton of questions. Who’s my boss? What exactly is my job? How do I allocate my time? How will I be measured and compensated? It took time to work out the answers, but few doubted the logic of the move and were thus inclined to be patient rather than whiny.

Squad leaders faced the toughest challenge. While they bore ultimate responsibility for the commercial success of their drugs in the marketplace, the members of their squad—typically ten individuals—weren’t “subordinates,” and sometimes served on other squads as well. Where a franchise head might have once overseen a hundred individuals, they now had a team of less than a dozen peers.

One of the undeniable advantages of the squad model was that team members now had a holistic view of the business, the market, and most critically, their patients. Functional specialists were now thinking like businesspeople, and with all the functions around the same table, problems that used to bounce between different teams for weeks could now be solved in a few hours. In addition, cross-functional issues, such as health equity, were now less likely to fall between the cracks.

In the past, there had often been mismatches between functional priorities and the needs of market-facing units. Driven by their own interests, functions would sometimes overinvest in tangential capabilities and underinvest in less exciting but much-needed skill sets. Embedding functional experts in the squads was an important step in getting better alignment, but there was more to be done.

Each function was asked to develop a patient-centered value proposition and gather feedback from the squads: Does this reflect what you expect from us? Is it patient focused? The functions also developed detailed capability maps—what we’re good at and where we are investing—and presented them to the squads. The goal was to produce a two-sided heat map. A squad leader might say, “We’re going to need a lot more analytical support, some help on digital, but not much training.” The functions were then expected to focus and scale their efforts accordingly. It was understood that any activity that was insufficiently patient-centric or in low demand would need to be refocused or culled.

Learning to Be Brave

The changes at Genentech were driven by a conviction that you can’t build a resilient, fast-paced organization without redistributing power. Anderson was relentless on this point, insisting that the people best placed to make decisions are those closest to customers. One might have expected employees to welcome the offer of greater autonomy, but it wasn’t that simple.

One problem was fear or, more specifically, an engrained culture of perfectionism. While it’s understandable that people would be wary of mistakes in a business where customers’ lives are at stake, over time, that vigilance had metastasized into a general fear of being caught out. As one executive put it, “We worked hard 100 percent of the time to avoid a 1 percent miss.” As a result, a lot of people were more focused on minimizing risk than generating impact.

Among the senior team, there were lots of conversations about how to destigmatize failure. Yet despite repeated exhortations to “fail fast and fail forward,” many remained reluctant to take even modest risks. “We realized,” said Witt, “that failure was never going to be OK, because a concern for patients is central to who we are.” Ultimately, the breakthrough involved a shift in perspective. Witt continues, “Our people were used to thinking, ‘Patients matter deeply, so don’t screw up.’ What flipped the switch is when we said, ‘Yes, patients matter deeply, and they can’t wait.’ That made progress more important than perfection and gave people the license to take smart risks on behalf of patients.”

A related problem was the tendency to manage up. To protect their backsides, even experienced leaders would often wait for a top-level sign-off before taking action. This created bottlenecks and undermined accountability. Executives could also be complicit. After all, weren’t they paid to make the big calls? But in reimagining their roles, Genentech’s top team realized it was unhelpful for them to backstop squad-level decisions. Instead, they had to tell squad leaders, “This is your call. Consult your peers if you like, but you can’t wait for certainty before making a decision.” The shift in accountability generated immediate benefits, including a steep drop in the number of review meetings and noticeably faster decision-making.

Collective Leadership

In January 2019, Anderson became CEO of Roche Pharmaceutical and moved to Basel, Switzerland. Alexander Hardy, who had joined Genentech in 2005, replaced Anderson as Genentech’s CEO. Hardy had supported the changes at Genentech but was worried that the enthusiasm for autonomy within the squads was undermining coordination.

Hardy’s first move was to create an integrated sales function organized by geography rather than by therapeutic category. Instead of reporting to product squads, sales reps would be assigned to one of thirty regional health care “ecosystems.” This was a radical shift, one that Anderson would later admit he had been reluctant to make. Nevertheless, the change would prove to be critical to keeping Genentech’s sales efforts in sync with a rapidly changing health care landscape.

Historically, Genentech’s most important customers had been individual doctors and physician-owned medical groups. But with large health care systems acquiring physician practices at an accelerating pace, there was an increasing need for Genentech to interact with clinical leaders in multihospital systems. Genentech’s ecosystem leaders would fulfill that role and negotiate prices and rebates across multiple product categories.

The move to an integrated salesforce also improved Genentech’s ability to partner with its customers around major health care issues. A typical example was a partnership with the American Diabetes Association and UAB Medicine (a health system operated by the University of Alabama, Birmingham) aimed at better serving individuals with macular edema.

Hardy and his closest colleagues—Ashley Magargee, who supported the product squads; Witt, who was responsible for Genentech’s support functions; and Kate Rowbotham, who oversaw the field organization—were united in their ambition to build a more cohesive organization. They realized, though, that structural moves would only take them so far. Structures and policies are static and tend to hardwire trade-offs. Hardy and company wanted dynamic coordination—the ability of different units and teams to collaborate on the fly as needs and circumstances changed. Achieving this would require another major leadership reset. Genentech needed leaders—at all levels—who had the inclination, incentives, and information to act as enterprise leaders, who worked to optimize the whole rather than the parts and put collective success ahead of personal wins.

To advance the cause of collective leadership, Hardy commissioned a series of Kinesis-like events that were aimed at defining what it means to be a great colleague and an enterprise leader. The program focused on the importance of building deep, trust-based relationships and how to build those relationships by spending time together, opening up about life outside work, and being willing to have difficult conversations. The core message: improving human health is a team sport.

The next step was ensuring everyone on the squads had access to enterprise data. Says Magargee, who in early 2024 took over from Hardy as Genentech CEO, “We told leaders, ‘we’re going to give you absolute transparency across the entire P&L.’ ” Leaders at all levels were encouraged to “overshare”—to communicate openly and honestly about challenges and opportunities that had implications for their peers.

One of the most consequential steps was a radical change to Genentech’s budgeting process. Fritz Bittenbender, who heads Genentech’s government affairs function, recalls that before 2019, leadership meetings sometimes resembled a “food fight,” with everyone scrapping to grab budget dollars and advance their parochial interests. The budgeting process was also widely recognized to be a bureaucratic quagmire.

The solution, described more fully in chapter 9, involved two critical changes. First was the move to “one budget.” Instead of operating units “owning” their resources, talent and funds would be held in common and allocated dynamically as needs and circumstances changed. Accomplishing this required a second shift. Instead of a once-a-year carve-up, squad leaders would meet monthly, develop a list of Genentech’s most urgent priorities, and then shift resources accordingly. Everyone was expected to be transparent about their funding needs and highlight “spare” resources that could be better used elsewhere. The food fight was over.

At Genentech, the shift to collective leadership required fundamental changes to mindsets, roles, accountabilities, and processes. The result is an organization that’s more lateral than vertical—and notably better at addressing shared challenges. Says Bittenbender, “We’ve been working on this for two-and-a-half years, but today, if you’re sitting in a leadership meeting, you’d have hard time telling which leader is representing which part of the business.” Recently, in a mark of the progress made, Genentech’s top 30 leaders were rechristened the Senior Leadership Collective.

No one, says Magargee, wants to go back to the old model. “People say, ‘I love the culture. I love the people around me. I love the freedom to solve complex problems together.’ ” She adds that Genentech’s staff turnover is now far lower than the industry average.

Padraic Ward, who leads Roche’s pharma business outside the United States and Japan, admits to being skeptical after the Kinesis experience in 2017: “I didn’t think we had an emergency. I thought if we messed around with the way we did things, we could damage our business. Then one day, in the middle of a meeting, someone asked, ‘How badly could this go wrong before we noticed it and fixed things?’ And I realized Roche is a very stable organization, and the thing we needed to worry about isn’t maintaining stability but what happens if we don’t change.”

From Managing to Enabling

As with Genentech, there was an understanding that the only way to build a more supple, quick-witted organization was to create more space for people to grow. “For those of us in senior roles,” says Ward, “we had to find the nerve to put aside many of the things that got us our jobs. We knew we’d need to give away a lot of authority.”

A group of twenty-five senior leaders began meeting in person for four days each month in Frankfurt. Everyone sat in a circle, and there were no PowerPoint slides. The questions to be tackled were deep: How do we want to show up to the rest of the organization? What behaviors should we role-model? What’s our value-added? How should we be compensated? How should we organize ourselves? The focus, recalls one participant, “wasn’t on changing the organization, but changing us.”

With the goal of saving lives paramount, no topic was off-limits. Jean-François Brochard, the head of Roche Pharma in France, recalls a pivotal moment when the group asked itself whether the many weeks devoted each year to setting performance targets was creating any value. The truth, they admitted, was that most of the work was little more than budgetary theater.

The monthly meetings were also a place to practice new, more collegial leadership behaviors. Ward would often play the role of provocateur, asking, for example, how the head of Germany would react to a decision to shift resources to China. Outside the meetings, the executives were encouraged to test the principles of creative leadership within their own teams and then share what they had learned at the next conclave.

The work of retooling behaviors didn’t always go smoothly. Eager not to be seen as interfering, leaders were sometimes overly reluctant to step in when things weren’t going well; and with the empowerment message percolating throughout the organization, there was occasional pushback when executives offered advice. Eventually, an accord was reached: leaders would avoid making peremptory decisions but had the right to check in and ask questions—particularly when performance was lagging.

One of the most critical shifts came in 2019 with the decision to merge Ward’s senior executive group into an expanded International Network Enablement Team, or INET, which would include the heads of key functions and geographies. As Ward explains, “We didn’t want to be called ‘the leadership team’ because we needed to be in a support role, and we needed everyone to be connected.” To back up the INET’s one-for-all ethos, it was agreed that all of its members would participate in the same bonus scheme.

The work of reshaping leadership roles and behaviors was immensely time-consuming. For more than a year, it occupied the majority of Ward’s time. “The commitment,” he says, “had to start with me. I wasn’t doing the things I had done before, like reviewing launch plans for drug x in country y, but I knew that if I didn’t demonstrate a commitment to changing the way I led, I’d have no chance of helping others change.”

Disbanding Regional Organizations

One of the INET’s first decisions was to disband Roche Pharma’s long-standing regional structure. Over the years, the regional organizations—Europe, Eastern Europe, the Middle East, and Africa (EEMEA), Latin America, and Asia Pacific—had become steadily larger and more intrusive. Amanda McKean, a Roche transformation leader based in Australia, recalls the situation: “Each region had grown to two to three hundred people, adding layers and bureaucratic chores that weighed affiliates down.” Country teams were spending more time in regional meetings than with external stakeholders, notes McKean, and there was growing dissatisfaction with the lack of customer focus in regionally driven activities. Duplication was also an issue as regions and affiliates both worked to localize global initiatives. “It was,” says McKean, “busyness for the sake of busyness. Middle management was swelling, and we were trying to drive better outcomes for patients one PowerPoint deck at a time.”

Removing more than eight hundred regional roles was a bold and radical move, but was entirely consistent with what was fast becoming a Roche-wide conviction: flatter is better. With the heads of Roche’s largest markets now members of the INET, decisions that might once have ping-ponged between regions and affiliates could now be quickly addressed by a network of peers.

Design Teams

Much of the foundational work of redesigning structures and processes was assigned to nine “design teams.” The teams, supported by coaches and outside consultants, were given wide-ranging remits and a promise that their recommendations, however bold, would be implemented.

Anyone could volunteer to serve on a team, and hundreds raised their hands to do so. It was up to the team leads, who had been appointed by Ward, to select their teammates. Great care was taken to incorporate a wide range of viewpoints, with a particular emphasis on including those with physician and patient-facing roles.

Flying in from around the world, the members would huddle in a conference room for two weeks to work on their assigned challenge. While bivouacked, the teams scheduled frequent online brainstorming sessions with internal constituencies. There were also regular “drop-in sessions” that were open to anyone from across Roche. Said one observer, “This was the most transparent change process in the history of Roche.”

The high stakes energized the design teams. They were Plan A; there was no Plan B. While Ward and other leaders would occasionally check in, they avoided critiquing the team’s efforts. Instead, they’d ask, “Do you think you’re being ambitious enough?” “Are you challenging the status quo?” “What will you need to make this work?” Says McKean, “Every team understood the goal was to remove or reduce anything that got in the way of collaboration, empowering affiliates, and delivering for patients and customers.”

Following the two-week sprint, team members returned home but continued to meet online. A few weeks later, they’d reconvene for another sprint, having spent much of the intervening time collecting feedback from colleagues. During the second two-week dash, the team would refine its ideas, develop an implementation plan, and check in with senior leaders—not to secure their approval but to line up the resources required for implementation.

iSquads

The first design team to launch, DT1, included representatives from both Pharma International and Genentech and was tasked with breaking down functional silos and better integrating global brand strategies with country-level strategies. While disbanding the regional organization had shortened communication channels, there was still a widespread perception that central functions were insufficiently responsive to the needs of Roche’s far-flung affiliates.

Similar to what had been done in Genentech, the solution was to meld the functions into disease area communities called iSquads (where “i” stands for integrated). To reinforce the shift, budgetary authority moved from functions to iSquads, making it easier to align functional expertise with resources and market priorities.

Each of the thirty-two iSquads was captained by an “integrated strategic leader” (iSL) and had eight members: the iSL, four leaders from large affiliates, and three functional envoys for marketing, medical, and patient access. Notably, no one reports to the iSL, nor does the iSL have independent executive authority. Squads meet every fortnight, and members are collectively responsible for maximizing the success of their products.

In developing the brand objectives, positioning, and priorities for their products, the iSquads lean heavily on an iCommunity—a diverse network of up to forty disease-focused experts who provide medical and market insights and help translate strategic goals into short-term work packages and deliverables.

Several years on, no one doubts that the shift from functions to squads was the right move. Says McKean, “We’re undoubtedly faster and more adaptable because we have tighter collaboration both horizontally and vertically. We became much better at translating strategy into tangible actions and are able to make trade-offs much faster.”

Network Enabling Office

With Pharma International’s regional headquarters now gone, the task for the second design team (DT2) was to define the systems and roles that would help Pharma International meet the needs of local affiliates. As with the INET and the iSquads, the solution was a lateral community—the Network Enabling Office (NEO). With roughly a hundred staffers, the NEO is comprised of “chapters,” each of which is headed by a member of the INET.

NEO’s primary charter is to support cross-affiliate problem-solving. To this end, NEO includes thirteen designated “sparkers” who are charged with identifying common challenges within specific disease areas and mobilizing teams to tackle them. A typical challenge might focus on improving breast cancer detection rates. At the time of this writing, the sparkers were supporting twenty-six multicountry problem-solving squads.

The sparkers are also responsible for diffusing best practices. Working with affiliates, they developed shared reporting standards that make it easier to identify local strengths and weaknesses. Critically, the NEO is solely a support function—it doesn’t issue policies or mandates. Like everything else in Roche’s transformation, it reflects a belief that collaboration is better than centralization.

Outcome-Based Planning

In the international division, as in Genentech, the quest to eliminate low-value activities put the planning process in the crosshairs. With volatility increasing, Ward and his colleagues agreed there wasn’t much value in debating medium-term targets. After all, it wasn’t elaborate plans that got you to the future first but sharply defined goals and faster cycle times. Employees needed to aim high, even if that raised the risk of undershooting the goal.

As is often the case, the legacy planning process was plagued with incrementalism. Next year’s targets were typically last year’s targets plus-or-minus a few percentage points. There was no moonshot goal to inspire bold thinking and doing. That changed in 2020 when the global pharma leadership team proposed an audacious ten-year goal: deliver three times more patient value at 50 percent of the cost. With national health care budgets stretched to the breaking point, it was critical that Roche maximize the impact of every dollar spent. The bold challenge struck a deep chord and helped revive those suffering from transformation fatigue.

The new planning approach, which emerged after a couple of preliminary experiments, was dubbed “outcome-based planning” (OBP). Here’s how it works.

Each year, Ward and his senior team identify five to ten key outcomes to be achieved over the next twelve to twenty-four months. Based on these priorities, affiliates develop tightly defined 90- or 120-day “work packages” focused on achieving local outcomes. A typical outcome might be to ensure that 80 percent of patients have ready access to an intravenously delivered drug. Says Renfree, “The short cycle times empower local teams to craft their own plans and pivot quickly when new information emerges.” Local outcomes and work packages are posted online—a practice that encourage cross-affiliate collaboration.

The ethos of OBP is to do fewer things faster. Each affiliate force-ranks its work packages so there’s no doubt about which initiatives are first in line for scarce resources. To support dynamic talent flows, key tasks—or “gigs”—are posted online.

When compared to Roche’s traditional planning system, with its avalanche of top-down KPIs, the benefits of OBP have included a sharper focus on high-impact activities, more freedom for affiliates to devise creative solutions, accelerated work cycles, and greater collaboration.

Customer Ecosystems

Arguably, the most profound changes in Roche Pharma have come at the interface with patients.

As in the United States, there’d sometimes be half a dozen Roche sales reps calling on a single physician. Patients were also confronted with multiple touchpoints—including websites, call centers, and support groups—and often found it difficult to access the right sort of help. A further aggravation was that frontline employees often lacked the authority to resolve problems on the fly. At the same time, with Roche’s portfolio shifting to include more rare and chronic diseases, the need for ongoing patient support was ramping up.

A turning point came when Ward and his senior colleagues spent several hours listening to patient calls. “People were frustrated and angry,” says Ward. “There was a lot of compliance behavior—reading countless disclaimers, transferring the patient to someone else, asking for their name a third time. To change things, we knew we had to empower those on the front lines to do the right thing for patients.”

There were other reasons for rethinking the sales function. The traditional model focused on making sure physicians had the information they needed to prescribe the right drug at the right time, but with this information now online, the value of in-person sales calls was fast declining. Moreover, physician education was just one of many factors influencing patient outcomes—to wit: Were patients getting into the health care system at the right time? Were they getting properly diagnosed? Were they able to get the right treatment at the right intervals? Were patients or health care agencies able to pay for treatment? The answer was often “no,” and it was becoming clear that these and related challenges could no longer be left entirely to overburdened physicians and health care systems. Says McKean, “We needed to become a partner and support the entire patient journey.”

The solution, which emerged from a second round of design teams, centered on the creation of two new roles—patient journey partners (PJPs) and health system partners (HSPs). PJPs are responsible for developing solutions that improve the patient journey while HSPs focus on improving the capabilities of local health systems. A midsize market like Australia might have three dozen PJPs and a third as many HSPs.

A typical example involved developing new assessment protocols for spinal muscular atrophy, a genetic disorder that robs people of their physical strength, including the ability to walk, eat, and even breathe. Evrysdi, a Roche drug introduced in 2020, helps address the symptoms, but patients must first undergo a battery of tests. This often led to long waits, as the tests had to be conducted in a hospital or specialty clinic. In a bid to clear the backlog, a team of PJPs worked with medical researchers and designed a study to measure the effectiveness of home-administered assessments. “Today,” says Renfree, “everyone is customer-facing. Those on the front lines can directly shape policy and bring others in to solve patient problems.”

The new roles, which Roche believes are unique in the pharma industry, prompted a significant reduction in the number of sales reps while dramatically enlarging the influence and authority of those in patient contact roles. Says Ward, “We’ve learned that moving authority closer to customers is always a good thing.”

“Overall,” says McKean, “we’re far more collaborative; we are solving more problems faster. We can mobilize around shared challenges without a lot of permission seeking.” Senior executives who previously had five or six direct reports are now coordinating the efforts of twenty-member squads—a shift that has dramatically reduced the risk of micromanagement. Employees, at last, are able to use the full measure of their initiative and ingenuity.

The impact of Roche’s transformation has been remarkable. In 2023, Genentech’s revenues were 24 percent higher than they’d been five years earlier, and ROI was up by 27 percent—this despite the patent cliff. This remarkable result was achieved with 22 percent fewer people—the result, in part, of a deep commitment to delayering. The changes in Pharma International have been equally dramatic. Says Renfree, “We now have one-third fewer people delivering one-third more revenue.” The changes freed up $3 billion per year, which Roche was able to add to its R&D budget.

Roche’s new management model is uniquely suited to the company’s mission and circumstances, yet it is morphologically similar to what we observed at Haier. In both cases, one finds …

A flattened and inverted pyramid
An organization that is more lateral than vertical—a community of communities
Coordination without centralization
Dramatically expanded decision rights for those on the front lines
Employees who report to customers, not managers
Dynamic resource allocation that maximizes the returns on talent and capital
Individuals at all levels who think like businesspeople rather than product or functional specialists
Functions that serve users, rather than the other way around
A dramatic reduction in bureaucratic busywork
A focus on impact over effort and outcomes over process
Major increases in transparency, collegiality, and trust
A vibrant spirit of entrepreneurship

While there’s no single blueprint for building a post-bureaucratic organization, it’s possible to make some generalizations about what it takes to disrupt the management status quo and supercharge achievement.

Leadership Matters

First, leadership matters. As we’ll see in chapter 16, you don’t have to be the CEO to hack the management model—but an enthusiastic top team can help accelerate progress and ensure change doesn’t stall out. It’s also immensely helpful when senior executives are willing to admit they’re part of the problem, since it’s devilishly hard to dismantle the administrative aristocracy when the dukes and duchesses are unwilling to surrender their prerogatives. On this point, Roche’s senior leaders were worthy exemplars. They de-bureaucratized themselves and willingly diluted their formal authority by merging their roles into larger, collaborative structures.

More specifically, executives exhibited four qualities that are essential to curing bureausclerosis. First, they opened their minds to the possibility that there might be ways of working and organizing that were as different from the bureaucratic status quo, as Netflix is different from the BBC or ChatGPT is different from Google’s search engine.

Second, they were courageous. Executives often suffer from ADD—ambition deficit disorder. When challenged to do something truly new—like flattening the pyramid—their first question is, “Who’s already done it?” Without a well-trodden path in view, they’re unwilling to even make a start. They are, in other words, reluctant to actually lead.

In large organizations it’s not a lack of resources that limits accomplishment but a lack of audacity. Timidity is often defended as prudence—the assumption being that radical change is unavoidably risky. But as we’ve seen, even nervy changes can be de-risked through consultation and experimentation—both of which featured heavily in Roche’s transformation.

Without audacity, there is only mediocrity—tweaks atop tweaks and only meager gains in performance. Pharma International’s senior team understood this, as did their colleagues. Said McKean, “We couldn’t simply make incremental changes to a broken system. We had to go deep and look at things like the purpose of a large organization, question assumptions about the role of management, and understand why startup biotech firms could be far more effective than large ones.”

A third essential but often rare leadership attribute is systemic thinking. As the experiences of both Haier and Roche illustrate, it’s impossible to build a resilient, inspiring organization without reimagining every element of the management model: structure, roles, goal-setting, resource allocation, decision rights, technology platforms, people practices, and more. Put simply, you can’t change one element in an elaborate bureaucratic edifice and hope for a metamorphosis.

Systemic change is, by definition, complex, and presents leaders with a myriad of brow-knitting questions: What’s central and what’s peripheral? How do different systems interconnect? Which changes will provoke a backlash and which won’t? Which moves offer the highest payback, and how should they be sequenced? The answers will be different for every organization, but senior leaders must be willing to spend weeks and months grappling with questions like these.

On this point, it’s worth quoting at length from a companywide memo Anderson wrote shortly after becoming the Roche Pharma CEO:

I knew we had spent ten years trying to improve processes and empower people, and I was still hearing people say they couldn’t get anything done. My first reaction might have been to double-down on process improvement, which would have been completely ineffective and totally demoralizing. Instead, despite having a highly motivated workforce, great values, and huge commitment, I was forced to confront that something was wrong with the whole system.

There’s something wrong with the “whole system” in just about every organization, but rather than opt for a “down to the studs” remodel, most leaders simply rearrange the furniture—contenting themselves with a strategy review, IT update, acquisition, cost-cutting scheme, or some other initiative du jour.

A final requisite is perseverance. Leaders within Genentech and Pharma International understood that reconstructing assumptions, behaviors, roles, processes, and structures takes time. (The leadership reset alone consumed the better part of a year.) For them, building a radically more capable organization was a quest, not a project—and seven years after the launch of Kinesis, the journey continues.

As we’ll see in chapter 16, technology-supported crowdsolving can accelerate progress, but deep change will always take time. Unfortunately, CEOs often struggle to keep their minds focused on a problem for more than a few months, and even then, their attention is fractional. Understanding this, many employees will simply hunker down and wait out the CEO’s short-lived fervor.

Contrast this with Anderson, Ward, Hardy, Magargee, and others. As the months passed, no one could doubt they were all in. Had they been any less committed and persistent, the change process would have stalled out long before it became irreversible.

Leaders Can’t Do It by Themselves

In our experience, senior leaders are often reluctant to admit the solution to a problem is beyond their ken. This lack of humility makes it difficult for them to ask the organization for help. Roche’s approach was different. Anderson and Ward weren’t afraid to say, “We don’t know how to build a post-bureaucratic organization and need lots of help.” In contrast to most change programs, Roche’s quest was highly participative and open-ended. Says Renfree, “I don’t believe in ‘change management,’ and neither does Padraic. You ‘manage’ change when you’re trying to get people to do things they don’t want to. The flip of that is when you have clarity of direction but no idea how to get there. Then you have to make it invitational—you invite the people who are closest to the problem to help solve the problem.”

Roche’s internal change leaders admit the process wasn’t tidy. Says Lowry:

We got chaos for a while. Parts of Pharma were doing no budgeting, other parts were doing very strict budgeting, and these different orgs had to work together. Pharma International changed so much, so fast, people didn’t know who to talk to. Everyone was changing their structures, but no one was using the same terminology.

But she adds:

The chaos wasn’t necessarily a bad thing. Without the chaos, without certain parts of the organization moving very fast, the rest of the organization might have been content to remain laggards. We needed front-runners. There was competition: who can transform the most?

Eighteen months into the effort, the transformation teams at Genentech and Pharma International began the hard work of consolidating nomenclature and frameworks. Networks were built to diffuse new practices and aid the search for common solutions. Some at Roche believe the work of integration should have started earlier. On the other hand, as we argued earlier, innovation is always a numbers game. True breakthroughs are rare, and to find them, you have to generate and test a lot of ideas. Better to converge too late than too early.

Yes, You Can

The most important lesson from Roche’s experience is this: No matter how large or complex a business, it’s possible to roll back bureaucracy and build an organization that’s as daring, resilient, and inventive as the times demand. Investors, customers, and employees should expect no less.

Nearly everyone at Roche Pharma will tell you the last few years have been immensely challenging but also the most exciting and rewarding of their careers. When you’re committed to improving human health, the journey never ends. Says, Witt: “A good analogy is mountain climbing. We are not at the summit and never will be, but we’re very far from base camp. If you believe you’ve reached the summit, you’ll get complacent, but if you never look down, you’ll never take pride in how far you’ve come.”

— 16 —

Start Here

Most of us quietly bear the burden of bureaucracy. We are resigned to the ponderous structures and convoluted processes that put a brake on speed, a headlock on initiative, and lead boots on creativity. Our collective acquiescence is the product of a misconception. Whether new team members or veteran managers, we assume we have neither the warrant nor the capacity to reinvent the way our organizations work.

We’ve bought into the fiction that the management structures and systems that confound and constrain us can be amended only by those at the top of the pyramid, or by their appointees in HR, planning, finance, and legal. The problem is, waiting for bureaucrats to dismantle bureaucracy is like waiting for politicians to put country ahead of party, for social media companies to protect our privacy, or for teenagers to clean their rooms. It may happen, but it’s not the way to bet. If you want to build an organization that’s as capable as the people inside it, you need to take the lead.

The question is, how do you change the system when you don’t own it, and when you’re not a senior vice president, or even a manager? As you might suspect, the first step is to change what’s inside you.

To change your organization, you must first change yourself. All of us must own our part in perpetuating bureaucracy and take corrective action. This means actively committing ourselves to the ideals of human agency, dignity, and growth. This is more than a philosophical orientation; it’s a heartfelt conviction that inspires personal transformation. To varying degrees, bureaucracy makes assholes of us all, but it’s no good to simply bash “the system.” Rather, we have to commit to doing soul repair in the areas where bureaucracy has eaten away at our humanity.

You’ll recall that the transformation at Roche started with a concerted effort by the company’s senior leaders to move beyond command-and-control. This meant working to change deeply engrained habits and shifting their personal focus from scaling the pyramid to maximizing collective achievement.

As we noted earlier, three-quarters of those who work in large organizations believe bureaucratic cunning is the secret to getting ahead. Does this belief represent reality? Is bureaucratic guile really more important than competence? Or is this just an excuse for incompetent people who’ve missed out on a promotion? Either way, what’s problematic is that people believe this to be true and, presumably, act accordingly. If you’re convinced that only skilled infighters get ahead, you’re likely to emulate their tactics—like the athlete who reluctantly concludes that doping is the only way to win a medal.

Bureaucracy, as we’ve noted, is a game. It pits contestants against one another in battles for positional power and the attendant rewards. We have no problem with competition—unless winning comes at the cost of one’s humanity—and organizational effectiveness. Bureaucracy won’t start to crumble until talented and principled people walk off the playing field; when big-hearted heretics decide to forgo bureaucratic wins for the sake of their own integrity and for the sake of those who’ve been diminished by bureaucracy. As Harvard professor Marshall Ganz notes, people who change the world are focused “not [on] winning the game, but changing the rules.”¹

If you’re a bureaucratic black belt, how do you change your reflexive habits? What does detox for bureaucrats look like? Not surprisingly, it looks a lot like other recovery programs—so a good place to start is to borrow an ordinance from Alcoholics Anonymous.

AA’s fourth step calls for a “searching and fearless” moral inventory—for honest, personal stocktaking. In that spirit, anyone who works in an organization needs to ask, “Where have I forfeited my principles and the best interests of my team for bureaucratic wins? How has bureaucracy made me less human?”

Here’s a simple exercise. Reflect on your actions across the last week or month and ask:

DID I SUBTLY UNDERMINE A RIVAL? In a bureaucracy, power is zero-sum. When a slot opens up, only one person gets promoted. In the battle to move ahead, it’s tempting to discount the contributions of others or sow doubts about their integrity or competence.
DID I HOLD ON TO POWER WHEN I SHOULD HAVE SHARED IT? In a formal hierarchy, it’s the people who make the big decisions who get paid the big bucks. To justify their superior status, managers must be seen to be making the tough calls. This creates a disincentive to share authority.
DID I PAD A BUDGET REQUEST OR EXAGGERATE A BUSINESS CASE? Resource allocation in a bureaucracy is inflexible and conservative. Budgets often get set a year in advance, and anything that looks risky gets down-rated. As a result, it’s natural to bid for more resources than you need or overstate the merits of your case.
DID I FAKE ENTHUSIASM FOR ONE OF MY BOSS’S IDEAS? In a bureaucracy, disagreeing with your boss can be a career-limiting move. Hence, individuals often swallow their reservations rather than risk being seen as disloyal.
DID I DISREGARD THE HUMAN COSTS OF A DECISION? If your organization treats people as mere resources, you may be pushed to make decisions that sacrifice trust and relational capital for short-term business gains.
DID I PLAY IT SAFE WHEN I SHOULD HAVE BEEN BOLD? In a bureaucracy, the penalties for screwing up are often bigger than the penalties for sitting on your hands. It’s therefore tempting to defend timidity as prudence.
DID I FAIL TO CHALLENGE A COUNTERPRODUCTIVE POLICY? It’s easier to whine about a stupid rule than to challenge a senior policy maker. Civil disobedience is never the safest choice, but systems don’t change until people take a stand.
DID I DO LESS THAN I COULD TO FOSTER THE GROWTH OF THOSE WHO WORK FOR ME? There’s often an assumption that “commodity jobs” are filled with “commodity people.” As a result, it’s easy to overlook opportunities to nurture the growth of employees doing mundane jobs.
DID I FAIL TO CREATE TIME AND SPACE FOR INNOVATION OR MISS AN OPPORTUNITY TO BACK A PROMISING IDEA? There’s not much glory in being an innovation mentor. It takes time and often ends in failure. It’s easier to keep your head down than to champion a new idea, but the result is inertia and incrementalism.
DID I FAVOR MY TEAM AT THE EXPENSE OF THE BUSINESS OVERALL? Bureaucracies offer few rewards for sharing scarce resources with other units. Behaving parochially often produces the best personal outcomes, even when it’s suboptimal for the organization at large.
DID I UNFAIRLY DEFLECT BLAME OR CLAIM CREDIT? In a bureaucracy, performance assessments are typically focused on individuals rather than teams. The goal is to be Teflon when the shit hits the fan and Velcro when plaudits are being handed out. This behavior distorts reputations and misallocates rewards, but it’s the way to win in an individualistic organization.
DID I SACRIFICE MY VALUES FOR EXPEDIENCY? Bureaucracies value results above all else. If you exceed your targets, no one’s likely to ask what shortcuts you took. Over time, the bias for outcomes over ethics desensitizes an organization to the moral consequences of its actions.

Set aside some time and work through these questions. Get a journal or create a spreadsheet. Can you recall times when you behaved more like a bureaucrat rather than a human being? What was the trigger? How might you reduce the chances of being triggered in the future? In our experience, there’s value in making this a weekly exercise. If you approach this task seriously, your colleagues will soon notice the change. You will become more generous, considerate, and approachable, and consequently, more effective.

Transformation is never a solo endeavor. You’re going to need accountability partners. Reach out to three or four trusted peers and talk to them about your desire to become a post-bureaucratic leader. Share your personal inventory with them and invite them to do the same. Brainstorm ways of living bureaucracy-free, and arrange regular check-ins to share progress.

When you’re ready, circulate the detox questions to the people who work for you. Ask them, “When have you seen me acting like a bureaucrat rather than a mentor or an advocate? What should I have done differently?” Ask people to write down their feedback and bring it to a staff meeting. Pass the comments around and have each person share a piece of feedback contributed by one of their colleagues. This will keep the process anonymous and give everyone the chance to be heard. Make this a monthly or quarterly exercise. Over time, team members will gain the courage to call you out when they see you slipping back into bureaucratic habits.

As you become more comfortable in your post-bureaucratic skin, you and your support group can start to share your experiences more broadly. Invite more of your peers to join the discussion, write a blog, and talk about what you’ve learned. Most of your colleagues will applaud you for your integrity and authenticity—“I’m Karl, and I’m a recovering bureaucrat.” By taking accountability for your share of the problem, you encourage others to do the same. Moral courage is contagious.

There’s an adage, variously attributed to Winston Churchill, Marshall McLuhan, and Father John Culkin, that “We shape our tools and thereafter our tools shape us.” This is true of every human invention—from cuneiform tablets to smartphones, from the wheel to self-driving vehicles, and from algebra to machine learning. A century and a half ago, human beings hammered out the basic structures of industrial-scale bureaucracy, and ever since, bureaucracy has been hammering the humanity out of us. But we’re not helpless. We can push back when we feel our souls are being beaten into shapes that make us less than fully human. That’s the first step on the journey to humanocracy.

The pursuit of humanocracy is inherently sacrificial. Mary Parker Follett, the early-twentieth-century management guru, argued that “leadership is not defined by the exercise of power but by the capacity to increase the sense of power among those led.” As a rebuke to bureaucratic power mongers, this is nearly as radical as Christ’s proclamation that the first shall be last. It’s here we find the beating heart of humanocracy—in the selfless desire to help others accomplish more than they would have thought possible.

This is the ethos behind Zhang Ruimin’s vision of Haier as a squadron of dragons. It’s what prompts a Nucor plant manager to proclaim that “we value every single job, every single position, every single person, but being a manager is the least noble job.” It’s what motivated Jos de Blok of Buurtzorg to build a health care provider that puts “humanity above bureaucracy.”

If you’re a manager of any sort, you can’t empower others without surrendering some of your own authority. You have to exchange the currency of power—perks, decision rights, and sanctions—for new coinage: wisdom, generosity, and mentorship.

A good first step is to ask those who work for you, “What am I doing that feels like interference or adds no value?” Fearing repercussions, they may at first be hesitant to give direct feedback. If so, be patient. It may take several tries before they trust you enough to unload. Next, ask: “What am I doing that you could do better?”

There are many ways you can begin syndicating the work of managing to your team. Here are a few.

Setting Direction

Ask your team to define its shared mission. Give them time to brainstorm answers to questions like, “What’s our value proposition?” “How should we measure the success of our team?” and “What are the most important things we could do to increase our impact?”
Hold a monthly half-day session to discuss business unit or corporate-level strategy. Ask your colleagues to identify what they could do to support the overall mission.
If your company has a formal planning process, ask your team to take the lead in defining priorities, setting milestones, and developing budgets.

Building Skills

Ask team members to identify areas where they would like to build new skills—in creative problem-solving, financial analysis, design thinking, or interpersonal relationships.
Challenge team members to develop personal development plans, and then back these with a small budget.
Support team members throughout the year in acquiring new skills. This could mean giving people time to take online classes, setting up job rotations, or working to become a better mentor.

Coordinating with Other Teams and Functions

Send team members to senior-level meetings in your place. Be sure they have the proper context and the authority to speak on the team’s behalf.
Give team members the time and opportunity to liaise with other units and with functions such as quality, HR, finance, and IT. Delegate the responsibility for managing cross-unit coordination.
Facilitate job rotations so employees can better understand the critical linkages that need to be managed.

Organizing Work

Give your team the authority to reassign work roles with the goal of increasing engagement and effectiveness.
Invite team members to craft their ideal job descriptions. Set aside time to review and iterate these as a team.
Ask the team to take the lead in setting daily or weekly goals and assessing progress.

Driving Team Results

Have the team organize and host weekly or monthly conversations about unit performance. Let team members create the agenda, assemble the relevant information, identify areas for improvement, and develop action plans.
Challenge team members to develop and test improvement ideas, and ensure they have the time and budget to do so.
Host monthly innovation jams—daylong sessions where your team gets the chance to tackle bigger, more strategic problems.

Managing Performance

Ask team members whether they believe they have the right performance targets. If not, ask them to suggest alternatives.
Facilitate peer-to-peer feedback. Hold a session in which every team member is given constructive feedback by their colleagues.
Invite team members to develop a monthly survey for monitoring the health of the team. The questionnaire could probe engagement, effectiveness, collaboration, and value-added.

Sharing Information

Host a quarterly discussion that gives team members the chance to interact directly with internal and external customers they otherwise wouldn’t meet. Focus the session on identifying and solving unmet needs.
Ask the team if there’s additional financial or operational information that would be useful to them, and do your best to provide it.
Help frontline team members better understand the strategic measures and screens that business unit or corporate leaders use to judge organizational effectiveness.

As you begin the work of distributing authority, invite a few peers to follow suit. Bring your teams together periodically to share learning. Never believe you have to fight bureaucracy single-handedly.

You can’t demolish bureaucracy with a giant wrecking ball or a stick of dynamite. Instead, it must be dismantled, brick by brick. Detox and delegation are the first steps, but then what? What can you do to change the system without putting your career at risk? You can start by calling attention to bureaucratic lunacies—to rules, processes, and policies that are so mind-numbingly stupid they defy common sense. The beauty of targeting these inanities is that you’re likely to find allies at every level of the organization.

Dr. Melinda Ashton, a pediatrician and chief quality officer at Hawaii Pacific Health (HPH), found herself leading just such a crusade in 2017. At HPH, a nonprofit health care system with seven thousand staff members across four hospitals, the symptoms of bureaucratic bloat were everywhere. Ashton watched with growing concern as her colleagues spent more time to wrestling with paperwork than tending to patients. The digital revolution, meant to streamline health care, had instead created a labyrinth of electronic forms and click-heavy processes that were driving medical professionals to distraction.

The tipping point came when a group of nurses, fed up with the daily grind of pointless documentation, decided to quantify their frustration. They calculated that they were spending a staggering 1,700 hours per month—equivalent to about ten full-time positions—simply recording that they had completed hourly rounds. This revelation was the bureaucratic equivalent of finding a tumor on an X-ray, and Ashton knew it was time for a “burectomy.”

She branded her initiative GROSS—get rid of stupid stuff. The blunt name raised eyebrows, but Ashton insisted the problem be honestly acknowledged. In October 2017, GROSS launched across HPH’s four hospitals, with all staff members invited to identify anything in the electronic health records (EHR) system that was poorly designed, unnecessary, or nonsensical. Submissions were to be made using a simple form.

A form used in a get-rid-of-stupid-stuff initiative for submitting ideas for eliminating unnecessary tasks in the electronic health records system.

To create buzz, Ashton toured all HPH facilities, sharing vivid examples of administrative insanity and exhorting her colleagues to join the campaign. The initiative quickly gained traction, with two hundred suggestions flooding in during the first year. Many nominations targeted patently absurd tasks. For instance, nurses in adolescent oncology had been dutifully documenting “cord care” for over a decade—despite their patients not having umbilical cords. Another nomination highlighted how neonatal nurses had to check three separate boxes every time they changed a diaper, indicating whether the infant was incontinent of urine, stool, or both.

To manage the influx of ideas, Ashton’s team developed a simple but effective triage mechanism. Simple fixes were handled directly by two nursing leaders who, along with Ashton, comprised the GROSS team. More complex issues were routed to existing quality and EHR work groups. Representing different areas of the hospital, the teams reviewed and prioritized suggestions. When an idea was approved, the submitter was invited to help with the redesign.

The initiative’s impact extended beyond just eliminating unnecessary tasks. It empowered frontline staff to challenge inefficient systems and processes, fostering a culture of continuous improvement. As Ashton noted, “There is stupid stuff all around us, and although many of the nominations we receive aren’t for big changes, the small wins that come from acknowledging and improving our daily work do matter.”²

In its second year, GROSS generated three hundred proposals, ranging from the termination of pointless activities to complex process redesigns. In addition to saving thousands of hours across HPH, the GROSS initiative also impacted the culture—principally by empowering frontline team members to challenge the systems and processes that made their work needlessly difficult or inefficient.

In the face of entrenched norms and processes, it’s easy to succumb to a sense of helplessness and to accept the status quo as an immovable reality. Yet, Ashton’s example reminds us that with simple and smart process improvements, we can challenge and reshape the systems that bind us—and that there are plenty of folks around you eager to help. Indeed, the success of GROSS inspired other health care systems to follow suit. The Cleveland Clinic and Mount Sinai Health System launched their own versions, and the American Medical Association now offers a GROSS module as part of its practice improvement program.

While it’s good to start by picking the low-hanging fruit, at some point, you’ll have to overhaul the core processes by which your company is run—planning, resource allocation, project management, product development, performance assessment, promotion, compensation, hiring, training, and all the rest. Each of these processes must be rebuilt atop the principles of humanocracy.

Complex systems, like a human organism or a vibrant city, aren’t built top down. They have to be assembled bottom up through trial and error. No small group of senior staffers or consultants has the imagination or wisdom to design a fully functioning post-bureaucratic Arcadia. This might be different if dozens of companies had already made the shift to humanocracy, but that’s not the case. There’s no step-by-step manual for building a humanocracy. It’s not like migrating IT systems to the cloud, rolling out a self-serve HR portal, or rebranding project managers as “scrum masters.”

By definition, humanocracy is a radical departure from the status quo. Yet, in building it, we have to be careful not to throw a giant wrench into the clanking machinery of bureaucracy. What’s required is an approach that is both revolutionary and evolutionary; that’s radical in its aspirations yet pragmatic in its approach. In practice, this means running lots of experiments—this is how human beings test whacky ideas without blowing things up. Before sending an astronaut into space, we launch a monkey or two. Before putting a new drug on the market, we test it on rats. Luckily, in the case of humanocracy, no animal testing is required—unless, of course, you count us.

Solving a complex and novel challenge—like carbon capture or autonomous vehicles—requires lots of experimentation. Building human-centric organizations is no different.

If you’re a team leader, middle manager, or even a VP, it’s easy to believe that someone else should take the lead in busting bureaucracy. But what if they don’t? The good news is that anyone can be a management renegade, and every team can be a laboratory.

The secret is to think like a hacker—not the ones who steal your credit card data, but the ones who post helpful bits of code on GitHub. Hackers don’t wait to be asked. They don’t think, “That’s someone else’s problem.” Instead, they take the initiative. They act as if they have permission, whether they do or not. The term “hacker” first came to prominence in the 1990s as a label for renegade coders who were committed to undermining the hegemony of Microsoft and other software giants by producing free, community-authored software. Linus Torvalds, the world’s most famous hacker, released the first version of Linux in 1991 and invited other hackers to make it better. Today, Linux encompasses more than 26 million lines of code, assembled by more than sixteen thousand contributors.

Could rebel hackers have the same dramatic impact on management they’ve had on software? Yep—but only if they sign up to the hacker ethos. Eric Raymond, author of The Cathedral and the Bazaar, the classic treatise on open-source software, identifies five beliefs that define a hacker.³

The world is full of fascinating problems to be solved.

To be a hacker you have to get a basic thrill from solving problems, sharpening your skills, and exercising your intelligence. You also have to develop a kind of faith in your own capacity to learn—a belief that even though you may not know all of what you need to solve a problem, if you tackle just a piece of it and learn from that, you’ll learn enough to solve the next piece and so on, until you’re done.

No problem should ever have to be solved twice.

To behave like a hacker, you have to believe that the thinking time of other hackers is precious—so much so that it’s almost a moral duty for you to share information, solve problems, and then give the solutions away just so other hackers can solve new problems instead of having to perpetually readdress old ones.

Boredom and drudgery [and bureaucracy] are evil.

Hackers (and creative people in general) should never be bored or have to drudge at stupid repetitive work, because when that happens it means they aren’t doing what only they can do—solve new problems. This wastefulness hurts everybody. Therefore boredom and drudgery are not just unpleasant but actually evil.

Freedom is good.

Hackers are naturally anti-authoritarian. Anyone who can give you orders can stop you from solving whatever problem you’re being fascinated by—and, given the way authoritarian minds work, will generally find some appallingly stupid reason to do so. So the authoritarian attitude has to be fought wherever you find it, lest it smother you and other hackers.

Attitude is no substitute for competence.

To be a hacker, you have to develop some of these attitudes. But copping an attitude alone won’t make you a hacker, any more than it will make you a champion athlete or a rock star. Becoming a hacker will take intelligence, practice, dedication, and hard work. Therefore, you have to learn to distrust attitude and respect competence of every kind.

If this is your creed, congratulations—you’re a hacker. But what, exactly, are you going to hack, and how? What does a management hack look like? Let’s take a few examples.

The Hawthorne Experiments

The most famous management hack was conducted in the 1920s at the Hawthorne Works plant of Western Electric, at the time the manufacturing arm of AT&T. The study was organized by the National Research Council with the support of the Illuminating Engineering Society, a body set up to encourage companies to invest in artificial lighting. The initial experiment, designed to test the hypothesis that better task lighting would raise output, was conducted in two test rooms. In the first room, the illumination level was gradually increased, while in the second, it was decreased. Surprisingly, output in both test rooms increased relative to other areas of the plant. It seemed that the simple act of paying attention to people improved their performance. This unexpected result brought a team of Harvard researchers to the plant, led by Elton Mayo. Over the next several years, they conducted additional experiments to better understand workplace motivation. This research laid the foundation for the human relations movement and the first halting efforts to humanize work.

Now let’s look at more recent hacks.

Crowdfunding on the Cheap

At one of our clients, a young e-commerce team inspired by the promise of market-based decision-making built an experiment to test the feasibility of internal crowdfunding. Team members believed that promising ideas often failed to get a hearing when they didn’t jibe with existing priorities or came from junior colleagues. Having studied sites like Kickstarter and Indiegogo, the team wondered what would happen if every employee was given $1,000 a year to invest in peer-sourced projects. While the hypothesis was simple—crowdfunding will help advance ideas that otherwise wouldn’t get resourced—the question of how to test the concept was problematic. Giving every employee $1,000 would cost millions of dollars, and building an online marketplace would require the support of IT, finance, and HR.

The easier path, the team concluded, would be to run a small, localized experiment. After a bit of lobbying, the company’s head of e-commerce agreed to a short trial. Everyone in the unit—about sixty individuals—was given $150 each to invest and invited to post one-page proposals on an extra-large whiteboard—a scrappy alternative to a more costly online platform. Once an idea went up, employees could append comments and investment commitments using sticky notes. Each idea had a funding progress bar, which was updated daily. Ten ideas were proffered during the two-week test, and six met their funding targets. Most of the winning ideas were productivity boosters like projectors for meeting rooms and repositories of commonly used PowerPoint templates.

This quick and dirty experiment validated the team’s hypothesis and pushed the company into building a robust online funding platform—a move that is unlikely to have happened had the young team not given itself permission to hack the resource allocation process.

Empowering Corporate Travelers

How would you test the hypothesis that transparency beats petty rules as a means of control? That’s the question a group of midlevel managers in a global pharma company asked themselves during a workshop led by one of our colleagues.

The first step was to look for a Byzantine policy that was widely regarded as a pain in the ass. As you might suspect, there were plenty of candidates, but the company’s irksome travel policies seemed a particularly juicy target. In an attempt to rein in a corporate travel budget of roughly $500 million per year, the finance function had developed a maze of niggling rules. There were strict guidelines on who could travel, for what purpose, on which airlines, and in which class of service. Hotel and rental-car choices were similarly constrained. There were also tight limits on food and beverage spending. As one manager groused, “I’m responsible for $70 million in sales, but when I’m traveling have to check to see whether I’ll get reimbursed for a $3 cup of coffee.”

The experiment, modeled on the company’s methodology for drug trials, involved two pairs of treatment and control groups—one pair at head office and the other in an operating unit. The experiment was designed to test the hypothesis that increased autonomy and transparency would (1) simplify travel planning, (2) reduce frustration, and (3) not raise costs. Fifty people were recruited for each group, for a sample of two hundred individuals. The treatment groups were told that for the next ninety days, they’d be able to make their own travel arrangements with no pre-trip authorizations or post-trip audits. The catch: all their travel expenses would be posted online for everyone to see.

At the end of the trial, the team analyzed the results. A large majority of those in the two treatment groups—74 percent and 87 percent—reported that the new process was less time-consuming than the old one. What was more surprising was that 45 percent of the participants said the simple rule change had increased their overall job satisfaction. The researchers had expected travel costs to edge up slightly, and were prepared to argue this was a price worth paying for a more time-efficient process, but in the end, travel costs fell for the treatment groups while remaining essentially unchanged for the control groups.⁴

This simple experiment offers a lesson in how to challenge a boneheaded policy: instead of bitching about it, hack it and collect some data.

To come up with your own hack, involve your team in a daylong “management jam.” Here’s how.

First, diagnose. A week or two in advance, invite your colleagues to fill out the bureaucratic mass index (BMI). This will help identify what they see are the primary costs to bureaucracy run amuck. (Go to www.humanocracy.com/BMI, or see appendix A.)

You can also ask them to identify the obstacles they encounter at work that frustrate achievement. Specifically, what do you experience in your job that …

Blurs or reduces accountability
Slows you down or wastes time
Makes you less effective
Doesn’t serve the interests of customers
Frustrates bold thinking
Feels disempowering
Impedes collaboration
Reduces flexibility
Rewards politicking
Erodes trust and transparency
Makes you feel undervalued
Seems unfair

As part of Roche’s transformation, the leadership team in one unit with fifteen hundred employees conducted more than ninety interviews with four to five employees at a time, aimed at uncovering things that were preventing teams from doing their best work. This proved invaluable in highlighting systems and processes that needed to be hacked.

Second, prioritize. The next step is to bring your team together physically and share the results of the BMI survey or diagnostic questionnaire. Give individuals an hour or two to reflect on the findings and share specific experiences. Once they’ve thoroughly discussed the findings, ask them to prioritize the bureaucratic impediments they feel are most urgent to address.

Third, unpack. Once you have three or four specific bureaucratic ailments in focus, ask your colleagues to identify the specific systems, processes, or rules that are at the root of their frustrations. Try to be as specific as possible, and list the most egregious elements on a whiteboard. Next, try to identify the specific outcomes these systems, processes, and rules were designed to achieve, even though they may have failed or produced a host of unintended and costly consequences. The original purpose of even the most noisome bureaucratic practices may have been valid—like improving control, alignment or efficiency. It’s important to note the intended goal, and then, when brainstorming hacks, ask if there are ways of achieving that goal through non-bureaucratic means.

Fourth, pick a principle. Ask your colleagues which of the post-bureaucratic principles—ownership, markets, meritocracy, community, openness, experimentation, and paradox—might be useful in addressing the malady. For example, if the problem is a lack of collaboration, the notion of community might be helpful. If the grievance is a result of disempowerment, then ownership might be the right principle. Or, if destructive politicking is causing frustration, then meritocracy could be the right choice. Go around the table, and once everyone’s weighed in, pick one or two principles that would be most helpful in redressing the bureaucratic shortcoming.

Fifth, brainstorm. After breaking for lunch, move on to brainstorming solutions. Ask each team member to spend thirty minutes generating a handful of potential hacks. Each hack should be summarized on a sticky note and describe a specific change that would help to reduce the costs of bureausclerosis and overcome impediments to achievement.

Once everyone has generated four or five hacks, do a share-out. Each team member should read their hacks and then take questions from the group. Once all the hacks have been given a hearing, ask the team to prioritize two to three hacks for further development and to self-organize around their preferred hack. Once in groups, they should spend the next couple of hours working up an experimental design.

Important questions at this stage will include:

What’s our proposed solution, in a single sentence?
What are the key components of our hack?
What hypotheses do we need to test?
Who will participate in the experiment?
What data will we collect?
How will we ensure we get meaningful results?
How much time will be needed to run the experiment, and what resources will be required?

Answers should be captured in a simple, shareable template like the one in table 16-1, which summarizes the travel experiment we described earlier. After a break, reassemble the group and spend a couple of hours pressure-testing the proposed designs: Are we clear about what we’re proposing and why we think it will produce positive results? Are there potential downsides we’ve overlooked? Are there any legal or regulatory constraints we haven’t considered? The goal is to make each hack as robust as possible—and to ensure that potential questions and objections get addressed before the hacks are shared more broadly.

TABLE 16-1

Experimental design template—self-managed travel approvals

Elevator pitch
We spend over $500 million in travel costs each year, but that doesn’t count the time required to obtain approvals for trips and expense reimbursement. The process is burdensome and undercuts our aspiration to treat each employee as a business owner. We envision a new process for managing expenses that relies on personal responsibility and peer control.
Proposed solution
The primary components of our solution are:
• Autonomy: Give employees the ability to “self-authorize” business travel and decide on appropriate expense levels.
• Transparency: Share all travel expense data on an internal website (“sunshine is the best disinfectant”).
Hypotheses	Target groups
H1: Most employees will regard self-authorizing travel as simpler and more in line with our values.	A select group of employees from two locations (approximately a hundred people per location).
H2: Some employees will find the increased personal discretion and trust to be motivating.
H3: Aggregate travel expenses won’t substantially increase.
Test type	Measurement strategy
In each location, we will evenly divide the group into a control group and treatment group:	• We will conduct a survey with the treatment groups at the beginning and end of the experiment. The questions will be focused on hypotheses 1 and 2.
• The control group will see no change in travel policy.	• For hypothesis 3, we will track individual and overall expenses for the treatment and control groups throughout the test.
• The treatment group will be asked to participate in a low-key test of a new expense management process.
Duration	Resources required
Three months—August to October.	• Support from department managers willing to host the experiment.
	• Access to expense data from the finance function.
	• Support from IT in setting up an intranet page for sharing granular expense data.

Sixth, test, improve, and test again. As you move to testing, you’ll want to be thoughtful about minimizing risks. A few tips:

Keep it simple. Test one or two hypotheses at a time, starting with the most critical.
Use volunteers. Don’t compel anyone to take part in your experiment.
Make it fun. Think of ways to gamify the experience.
Start in your own backyard. That will minimize the number of permissions you need and the risk that someone tells you to stop.
Run the new in parallel with the old. Don’t blow up the existing process until you’ve validated the new one.
Be clear that this is an experiment, not a “pilot.” There’s a nontrivial chance that the hack won’t work, and a certainty that even if it does, further refinements will be needed.
Stay loyal to the problem. Don’t fall in love with your solution. If your hack doesn’t work, go back to the drawing board.

With no more than a day’s work, your team ought to be able to generate two or three promising hacks. You don’t have to get a top-level sign-off, anticipate every pitfall, work out the entire solution in advance, or convince thousands of individuals to change the way they work. Remember the hacker ethos—start where you are, change what you can, rinse, repeat. (For more help building your hack, visit www.humanocracy.com/hack.) The point is each of us has agency. Ralph Waldo Emerson once wrote, “There are always two parties, the party of the past and the party of the future: the establishment and the movement.” Everyone gets to choose. You can complain about all the bureaucratic bullshit, or pick up a shovel.

Still, the idea that you and your team can hack the system may seem dubious: “Sure, we can run a local experiment, but what’s really going to change? Will anyone notice? This seems like battling a five-alarm fire with a garden hose.” We understand your skepticism, but hang with us. In the final chapter, we’re going to show you how to scale up.

— 17 —

Scale It Up

De-bureaucratizing yourself, giving away power, running local experiments—these are good places to start, but they’re not enough. Ultimately, you need to mobilize your entire organization around the challenge of building a humanocracy. To do that, you’re going to need to think like an activist.

It’s activists, not bureaucrats, who change the world—individuals like Malala Yousafzai, the Nobel Prize–winning Pakistani activist who, after surviving an assassination attempt by the Taliban at the age of fifteen, launched a global campaign to expand education opportunities for girls. If a teenager can launch a powerful case, why not you?

Even if you’re willing, you may be wondering, what does it take for a single individual to catalyze systemwide change? In our experience, there are five personal attributes that transform lone individuals to successful activists.

CREDIBILITY: In most organizations, there’s a yawning gap between rhetoric and reality around corporate values. People are justifiably skeptical of high-minded speechifying. So act before you exhort. Work on your own bureaucratic recovery, launch a few local experiments, and then work to enroll others.

COURAGE: In the book A Game of Thrones, Brandon Stark asks his father, “Can a man still be brave if he’s afraid?” The answer: “That’s the only time a man can be brave.” It takes guts to stand up to bureaucracy, but remember that in life, our accomplishments are proportionate to our courage.

CONTRARIAN THINKING: If a problem’s been around for a while, it probably can’t be solved with conventional thinking. Seek out the positive deviants, like Nucor and Haier. Borrow ideas from other domains, like biology, startups, and crowdsourcing. Rigorously challenge your deepest assumptions. Do this, and you’ll increase the odds of finding a novel solution.

COMPASSION: People aren’t merely skeptical; they’re cynical—and with good reason. Everyone’s fighting their own corner and looking out for their own interests. When asked to help, most people will ask, “What’s in it for me?” To jump this hurdle, you have to put others first. When colleagues see you working to understand their needs, when you help them craft their experiments, and ensure they get the credit, they’ll start to trust you. When your compassion shines through, people will take risks with you and pick you up when you fall.

CONNECTION: Building a community is perhaps the most important thing an activist can do. This is the ultimate multiplier of individual effort. Employees eager to try something new often make the mistake of asking their boss for permission. Usually they get shot down or win only grudging support. This isn’t entirely the manager’s fault. A priori, it’s hard to know whether an untested idea is brilliant or batty. Since great ideas are rare, the default setting for most managers is to say no. So don’t go up—go sideways. Talk to your peers. Find a few colleagues who are willing to help you build and run an experiment. It’s easy for a manager to say no to a lone supplicant, but much harder to turn aside a small band of partisans who are passionate about making things better and have already made a start.

We like the word “hacktivist,” even though it’s a clumsy mash-up. A hacker builds things. An activist marshals a coalition. A hacktivist does both—mobilizing lots of people to try new things.

Consider the story of Bertrand Ballarin, who became an unlikely hacktivist at global tire giant Michelin. In early 2012, Ballarin was nearing the end of his tour as manager of Michelin’s Shanghai plant. In a company known for long tenures, Ballarin was an exception—he had spent three decades as an officer in the French Army before joining Michelin in 2003. Nevertheless, he soon developed a reputation for rescuing underperforming factories by giving employees the purpose, skills, and autonomy to turn things around.

Ballarin had been invited to a workshop hosted by Jean-Michel Guillon, then head of Michelin’s personnel department. Guillon argued that the traditional approach of squeezing productivity gains through standardized, regimented manufacturing processes was yielding diminishing returns and crowding out local initiative. During the session, Ballarin proved to be a powerful advocate for empowerment, describing how he had used self-management to achieve exceptional performance gains.

A few weeks after the workshop, Guillon invited Ballarin to join the personnel department as head of industrial relations. With encouragement from Guillon, the former soldier sketched out a bold experiment in decentralization christened Autonomous Management of Performance and Progress (MAPP), or responsabilisation, for short—a French word that encompasses notions of both autonomy and accountability. Ballarin’s plan contained seven key elements:

VOLUNTARY PARTICIPATION: Production supervisors and teams would be asked to volunteer as MAPP “demonstrators.”
FRONTLINE LEADERSHIP: Teams would experiment with new ways of operating autonomously so they’d be able to make decisions without intervention from supervisors or support functions.
REPRESENTATIVE TEAMS: Demonstrators would be drawn from average-performing teams across multiple countries to ensure generalizable results.
FOCUSED EFFORTS: Teams would focus on one or two key areas in which to expand their autonomy—such as performance management, role of team leader, staffing and attendance, relationships with other teams, recruitment, management protocols and standards, and team cohesion.
YEARLONG EXPERIMENTS: Teams would have a full twelve-month performance cycle to push the boundaries of empowerment.
EXPERIMENTINGAND“MAKING PLAN”: Demonstrators would be expected to deliver on their commitments while testing new approaches.
NO MANAGEMENT INTERFERENCE: Plant managers and support staff would offer support, but only if asked by the teams.

With this framework in place, Ballarin reached out to plant managers for help in finding volunteers. By the end of September, thirty-eight teams from seventeen plants had signed on. Collectively, they encompassed fifteen hundred people, or a little more than 1 percent of Michelin’s total head count.

The next few months were hectic. Ballarin journeyed to each plant for kickoff meetings, reminding plant managers that “the whole point of the exercise is for teams to discover the solution. The only help they need is for you to encourage them to be bolder and more creative.” Ballarin walked each demonstrator team through a short document explaining the mission of expanding frontline autonomy and accountability.

The demonstrator teams kicked off in January 2013. The experience of Olivier Duplain, a supervisor in a tractor tire plant, was typical. Standing in front of his forty-person team, Duplain introduced the idea of responsabilisation with a question: “What do I do today that you can imagine taking over tomorrow?” As he recounts,

I got a very interesting and surprising answer: “We can’t answer your question, Olivier, because we’re not quite sure what you do. We see you in the morning for a few hours as we go through equipment checks and review individual tasks. But by mid-morning you leave us and go somewhere else. Perhaps you spend a lot of time in the cafe?”

Olivier realized the disconnect went both ways. Just as his team was unsure about his job, he was unfamiliar with the intricacies of their work. So they struck a deal: Olivier would work a few shifts side-by-side with the team, and then three of his subordinates, one from each shift, would shadow him for a week. They would identify areas where they could expand their responsibilities. The team eventually took over shift scheduling and production planning, making decisions about shift assignments and daily production targets that were previously handled by supervisors or planning staff.

The demonstrator team at Michelin’s tire-producing plant in Homburg, Germany, was responsible for producing tire components such as steel cord and bead wire. Having struggled with workflow issues, the team chose to focus on improving internal coordination with their downstream counterparts. A breakthrough came when the demonstrator team proposed conducting fifteen-minute meetings with the assembly team at the beginning and end of each shift. This simple mechanism immediately smoothed out the production flow, eliminating two hours’ worth of downtime per day.

As the year progressed, Ballarin connected the teams through monthly conference calls and an online platform called MAPPEDIA. In late 2013, he organized a three-day workshop where teams shared video summaries of their experiments and recorded the most successful on 120 cards. These were then clustered into six categories: developing a shared mission and objectives, organizing work, developing competencies, driving innovation, coordinating with others, and managing performance. In the following months, this framework and the repository of new practices would become an essential resource for other teams working to expand their autonomy.

The impact of responsabilisation was remarkable. By the end of the year, the demonstrator at Homburg had achieved a steep decline in its defect rate, from 7 to 1.5 percent. Productivity increased by 10 percent, and absenteeism dropped from 5 percent to virtually zero. Demonstrator projects in other plants reported similar gains. Engagement also soared. For the first time in their careers, team members felt as if they were managing their own business.

In December 2013, Ballarin presented the results to Michelin’s senior leadership. He shared some of the demonstrator videos, outlined the performance gains, and requested permission to scale up the most successful experiments to plant level. He proposed giving the volunteer plants a five-year runway, given the greater complexity and scale of the envisioned change.

Mindful he was challenging a century of management orthodoxy, Ballarin urged his audience to think big. “Why,” he asked, “couldn’t Michelin be the Toyota of the twenty-first century—a company that pioneered a new management model by enlarging the freedom and accountability of every employee?”

The executives were captivated. Florent Ménégaux, who would later become CEO, exclaimed, “We have a chance to be the company we’ve always aspired to be.” Ballarin had hoped to scale up in two factories, but left the meeting with approval to scale up in six. Over the next six years, the resulting transformation would deliver half a billion dollars in manufacturing improvements and redefine the work of tens of thousands of employees across the company.

Ballarin’s responsabilisation initiative offers important lessons for anyone eager to create a humanocracy groundswell:

People will embrace change when it makes work more fulfilling.
Getting change started doesn’t have to be complicated, costly, or risky.
Change is easier with volunteers rather than conscripts.
Don’t ask for special privileges, like easier financial targets.
To maximize learning, focus on the “what,” not the “how.”
To make your initiative difficult to kill, go directly to frontline employees and keep the initial experiments small.
Stay under the radar until you have irrefutable evidence of success.
To build an unstoppable movement, connect teams together.
Remember you have a choice: moan or mobilize.

To activate a pro-human movement in your organization, start by recruiting a few colleagues who will help you craft a simple campaign—like the seven components of Ballarin’s plan. Your coconspirators don’t have to be senior leaders, but they should represent a cross-section of your business or the organization at large.

At the beginning, the goal is to create awareness and positive energy. Like Ballarin, you should put together a short document or video explaining the challenge and inviting others to join you.

Here are some options for conversation starters.

BASELINING: Post a link to the bureaucratic mass index (BMI) survey (go to www.humanocracy.com/BMI, or see appendix A), and ask people to help you document how bureaucracy is disabling your organization. Share the results once you have a good sample size.

DIAGNOSIS: Put up an online discussion board and ask colleagues to identify the bureaucratic bottlenecks—policies and processes—that prevent your organization from being more adaptable, innovative, and inspiring. Invite them to provide short, one-paragraph illustrations of how bureaucracy has sabotaged change, innovation, and initiative.

HABITS: Put up the list of bureaucratic behaviors that we listed in chapter 16. Ask people to pick a behavior and describe the bureaucratic systems or processes that elicit and reward that behavior. Ask people to make a specific pledge to live “bureaucracy-free.”

QUICK WINS: Invite people to nominate a “stupid rule” or needless bureaucratic impediment that makes their everyday job harder than it needs to be. Ask them to suggest a remedy.

MINI-HACKS: Post one of the humanocracy principles along with a short description. Invite people to offer a tweetable idea for putting that principle into practice. Run this for a week, then move on to another principle. Ask people to “like” their favorite mini-hacks and then challenge them to turn them into experiments.

It shouldn’t be hard to get your colleagues energized. Most people have had a bellyful of bureaucracy but haven’t had a platform where they can vent, much less offer a solution. A physician friend of ours who works for a large health care group told us that when she called IT for help in hooking up an unused printer, she was advised that installing an additional printer would put her clinic in violation of a policy that stipulated a maximum of one printer per eight physicians. Her only recourse, she was told, was to petition the printer committee for a policy exception. Given the chance, you can bet she’d have been happy to challenge such idiocy online.

Stories like this are legion, but seldom lead to action. Employees assume they’re powerless to change things, so they chafe silently under the yoke of bureaucracy. There’s no forum where they can speak up and no way of aggregating their collective frustration. As a result, leaders assume bureaucracy is far less pervasive and destructive than it actually is. You can change that. You can get a conversation going about the idiocy and inhumanity of bureaucracy and what to do about it. The energy you unleash will help your organization to rediscover its heart.

Once you’ve roused people, then what? How do you harness the frustration? How do you gin up dozens, if not hundreds, of hacks? How do you move forward on multiple dimensions simultaneously? While Ballarin’s slow-and-steady approach at Michelin has much to recommend it, we believe it’s possible to move faster. When you bring people together online and give them the right tools, you can dramatically increase the pace and scope of management innovation. To see how, we’ll share a brief case study of a multibillion-dollar consumer goods company that invited more than four thousand employees to reimagine the company’s organization model.

The company had spent several years trying to reverse revenue and margin declines, with little success. In an initial conversation with the executive team, we asked whether the roots of the problem might lie with the company’s conservative, top-down management practices. Those around the table admitted there was little in the organization that supported continuous, rule-shredding innovation, and much that worked against it. What could be done, they asked, to build a pro-innovation environment? How can we redesign our management processes to be innovation-friendly rather than innovation-toxic? There were few companies, we admitted, that had systematically reengineered their organizations for innovation. The magnitude and complexity of the challenge was daunting, and there were no ready-made solutions to roll out. On the other hand, we argued, they had thousands of employees who were eager to swarm the problem if asked. As they say in open-source software development, “Given enough eyeballs, all bugs are shallow.”

The ensuing six-month hackathon, hosted on a purpose-built platform, sought answers to a deceptively simple question: “How do we wire pro-innovation principles into every management system and process?”

The first task was to identify the obstacles that stymied creativity. A short survey generated eye-opening results. Team members blamed a lack of time, resources, and staff support. Many were also frustrated by what they saw as an obsession with short-term results and an overabundance of bureaucratic rules and restrictions.

These findings sparked robust conversations on the platform’s discussion board. Many participants, for example, voiced concern about a lack of executive accountability for innovation. Others shared painful examples of how specific processes had choked off initiative and original thinking.

Having prioritized the biggest obstacles, the hackathon shifted to brainstorming potential solutions. Over the next several months, team members took part in seven problem-solving “sprints.” Each sprint was built around a specific humanocracy principle. After being introduced to a principle with a short video lecture, participants were asked to brainstorm how it could be operationalized in the company’s management model, including planning, resource allocation, performance management, compensation, and job design (see figure 17-1).

FIGURE 17-1

Framework for hacking management

Framework diagram for “hacking management” with vertical arrows labeled for principles (Ownership, Experimentation, Markets, Meritocracy, Community, Openness, and Paradox) and rows showing various management functions. The principles apply across the management functions.

Hacks contributed during the “Markets” sprint, for example, included ideas for establishing VC-like investment pools in each business, creating a crowdfunding market that would allow employees to invest in nascent ideas, building an internal “gig economy” app that would attract talent to short-term design and marketing projects, and incorporating market-focused metrics such as profitability or Net Promoter Scores in all performance reviews.

Initially, most of the hacks were scarcely more than tweets. At this stage, the goal was to generate as many promising ideas as possible. Evaluation and elaboration would come later. By the end of the seven sprints, the community had generated over five thousand mini-hacks and shared thousands of comments and likes.

The three-person team supporting the initiative, which included a business development manager, an innovation specialist, and a social media expert, was instrumental in fueling community engagement both on and off the platform. Volunteer “ambassadors” were enlisted in every location to help with local activation. A typical gambit was to host hackathon meetups on Friday afternoons, with pizza and beer supplied by department managers.

Everyone on the platform had a “hacker score” that incorporated metrics on the number of hacks and comments they had posted and the number of followers and likes they had earned. Hacker leaderboards were closely watched and spurred friendly competition among a group of super-contributors.

Having worked to operationalize the principles, the community’s next task was to identify the most promising mini-hacks. Each team member was given a week to review their own mini-hacks and select one to go forward. After this winnowing, eight hundred hacks remained. Over the next two weeks, every hacker was given a handful of randomly chosen mini-hacks to score. For each hack, they were asked:

Is it deep? (Does it address one or more of the barriers? Does it significantly advance our capacity to innovate?)
Is it doable? (Is the idea practical? Can you imagine how it might be tested?)

The peer-review process generated ten thousand evaluations, or about twelve reviews per mini-hack. The authors of the one hundred highest-rated mini-hacks were given a couple of additional weeks to expand their proposals into full-fledged experiments, using a template similar to the one shown in table 16-1 in the previous chapter. Given the considerable amount of work required to flesh out their hacks, participants were encouraged to reach out to colleagues who had submitted similar ideas and team up when it made sense.

At the end of the two weeks, the hacker community once again helped narrow the field. Each participant was given five votes to allocate to their favorite hacks. The goal was to converge on a manageable number that would be fast-tracked for experimentation. In the end, sixteen hacks bubbled to the top, including:

Leadership Promoter System (LPS)

PRINCIPLE: Meritocracy

HACK: Introduce a new metric, the LPS, to gauge managerial value-added. Generated via a quarterly survey of a manager’s direct reports and colleagues, the LPS is meant to be a simple index that measures desired leadership behaviors, such as encouraging innovation within one’s team.

Field Entrepreneurship

PRINCIPLE: Ownership

HACK: Grant frontline sales teams much greater discretion over pricing, marketing investment, and customer engagement strategies. This will be supported with team-level P&Ls.

U-Fund-It

PRINCIPLE: Markets

HACK: Create a platform where employees can crowdfund peer-generated ideas.

Following the voting, the sixteen winning teams assembled for a two-day in-person “Hack Lab.” After reviewing the principles of experimental design, the teams set to work developing detailed tests. At the conclusion of the lab, each team was paired with an executive sponsor and given a budget of up to $30,000 to cover the costs of running their experiment. Every team member was also given one day a week over the next three months to push their idea forward.

The broader hackathon community remained involved as the experiments progressed. Each experiment had its own space on the platform where teams could post updates and solicit help. The LPS crew, for example, tapped its network of followers for advice on the leadership behaviors that should be included in the assessment tool. Many of the teams made swift progress. The U-Fund-It team, whose crowdfunding test was described in chapter 16, designed and executed their experiment within the space of a month. Other teams moved equally quickly to set up trials.

Two years after the hackathon, several of the experiments had been scaled up, some were still being iterated, and a few had been abandoned. Collectively, their impact on results and culture was remarkable. Innovation was no longer an isolated activity that happens despite the system. Revenue and margin growth were above industry trends, and engagement scores were up substantially. As the CEO noted, the hackathon signaled to everyone that they “could think, challenge, and experiment with how the company was run.”

As this example suggests, building a humanocracy requires a radical shift in how we think about two management constructs: leadership and change. We believe both need to be rebuilt in ways that are consistent with the principles of humanocracy.

If the definition of a leader is someone who catalyzes positive change, then every organization needs all the leaders it can get. Unfortunately, the idea of leadership that predominates in most organizations has been hopelessly compromised by bureaucratic thinking.

To understand how this happened, we need to review a bit of history.

In the early decades of industrialization, administrative competence was in short supply. Between 1890 and 1920, US manufacturing employment more than doubled, from 5 million to 11 million workers, and then expanded by another 50 percent before the outbreak of the Second World War. Who was going to wrangle this fast-growing herd of (often) poorly educated employees if not a cadre of newly minted managers? Recognizing a need, America’s universities geared up to help. The Wharton School at the University of Pennsylvania was founded in 1881, Harvard Business School in 1908, and Stanford’s Graduate School of Business in 1925.

At the time, management was regarded as a uniquely complex and demanding discipline—much the way genetic engineering and data science are viewed today. There was little in the way of codified management wisdom and even less research and theory. Bit by bit, though, a corpus of management knowledge began to emerge. By mid-century, companies were starting to invest in management training, and in 1956, General Electric opened its famed management academy in Crotonville, New York. The goal, said then-chairman Philip D. Reed, was to make GE the world’s “best-managed company.” This was a worthy goal. It was management, after all, that turned labor and steel into locomotives, turbine generators, and washing machines.

By 1977, when Harvard historian Alfred Chandler published his anthem to “managerialism,” The Visible Hand, management was no longer a mysterious or exceptional activity. Thanks to the work of Peter Drucker and others, the principles and practices of administrative work had been thoroughly codified and broadly disseminated.

But by the 1980s, management had become passé. Consultants and business schools needed something new to sell. Not surprisingly, they landed on “leadership.” Who would want to remain a mere manager, they asked their clients, when with the right training, you could become a valiant leader? (See figure 17-2.)

FIGURE 17-2

Mentions of “management development” and “leadership development” in English language books, 1980–2020

Indexed: 100 = number of “management development” mentions in 1980

Line graph tracking frequency of "management development" and "leadership development" mentions in English language books from 1980 to 2020. "Management development" initially dominates but steadily declines and is surpassed in the mid-1990s by mentions of “leadership development,” which further increase.

Source: Google Books Ngram, which provides the share of each keyword in Google’s sample of books written in English.

Today, more business books are written about leadership than any other topic, so it’s easy to forget the relative novelty of our leadership obsession. In his 1966 classic, The Effective Executive, Drucker used the word “manager” and its variants 209 times while deploying the words “leader” or “leading” a scant 15 times. Today, that count would be reversed. Yet despite the ubiquity of the topic—if you Google “leadership model,” you’ll get more than a billion hits—there’s little evidence we know how to grow leaders or that most of those we call leaders deserve the title.

Scholars like Stanford’s Jeffrey Pfeffer and Harvard’s Barbara Kellerman believe traditional leadership training produces little value for the organizations that invest in it, or for those who endure it.¹ Leadership development is a roughly $50 billion-a-year industry.² Yet, despite the vast sums lavished on executive training, a 2023 study of fourteen thousand managers found that only 40 percent ranked their organization’s quality of leadership as high, and among HR respondents, only 11 percent said their company had a strong pool of leaders to fill key roles.³ Moreover, in a Gallup survey, fewer than a quarter of individual contributors strongly agreed with the statement that their boss “manages in a way that motivates strong performance.”⁴ (This is a regrettable result but begs the question of why we expect managers to be motivators? Reflecting back on our own careers, we’ve been motivated by tough problems, brilliant colleagues, courageous clients, and the chance to have an impact, but never by a boss.)

Even among so-called leaders, there’s widespread skepticism over the value of leadership training. In a Fortune CEO survey, only 7 percent of the respondents said their companies were effective in developing global leaders, and only 10 percent believed that leadership training produced positive returns. A McKinsey study mirrored these results, with just 11 percent of the executives polled confident that their company’s leadership initiatives delivered lasting benefits.

Though discomforting to many, this conclusion is hardly surprising. How could it be otherwise when most leadership training takes place entirely within the bureaucratic frame? Typically, the goal isn’t to help individuals become catalysts for change but to prepare them for more expansive managerial roles.

To be fair, leadership training is seldom focused solely on administrative competence. In a multiweek program at a leading B-school, there will be modules on generative AI, neuroscience, the Gen Z workforce, and other relevant topics. Contemporary leadership training also emphasizes “soft skills,” affirming the value of “authenticity,” “empathy,” and “mindfulness.” Sadly, however, these skills are of little value in a bureaucratic cage match. Once back on the job, graduates quickly discover there is little in their organization that reinforces honesty, humility, and introspection and little they can do to change that fact.

Elitism is yet another factor that limits the impact of leadership development. Leadership training tends to be stratified. At the executive level, the focus is on “managing the organization,” at mid-levels on “leading the business,” and at lower levels on “leading your team.” This hierarchical approach is based on the questionable proposition that lower-level employees are unable to think beyond their own role or unit, or that there’s no value in expecting them to do so.

We have a long way to go in disentangling leadership from hierarchy. A case in point: When people in your organization talk about “the leadership team,” do they mean “everyone in the organization who can mobilize others,” or the dozen or so EVPs who sit atop the pyramid? The reality, of course, is that many of those on the leadership team aren’t leaders at all—not in the Bertrand Ballarin sense of the word. Neither are they a “team,” if by that you mean a group of selfless souls united around a shared cause.

Competence in the leadership tasks that really matter—spotting opportunities, energizing colleagues, challenging vested interests, reimagining business models, and nurturing others—doesn’t correlate with hierarchy and receives little attention in most leadership programs.

The absurdity of the bureaucratic leadership model is apparent to anyone who grew up on the social web, where leadership is about attracting followers rather than satisfying your superiors. If you’re a digital native, you view positional power as inherently authoritarian and are deeply suspicious of anyone who seeks “power over.” To you, leadership isn’t about assuming command and giving orders, it’s about activating a community and pitching in. For you, being an activist isn’t a set of tactics—it’s your everyday posture. It’s how you make a difference, whatever the task at hand. Credibility, courage, contrarian thinking, compassion, connection—that’s how you roll. You understand that the fastest way to erode your real leadership capital is to bludgeon others with positional authority.

Given all this, it’s time for a radical rethink of leadership and leadership development. As much energy as your organization spends teaching up-and-comers to be better administrators, it needs to invest even more in identifying and equipping those who are naturally inclined to be hacktivists. This is common sense. All CEOs know their organizations need to change faster. And as any social historian will tell you, deep change usually comes from the fringe—from people who haven’t been seduced by power and care enough to put themselves in the firing line. When we finally abandon the myth that a big title makes you a leader, and when the HR function stops playing to the top of the house, then our approach to leadership will finally catch up to the realities of the twenty-first century.

As we’ve argued throughout this book, the shift to humanocracy requires radical change—in individuals, teams, and the core processes by which our organizations are run. In the face of this challenge, the traditional change model is wholly inadequate. The typical change program is slow, incremental, clumsy, and needlessly antagonizing—all artifacts of a bureaucratic model that assigns the responsibility for deep change to a small core of senior managers and their advisers. Yet as we noted in chapter 3, by the time a problem or opportunity gets big enough to trigger top-down change, the organization’s already playing catch-up. In our survey with Harvard Business Review, only 10 percent of respondents said their organization’s recent change programs were “always” or “mostly” about breaking new ground. When change requires a CEO sign-off, an organization is going to spend a lot of time eating dust.

The complexity of top-down change creates further drag. Organizational structures and processes are convoluted and intertwined. It’s hard to change one thing without changing everything. This complexity means the typical company can manage a major reorg only once every three to four years. Most change programs still conform to Kurt Lewin’s seventy-year-old, three-stage change model: unfreeze—change—refreeze. In Lewin’s conception, change was episodic and programmatic rather than emergent and continuous. That view might have made sense in the 1940s, but it’s ill-suited to a world that’s all punctuation and no equilibrium.

In a bureaucracy, change isn’t merely slow, it’s also fainthearted. When the imperative to change finally becomes inescapable, the executive committee will ask, “Who’s already done this?” Wary of creating operational chaos—a real risk when you force through system-level change from the top—they’ll look for a well-trodden path. Thanks to this timidity, corporate change programs seldom change the things that most need changing. They don’t redistribute power, shrink corporate functions, collapse layers, or weed out pointless rules.

Here’s another problem: centrally driven change lacks nuance. By definition, top-down change is a blunt instrument—not just because the prescriptions tend to be uniformly applied but because they’re often crafted with little input from those on the front lines. In a large European survey, roughly half of nonsupervisory employees said their organization had recently gone through a major reorganization, but barely a quarter of the respondents said they had been asked for their opinion in advance of the rollout.⁵ In most change programs, the hapless underlings charged with making things work on the ground are left scratching their heads and wondering, “What were those idiots thinking?” Contrast this with the approach at Roche, where design teams spent weeks gathering detailed feedback from those at every level of the organization—a process that was slower and less engaging than an all-hands hackathon but far better than an approach that overweights the views of those at the top.

A final shortcoming of top-down change is that it inevitably produces blowback. According to research by McKinsey & Company, resistance to change is the top reason large-scale change programs stall out. This is not, as is often claimed, because people are change-phobic. What irks employees are royal edicts—change that is imposed, that doesn’t improve their jobs, and that works better for the generals than the grunts.

A few years back we were talking to the head of sales for a well-known tech giant. With the aid of some consultants, he had recently overhauled compensation policies effecting twelve thousand employees. “How did it go?” we asked. “Frankly,” he admitted, “it was a bit of a cluster****. I didn’t expect so much resistance. Some of our best performers jumped ship.” We asked, “Did you blog about the proposed changes before rolling them out? Did you get a lot of input?” “No,” he replied, “that would have taken too long.” At the risk of being impertinent, we reminded him that what matters is not time to roll out but time to success.

Simply put, the bureaucratic change model, like the bureaucratic leadership model, is no longer fit for the purpose. According to independent studies by McKinsey, Boston Consulting Group, and Bain & Company, most change programs fail to meet their objectives. Two studies conducted by Bain in 2013 and 2023 produced the same dismal result: only 12 percent of transformation efforts met or exceeded expectations. Like leadership development, it seems the torrent of books, articles, and blogs on change management has had no discernible impact on performance.⁶

This is hardly surprising. Today, organizations need to change more rapidly and deeply than ever before. Yet “change management,” like “strategic planning,” “virtual presence,” and “Scottish cuisine” is an oxymoron. There’s simply no way that proactive, deep-rooted, and systemic change can be designed and deployed top down. Even when an organization is led by a pioneering CEO, like Jan Wallander of Handelsbanken or Zhang Ruimin of Haier, crafting a new management model is more about “explore and experiment” than “engineer and enforce.”

To eliminate the bureaucratic lags between sense and respond, the responsibility for change must be broadly syndicated. All employees must view themselves as potential change leaders. In the face of new challenges, everyone must step up and act rather than wait for executive priorities to catch up with reality.

Senior managers must embrace the complexity of systemic change while resisting the urge to fabricate exhaustive and highly prescriptive change programs. The problem of rewiring the organizational genome needs to be disaggregated and small teams empowered to work on individual components. Tellingly, this is how Amazon organizes its software development teams.

Nearly two decades ago, growing anxiety about the company’s ability to maintain its lead prompted Amazon to break its IT organization into hundreds of microservice teams. Hitherto, the software running the company’s sprawling e-commerce business had resided in a single, monolithic codebase. Hundreds of senior engineers were needed to integrate the code being produced by the company’s multiple development teams. As you might expect, conflicts were rife, delays frequent, and every major update a Herculean task. Realizing this approach wouldn’t scale, Amazon distributed development work to scores of small teams, each of which had responsibility for a single website element, such as the “Buy” button. Going forward, software components would be integrated through standardized interconnects known as application programming interfaces, or APIs. These moves freed teams to work at their own pace and dramatically reduced the need for managerial coordination. Today, Amazon’s home page is put together by hundreds of individual teams. The success of this model has prompted scores of companies to follow Amazon’s lead, including web stalwarts Netflix and Uber (the latter of which is reported to have thirteen hundred microservice teams).⁷

Our experience suggests that a distributed, cellular approach to building humanocracy is similarly sensible. One can easily imagine a large organization supporting dozens of parallel management experiments such as those outlined in chapter 16. That’s the way to bring down bureaucracy—not with a giant reorg but with a swarm of hacks.

Distributing the responsibility for change is also the secret to winning genuine commitment. Senior executives often talk about the need to get employee buy-in. This is usually, and wrongly, viewed as a communication exercise. As a Boston Consulting Group report on change put it, “All participants, at every level, need to understand clearly the program’s rationale and design, its role in driving the organization’s strategy, and their own roles and responsibilities within the program.”⁸ Good enough—but knowledge isn’t the same thing as commitment. Genuine buy-in, as distinguished from compliance, is the product of involvement, not exhortation. To embrace change, employees need a hand in creating it.

It can be scary for a leader to turn over a major change initiative to the “crowd,” but it’s the only way to face down the defenders of bureaucracy. A lone CEO doesn’t have enough hours in the day to single-handedly cajole dozens or hundreds of high-powered bureaucrats into surrendering their privileges—just consider the challenges faced by the late Pope Francis.

In a September 2013 interview, six months after becoming pontiff, Pope Francis denounced what he saw as the church’s arrogant and insular bearing: “Heads of the church have often been narcissists, flattered and thrilled by their courtiers. The court is the leprosy of the Papacy. This Vatican-centric vision neglects the world around it and I will do everything I can to change it.” He accused the church of being “obsessed” with “small-minded rules” and warned it must change or “fall like a house of cards.” He called on the church’s senior clerics to help build an “organization that is not just top-down, but horizontal.⁹ Since then, progress—in addressing sexual abuse, enforcing fiscal responsibility, and dismantling central structures—has been slow to nonexistent. Changing the church, Pope Francis remarked in 2018, is like “cleaning the sphinx with a toothbrush.”¹⁰ Even papal infallibility, it seems, must bow before bureaucracy.

While changing a two-thousand-year-old organization presents a particularly vexing challenge, we’ve met dozens of CEOs who share the pontiff’s frustration. Eager for root and branch change, they watch helplessly as their intended reforms are swallowed by the quicksand of bureaucracy. Skilled bureaucrats have a hundred ways of postponing, neutering, or sabotaging discomforting initiatives—while feigning support. What a reformist CEO needs is a lot more people with toothbrushes.

That’s the power of an open platform—it can activate a pro-change coalition that is big enough and broad enough to counter the foot-dragging of those threatened by a redistribution of power. When reforms have been publicly crafted and endorsed by hundreds or thousands of individuals, it’s not easy for a few senior staffers to pick them apart.

Not every problem requires this sort of change process. If your organization is lagging in integrating its online and offline distribution systems, you don’t need a companywide hackathon—there are plenty of well-tested recipes for getting everything joined up. But when you’re trying to break new ground, when you’re trying to change something that is complex and systemic, when you’re going for DNA-level change, or when you’re challenging deeply entrenched interests, you need a process that is …

Open to everyone

Informed by new principles

Avowedly radical

Highly generative

Peer regulated

Experimental

Inescapable

In the years ahead, the most effective change efforts will be socially constructed. They will roll up, not out, and the word “cascade” will have been banished from the corporate lexicon. To escape the curse of bureaucracy, we must change the way we change.

Let’s return for a moment to our starting premise. Across the world, organizations are disabled by bureaucracy—they are inertial, incremental, and inhuman. This is a problem not just for CEOs but for all of us.

Ponderous, inflexible institutions misuse society’s resources and reduce productivity. They squander imagination, suppress initiative, and bungle the future.

Executives, desperate to offset the stultifying effects of bureaucracy, resort to desperate means. They slash investment to juice short-term earnings, buy back stock to inflate the share price, and acquire competitors to boost market power and political clout. None of this is good for investors, for customers, or for citizens. But it’s employees, in their millions, who pay the biggest price. The bureaucratic caste system deprives them of the chance to acquire new skills, exercise their ingenuity, and enlarge their impact. Stripped of agency and upside, they have little opportunity to raise the emotional and financial returns on their work.

We can do better than this, and we must. By embracing the principles and practices of humanocracy, we can build organizations that are as resilient, creative, and passion-filled as the people who work within them. Doing so will allow us to wring the bureaucratic inefficiencies out of our economies. It will unleash a flood of dammed-up innovation. It will give every organization the ability to outrun change and succeed in a world that looks nothing like the one that gave birth to bureaucracy. Most importantly, it will turn every job into a good job. It will give every human being at work the opportunity to flourish.

Freeing the human spirit—that’s the promise of humanocracy. With grit and determination, you can claim that promise for yourself, for your team, and for your organization. Like every epic quest, the journey will be arduous but ultimately fulfilling. It will test you but also feed your soul. So, if you’re longing to work for an organization that nurtures, elicits, and honors the best of every human being, it’s time to put this book down and put your boots on.

Appendix A

The Bureaucratic Mass Index Survey

How many layers are there in your organization (from frontline employees up to the CEO, president, or managing director)?

– Three or fewer layers: 0 points

– Four layers: 2.5 points

– Five layers: 5 points

– Six layers: 7.5 points

– Seven layers or more: 10 points

How much time do you spend on “bureaucratic chores” (e.g., preparing reports, attending meetings, complying with requests, securing sign-offs, or interacting with staff functions such as HR)?

– Virtually none: 0 points

– Less than 10%: 2.5 points

– 10%–20%: 5 points

– 20%–30%: 7.5 points

– More than 30%: 10 points

How much does bureaucracy slow decision-making and action in your organization?

– Hardly at all: 0 points

– Moderately: 2.5 points

– Significantly: 7.5 points

– Substantially: 10 points

To what extent are your interactions with your manager and other leaders focused on internal issues (e.g., resolving disputes, securing resources, getting approvals)?

– Less than 10% of time focused on internal issues: 0 points

– 10%–30%: 2.5 points

– 30%–50%: 5 points

– 50%–70%: 7.5 points

– More than 70%: 10 points

Within your work environment, how much autonomy do you or your team have to set targets and priorities?

– Complete autonomy: 0 points

– Substantial autonomy: 2.5 points

– Moderate autonomy: 5 points

– Little autonomy: 7.5 points

– No autonomy: 10 points

How often are frontline team members involved in the design and development of change initiatives?

– Always involved: 0 points

– Frequently involved: 2.5 points

– Occasionally involved: 7.5 points

– Never involved: 10 points

How do people in your organization react to unconventional ideas?

– With enthusiasm: 0 points

– Interest: 2.5 points

– Indifference: 5 points

– Skepticism: 7.5 points

– Resistance: 10 points

In general, how easy is it for a frontline employee in your organization to launch a new project that requires a small team and a bit of seed funding?

– Easy. We have a well-honed approach that is open to all (e.g., an internal Kickstarter). (0 points)

– Not easy. You can make it happen, but you need the right connections and plenty of courage. (5 points)

– Very difficult. It takes a lot of effort and a lot of sign-offs. (10 points)

How prevalent are political behaviors in your organization?

– Never observed: 0 points

– Occasionally observed: 5 points

– Often observed: 10 points

How often do political skills, as opposed to demonstrated competence, influence who gets ahead in your organization?

– Never: 0 points

– Rarely: 2.5 points

– Occasionally: 5 points

– Often: 7.5 points

– Almost always: 10 points

Appendix B

Sizing Up the Bureaucratic Class

Estimates for the Labor Force and Occupational Mix

The US Bureau of Labor Statistics (BLS) collects detailed occupational employment data through two surveys—the Current Population Survey (CPS) and the Occupational Employment Survey (OES). The CPS is the most widely used survey in economic analyses—it forms the basis for official statistics such as the rate of unemployment and underpins most studies of workforce trends. CPS data is self-reported and collected through monthly surveys. OES data is gathered in an annual survey of establishments and excludes unincorporated self-employed workers, agricultural workers, and houseworkers.

We based the overall US employment estimate of 150 million on the average of the 2024 CPS data—excluding the self-employed—and the OES data. The number of managers and administrators was also estimated by drawing on both CPS and OES data. Specifically, we first computed the share of total employment for relevant occupational categories in both the CPS and OES, took an average of the shares for each occupation across the two surveys, and then applied the blended share to the overall workforce of 150 million.

Our logic for a using blended approach was twofold. First, the occupational mixes in the two surveys for managers and administrators differ significantly—in the CPS data, managers and administrators make up 22 percent of the workforce, while in the OES data, this share is at 18 percent. Second, there is no consensus among labor economists about which survey is more suitable for analyzing labor force composition (if anything, the CPS is more widely used), so we were disinclined to treat either data source preferentially.

The CPS data likely suffers from management “grade inflation” since it is based on self-reported data. However, it is difficult to estimate the degree to which this factor biases the numbers.

Conversely, there are reasons to consider the OES estimates of managers and administrators as inherently conservative. Senior managers charged with providing occupational data may be inclined to report a less top-heavy structure (for example, not considering “team leaders” as part of the managerial ranks). We saw some evidence of this drift in our bureaucratic mass index (BMI) survey, where executives tended to report fewer management layers in their organization compared to less senior respondents (this held up when controlling for size of the respondent’s organization).

Here, our goal was to quantify how many nonmanagerial employees are part of administrative support functions. Our estimates are based on our review of the occupational category the BLS describes as “Business and Financial Occupations.” Some of the large occupational groups in this category include accountants and auditors, compliance officers, human resource workers, management analysts, purchasing agents, and training and development specialists. We excluded from our estimates a number of occupations we deemed unlikely to be primarily administrative, such as claims adjusters, insurance underwriters, and personal financial advisers. Lawyers were not counted in this group. We also did not include occupations related to IT support, since it is impossible to differentiate between IT professionals who are in line positions and those who play support roles. Given the exclusion of IT-related occupations, our estimates are therefore likely to undercount the total number of administrators.

We estimated compensation by multiplying average annual wages (obtained through the OES survey) for each occupational group (managers, supervisors, administrators, other employees) by the number of people in each group. This yielded $10.5 trillion for an estimated labor force of 150 million employees, which is consistent with the latest BLS estimate of $11.2 trillion for overall employee wages (according to the Quarterly Census of Employment and Wages for the second quarter of 2024). To estimate total compensation, we increased wage compensation by one-third, reflecting estimates from the BLS statistics (from the National Compensation Survey). This yields a total of $13.9 trillion, which is in line with US Bureau of Economic Analysis estimates of $15 trillion in total employee compensation. We suspect that our estimates for total compensation are lower because the underlying wage data does not include particularly lucrative forms of executive compensation, such as profit-sharing and subsidized stock options.

Notes

Chapter 1

1. Mariella Moon, “Intel Is Separating Its Ailing Foundry Business from the Main Company,” Engadget, September 17, 2024, www.engadget.com/general/intel-is-separating-its-ailing-foundry-business-from-the-main-company-110043046.html.

2. “Intel Passed on Its Chance to Own OpenAI Years Ago. Now It Has Fallen Behind,” Fast Company, August 7, 2024, www.fastcompany.com/91169548/intel-passed-chance-own-openai-years-ago-fallen-behind.

3. Max A. Cherney, “Intel Board Member Quit after Differences over Chipmaker’s Revival Plan,” Reuters, August 27, 2024, www.reuters.com/technology/intel-board-member-quit-after-differences-over-chipmakers-revival-plan-2024-08-27/.

4. Cherney, “Intel Board Member Quit.”

5. Steve Lohr and Don Clark, “How Intel Got Left Behind in the AI Chip Boom,” New York Times, October 24, 2024, www.nytimes.com/2024/10/24/technology/intel-ai-chips-mistakes.html.

6. Gergely Orosz, “The Scoop #38: A Trend of Fewer Middle Managers?,” The Pragmatic Engineer, February 9, 2023, https://newsletter.pragmaticengineer.com/p/the-scoop-38.

7. For more, see Casey Handmer, “SLS Is Still a National Disgrace,” October 2, 2024, https://caseyhandmer.wordpress.com/2024/10/02/sls-is-still-a-national-disgrace/; Sara Knapton, “Nasa Too Old and Bureaucratic to Get Back to Moon, Warns Apollo Team,” The Telegraph, July 20, 2019, www.telegraph.co.uk/science/2019/07/20/nasa-old-bureaucratic-get-back-moon-warns-apollo-team/.

8. Dan Patt and William Greenwalt, “Competing in Time: Ensuring Capability Advantage and Mission Success through Adaptable Resource Allocation,” Hudson Institute, February 25, 2021, www.hudson.org/national-security-defense/competing-in-time-ensuring-capability-advantage-and-mission-success-through-adaptable-resource-allocation.

9. See, for instance, Federal Demonstration Partnership, “2018 Faculty Workload Survey: Research Report, Primary Findings,” 2020, https://thefdp.org/wp-content/uploads/FDP-FWS-2018-Primary-Report.pdf; “Why Do Researchers Often Prefer Safe over Risky Projects? Explaining Risk Aversion in Science,” Phys.org, August 15, 2024, https://phys.org/news/2024-08-safe-risky-aversion-science.html.

10. Bureau of Labor Statistics, “Productivity Change in the Nonfarm Business Sector, 1947–2024,” March 6, 2025, www.bls.gov/productivity/home.htm.

11. Robert J. Gordon, The Rise and Fall of American Growth: The US Standard of Living since the Civil War (Princeton, NJ: Princeton University Press, 2017), 462–463.

12. Daron Acemoglu, “The Simple Microeconomic of AI,” NBER Working Paper 32487, May 2024, www.nber.org/papers/w32487; Goldman Sachs, “The Productivity Outlook: Back to the Future,” October 2024.

13. Germán Gutiérrez and Thomas Philippon, “Some Facts about Dominant Firms,” NBER Working Paper 27985, October 2020, www.nber.org/system/files/working_papers/w27985/w27985.pdf.

14. For data on HR budgets as a percentage of total operating costs, see Bloomberg, HR Department Benchmark and Analysis, 2017. For data on executive surveys of HR’s strategic role, see John Boudreau and Ed Lawler, Strategic Role of HR, Center for Effective Organization Publication G14-12, December 2014.

15. See, for instance, Michael Mankins and Richard Steele, “Stop Making Plans; Start Making Decisions,” Harvard Business Review, January 2006; and Peter Young, “Finance: 2 Reasons Why Managers Hate Budgeting (and What to Do about It),” Corporate Executive Board Blog, August 28, 2014, www.cebglobal.com/blogs/finance-2-reasons-managers-hate-budgeting-and-what-to-do-about-it/.

16. Gallup, State of the Global Workplace: 2024 Report, June 2024.

17. Ryan Decker and Jacob Williams, “A Note on Industry Concentration Measurement,” Federal Reserve, February 3, 2023, www.federalreserve.gov/econres/notes/feds-notes/a-note-on-industry-concentration-measurement-20230203.html.

18. Jan De Loecker, Jan Eeckhout, and Gabriel Unger, “The Rise of Market Power and the Macroeconomic Implications,” Quarterly Journal of Economies 135, no. 2 (2020): 561–644.

19. Mike Konczal and Niko Lusiani, “Prices, Profits, and Power: An Analysis of 2021 Firm-Level Markups,” Roosevelt Institute, June 2022, https://rooseveltinstitute.org/wp-content/uploads/2022/06/RI_PricesProfitsPower_202206.pdf.

20. Jan De Loecker and Jan Eeckhout, Global Market Power, February 10, 2021, www.janeeckhout.com/wp-content/uploads/Global.pdf.

21. James E. Bessen, “Accounting for Rising Corporate Profits: Intangibles or Regulatory Rents?,” Boston University School of Law, Law and Economics Research Paper No. 16-18, November 9, 2016, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2778641.

22. Shikhar Singla, “Regulatory Costs and Market Power,” LawFin Working Paper No. 47, February 24, 2023, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4368609.

23. Michael Smolyansky, “End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock Returns,” Federal Reserve, June 2023, www.federalreserve.gov/econres/feds/end-of-an-era-the-coming-long-run-slowdown-in-corporate-profit-growth-and-stock-returns.htm.

24. Lucian A. Bebchuk, Alon Brav, and Wei Jiang, “The Long-Term Effects of Hedge Fund Activism,” Harvard Law School John M. Olin Center Discussion Paper No. 802, June 2015, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2291577.

25. Joseph Blasi and Douglas Kruse, “Employee Ownership and ESOPs: What We Know from Recent Research,” April 2024, www.aspeninstitute.org/wp-content/uploads/2024/04/Employee-Ownership-and-ESOPs-What-We-Know-from-Recent-Research-1.pdf.

26. Pew Research, “Modest Declines in Positive Views of ‘Socialism’ and ‘Capitalism’ in US,” September 19, 2022, www.pewresearch.org/politics/2022/09/19/modest-declines-in-positive-views-of-socialism-and-capitalism-in-u-s/.

27. Institute of Economic Affairs, “67 Per Cent of Young Brits Want a Socialist Economic System, Finds New Poll,” news release, July 6, 2021, https://iea.org.uk/media/67-per-cent-of-young-brits-want-a-socialist-economic-system-finds-new-poll/.

28. Marcus Lu, “The Decline of Upward Mobility in One Chart,” Visual Capitalist, August 26, 2020, www.visualcapitalist.com/the-decline-of-upward-mobility-in-one-chart/.

29. Economic Policy Institute, “Low Wage Workforce Tracker,” accessed December 18, 2024, www.epi.org/low-wage-workforce/.

30. OECD, “Skills Matter: Further Results from the Survey of Adult Skills,” 2016, https://doi.org/10.1787/9789264258051-en.

31. Eurofound and Cedefop, European Company Survey 2019: Workplace Practices Unlocking Employee Potential (Luxembourg: Publications Office of the European Union 2020).

32. Statistics are drawn from Physicians Advocacy Institute, “The Impact of Practice Acquisitions and Employment on Physician Experience and Care Delivery,” November 2023; Medscape, “Physician and Compensation Report,” April 2023; Medscape, “Physician Burnout and Depression Report,” January 2023; Medscape, “Nurse Practitioner Burnout and Depression Report,” August 2024; American Association of Colleges of Pharmacy, “National Pharmacist Workforce Study: Final Report,” May 2023.

33. Author’s analysis of the 2021 National Teacher and Principal Survey run by the National Center for Education Statistics, DataLab, https://nces.ed.gov/datalab/.

34. Author’s analysis of the 2021 Nature Magazine Salary and Satisfaction Survey; see Chris Woolston, “Stagnating Salaries Present Hurdles to Career Satisfaction,” Nature, November 16, 2021, www.nature.com/articles/d41586-021-03041-0. Responses are from those with a direct research role.

35. Lilly Price, “Baltimore’s Math Scores Consistently Trail Maryland’s. Here’s City Schools’ 5-Year Plan for Improvement,” Baltimore Sun, June 12, 2024, www.baltimoresun.com/2024/06/12/math-curriculum-baltimore-schools/#.

1. Eric J. Chaisson, Cosmic Evolution (Cambridge, MA: Harvard University Press, 2001).

2. Transforma Insights and Exploding Topics, July 1, 2023. The number of internet of things (IoT) connected devices worldwide from 2022 to 2023, with forecasts from 2024 to 2030 (in billions), is taken from Statista, accessed April 15, 2025, www.statista.com/statistics/1183457/iot-connected-devices-worldwide/.

3. Jim Harter, “In New Workplace, US Employee Engagement Stagnates,” January 23, 2024, www.gallup.com/workplace/608675/new-workplace-employee-engagement-stagnates.aspx.

4. Jim Harter and Amy Adkins, “Employees Want a Lot More from Their Managers,” Gallup.com, April 8, 2015, www.gallup.com/workplace/236570/employees-lot-managers.aspx.

5. Amy Adkins, “Only 35% of US Managers Are Engaged in Their Jobs,” Gallup.com, April 2, 2015, www.gallup.com/workplace/236552/managers-engaged-jobs.aspx.

6. Max Weber, Economy and Society, ed. G. Roth and C. Wittich (Berkeley: University of California Press, 1978), 975.

7. Max Weber, The Theory of Social and Economic Organization, trans. A. M. Henderson and Talcott Parsons (New York: Free Press of Glencoe, 1947), 337.

1. For a detailed account of the ATLAS’s organizational model, see Max Boisot et al., eds., Collisions and Collaboration: The Organization of Learning in the ATLAS Experiment at the LHC (Oxford: Oxford University Press, 2011).

2. A. G. Lafley, “What Only the CEO Can Do,” Harvard Business Review, May 2009.

3. Yuan is quoted in Kevin Lincoln, “How Eric S. Yuan Connected the World,” Sequoia, April 13, 2022, www.sequoiacap.com/article/eric-yuan-zoom-spotlight (first quote); and Alex Konrad, “Zoom, Zoom, Zoom! The Exclusive Inside Story of the New Billionaire behind Tech’s Hottest IPO,” Forbes, April 22, 2019, www.forbes.com/sites/alexkonrad/2019/04/19/zoom-zoom-zoom-the-exclusive-inside-story-of-the-new-billionaire-behind-techs-hottest-ipo/?sh=3e48f9cc4af1 (second quote). See also Drew Gurley, “Happiness Led to the Creation of the Fastest Growing Video Conferencing Platform, with Eric S. Yuan, CEO Zoom Video Communications,” Medium, March 14, 2018, https://medium.com/authority-magazine/happiness-led-to-the-creation-of-the-fastest-growing-video-conferencing-platform-with-eric-s-dfe9a23b34f3.

4. Tony Maglio, “The Latest R-I-P to Linear TV: Cord-Cutters Will Outnumber Cable Subscribers by EOY,” IndieWire, November 30, 2023, www.indiewire.com/news/business/cord-cutters-outnumber-cable-tv-subscribers-study-1234930781/; Marketing Charts, “The US’ Pay-TV Penetration Rate Continues to Fall,” November 21, 2023, www.marketingcharts.com/television/pay-tv-and-cord-cutting-231267.

5. Tim Arango, “Comcast Loses More Subscribers than Expected, but Its Earnings Top Estimates,” New York Times, October 27, 2010; and “Time Warner Views Netflix as a Fading Star,” New York Times, December 12, 2010.

6. Based on authors’ analysis of Compustat Execucomp data.

7. Josh Bivens and Jori Kandra, “CEO Pay Slightly Declined in 2022 (but It Has Soared 1,209.2% since 1978),” Economic Policy Institute, September 21 2023, www.epi.org/publication/ceo-pay-in-2022/.

8. See, for instance, Ria Marshall and Linda-Eling Lee, “Are CEOs Paid for Performance?,” MSCI Research, July 2016; and Weijia Li and Steven Young, “An Analysis of CEO Pay Arrangements and Value Creation for FTSE-350 Companies,” UK CFA Society, December 2016.

9. Andrew Toma et al., “Flipping the Odds for Successful Reorganization,” Boston Consulting Group, April 2012, www.bcg.com/en-us/publications/2012/people-organization-design-flipping-odds-successful-reorganization.aspx.

10. Eric C. Schneider et al., “The US COVID-19 Vaccination Program at One Year: How Many Deaths and Hospitalizations Were Averted?,” The Commonwealth Fund, December 14, 2021, www.commonwealthfund.org/publications/issue-briefs/2021/dec/us-covid-19-vaccination-program-one-year-how-many-deaths-and.

11. Paul Mango, Warp Speed: Inside the Operation That Beat Covid, Critics, and the Odds (New York: Republic Book Publishers, 2022), 79.

12. David Barboza, “An iPhone’s Journey, from the Factory Floor to the Retail Store,” New York Times, December 29, 2016, www.nytimes.com/2016/12/29/technology/iphone-china-apple-stores.html.

13. Jack Morse, “This College Student Spent His Summer Undercover in a Chinese iPhone Factory,” Mashable, April 25, 2017, https://mashable.com/2017/04/25/iphone-factory-dejian-zeng-apple-china/.

14. Data is weighted using each survey’s suggested population weights. The European sample includes respondents from the EU-15 countries (i.e., members of the European Union before the 2003 eastward enlargement).

15. Morning Star employee quotes and descriptions of company practices were sourced from personal interviews conducted by the authors.

16. “Scientific Management,” The Economist, February 9, 2009, www.economist.com/node/13092819.

17. Frederick Winslow Taylor, The Principles of Scientific Management (New York: Harper and Brothers, 1911), 83.

18. Taylor, Principles of Scientific Management, 59.

19. Discussion with the authors, June 2018.

20. Graham Ruddick, “James Daunt: The Boss Who Saved the Bookshop,” Business Leader Podcast, February 21, 2023, https://offtolunch.substack.com/p/james-daunt-the-boss-who-saved-the.

21. Ruddick, “James Daunt.”

22. Nilay Patel, “ ‘The Goliath Is Amazon’: After 100 years, Barnes & Noble Wants to Go Back to Its Indie Roots,” The Decoder Podcast, May 16, 2023, www.theverge.com/23642104/barnes-and-noble-amazon-bookshop-ecommerce-decoder-podcast.

23. Daniel Roth, “The Simple Principle CEO James Daunt Used to Save Barnes & Noble,” This Is Working, December 21, 2023, www.linkedin.com/pulse/simple-principle-ceo-james-daunt-used-save-barnes-noble-daniel-roth-ut8df/.

24. Roth, “The Simple Principle.”

25. Maureen O’Connor, “Barnes and Noble Sets Itself Free,” New York Times, October 18, 2023, www.nytimes.com/2023/10/17/style/barnes-noble-redesign.html.

26. Ezra Klein, “How Barnes & Noble Came Back from Near Death,” New York Times, January 28, 2023, www.nytimes.com/2023/01/28/opinion/barnes-noble-amazon-bookstore.html.

27. Klein, “How Barnes & Noble Came Back.”

28. Ben Cohen, “That Cool New Bookstore? It’s a Barnes & Noble,” Wall Street Journal, July 29, 2023, www.wsj.com/articles/barnes-noble-bookstores-james-daunt-c1afc06b.

1. “Size and Growth of Administration and Bureaucracy at Yale,” Yale FAS Senate Committee on Governance, January 14, 2022. Scott’s quote comes from Philip Mousavizadeh, “A ‘Proliferation of Administrators’: Faculty Reflect on Two Decades of Rapid Expansion,” Yale News, November 10, 2021, https://yaledailynews.com/blog/2021/11/10/reluctance-on-the-part-of-its-leadership-to-lead-yales-administration-increases-by-nearly-50-percent/.

2. Praveen Seshadri, “The Maze Is in the Mouse,” Medium, February 13, 2023, https://pravse.medium.com/the-maze-is-in-the-mouse-980c57cfd61a.

3. Art Kleiner, The Age of Heretics: A History of the Radical Thinkers Who Reinvented Corporate Management (San Francisco: Jossey-Bass, 2008), 199, Kindle.

4. “Topeka Pride,” The Modern Times Workplace, accessed December 22, 2024, www.moderntimesworkplace.com/DVD_Collection/Whole/TopekaPride.pdf.

5. David Olsen and Richard Parker, “Lessons of Dogfood Democracy,” Mother Jones, June 1977, 19–20.

6. Brett Frischmann and Evan Selinger, “Robots Have Already Taken Over Our Work, but They’re Made of Flesh and Bone,” The Guardian, September 25, 2017, www.theguardian.com/commentisfree/2017/sep/25/robots-taken-over-work-jobs-economy.

7. Jodi Kantor and Arya Sundaram, “The Rise of the Worker Productivity Score,” New York Times, August 14, 2022, www.nytimes.com/interactive/2022/08/14/business/worker-productivity-tracking.html.

8. Mike Swift, “Five Silicon Valley Companies Fought Release of Employment Data, and Won,” San Jose Mercury News, February 11, 2010, www.mercurynews.com/2010/02/11/five-silicon-valley-companies-fought-release-of-employment-data-and-won/.

9. “Google’s Diversity Record Shows Women and Minorities Left Behind,” PBS News Hour, May 28, 2014, www.pbs.org/newshour/show/google-report-shows-women-and-minorities-left-behind.

10. “Getting to Work on Diversity at Google,” Google Blog, May 28, 2014, https://googleblog.blogspot.com/2014/05/getting-to-work-on-diversity-at-google.html.

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1. Julie Coleman, “Nucor CEO Explains What Led the Steelmaking Company to Its Third-Most Profitable Year,” CNBC.com, January 30, 2024, www.cnbc.com/2024/01/30/nucor-ceo-explains-what-led-the-steelmaker-to-profitable-year.html.

2. In a blast furnace, oxygen is forced through pig iron in a superheated oven, usually powered by natural gas. Mini-mills instead rely on an electric arc furnace, which uses electricity as its main source of energy. Giant electrodes produce an arc in the steelmaking oven where temperatures can reach 3,000 degrees centigrade.

3. Authors’ calculations based on Nucor and industry data.

4. Industry employment data from the US Bureau of Labor Statistics (primary metals) and company filings.

5. Kenneth Iverson, Plain Talk: Lessons from a Business Maverick (Hoboken, NJ: Wiley, 1997), 91.

6. Unless otherwise noted, Nucor employee quotes and descriptions of company practices were sourced from personal interviews conducted by the authors.

7. Gallup, Leadership and Management Indicators, accessed December 22, 20, 2024, www.gallup.com/404252/indicator-leadership-management.aspx.

8. Industry employment data is from the US Bureau of Labor Statistics (primary metals).

9. Iverson, Plain Talk, 9.

10. “The Working Man’s Evangelist,” Metals Service Center Institute, January 1, 2006.

1. Chapter 6 was sourced almost exclusively from personal interviews conducted by the authors and internal documents provided by Haier.

1. David Graeber and David Wengrow, The Dawn of Everything: A New History of Humanity (New York: Farrar, Straus and Giroux, 2021), 515.

1. Arthur Cole, Business Enterprise in Its Social Setting (Cambridge, MA: Harvard University Press, 1959), 28.

2. Edmund S. Phelps, Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge, and Change (Princeton, NJ: Princeton University Press, 2014).

3. Phelps, Mass Flourishing, 270.

4. Phelps, 241–242.

5. Arthur Cole, “An Approach to the Study of Entrepreneurship,” Journal of Economic History 6, supp. 1 (1946), reprinted in Frederick C. Lane and Jelle C. Riemersma, eds., Enterprises and Secular Change: Readings in Economic History (Homewood, IL: Richard D. Irwin, 1953), 183–184.

6. Chris Hughes, “It’s Time to Break Up Facebook,” New York Times, May 9, 2019, www.nytimes.com/2019/05/09/opinion/sunday/chris-hughes-facebook-zuckerberg.html.

7. Henry Hansman, “Ownership of the Firm,” Journal of Law, Economics, and Organization 4, no. 2 (Fall 1988): 269.

8. Joseph Blasi, Richard Freeman, and Douglas Kruse, “Do Broad-Based Employee Ownership, Profit Sharing and Stock Options Help the Best Firms Do Even Better?,” British Journal of Industrial Relations 54, no. 1 (March 2016): 55–82.

9. Dirk van Dierendonck and Inge Nuijten, “The Servant Leadership Survey: Development and Validation of a Multidimensional Measure,” Journal of Business and Psychology 26, no. 3 (September 2011): 249–267.

10. Blasi et al., “Do Broad-Based Employee Ownership, Profit Sharing and Stock Options Help the Best Firms Do Even Better?”

11. “Employer Costs for Employee Compensation: Historical Listing,” Bureau of Labor Statistics, December 2023; “Incentive Pay Practices: Publicly Listed Companies,” World at Work, July 2021.

12. “Employee Ownership by the Numbers,” National Center for Employee Stock Ownership, February 2024, www.nceo.org/articles/employee-ownership-by-the-numbers. Estimates of total employment in the private sector and total capitalization of US-based companies come from the US Bureau of Labor Statistics and Capital IQ, respectively. European data comes from Marc Mathieu, Economic Survey of Employee Share Ownershipin European Countries in 2023 (Brussels: European Federation of Employee Shared Ownership, 2024).

13. Dominic Barton, Dennis Carey, and Ram Charan, “An Agenda for the Talent-First CEO,” McKinsey Quarterly, March 2018, www.mckinsey.com/business-functions/organization/our-insights/an-agenda-for-the-talent-first-ceo.

14. This section was sourced almost exclusively from personal interviews conducted by the authors and documents provided by KKR and Ingersoll Rand.

15. Xavier Huillard, “Expanding without Getting Fat: Managing the Vinci Group,” L’École de Paris, Business Life Seminar, January 6, 2017. All the quotes from Xavier Huillard used in this chapter are drawn from this source.

16. Roy Jacques, Manufacturing the Employee (London: Sage, 1966), 40.

1. “China’s SOEs Are Stuck in a Debt Trap,” S&P Global Ratings, September 20, 2022, www.spglobal.com/_assets/documents/ratings/research/global-debt-leverage-1.pdf; Itzhak Goldberg, “China’s Heavy Economic Legacy of State Ownership and Central Planning,” The Diplomat, November 18, 2023, https://thediplomat.com/2023/11/chinas-heavy-economic-legacy-of-state-ownership-and-central-planning/.

2. Qin (May) Mei, “Fortune Favors the State-Owned: Three Years of Chinese Dominance on the Global 500 List,” Trustee China Hand (blog), CSIS.com, October 7, 2022, www.csis.org/blogs/trustee-china-hand/fortune-favors-state-owned-three-years-chinese-dominance-global-500-list.

3. Alexis C. Madrigal, “Paul Otellini’s Intel: Can the Company That Built the Future Survive It?,” The Atlantic, May 16, 2013, www.theatlantic.com/technology/archive/2013/05/paul-otellinis-intel-can-the-company-that-built-the-future-survive-it/275825/.

4. Benjamin J. Gillen, Charles R. Plott, and Matthew Shum, “A Pari-Mutuel-Like Mechanism for Information Aggregation: A Field Test Inside Intel,” California Institute of Technology, working paper, November 8, 2015, www.its.caltech.edu/~mshum/papers/IAMField.pdf.

5. Bo Cowgill and Eric Zitzewitz, “Corporate Prediction Markets: Evidence from Google, Ford, and Firm X,” Review of Economic Studies 82, no. 4 (2015): 1309–1341.

6. Adam Mann, “The Power of Prediction Markets,” Nature, October 18, 2016, www.nature.com/news/the-power-of-prediction-markets-1.20820.

7. Justin Wolfers and Eric Zitzewitz, “Prediction Markets,” Journal of Economic Perspectives 18, no. 2 (Spring 2004): 107–126.

8. Andrew Wallenstein, “Inside CNN Plus: A First Look at the New Streaming Service,” Variety, July 19, 2021.

9. John Koblin, Michael M. Grynbaum, and Benjamin Mullin, “Inside the Implosion of CNN+,” New York Times, April 24, 2022; Lucia Moses et al., “ ‘Hubris. Nothing More.’ Insiders Blame Jeff Zucker and Jason Kilar for the Rapid Demise of CNN+ as Warner Bros. Discovery Leadership Looks Forward,” Business Insider, April 22, 2022.

10. For an excellent review of research on resource allocation, see John Busenbark et al., “A Review of the Internal Capital Allocation Literature: Piecing Together the Capital Allocation Puzzle,” Journal of Management 43, no. 8 (November 2017): 2430–2455.

11. Gary Hamel, “Bringing Silicon Valley Inside,” Harvard Business Review, September–October 1991, 71–84.

12. David Bardolet, Alex Brown, and Dan Lovallo, “The Effects of Relative Size, Profitability and Growth on Corporate Capital Allocations,” Journal of Management 43, no. 8 (November 2017): 2469–2496.

13. Matthias Arrfelt, Robert Wiseman, and G. Tomas Hult, “Looking Backward Instead of Forward: Aspiration-Driven Influences on the Efficiency of the Capital Allocation Process,” Academy of Management Journal 56, no. 4 (2013): 1081–1103.

14. Hyun-Han Shin and Rene M. Stulz, “Are Internal Capital Markets Efficient?,” Quarterly Journal of Economics 133 (1998): 531–552.

15. Markus Glaser, Florencio Lopez-De-Silanes, and Zacharias Sautner, “Opening the Black Box: Internal Capital Markets and Managerial Power,” Journal of Finance 68, no. 4 (August 2013): 1577–1631.

16. James Ang, Abe DeJong, and Marieke van der Poel, “Does CEOs’ Familiarity with Business Segments Affect Their Divestment Decisions?,” Journal of Corporate Finance 29 (December 2014): 58–74.

17. Julie Wulf, “Influence and Inefficiency in the Internal Capital Market,” Journal of Economic Behavior and Organization 72, no. 1 (2009): 305–321.

18. David Bardolet, Craig Fox, and Dan Lovallo, “Corporate Capital Allocation: A Behavioral Perspective,” Strategic Management Journal 32, no. 13 (December 2011): 1454–1483.

19. Stephen Hall, Dan Lovallo, and Reinier Musters, “How to Put Your Money Where Your Strategy Is,” McKinsey Quarterly, March 2012.

20. Anne Fisher, “How IBM Bypasses Bureaucratic Purgatory,” Fortune, December 5, 2013, https://fortune.com/2013/12/04/how-ibm-bypasses-bureaucratic-purgatory/.

21. Fisher, “How IBM Bypasses Bureaucratic Purgatory.”

22. “The Generative AI Boom in 6 Charts,” CB Insights Research Briefs, February 27, 2024, www.cbinsights.com/research/generative-ai-funding-top-startups-investors-2023/.

23. Sampath Sharma Nariyanuri, “Fintech Funding Falls 42% to $35B in 2023, but Downturn May Be Nearing End,” S&P Global, February 14, 2024, www.spglobal.com/marketintelligence/en/news-insights/research/fintech-funding-falls-42-to-35b-in-2023-but-downturn-may-be-nearing-end.

24. All quotes and descriptions of company practices were sourced from personal interviews conducted by the authors.

25. Peter Cappelli, “Why We Love to Hate HR and What HR Can Do about It,” Harvard Business Review, July–August 2015, 54–61; and Ram Charan, Dominic Barton, and Dennis Carey, “People before Strategy: A New Role for the CHRO,” Harvard Business Review, July–August 2015, 62–71.

1. Peter Coy, “The Future of Work,” Business Week, August 20, 2007, 41–46.

2. P. A. Mabe III and S. G. West, “Validity of Self-Evaluation of Ability: A Review and Meta Analysis,” Journal of Applied Psychology 67 (1982): 280–286.

3. Cameron Anderson et al., “A Status-Enhancement Account of Overconfidence,” Journal of Personality and Social Psychology 103, no. 4 (2012): 718–735.

4. Paola Rovelli and Camilla Curnis, “The Perks of Narcissism: Behaving Like a Star Speeds Up Career Advancement to the CEO Position,” The Leadership Quarterly 32, no. 3 (June 2021).

5. Kevin Crowley, “Exxon’s Exodus: Employees Have Finally Had Enough of Its Toxic Culture,” Bloomberg BusinessWeek, October 13, 2022, www.bloomberg.com/news/features/2022-10-13/exxon-xom-jobs-exodus-brings-scrutiny-to-corporate-culture.

6. Marcus Buckingham, “Most HR Data Is Bad Data,” Harvard Business Review, February 9, 2015, https://hbr.org/2015/02/most-hr-data-is-bad-data.

7. Neha Mahajan and Karen Wynn, “Origins of ‘Us’ versus ‘Them’: Prelinguistic Infants Prefer Similar Others,” Cognition 124 (2012): 227–233.

8. Emily Chang, Brotopia: Breaking Up the Boys Club of Silicon Valley (New York: Portfolio/Penguin, 2018).

9. Joe Nocera, “Silicon Valley’s Mirror Effect,” New York Times, December 26, 2014, www.nytimes.com/2014/12/27/opinion/joe-nocera-silicon-valleys-mirror-effect.html.

10. F. David Schoorman, “Escalation Bias in Performance Appraisals: An Unintended Consequence of Supervisor Participation in Hiring Decisions,” Journal of Applied Psychology 73, no. 1 (1988): 58–62.

11. Kathryn Tyler, “Undeserved Promotions,” HR Magazine 57, no. 6 (June 2012): 79.

12. Dana Wilkie, “Is the Annual Performance Review Dead?,” Society for Human Resources Management, August 19, 2015, www.shrm.org/resourcesandtools/hr-topics/employee-relations/pages/performance-reviews-are-dead.aspx.

13. Dacher Keltner, The Paradox of Power: How We Gain and Lose Influence (New York: Penguin Books, 2016). See also Nathanael Fast et al., “Power and Overconfidence in Decision-Making,” Organizational Behavior and Human Decision Processes 117, no. 2 (March 2012): 249–260.

14. Reed Hastings and Erin Meyer, No Rules Rules: Netflix and the Culture of Reinvention (New York, Penguin Press, 2020). Unless otherwise noted, the facts and quotes in this section are drawn from this book.

15. Patty McCord, “How Netflix Reinvented HR,” Harvard Business Review, January–February 2014.

1. See, for example, N. K. Humphrey, “The Social Function of Intellect,” in Growing Points in Ethology, ed. P. P. G. Bateson and R. A. Hinde (Cambridge: Cambridge University Press, 1976), 303–317; and Roy F. Baumeister and E. J. Masicampo, “Conscious Thought Is for Facilitating Social and Cultural Interactions: How Mental Simulations Serve the Animal-Culture Interface,” Psychological Review 117, no. 3 (July 2010): 945–971.

2. See Julianne Holt-Lunstad, Timothy B. Smith, and J. B. Layton, “Social Relationships and Mortality Risk: A Meta-Analytic Review,” PLoS Medicine 7, no. 7 (2010): 1–20; and Julianne Holt-Lunstad et al., “Loneliness and Social Isolation as Risk Factors for Mortality: A Meta-Analytic Review,” Perspectives on Psychological Science 10, no. 2 (2015): 227–237.

3. Gallup, State of the Global Workplace: 2024 Report, June 2024.

4. For a comprehensive study of the relative importance of different factors affecting behavior change of AA members, see John F. Kelly et al., “Determining the Relative Importance of the Mechanisms of Behavior Change within Alcoholics Anonymous: A Multiple Mediator Analysis,” Addiction 107, no. 2 (February 2012): 289–299.

5. AA Membership Survey, Alcoholics Anonymous, 2022, www.aa.org/membership-survey-2022.

6. See, for instance, Kimberly S. Walitzer, Kurt H. Dermen, and Christopher Barrick, “Facilitating Involvement in Alcoholics Anonymous during Outpatient Treatment: A Randomized Clinical Trial,” Addiction 104, no. 3 (March 2009): 391–401, www.ncbi.nlm.nih.gov/pmc/articles/PMC2802221/. See also Michael Gross, “Alcoholics Anonymous: Still Sober after 75 Years,” American Journal of Public Health 100, no. 12 (December 2010): 2361–2363.

7. Gross, “Alcoholics Anonymous.”

8. This section draws on the reporting of John Kania and Mark Kramer in “Collective Impact,” Stanford Social Innovation Review, Winter 2011, 36–41, https://ssir.org/articles/entry/collective_impact#.

9. David Brooks, “A Really Good Thing Happening in America,” New York Times, October 3, 2018, www.nytimes.com/2018/10/08/opinion/collective-impact-community-civic-architecture.html.

10. David Bornstein, “Coming Together to Give Schools a Boost,” New York Times Blogs, March 7, 2011, https://opinionator.blogs.nytimes.com/2011/03/07/coming-together-to-give-schools-a-boost/.

11. Bornstein, “Coming Together to Give Schools a Boost.”

12. John Kania and Mark Kramer, “Embracing Emergence: How Collective Impact Addresses Complexity,” Stanford Social Innovation Review, January 21, 2013, https://ssir.org/articles/entry/social_progress_through_collective_impact.

13. Ernst & Young, Maatschappelijke Business Case Buurtzorg, 2009. The estimates were for savings by 2013, taking into account a 2 percent growth rate in clients.

14. F. T. Schut and B. van den Berg, “Long-Term Care Insurance in the Netherlands,” in Financing Long-Term Care in Europe, ed. J. Costa-Font and C. Courbage (London: Palgrave Macmillan, 2012), https://doi.org/10.1057/9780230349193_7.

15. S. S. Nandram, Organizational Innovation by Integrating Simplification: Learning from Buurtzorg Nederland (Cham: Springer, 2015), 14.

16. Gallup, State of the American Workplace, 2017, 118.

17. K. A. Monsen and J. de Blok, “Buurtzorg: Nurse-Led Community Care,” Creative Nursing 24, no. 1 (2018): 112–127, https://doi.org/10.1891/1078-4535.19.3.122.

18. Nandram, Organizational Innovation by Integrating Simplification, 117.

1. Ross Perlin et al., “Mapping Urban Linguistic Diversity in New York City: Motives, Methods, Tools, and Outcomes,” Language Documentation & Conservation 15 (2021): 458–490.

2. “International Migration, England and Wales: Census 2021,” UK Office for National Statistics, November 2, 2022, www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/internationalmigration/bulletins/internationalmigrationenglandandwales/census2021

3. PitchBook NVCA Venture Monitor, Q1 2024, April 10, 2024.

4. “Driving the Innovation Economy,” infographic, in AUTM 2022 Licensing Activity Survey (Washington, DC: AUTM, 2022), https://autm.net/surveys-and-tools/surveys/licensing-survey/2022-licensing-survey.

5. Henry Chesbrough, “The Future of Open Innovation,” Research Technology Management, November–December 2017, 34.

6. Kevin J. Boudreau and Karim R. Lakhani, “Using the Crowd as an Innovation Partner,” Harvard Business Review, April 2013, https://hbr.org/2013/04/using-the-crowd-as-an-innovation-partner.

7. Erik Kirschbaum, “German Automakers Who Once Laughed Off Elon Musk Are Now Starting to Worry,” Los Angeles Times, April 23, 2016.

8. Steve Jobs, Stanford University commencement speech, June 12, 2005, https://news.stanford.edu/news/2005/june15/jobs-061505.html.

9. Thomas S. Kuhn, The Structure of Scientific Revolutions (Chicago: University of Chicago Press, 1970), 90.

10. Shunryū Suzuki, Zen Mind, Beginner’s Mind (Boston: Shambhala Publications, 2006), 1.

11. Aravind Eyecare System, Activity Report 2017–2018, 5, https://online.pubhtml5.com/idml/copn/#p=1.

12. “eCommerce: Market Data and Analysis,” Statista Market Insights, September 2023.

13. “2019: China to Surpass US in Total Retail Sales,” eMarketer Report, January 23, 2019. Also see Kai-Fu Lee and Jonathan Woetzel, “China as a Digital World Power,” Acuity Magazine, December 2, 2018, www.acuitymag.com/business/china-as-a-digital-world-power.

14. “Time Out Market Lisbon Celebrates Its 10th Anniversary as the Group Prepares to Open Its 10th Market Later This Year,” Time Out news release, May 17, 2024.

15. “Fabless Manufacturing,” Wikipedia, accessed December 29, 2024, https://en.wikipedia.org/wiki/Fabless_manufacturing.

16. “The Strategy Crisis: Insights from the Strategy Profiler,” Strategy&, 2019, www.strategyand.pwc.com/gx/en/unique-solutions/cds/the-strategy-crisis.pdf.

17. “34 Esports Statistics for 2024,” Influencer Marketing Hub, September 9, 2024, https://influencermarketinghub.com/esports-stats/.

18. This section was sourced almost exclusively from personal interviews conducted by the authors and internal documents provided by Haier.

19. Yu Tang Hsiao et al., “vTaiwan: An Empirical Study of Open Consultation Process in Taiwan,” SocArXiv, Center for Open Science, 2018, https://ideas.repec.org/p/osf/socarx/xyhft.html. See also Audrey Tang, “g0v—Fork the Government,” presented at SEAIP 2015: Southeast Asia International Joint-Research and Training Program, December 7, 2015, https://speakerdeck.com/audreyt/g0v-fork-the-government?slide=97.

20. Audrey Tang, “Uber Responds to vTaiwan’s Coherent Blended Volition,” Medium, May 23, 2016, https://blog.pol.is/uber-responds-to-vtaiwans-coherent-blended-volition-3e9b75102b9b.

21. See the website for vTaiwan (https://info.vtaiwan.tw) for more information on its accomplishments and how it works.

22. E. Glen Weyl and Audrey Tang, Plurality: The Future of Collaborative Technology and Democracy (RadicalxChange, 2024), 66.

23. In 2022, this practice evolved into “Ideathon,” a new annual event for speculative design; for more information, see https://ideathon.tw/en.

24. Audrey Tang, “A Strong Democracy Is a Digital Democracy,” New York Times, October 15, 2019, www.nytimes.com/2019/10/15/opinion/taiwan-digital-democracy.html.

1. Based on authors’ analysis of the Gallup Great Jobs Demonstration Survey, November 2019. Excludes self-employed or contract workers and nonmanagerial employees (though the responses for managerial employees are only slightly higher). Data is weighted using Gallup’s suggested population weights.

2. “The Most Innovative Companies 2018,” Boston Consulting Group.

3. “Venture Capital Funnel Shows Odds of Becoming a Unicorn Are About 1%,” CB Insight Research Brief, September 6, 2018.

4. Abe Othman, “What Percentage of AngelList Seed-Stage Startups Become Unicorns?,” AngelList, July 15, 2021, www.angellist.com/blog/angellist-unicorn-rate.

5. Peter Diamandis, “Culture and Experimentation—with Uber’s Chief Product Officer,” Medium, April 10, 2016, https://medium.com/abundance-insights/culture-experimentation-with-uber-s-chief-product-officer-520dc22cfcb4.

6. Greg Linden, “Early Amazon: Shopping Cart Recommendations,” Geeking with Greg (blog), April 25, 2006, https://glinden.blogspot.com/2006/04/early-amazon-shopping-cart.html.

7. “List of Falcon 9 and Falcon Heavy Launches,” Wikipedia, https://en.wikipedia.org/w/index.php?title=List_of_Falcon_9_and_Falcon_Heavy_launches.

8. Thomas G. Roberts, “Space Launch to Low Earth Orbit: How Much Does It Cost?,” Center for Strategic and International Studies Aerospace Security Project, September 2022, https://aerospace.csis.org/data/space-launch-to-low-earth-orbit-how-much-does-it-cost/.

9. Jack Kuhr, “2024 Orbital Launch Attempts per Country,” Payload, January 3, 2025, https://payloadspace.com/2024-orbital-launch-attempts-by-country/.

10. “How Big Companies Can Innovate,” McKinsey & Company, white paper, February 2015, www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-big-companies-can-innovate.

11. Jeff Zias, “Snap and File: An Innovation Story behind Intuit’s TurboTax Mobile App,” LinkedIn post, April 14, 2016, www.linkedin.com/pulse/snap-file-innovation-story-behind-intuits-TurboTax-mobile-jeff-zias/.

12. Brad Smith, “Intuit’s CEO on Building a Design-Driven Company,” Harvard Business Review, January–February 2015.

13. Kavita Appachu, “Painting the Art of the Possible, with Brad D. Smith,” Moves the Needle podcast, 55:15, accessed December 22, 2024, https://movestheneedle.com/leadership/painting-the-art-of-the-possible-with-brad-d-smith/.

14. “Making Innovation Easier: Intuit’s Scott Cook,” interview with Michael Chui, McKinsey & Company, February 1, 2015, www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-big-companies-can-innovate.

15. Suzanne Pellican, “How Intuit Applied Design Thinking,” O’Reilly Design Conference, 2016.

16. Hugh Molotsi and Jeff Zias, The Intrapreneur’s Journey: Empowering Employees to Drive Growth (Lean Startup Co., 2018), 823–824, Kindle.

17. Scott Cook, “Accounting for Intuit’s Success,” Stanford University lecture, November 4, 2015, https://stvp.stanford.edu/wp-content/uploads/sites/3/2024/09/innovation-fueled-by-experimentation-transcript.pdf.

18. Matt Marshall, “Inside the Race to Build an ‘Operating System’ for Generative AI,” Venture Beat, June 30, 2023, https://venturebeat.com/ai/inside-the-race-to-build-an-operating-system-for-generative-ai/.

19. Bennett Blank, “Lessons on Innovation from Intuit,” June 12, 2017, https://innov8rs.co/news/make-innovation-part-everyones-job-cisco-ge-adobe-intuit-intrapreneurship/.

1. Roger Scruton, “Conservatism,” accessed December 20, 2024, www.roger-scruton.com/images/pdfs/Conservatism-POV-1.pdf.

2. The Complete Works of Ralph Waldo Emerson, vol. II (London: Bell and Daldy, 1866), 266.

3. Charles Simeon, quoted in H. C. G. Moule, Charles Simeon (London, 1956), 77–78.

4. G. K. Chesterton, Complete Works of G. K. Chesterton (Hastings, UK: Delphi Classics, 2014), Kindle.

5. James March, “Exploration and Exploitation in Organizational Learning,” Organization Science 2 (1991): 71–87.

6. IQVIA Institute for Human Data Science, Global Trends in R&D 2024, February 2024.

7. Pedro Cuatrecasas, “Drug Discovery in Jeopardy,” Journal of Clinical Investigation 116, no. 11 (2006): 2837–2842.

8. “Stable Customer Satisfaction Levels Despite Turbulent Times,” EPSI Ratings, September 18, 2023, www.epsi-rating.com/wp-content/uploads/2023/09/epsi-uk-2023.pdf.

9. Jan Wallander, Decentralization—Why and How to Make It Work (Stockholm: SNS Forlag, 2003), 42.

10. Wallander, Decentralization, 87.

11. Amar Bhide, Dennis Campbell, and Kristin Stack, Handelsbanken: May 2002, Case 116–119 (Boston: Harvard Business School, July 1, 2016), 5.

12. Nassim Nicholas Taleb and Gregory F. Treverton, “The Calm before the Storm,” Foreign Affairs, January/February 2015, www.foreignaffairs.com/articles/africa/calm-storm.

13. Accenture, “Global Banking Customer Study: Reignite the Connections to Discover Hidden Human Value,” 2023, www.accenture.com/content/dam/accenture/final/industry/banking/document/Accenture-Banking-Consumer-Study.pdf.

14. Richard Milne, “Handelsbanken Is Intent on Getting Banking Back to the Future,” Financial Times, March 20, 2015, www.ft.com/content/85640c38-ad2a-11e4-a5c1-00144feab7de.

15. Handelsbanken’s treasury department charges branches for the funds they advance to borrowers; these costs are in part driven by the branch’s loan portfolio. For instance, a branch with a large amount of fixed thirty-year loans will face higher funding costs than one with more ten-year adjustable-rate mortgages because of its higher interest rate risk. The specific loans on the branch’s books also drive capital charges—the greater the amount of relatively risky loans, the greater the charge for covering the cost of equity capital set aside as a buffer against potential losses. While not all the funding costs are controlled by the branch (they reflect a variety of factors, including the overall balance between assets and liabilities across all branches and the cost of funding gaps between the two in the capital markets), Handelsbanken’s practice of allocating funding and capital costs in a way that reflects the branch’s loan portfolio and the actual funding costs of the bank is uncommon in the industry. For more details, see Kroner Niels, A Blueprint for Better Banking: Svenska Handelsbanken and a Proven Model for Post-Crash Banking (Petersfield, UK: Harriman House, 2009), 106–107, Kindle.

16. Caroline Teh, Researching Stewardship (Göteborg, Sweden: BAS Publishing, 2016), 101.

17. Lindsay R. Murray and Theresa Libby, “Svenska Handelsbanken: Controlling a Radically Decentralized Organization without Budgets,” Issues in Accounting Education 22, no. 4 (November 2007): 631.

18. Teh, Researching Stewardship, 102.

19. Jeremy Hope and Robin Fraser, Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap (Boston: Harvard Business School Press, 2003), 134.

20. Charles A. O’Reilly III and Michael L. Tushman, “The Ambidextrous Organization,” Harvard Business Review, April 2004.

1. Revenue converted from Swiss francs to US dollars using exchange rate as of December 31, 2023.

2. All quotes and descriptions of company practices were sourced from personal interviews conducted by the authors.

1. Marshall Ganz, “Leading Change: Leadership, Organization, and Social Movements,” June 6, 2008, www.researchgate.net/publication/266883943_Leading_Change_Leadership_Organization_and_Social_Movements.

2. Melinda Ashton, “Getting Rid of Stupid Stuff,” New England Journal of Medicine 379, no. 19 (2018): 1789–1791.

3. Adapted from Eric Steven Raymond, The Cathedral and the Bazaar (Sebastopol, CA: O’Reilly Media, 2001), 197–199.

4. Paul Lambert, “Roche: From Oversight to Insight,” Management Innovation eXchange, December 23, 2011, www.managementexchange.com/story/roche-oversight-insight.

1. See, for instance, Barbara Kellerman, The End of Leadership (New York: HarperCollins, 2012); and Jeffrey Pfeffer, Leadership BS: Fixing Workplaces and Careers One Truth at a Time (New York: HarperBusiness, 2015).

2. The rough estimate on the size of the leadership development industry was derived from multiple sources, including Training Industry Magazine’s 2023 Training Industry Report and industry research reports by Global Insights Services and Future Market Insights.

3. Claudio Feser, Nicolai Nielsen, and Michael Rennie, “What’s Missing in Leadership Development,” McKinsey Quarterly, August 2017; Global Leadership Forecast Survey, Development Dimensions International, 2023.

4. Ben Wigert, “The Strengths, Weaknesses and Blind Spots of Managers,” Gallup Workplace, May 28, 2024, www.gallup.com/workplace/645299/strengths-weaknesses-blind-spots-managers.aspx.

5. This finding is based on the authors’ analysis of the 2015 European Working Conditions Survey. Sample includes respondents from the original fifteen European Union member countries working in organizations with more than 250 people and whose tenure is of at least three years (the relevant question asks respondents whether they have experienced a major reorganization in the last three years). Data is weighted using the survey’s suggested population weights.

6. Michael Mankins and Patrick Litre, “Transformations That Work,” Harvard Business Review, May–June 2024.

7. Amit Yadav, “Why Companies Like Netflix, Uber, and Amazon Are Moving Towards Microservices,” TechSur, January 10, 2018.

8. Peter Tollman et al., “Getting Smart about Change Management,” Boston Consulting Group, January 5, 2017, www.bcg.com/en-us/publications/2017/change-management-getting-smart-about-change-management.aspx.

9. Scott Neuman, “Pope Francis Says the Court Is the ‘Leprosy of the Papacy,’ ” National Public Radio, October 1, 2013, www.npr.org/sections/thetwo-way/2013/10/01/228200595/francis-says-the-court-is-the-leprosy-of-the-papacy.

10. Ed Condon, “Pope Francis’s Bold Reforms Have Been Frustrated. How Did This Happen?,” Catholic Herald, February 2, 2018.

Index

Note: Page numbers followed by f or t indicate figures or tables, respectively.

abolitionist movement, 89

accelerators, 40

accountability

autonomy and, 154, 275, 278

at Barnes & Noble, 66, 68

correlation between job-related factors and, 143, 143t, 144t

at Haier, 119, 126

at Handelsbanken, 275–276

maximizing freedom and, 58

at Michelin, 333–336

at Netflix, 183–184

at Nucor, 99, 107

protecting employees from, 77

Acemoglu, Daron, 11

acquisitions, 40–41

activist investors, 16–17

activists/activism, 346

administrative competence, 180–181, 182, 343

administrative competence and skill, 181

administrative support, estimates of, 358–359

administrator compensation, estimates of, 359

The Age of Heretics (Kleiner), 78

AI. Seeartificial intelligence (AI)

Airbnb, 27

Airbus, 7

Air Cube, 233

Åkerström, Carina, 271

Ala-Pietila, Pekka, 227

Alcoholics Anonymous (AA), 194–195, 310–311

Alexa, 246

alignment, 54

allocational agility, 162–167

Alphabet, 17, 40

Altman, Sam, 10–11

Amabile, Theresa, 43

Amazon, 222

Amazon Marketplace, 246

Amazon Prime, 36

Amazon Prime Air, 246

Amazon Web Services, 246

experimentation by, 246–247

site recommendations of, 247

software development teams in, 349

The Ambidextrous Organization (O’Reilly and Tushman), 277

ambiguity, bureaucratic aversion to, 263–264

American Diabetes Association, 294

American Medical Association, 319

Anderson, Bill, 288, 289, 292, 293, 305, 306

Anderson, Cameron, 177

Android operating system, 35–36, 230

Anduril, 4

angel investors, 164, 165

animated films, 32

Apple (company), 5, 223, 240, 248. See alsoiPhone

Apple TV, 52

appliances. SeeHaier

Aravind Eye Care System, 218

Aristotle, 89

Arkwright, Richard, 139

ARM Holdings, 6

artificial intelligence (AI), xiii

Intuit Assist, 251

organizational change and, 35–36

potential impact of, xii

productivity and, 10–11

Ashby, Ross, 245

Ashton, Melinda, 317–319

assumptions, challenging unexamined, 217–218

AT&T, 37, 38t, 52

athletic wear, 219, 231–232

ATLAS project, 49–51

authenticity, 143, 143t, 345

authority

aligning wisdom and, 184–186

costs of unquestioned, 160

in formal hierarchies, 187–188

at Genentech, 296, 299

monarchial, 88

Operation Warp Speed and, 58

in pharma industry, 302

redistributing, 156

reverse accountability and, 107

surrendering your own, 314–317

top-down view of, 178

Acknowledgments

This book reflects the goodwill of leaders across the world who shared their organization’s human-centric principles and practices. For these contributions, we wish to acknowledge the following organizations and individuals:

At Burberry and later Apple: Angela Ahrendts. At Adidas: Mark King. At the ATLAS Project, CERN: Markus Nordberg and Marzio Nessi. At Buurtzorg: Jos de Blok and Thjs de Blok. At Haier: Ji Guangqiang, Lu Kailin, Wu Yong, Wang Jian, Elizabeth Shi, and Zhang Ruimin. At Ingersoll Rand: Vincente Reynal and Peter Stavros. At Michelin: Bertrand Ballarin, Laurent Carpentier, Jean-Noel Gorce, Jean-Michel Guillon, Jaroslaw Michalak, and Christian Thierolf. At Morning Star: Paul Green, Doug Kirkpatrick, and Chris Rufer. At Nucor: John Ferriola, James Frias, Donovan Marks, Katherine Miller, MaryEmily Slate, and Thad Solomon. At Roche: Bill Anderson, Walt Renfree, Jonathan Witt, and Amanda McKean. At Svenska Handelsbanken: Anders Bouvin, Carina Åkerström, and Richard Winder. At Vinci: Xavier Huillard and Reinhard Schlemmer. At W.L. Gore and Associates: Michelle Augustine, Terri Kelly, and Jason Eads. For Taiwan’s efforts at digital democracy: Audrey Tan and Glen Weyl. For Operation Warp Speed: Paul Mango.

Many of the ideas in this book were first previewed with participants in the London Business School’s senior executive program. We are grateful for the insights and encouragement they provided.

We are also grateful to Adi Ignatius, former editor in chief of Harvard Business Review Press, for giving us the chance to work with his magnificent staff, starting with Jeff Kehoe, our editor. We truly appreciate Jeff’s thoughtful guidance on the book’s structure and content and his steadfast support and encouragement. Others who deserve tribute include Nicole Torres, Jen Waring, Felicia Sinusas, and Julie Devoll, as well as the entire Press marketing and publicity team.

Writing a book is arduous, not only for the authors but also for their families. We are deeply grateful for the patience and support we received from our partners and children through the years of research and writing that were required to produce this volume.

While the credit for this book must be widely shared, the responsibility for any shortcomings rests with us.

About the Authors

Most of the time

Most of the time

Are you consulted before objectives are set for your work?

Can you influence decisions important to your work?

Do you have a say in choosing the colleagues you work with?

Source: Authors’ analysis of data from the European Working Conditions Survey (European Foundation for the Improvement of Living and Working Conditions, March 2018) and the American Working Conditions Survey (RAND Corporation, November 2019).