Centralised control has failed in every single economic endeavour known to man.
As a national economic system, centralised control, often known as communism, failed spectacularly in the USSR. More recently China's attempt to incorporate capitalist elements to its centralised economic control framework led to the country wasting US$6.8 trillion in investment, according to a recent report in The Financial Times.
Such failure also tends to be true at the company level. Centralised management, or non-delegation, restricts a company’s potential. The chief executive is a single person and if he retains complete control and refuses to delegate then he will limit the potential of the company to his personal ability to manage all of it.
On the other hand, a more distributed control structure allows the company to scale its business by scaling its human resources.
Lack of delegation not only affects revenue, it also presents catastrophic risks. That is correct, risks is plural.
First is that any error in judgment by the chief executive is promulgated through the organisation with little chance of being checked. An error will therefore immediately spread through the whole organisation.
Lack of opportunity for other executives and middle-management to make decisions cripples their development as effective managers. Sitting in one's office chair every day does not equate to work experience. When the CEO eventually leaves, or more likely is pushed out or retires, there will be no one who is familiar with the company and who has any real management skills.
Replacing the chief executive in a healthy company need not disrupt the business. But replacing one who does not delegate, and when the chief operating officer, chief financial officer and the heads of departments do not understand how to manage their business, is a catastrophe.
In the Middle East these issues are more prevalent than in developed markets. The reasons for this range from unique social and cultural norms to nascent shareholder activism to ineffective boards.
The first issue is the use of information as power. This is not unique to the Middle East, but the extent to which it is used in the region relative to developed markets is breathtaking.
The use of the power is also bi-directional. Used downwards the control of information exercises complete control over the CEO’s subordinates since without information employees cannot perform their jobs. As the UAE’s economy continues to grow into a knowledge- based economy this makes the problem much more acute. The inefficiency of having to play corporate politics just to get the job done is clearly value-destructive.
Controlling the information downwards has the added benefit of controlling it upwards. This allows the CEO not only to control his employees but to surreptitiously control the board and even the shareholders. This in turn weakens and even neutralises any corporate governance or other forms of oversight.
The next issue is the Middle Eastern insistence on personal loyalty. At first blush this might not make sense. But the issue here is personal loyalty as opposed to company loyalty. The company is where management’s loyalty should lie. A chief executive who instead demands personal loyalty to cement his centralised control over the organisation also creates a weak governance culture and lays the seeds for fraud.
The third Middle East-focused issue is a predilection to self-aggrandisement. Everybody wants to be seen as the star. Everybody wants to be regarded as the indispensable vizier. There is no faster way to do this than to control information.
Why does this happen? In the end, it goes back to loyalty. A board or a chairman who blindly trusts their CEO and refuses to listen to any other voices, be it from other board members, executives, clients, shareholders or other stakeholders creates an environment that allows the boss to abuse their position. It is a very real case of the emperor wearing no clothes and the CEO playing the overpaid tailor.
The solution, as it usually is, lies in the corporate governance framework of the company. The board needs to understand the value of a diffuse control structure and remain alert to the red flags of information manipulation, self-aggrandisement and lackey collecting. Most importantly if there is no real change in the C-suite over years, or worse, decades then you can be sure that the chief executive is in complete control. That is not a good thing.
Sabah Al Binali is an active investor and entrepreneurial leader. You can read more of his thoughts at al-binali.com
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