This article outlines various inside and outside influences that organizational leadership has to deal with during decision making. Governmental regulatory agencies have the vested authority to impose sanctions upon non-compliant companies. The dictates of regulatory agencies often create legalistic mazes and bureaucratic rituals that bear little relation to a framework conducive to rational decision making. Deviation from legally codified procedures can subject an organization to a situation where its legitimacy is threatened. Socially conscious groups, from NOW to PETA, have also gained significant constituencies, as well as credibility, for their causes within society as a whole. Many such organizations use more formal methods to give various populations of workers protected legal status. The number of stakeholders relevant to an organization has also increased sharply during the past 50 years. To complicate matters further, different stakeholders are likely to have competing interests. There are cases where organizational leadership proposes actions that are reasonable and necessary for the continuation of the organization, but are resisted very strongly, even by constituencies that might benefit, either immediately or eventually, from their implementation.
The past few years have turned many organizations, both in the U.S. and abroad, on their proverbial heads. Industries as diverse as banking, automobile manufacturing, and insurance were once perceived as stable and secure. Several companies in each of these sectors could, at one time or another, have proudly claimed the “darling of Wall Street” title.
However, a toxic combination of poor investment decisions and a recession have brought about a rude awakening. Mistakes, myths, and assumptions regarding the sustainability of certain business models, handed down from one generation of leaders to the next, have finally caught up with countless firms that chose to close their eyes to the changes occurring—sometimes obvious, but more often proceeding with the speed, and force, of a glacier.
Reacting to game changing developments in a company's core market or attempting to address fundamental problems within an organization is rarely an easy task. Leaders have to consider efforts to implement new practices against the forces, both internal and external to the firm, that are likely to resist and obstruct change. These countervailing forces may be pressures applied by employees, managers, customers, suppliers, lenders, insurers, activists, or any group which believes it has the potential to be impacted by a company's decisions. Since these groups can be affected, or believe they can be, by a company's actions, they are stakeholders in management decisions.
Consider, for example, companies that have experienced adverse financial repercussions resulting from the long-term dependencies (most often associated with defined-benefit pensions and retiree healthcare provisions) that were entered into decades ago with workers. Although the financial burden of these dependencies had been acknowledged many years ago, leadership was unable, or perhaps unwilling, to engage the potentially impacted parties in meaningful dialogue regarding any attempts to realign the programs with contemporary business realities.
Doing so might have enabled entire industries to provide compensation and other benefits more in line with competitors, and could have potentially saved thousands, and perhaps even millions, of jobs. Instead, leadership more often than not tried to appease constituencies whose myopic interests regarded the company as little more than a dispenser of benefits, instead of an organization competing with others for customers. Customers went elsewhere; so did the industries and their jobs.
The Modern-Day Organization
Despite the wide diversity of industries supplying the products and services we enjoy in contemporary society, the firms populating these industries are remarkably isomorphic. In other words, they are similar in many ways, sharing structural, cultural, and procedural characteristics. Organizations are hierarchical—that is, a chain of command still applies, with its self-apparent verticality. Standardized, “rational” procedures still rule.
Organization, of course, is necessary. Organizational characteristics allow for a sense of security and regularity in our lives that was almost unimaginable only a few generations ago. Engineers know what would happen if standards for pressure vessels, pipelines, and elevators that are so often taken for granted by the public didn’t exist.
What's more, a recognizable structure serves to legitimate, codify, and institutionalize, and forms a basis for our understanding of social reality. Conversely, if a company, or even a social club, lacks organization, it has difficulty legitimating itself with its stakeholders. It isn’t seen as “real.”
On the other hand, rigid organization tends also to construct an internal setting that restricts a company's ability to enact change, regardless of how crucial or necessary a change might be. As time progresses, rigidity can restrict the change options available to leadership.
There are many forces that contribute to isomorphism, including those impacting leadership within an organization. The leaders of industry are often drawn from a pool of individuals with similar experiences. Many business leaders share such background influences as education at certain degree-granting institutions, similar professional credentials, and often, board memberships.
Non-work activities are often similar, too—club memberships, charitable affiliations, and fraternal organizations. Business leaders tend to socialize with other business leaders.
The similarity of background tends toward homogenization of the pool of potential leaders upon which an organization is likely to draw. This homogenization produces leaders who perceive organizational challenges in much the same way, with subordinates (division presidents, general managers, directors, etc.) whose perception is also very similar. Over time, this may impair the ability of leadership to accurately perceive the landscape confronting the organization and to act appropriately, as more novel or unorthodox, but potentially effective, strategies for solving organizational problems do not receive sufficient consideration or attention.
Want to avoid such a possible pitfall in your organization? Truth be told—it is very difficult. Individuals who aspire to leadership are frequently groomed for years by very powerful and influential individuals in a company, and frequently have sparkling résumés with impeccable credentials. To give yourself a fighting chance at over-coming such a situation, be a consumer of the literature dedicated to helping companies unlock creativity, innovation, and unrealized talents in everyone—not just those with keys to the executive washroom.
Pressure exerted by outside organizations is another source of isomorphic influence.
Governmental regulatory agencies have the vested authority to impose sanctions upon non-compliant companies. The dictates of regulatory agencies often create legalistic mazes and bureaucratic rituals that bear little relation to a framework conducive to rational decisionmaking. Leaders are aware that deviation from legally codified procedures can subject the organization to a situation where its legitimacy is threatened.
Socially conscious groups, from NOW to PETA to AARP, have gained significant constituencies, and credibility, for their causes within society as a whole. Many such organizations are capable of using more formal methods to give various populations of workers protected legal status. Age, gender, disability, race, and a variety of other characteristics can grant workers protections under the law, or more to the point, in court.
A Business Week article in April 2007, “Fear of Firing” by Michael Orey, explored the increase in lawsuits brought by workers who claimed they were let go for unfair or discriminatory reasons. Many of the suits may have been frivolous, but almost all were costly.
The article was accompanied by a graph titled “Untouchable Nation.” Using data for 2006 from the U.S. Bureau of Labor Statistics, it estimated that as much as 84 percent of the workforce in the U.S. could claim some form of protected legal status.
Leadership choosing to propose a reduction in workforce must be aware that retention decisions are often not entirely based upon merit. Decisions are frequently vetted by attorneys to determine whether a protected group is disproportionately affected.
Isomorphism must be considered when an organization responds to situations where uncertainty, ambiguity, or unpredictability is present. Leadership tends to model its actions on those that it perceives to be superior in terms of legitimacy or success. For example, leaders are likely familiar with socially or culturally legitimated programs such as Six Sigma, Total Quality Management, ISO 9000, QS-9000, or Lean Manufacturing. Paradoxically, such programs frequently require additional organizational controls and constraints in order to conform to predetermined schema. Furthermore, employees may resist the increased work burdens that often accompany such programs.
Management may also contain an advocate of a particular system or program who will press for one choice, even when another option may be better suited or more appropriate to the unique needs of the organization.
Proliferation of Stakeholders
The number of stakeholders relevant to an organization has increased sharply during the past 50 years. A 1984 text by R. Edward Freeman, Strategic Management: A stakeholder approach, estimated that the number of stakeholders exerting influence on a major U.S.-based oil company doubled from the late 1950s to the early 1980s.
Freeman identified roughly 15 sources of influence on the oil company at slightly past mid-century. They included the U.S. and various foreign governments, dealers, customers, the press, stockholders, and so on.
By the early ’80s those influencers were still active, but they had been joined by several additional entities, many of which didn’t even exist in the late ’50s. New stakeholders included environmentalist groups, OSHA, the Equal Employment Opportunity Commission, non-petroleum energy industries, and consumer groups. Freeman also held that almost every “new” group (such as environmentalists, consumer advocates, and regulators) had an adversarial relationship with the company.
It is reasonable to expect that firms deriving a majority of revenues from certain products (such as pharmaceuticals, tobacco, alcoholic beverages, automobiles, financial services, and the like) would also have similar changes in their ranks of stakeholders. Further, the growth in membership of socially conscious organizations, many now possessing legal, social, and cultural legitimacy, to counter the actions of firms in certain industries, suggests the negative trend is pervasive towards a number of business sectors in modern society.
The road to hell, we’re told, is paved with good intentions. What actions, while likely undertaken with good intentions, may adversely affect the ability of leadership to implement necessary change in the future? Such actions may include efforts to curry favor with both internal stakeholders (including unions and employee interest groups) and external ones (including socially conscious groups or governmental entities).
To complicate matters further, different stakeholders are likely to have competing interests. There are cases where organizational leadership proposes actions that are reasonable, sensible, and necessary for the maintenance and continuation of the organization, but are resisted very strongly, even by constituencies that might benefit, either immediately or eventually, from their implementation.
Groups come to expect certain behaviors that benefit their perceived interests. When these behaviors change, the groups resist.
Labor unions, for example, for many years encountered little resistance in negotiating ever-more-generous compensation packages for members. When firms began bargaining more aggressively (often out of economic necessity), unions reacted in many ways, including threatening to strike. Despite the shrinking percentage of union-represented employees in the private sector, organizations in many industries have not successfully closed the compensation gap that exists between such employees and their non-union counterparts. This gap, and the organizational problems it causes, has become so acute that it has virtually eliminated entire industries in the U.S., and continues to threaten many others.
We’ve all heard the joke about the lost traveler who asks for directions, only to be told, “You can’t get there from here.” The leaders of some organizations, bound by the constraints of past assumptions and stakeholder pressures, may see more truth in the statement than previously realized. The constraints of isomorphism and organizational stakeholder proliferation likely make this a very real situation, with very real (and often adverse) consequences.
But what can a leader do? Books such as Weird Ideas That Work by Robert I. Sutton and First, Break All the Rules by Marcus Buckingham and Curt Coffman might be good places to start. Both will definitely disprove many myths regarding leadership.
Perhaps, too, there are questions that leaders need to ask themselves. For instance, how do prior organizational actions condition the expectations of various stakeholders? Over the course of time, what dependencies has the organization created that are either difficult to alter or to relinquish? How does the organization communicate its intentions, and the reasons for doing so?
The increasing volume of stakeholders’ voices both inside and outside a company are complicating life at the top. And at the middle and in the rank and file, too.
Despite these hindrances, the economic engine of prosperity and innovation that each firm helps to drive forward has managed to serve us well, and of course, we’re not going back to an agrarian way of life, even though there are groups that want the world to do that, as well.
But, businesses have to be aware of all those stakeholders and must be careful not to commit more resources to a constituency than it can reasonably expect to pay for in the years to come. Otherwise, it could very well wind up as road kill on the highway to the future.
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Cite this article as: Steven Kerno, Peer Pressure: Influences from both inside and outside can force companies into the same mold. Going along reduces the opportunities for change—and chances for survival., Renew. Energy Environ. Sustain. 00, 00 (0000)