As time wears on and the situation, brought about by the 2 year old drop of oil price, unfolds before our eyes, worsening in certain countries, if not all of the MENA, the author of this article analyses the Centralised Form of Governance that in the end was less successful as compared to the ones that were less centralised.  Please read on.

This article was first posted on the author’s blog

William J. Bernstein (born 1948) is an American financial theorist and neurologist.  Per Wikipedia   His research is in the field of modern portfolio theory and he has published books for individual investors who wish to manage their own equity portfolios.  He lives in Portland, Oregon, USA.

His bestselling books include The Birth of Plenty and A Splendid Exchange.

History’s warning to centralised powers

England beat France to the Industrial Revolution by a long margin.  In his book titled The Birth of Plenty, William J Bernstein makes no qualms about it. He specifically argues: “…even the briefest survey of Europe’s institutional history reveals that in the race to the Industrial Revolution, the French never really stood a chance.”

To be fair, France could have easily joined the ranks of the leaders in the advent of global prosperity, because the nation satisfied the prerequisites for the building of wealth. If the prerequisites were the establishment of property rights, scientific rationalism, the ting up of money markets and the development of infrastructure for the fast movement of goods and information, then, in the lead-up to the Industrial Revolution, France had met all of them.

At that time, it had established property rights through a strong government and independent judiciary; it had earned a seat as a scientifically enlightened country, thanks to its many contributions to innovation. It had its own version of money markets and it had provided superior infrastructure for the transfer of goods and information – which, in fairness to the brilliance of the French, outstripped England’s by far.

France not only had all the necessary prerequisites for producing prosperity – it could also serve as one of its key drivers.

Interestingly, France’s “problem” had absolutely nothing to do with the fundamental requirements and preconditions that produce prosperity. Instead, the issue boiled down to “efficiency”, which seemed to plague every component of the French system and for a good period of two centuries – thereby scuttling France’s prospect of joining the ranks of the drivers.

This efficiency challenge was deeply entrenched in a highly concentrated and centralised system of governance and management that had its roots in an ingrained “dirigiste” attitude. And that, in turn, mushroomed into a highly prescriptive steering system.

So, why is this relevant today and why should people and organisations care about it? After all, France is now very much part of the industrialised world and is making a huge contribution.

The answer is simple: the world is collectively searching for ways to effectively restart its economic engine and place itself, once again, on the path to prosperity. It seems that our economic output has stalled and, more importantly, that we are seriously challenged in restarting it.

At the crux of the matter is the question of centralisation.

Increasingly, more companies are centralising decisions and power. There is a growing number of organisations that are pulling away decisions long made by various subsidiaries and operations lying near to and far from headquarters. Today, a rising tide of managers and CEOs see themselves having to navigate treacherous economic conditions and more competitive environments that require agility and a faster pace of operation, while stripped of their ability to make decisions that were previously taken locally.

And if it is understandable that during an economic downturn, some organisations feel the need to reign in decisions at a local level – that may have a big impact on strategy or financial performance – it is rather self-defeating to emasculate local management by preventing them from making those strictly local decisions that can make a huge difference on performance, output and morale.

Central to the entire matter is a question of whether companies should centralise or decentralise, and why.  McKinsey’s research on the subject suggests that the tug-of-war between the two forces of centralisation is timeless, and that, in the absence of a structured approach to determining whether to centralise or not, managers often “fall on benchmarks, politics, fashion – sometimes centralisation is in vogue and sometimes decentralisation is – or instinct.”

While in the case of France, the reason was to instil structure and order in response to the emerging chaos from the Hundred Years War, the argument for centralisation goes further than just creating a sense of order. Organisations and institutions tend to centralise when it is critical to have oversight of a lot of details and when it is important to unite behind a single vision.

An example of this is when, in the mid-1990s, Microsoft made a successful strategic shift to embrace the Internet. That was only possible because Bill Gates understood the details of his business and had considerable centralised power.

Just as there are conditions for which centralisation is a good response, there are times when it is considerably more conducive to decentralise: when the motivation and creativity of many people is particularly critical either to serve growth, or because it is the nature of the industry.

When a company is growing rapidly and needs to cultivate an environment of creativity to enable people to explore new possibilities; when the industry is in the throes of rapid change or when small groups of people operate independently.

Furthermore, history cautions us to be wary of the perils of taking centralisation to extremes. France suffered from an over concentration and centralisation of power with the crown, which choked competition, eradicated initiative and stunted innovation.

It is no secret that this was taken to new heights under Louis XIV’s finance minister, Jean Baptiste Colbert (Controleur Generale des Finances), whose enthusiasm and determination to build up France’s economic health focused on building exports and entailed implementing a policy of squeezing maximum output – even if it meant treating factory workers like cannon fodder.

The net result of all of that is France lagged in the Industrial Revolution by a good century.

Sad as the past may be – at least for some – the future is yet to be written; not only for France but for all of us. Which means we can still heed the lessons of times past and avoid allowing the centralisation pendulum to swing far in the direction of stunting initiative and suppressing individual entrepreneurship.

Because, the reality is, the longer such a phase lasts, the more qualified we become as Controler Generale and the less time we spend creating value and achieving the growth organisations,

markets and individuals most absolutely need to get out of today’s deepening economic slowdown.

The history of the world clearly points to the fact that man prospered when trade opened up, when markets embraced free trade, when controls were lifted, and when entrepreneurship and personal enterprise were encouraged and fuelled – not when executives filled form after form or navigated a sea of a heavily layered “millefeuille” decision-making process, only to drown in an ocean of bureaucratic compliance.

Colbert, may his soul rest in peace, has gone down in history as a hardworking, fiercely loyal and devoted subject to the Sun King, but has left a terrible legacy. Ironically, well-intentioned as Colbert may have been, he has created a system that continues to plague organisations during economic downturns – when the last thing management needs is to be overburdened with a centralised decision-making process that curbs initiative and produces a vicious cycle of further centralisation.

After all, this leads to paralysis, inefficiency, and a decline in morale and performance – at a delicate time when one needs greater flexibility to respond to local environmental changes so as to ensure better decisions and optimum output.

Prosperity was unleashed when nations learnt how to be outwardly in their outlook, distributed as opposed to centralised and empowered as opposed to bridled. Humanity’s collective net worth grew when more people had a stake – not just the few.

As it was then, such it is today, and so it will be into the future. At a time when we have the technological ability to democratise everything, people and organisations that intuitively centralise during downturn should do the exact opposite, difficult and counterintuitive as it may be for them.

May they quickly heed this call before it proves way too costly if not too late.

This article written by Kamal Dimachkie and published in AMEinfo

Executive Regional Managing Director, Leo Burnett UAE, Kuwait & the Lower Gulf  Kamal Dimachkie has over 31 years of industry experience, during which he handled a number of multinational and regional assignments. He has been responsible for multiple teams and over 225 people. Under his leadership, Leo Burnett won more than 250 creative industry awards over the past 10 years.